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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST SECURITY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 6711 87-6118148
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION IDENTIFICATION NO.)
INTERNAL REVENUE CODE NUMBER)
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79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
(801) 246-5976
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRAD D. HARDY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FIRST SECURITY CORPORATION
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
(801) 246-5976
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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A. ROBERT THORUP, ESQ. JOSEPH DRAIN, ESQ.
RAY, QUINNEY & NEBEKER GRADY & ASSOCIATES
79 SOUTH MAIN STREET 20800 CENTER RIDGE ROAD, SUITE 116
SALT LAKE CITY, UTAH 84111 ROCKY RIVER, OHIO 44116-4306
(PHONE) (801) 532-1500 (PHONE) (440) 356-7255
(FAX) (801) 532-7543 (FAX) (440) 356-7254
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after the effectiveness 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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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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Common Stock ($1.25 par value)....... 1,976,471 shares $15.01(2) $29,666,329.71(2) $8,247.38
(1),(3)
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(1) The maximum number of shares of Common Stock to be issued in connection with
the merger described herein.
(2) Calculated pursuant to Rule 457(f)(1) solely for the purpose of the
registration fee based on market value as of April 20, 1999.
(3) One Right to purchase Junior Series B Preferred Stock of First Security is
associated with each share of Common Stock. The Rights are not transferable
separately from the Common Stock except in limited circumstances.
THIS REGISTRATION STATEMENT IS HEREBY AMENDED ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT WILL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT WILL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT WILL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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FIRST SECURITY CORPORATION XEON FINANCIAL CORP.
PROSPECTUS PROXY STATEMENT
TO THE STOCKHOLDERS OF XEON FINANCIAL CORP.:
XEON Financial Corp. and First Security Corporation have agreed to merge
XEON with and into First Security, subject to approval by XEON's stockholders.
The merger cannot be completed unless the XEON stockholders approve the merger.
Only if you hold your shares at the close of business on April 30, 1999 will you
be entitled to vote on the merger and to receive this Prospectus/Proxy
Statement. XEON and First Security are sending you this Prospectus/Proxy
Statement to provide you with important information about these proposed
transactions. XEON is calling a meeting of its stockholders on Tuesday, June 8,
1999 to allow you to vote your XEON shares on the proposal to approve the
merger, as well as on other business described in this Prospectus/Proxy
Statement.
THERE ARE RISKS INHERENT IN FIRST SECURITY SHARES. (SEE, "RISK FACTORS" ON PAGE
14.)
Upon completion of the merger, in exchange for your XEON shares, including
shares received upon exercise of options to purchase XEON shares, you will
receive between 0.4769 and 0.5996 shares of First Security common stock,
depending on the market price of First Security common stock during certain
periods before the merger closes. First Security shares are listed on the NASDAQ
National Market System under the symbol "FSCO."
The exchange of XEON shares will be tax-free to you for federal income tax
purposes. If you choose to perfect your dissenter's rights under Nevada law, you
will receive the fair value of your XEON shares in cash, and this would be a
taxable transaction for you.
The XEON Board of Directors believes that the merger and the transactions
associated with it are in your best interests and recommends that you vote to
approve the merger and the transactions associated with it by completing the
enclosed proxy voting form.
YOUR VOTE IS VERY IMPORTANT. PLEASE READ
THIS ENTIRE DOCUMENT CAREFULLY.
You can get more information about XEON Financial Corp. or First Security
Corporation, and about the merger, by writing or calling as follows:
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First Security Corporation XEON Financial Corp.
79 South Main Street, Second Floor P.O. Box 5700
Salt Lake City, Utah 84111 Stateline, Nevada 89449
Attention: Brad D. Hardy Attention: John A. Schopf, Jr.
(801) 246-5976 (775) 588-5124
</TABLE>
Please see "Where You Can Find More Information" on page 105 for additional
information about First Security which is filed with the Securities and Exchange
Commission. Information about First Security and XEON may change from that
contained in this Prospectus/Proxy Statement. First Security and XEON will send
you additional information about themselves before the Annual Stockholders'
Meeting if the new information would be material to your decision on the merger.
FIRST SECURITY SHARES ARE NOT INSURED BANK DEPOSITS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
AGENCY HAS APPROVED THE FIRST SECURITY SHARES OR DETERMINED THAT THIS
PROSPECTUS/PROXY STATEMENT IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus/Proxy Statement is dated May , 1999, and mailed to XEON's
stockholders on May , 1999.
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YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/ PROXY STATEMENT TO UNDERSTAND AND VOTE ON THE MERGER AND THE
TRANSACTIONS ASSOCIATED WITH IT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROSPECTUS/PROXY STATEMENT. BUT YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER
THAN THE DATE SHOWN ON THE COVER PAGE, AND NEITHER THE MAILING OF THIS
PROSPECTUS/PROXY STATEMENT TO XEON STOCKHOLDERS NOR THE ISSUANCE OF FIRST
SECURITY COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE
CONTRARY.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS MAY PROVE 4
INACCURATE..........................
QUESTIONS AND ANSWERS ABOUT THE 4
MERGER..............................
SUMMARY............................... 8
XEON's Annual Meeting of 9
Stockholders and Solicitation of
Proxies..........................
The Merger.......................... 10
RISK FACTORS.......................... 14
Risks to XEON Stockholders Resulting 14
from the Exchange Ratio..........
Volatility of Stock Prices.......... 14
Attraction and Retention of 14
Employees........................
Impact of Date Changes in 1999 and 15
2000.............................
Anti-Takeover Effect of Certain 15
Charter and Bylaw Provisions.....
SELECTED HISTORICAL FINANCIAL DATA FOR 16
FIRST SECURITY AND XEON.............
XEON MANAGEMENT'S DISCUSSION AND 20
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............
Results of Operations............... 20
Net Interest Income................. 20
Provision for Loan Losses........... 23
Non-Interest Income................. 23
Non-Interest Expense................ 24
Federal Income Taxes................ 25
Financial Condition................. 25
Capital............................. 25
Liquidity........................... 26
Asset/Liability Management.......... 27
New Accounting Pronouncements....... 29
Impact of Inflation and Changing 30
Prices...........................
Year 2000 Readiness Disclosure...... 30
COMPARATIVE PER SHARE DATA............ 32
COMPARATIVE MARKET PRICE AND DIVIDENDS 33
INFORMATION.........................
RESALE OF FIRST SECURITY SHARES 35
RECEIVED IN THE MERGER..............
THE MERGER............................ 35
General............................. 35
The Effective Time.................. 35
Management of XEON Following the 35
Merger...........................
Background of and Reasons for the 36
Merger; Recommendation of XEON's
Board of Directors...............
Opinion of XEON'S Financial 38
Advisor..........................
Recommendation of XEON'S Board of 42
Directors........................
Interests of Certain Persons in the 42
Merger...........................
Conversion of Shares; Exchange 44
Ratio............................
XEON Options........................ 45
Dissenting Shares................... 45
Exchange of Shares and 45
Certificates.....................
Fractional Shares................... 46
Representations and Warranties...... 46
Certain Covenants................... 46
Conditions to the Closing........... 47
Termination......................... 47
Survival of Representations and 47
Warranties and Covenants.........
Amendment, Modification and 48
Waiver...........................
Accounting Treatment of the 48
Merger...........................
The Effect of the Merger on XEON 48
Employee Benefit Plans...........
Regulatory Approvals................ 48
FEDERAL INCOME TAX ASPECTS............ 50
The Merger.......................... 50
Treatment of First Security and 50
XEON.............................
Exchange of XEON Shares for First 50
Security Common Stock............
Taxation of Option Holders.......... 51
Cash in Lieu of Fractional Shares... 51
Dissenting XEON Stockholders........ 51
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RIGHTS OF DISSENTING XEON 52
STOCKHOLDERS........................
INFORMATION ABOUT FIRST SECURITY...... 56
General............................. 56
Competition......................... 56
Description of First Security's 57
Capital Stock....................
INFORMATION ABOUT XEON................ 60
General............................. 60
Market Area and Competition......... 60
Lending Activities.................. 61
Nonperforming Loans................. 65
Investments......................... 69
Source of Funds..................... 70
Properties.......................... 72
Legal Proceedings................... 73
Personnel........................... 73
SUPERVISION AND REGULATION............ 73
Regulation of Bank Holding 74
Companies........................
Federal Deposit Insurance........... 76
Interstate Banking and Branching.... 76
Capital............................. 77
Limits on Dividends and Other 79
Payments.........................
Transactions with Affiliates........ 80
Community Reinvestment Act.......... 81
Federal Home Loan Banks............. 81
Nevada Bank Regulation.............. 82
Monetary Policy..................... 82
Bank Regulatory Developments........ 82
COMPARATIVE RIGHTS OF STOCKHOLDERS.... 83
Certain Differences Between Nevada 83
and Delaware Corporate Laws......
Authorized Capital Stock............ 83
Directors........................... 84
Repurchase and Redemption of 86
Shares...........................
Payment of Dividends to 86
Stockholders.....................
Assessments......................... 86
Preemptive Rights................... 86
Amendments to Articles or 87
Certificate of Incorporation.....
Amendments to Bylaws................ 87
Stockholder Approval of Mergers and 87
Other Business Combinations......
Rights of Dissenting Stockholders... 88
Annual Meetings of Stockholders..... 89
Special Meetings of Stockholders.... 89
Stockholder Consent to Action 89
Without a Meeting................
Stockholder Inspection of Records... 90
THE 1999 ANNUAL MEETING OF XEON 91
STOCKHOLDERS........................
Date, Time and Place................ 91
Purpose............................. 91
Record Date; Shares Outstanding and 91
Entitled to Vote.................
Vote Required....................... 91
Voting and Revocation of Proxies.... 92
Quorum; Broker Non-Votes............ 92
Voting Securities and Principal 93
Holders Thereof..................
Election of Directors (Proposal 95
2)...............................
Remuneration of Directors........... 97
Board Committees.................... 97
Executive Compensation.............. 98
Certain Relationships and Related 103
Party Transactions...............
Ratification of Independent Auditor 104
(Proposal 3).....................
Expenses; Solicitation of Proxies... 104
Other Matters....................... 104
LEGAL MATTERS......................... 105
EXPERTS............................... 105
WHERE YOU CAN FIND MORE INFORMATION... 105
Incorporation of Documents by 106
Reference........................
APPENDIX A -- AGREEMENT AND PLAN OF
REORGANIZATION
APPENDIX B -- OPINION OF DAIN RAUSCHER
WESSELS
APPENDIX C -- EXTRACTS FROM NEVADA
LAWS CONCERNING DISSENTERS' RIGHTS
OF XEON STOCKHOLDERS
APPENDIX D -- XEON FINANCIAL
STATEMENTS
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FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
First Security and XEON have each made forward-looking statements in this
Prospectus/Proxy Statement and in documents that are incorporated by reference
into this document. Forward-looking statements are subject to risks and
uncertainties. These forward-looking statements include information about future
results of XEON's operations or the performance of First Security after the
merger is completed. When we use any of the words "believes," "expects,"
"anticipates," "estimates" or similar expressions, we are making forward-looking
statements. Many possible events or factors could affect the future financial
results and performance of First Security after the merger, and could cause
those results or performance to differ materially from those expressed in our
forward-looking statements. These possible events or factors include the
following:
- actual cost savings resulting from the merger are less than expected
because First Security is unable to realize those cost savings as soon as
expected or First Security incurs additional or unexpected costs;
- revenues after the merger are lower than expected;
- competition among financial services companies increases;
- First Security is unable to integrate XEON's businesses as timely as
expected;
- changes in the interest rate environment reduce interest margins;
- general economic conditions change or are worse than we expected;
- legislative or regulatory changes adversely affect our businesses;
- personal or commercial customers' bankruptcies increase;
- technology-related changes, including "Year 2000" data systems
compliance, are more difficult to make or more expensive than we
expected; and
- changes occur in the securities markets.
All forward-looking statements attributable to First Security are expressly
qualified in their entirety by the factors which may cause actual results to
differ materially from expectations described in this document and in First
Security's reports filed with the Securities and Exchange Commission, including
the Annual Report on Form 10-K for the year ended December 31, 1998. All
forward-looking statements attributable to XEON are expressly qualified in their
entirety by the factors that may cause actual results to differ materially from
expectations described in this document.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS FIRST SECURITY PROPOSING TO ACQUIRE XEON? HOW WILL I BENEFIT?
A: First Security desires to expand its presence in the Nevada banking market,
particularly in Northern Nevada. XEON's sole business, Nevada Banking
Company, is a successful small bank in the Washoe and Douglas County market
areas, and it provides First Security with opportunities for growth in that
important Nevada market. Under the terms of the merger agreement, you will
become a stockholder in First Security, an institution whose common stock is
traded on the NASDAQ stock market. The XEON
4
<PAGE> 6
Board of Directors believes that the consideration you will receive in the
merger may deliver value to you that exceeds the value that could be expected
if XEON had continued as an independent entity. To review the reasons for the
merger in greater detail, and related uncertainties, see pages 35 through 49.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: In exchange for your XEON shares of common stock, you will receive shares of
First Security common stock. The exact number of shares you receive will be
calculated according to a formula described in greater detail in this
Prospectus/Proxy Statement. We refer to this formula as the "Exchange Ratio."
Q: HOW IS THE EXCHANGE RATIO CALCULATED?
A: The Exchange Ratio is calculated according to a relatively complex formula
that takes into account several factors, including:
- the number of XEON shares that are outstanding at Closing;
- the number of XEON Options;
- the average market price of First Security common stock.
As long as the market price of First Security common stock is between $17.00
and $21.375 per share, the Exchange Ratio results in a constant value of the
merger consideration.
Q: HOW MANY SHARES OF FIRST SECURITY COMMON STOCK WILL I RECEIVE IN EXCHANGE FOR
MY XEON SHARES?
A: At the time of the merger, for each XEON share that you own you will receive
between 0.4769 and 0.5996 shares of First Security common stock. You will
receive approximately 0.4769 shares of First Security common stock if the
market price of First Security common stock is equal to or greater than
$21.375; and you will receive approximately 0.5996 shares if the market price
is equal to or less than $17.00.
Q: WHAT WILL HAPPEN TO MY XEON OPTIONS?
A: First Security will not assume any XEON Options. Instead, all XEON Options
that have been granted and that have vested or will vest prior to Closing
must be exercised prior to Closing or they will be canceled. Each holder of a
vested XEON option may elect to exercise such options pursuant to a cashless
exercise procedure whereby each option holder who so elects shall be deemed
to have received a number of XEON shares of common stock with a value equal
to (a) the difference between the per share value of the XEON common stock as
calculated pursuant to the merger agreement and the option exercise price,
(b) multiplied by the number to shares obtainable upon the exercise of the
option. This number of XEON shares deemed to have been obtained will then be
converted into shares of First Security common stock at the Exchange Ratio.
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Q: WHAT RISKS SHOULD I CONSIDER?
A: You should review "RISK FACTORS" beginning on page 14.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The exchange of your shares for First Security shares of common stock will be
tax-free to you for federal income tax purposes. However, you may have to pay
taxes on cash received for fractional shares and each holder of vested XEON
options, who has received such options for the performance of services, may
recognize ordinary income in an amount equal to the fair market value of the
net number of XEON shares issuable pursuant to the cashless exercise
procedure. In addition, if you choose to vote against the merger and also
perfect your dissenter's rights under Nevada law, you will receive the fair
value of your XEON shares in cash, which would be a taxable transaction to
you. To review the tax consequences to XEON stockholders in greater detail,
see page 50. THE TAX CONSEQUENCES OF THE MERGER TO YOU WILL DEPEND ON YOUR
OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISORS FOR A FULL UNDERSTANDING
OF THESE TAX CONSEQUENCES.
Q: WHEN IS THE MERGER EXPECTED TO CLOSE?
A: We are working towards completing the merger as quickly as possible. In
addition to the approval of XEON stockholders, we must also obtain regulatory
approvals and satisfy other conditions described in the merger agreement. We
hope to complete the merger before July 31, 1999.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in this
document, please fill out and sign your Proxy Voting Form. Then mail your
signed Proxy Voting Form in the enclosed return envelope as soon as possible
so that your shares may be counted in determining a quorum at the Annual
Meeting and in voting on the matters to come before the meeting.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve the merger agreement and the transactions
associated with it. In the merger, XEON would merge with and into First
Security, and Nevada Banking Company would merge with and into First Security
Bank of Nevada. You are also being invited to vote on the election of a board
of directors for XEON to function if the merger is not approved. You are also
approving the selection of independent certified accountants to audit XEON's
financial statements for the coming year, if the merger does not close.
XEON'S BOARD OF DIRECTORS HAS APPROVED THE MERGER AGREEMENT AND RECOMMENDS
THAT YOU VOTE FOR THE MERGER AGREEMENT AND THE TRANSACTIONS ASSOCIATED WITH
IT.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: You can revoke your proxy any time prior to the time the vote is taken on the
merger. You may do this by sending a letter to the Secretary of XEON revoking
your proxy prior to the Annual Stockholders' Meeting, by attending the Annual
Stockholders'
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Meeting and announcing your revocation of your proxy, or by submitting a
later dated proxy prior to the Annual Stockholders' Meeting. Once the vote is
taken, your vote becomes irrevocable.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, First Security or The First Chicago Trust
Company of New York (the "Exchange Agent" for the merger) will send written
instructions to XEON stockholders for exchanging their stock certificates.
Q: WHO CAN HELP ANSWER FURTHER QUESTIONS?
A: If you would like additional copies of this Prospectus/Proxy Statement, or if
you have more questions about the merger, you should contact:
XEON Financial Corp./Nevada Banking Company
P.O. Box 5700
Stateline, Nevada 89449
Attention: John A. Schopf, Jr.
(775) 588-5124
7
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SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the proposed merger, you should read carefully this entire document as
well as the additional documents we refer you to. (See, "Where You Can Find More
Information" (page 105.)
FIRST SECURITY CORPORATION
79 SOUTH MAIN STREET
SALT LAKE CITY, UTAH 84111
(801) 246-6000
First Security is a Delaware incorporated multi-bank holding company
headquartered in Salt Lake City, Utah. At December 31, 1998, First Security and
its subsidiaries had total consolidated assets, deposits, and stockholders'
equity of $21.7 billion, $12.7 billion and $1.6 billion, respectively.
First Security Bank, N.A., and First Security Bank of New Mexico, N.A. are
First Security's primary assets. Both national banks are top level competitors
in their main locations (Utah, Idaho and Albuquerque, New Mexico), and provide a
full range of banking services. First Security also owns First Security Bank of
Southern New Mexico, N.A. and First Security Bank of California, N.A., both of
which are smaller national banks serving smaller markets, but with access to the
full range of First Security system products and services. First Security Bank
of Nevada is a growing Nevada-chartered bank headquartered in Las Vegas. In
addition to its acquisition of XEON, First Security has recently announced the
planned acquisition of Comstock Bank in Reno, Nevada to augment the Nevada
bank's market areas.
First Security also owns and operates several nonbank subsidiaries. Through
its nonbank subsidiaries, First Security provides capital markets advice,
municipal underwriting services, treasury management, investment management,
insurance, leasing, data processing and securities brokerage services. First
Security recently acquired San Francisco-based Van Kasper & Company, a
securities broker-dealer and investment advisor. Van Kasper and First Security's
other securities subsidiaries are subject to regulation and supervision by the
Securities and Exchange Commission and applicable state securities authorities.
The insurance agency and credit life insurance company are regulated by
applicable state insurance regulators.
A substantial portion of First Security's cash flow is typically derived
from dividends and interest from its subsidiaries, and from the sale of
investment securities to finance its growth and operations. (See, "Information
About First Security.")
FIRST SECURITY BANK OF NEVADA
530 LAS VEGAS BLVD. SOUTH
LAS VEGAS, NEVADA 89101
(702) 251-1100
First Security Bank of Nevada is a wholly owned subsidiary of First
Security engaged in general retail and commercial banking and trust activities.
First Security Bank of Nevada is a state-chartered bank supervised by the State
of Nevada and the FDIC.
8
<PAGE> 10
XEON FINANCIAL CORP.
229 KINGSBURY GRADE
STATELINE, NEVADA 89449
(775) 588-5124
XEON is a Nevada corporation formed for the sole purpose of being a bank
holding company for Nevada Banking Company. XEON has 295 stockholders of record.
XEON shares are traded over the counter through the OTC Bulletin Board, but XEON
is not required to file any reports with the Securities and Exchange Commission.
XEON had total assets of approximately $128 million, deposits of approximately
$116 million and stockholders' equity of approximately $10 million at December
31, 1998. XEON's operating subsidiary, Nevada Banking Company, operates three
branches and one loan production office, located in Douglas and Washoe counties
in the State of Nevada.
XEON'S ANNUAL MEETING OF STOCKHOLDERS AND SOLICITATION OF PROXIES
XEON has called its Annual Meeting of Stockholders for June 8, 1999, and is
inviting you to attend. XEON is also asking you for your written proxy
instruction for voting at the Meeting. As a XEON stockholder as of April 30,
1999, which is the record date for the Annual Meeting, you are entitled to
receive notice of the Meeting and to vote for or against the merger.
PURPOSES. The purpose of the Meeting and XEON's solicitation of proxies is
to approve the merger and the related transactions. You are also being asked to
vote on the election of a board of directors to govern XEON in the event the
merger does not close. You are also being asked to approve the selection of
Kafoury, Armstrong & Company as XEON's independent auditors of the 1999
financial statements, again assuming the merger does not close.
VOTES REQUIRED; RECORD DATE. In accordance with XEON's Articles of
Incorporation and Nevada law, the merger may be approved and adopted at a
meeting of XEON stockholders. At least 50.1% of the total outstanding common
stock must vote in favor of the merger for it to be approved legally by the XEON
stockholders. Your signed Proxy (1) assures that your shares will be voted and
(2) helps to assure that a quorum will be present at the Stockholders' Meeting.
A XEON Proxy may be revoked, by written notice to the Secretary of XEON, at
any time prior to the time the vote is taken at the Annual Stockholders'
Meeting. You may also submit a later dated Proxy, which would revoke your
earlier Proxy.
The Comstock Bancorp merger is expected to close before or at about the
same time as this merger, assuming the necessary approvals are obtained. The
"Record Date" for determining stockholders entitled to vote on the merger has
been set at April 30, 1999 by the XEON Board of Directors. At that date there
were 2,828,840 shares of XEON common stock outstanding and entitled to vote. Of
this number, at least 1,414,421 shares must be present in person or by Proxy to
constitute a quorum at the Annual Stockholders' Meeting, and at least this same
number of shares must be voted in favor of the merger for it to be legally
approved by the XEON stockholders.
As of April 30, 1999, directors and executive officers of XEON and their
affiliates were beneficial owners of an aggregate of 1,027,778 shares of XEON
common stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 36% of the
2,828,840 shares of XEON common stock
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that were issued and outstanding as of such date. (See, "The 1999 Annual Meeting
of XEON Stockholders" (page 91.)
DISSENTERS' RIGHTS. XEON stockholders who do not vote in favor of the
merger are entitled to dissenters' rights under Nevada law if they follow the
required steps. Dissenters' rights generally entitle the dissenting stockholders
to the fair value of their XEON shares in cash in a taxable transaction.
THE MERGER (PAGE 35)
First Security and XEON have agreed to merge XEON with and into First
Security, and to combine Nevada Banking Company with and into First Security
Bank of Nevada. The merger agreement is attached as Appendix A at the back of
this Prospectus/Proxy Statement. We encourage you to read the merger agreement.
It is the legal document that governs the proposed merger.
WHAT XEON STOCKHOLDERS WILL RECEIVE IN THE MERGER. As a result of the
merger, XEON stockholders will receive shares of First Security common stock.
The exact number of shares you receive will be calculated according to a formula
described in greater detail in this Prospectus/Proxy Statement. XEON
stockholders will not receive fractional shares. Instead, they will receive a
check in payment for any fractional shares based on the average market value of
First Security common stock during a specified period prior to the merger.
Do not send in your XEON stock certificates now. When the merger is
completed you will receive written instructions for exchanging your XEON stock
certificates.
OWNERSHIP OF FIRST SECURITY FOLLOWING THE MERGER. The shares of First
Security common stock issued to XEON stockholders in the merger will constitute
less than 1% of the outstanding stock of First Security after the merger, and
the current stockholders of First Security will hold the remaining 99% of the
outstanding stock of First Security after the merger. In addition to the present
transaction, First Security has also entered into an Agreement and Plan of
Reorganization to acquire Comstock Bancorp, a bank holding company located in
Reno, Nevada, and its wholly owned subsidiary, Comstock Bank, for a total amount
of $65 million payable in shares of First Security common stock and cash. If
approved by the shareholders of Comstock Bancorp and federal regulatory
agencies, First Security expects to issue shares of common stock equal to
approximately 1.9% of its presently issued and outstanding shares of common
stock to shareholders of Comstock Bancorp.
CONDITIONS (PAGE 47). The merger will not be completed unless certain
conditions are met, including the approval of the merger agreement and the
transactions associated with it by XEON stockholders. Certain of the conditions
may be waived by the company entitled to assert the condition.
TERMINATION (PAGE 47). First Security and XEON may together agree to
terminate the merger agreement without completing the merger whether or not the
XEON stockholders have approved the merger agreement.
10
<PAGE> 12
The merger agreement may also be terminated by the Board of Directors of
either company in certain other circumstances including:
(1) if the merger is not completed on or before August 29, 1999, except
that neither First Security or XEON may terminate the merger agreement
if its breach of the merger agreement is the reason the merger has not
been completed by that date;
(2) if the approval of the stockholders of XEON is not obtained; or
(3) if the other party has failed to perform certain of its obligations
under the merger agreement.
AMENDMENT (PAGE 48). After the XEON stockholders have approved the merger
agreement, the Boards of Directors of First Security and XEON may only amend the
merger agreement in certain ways. The Boards may not change the Exchange Ratio,
terms that would change the tax consequences, or method of accounting for the
merger.
VOTING AGREEMENTS (PAGE 95). In connection with the merger, two directors
of XEON holding in aggregate approximately 28% of the XEON shares of common
stock as of April 30, 1999 have agreed to vote their shares in favor of the
merger and the transactions associated with it. These voting agreements
terminate upon the completion of the merger or upon termination of the merger
agreement in specified circumstances.
NO SOLICITATION OF TRANSACTIONS. XEON has agreed in the merger agreement
that neither it nor any of its agents or employees, directly or indirectly, will
initiate, solicit or encourage any inquiries or the making of any proposal or
offer for, furnish any confidential information relating to, or engage in any
negotiations or discussions concerning, any acquisition or purchase of XEON
other than by First Security.
REGULATORY APPROVALS (PAGE 48). First Security is required to make filings
with or to obtain approvals from certain regulatory authorities in connection
with the merger. These consents and approvals include the approval of the
Federal Reserve Board and the State of Nevada. A notice was filed with the
Federal Reserve Board on March 12, 1999. All other necessary applications and
notices have been filed or are in the process of being filed. First Security
cannot predict whether it will obtain all required regulatory approvals, the
timing of such approvals, whether any approvals will include conditions that
would be detrimental to First Security or whether there will be litigation
challenging the approvals.
ACCOUNTING TREATMENT OF THE MERGER (PAGE 48). First Security expects that
the merger will be accounted for as a "purchase" under generally accepted
accounting principles. Purchase accounting calls for First Security to recognize
any premium it is paying for XEON as "goodwill" which will affect some financial
ratios of importance to regulators and the investment community. Purchase
accounting also allows First Security to step up its basis in the assets of XEON
for income tax purposes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 50). The exchange of XEON
common stock for First Security common stock (other than cash paid for
fractional shares) generally will be tax free. However, the exercise of any XEON
options you hold may be a taxable event for federal income tax purposes.
Tax matters are very complicated and the tax consequences of the merger to
you will depend on your own circumstances. You are urged to consult your tax
advisors as to the specific tax consequences of the merger to you.
11
<PAGE> 13
OPINION OF FINANCIAL ADVISOR (PAGE 38). Dain Rauscher Wessels has delivered
its written opinion to the XEON Board of Directors that, as of December 29,
1998, the merger consideration was fair from a financial point of view to the
XEON stockholders. The Dain Rauscher Wessels opinion is attached to this
document as Appendix B. You should read the opinion completely to understand the
assumptions made, matters considered and limitations of the review undertaken by
Dain Rauscher Wessels.
COMPARATIVE RIGHTS OF STOCKHOLDERS (PAGE 83). XEON is a Nevada corporation,
and you as a XEON stockholder have certain rights under Nevada law. After the
merger you will be a First Security stockholder and will have rights under
Delaware law. If the merger is completed, the rights of former XEON stockholders
who become First Security stockholders will be determined by First Security's
certificate of incorporation and by-laws which differ in certain respects from
XEON's articles of incorporation and by-laws.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT DIFFER FROM YOUR
INTERESTS (PAGE 42). Some of XEON's directors and officers have interests in the
merger that differ from, or are in addition to, their interests as XEON
stockholders, such as change-of-control agreements with XEON and contemplated
employment agreements with First Security. The members of XEON's Board of
Directors knew about these additional interests and considered them when the
Board of Directors approved the merger agreement and the merger contemplated
thereby.
Directors and executive officers of XEON own or have the right to acquire
more than 39% of XEON's common stock. Although XEON common stock is quoted on
the OTC Bulletin Board, trading in XEON common stock is very limited and occurs
on a sporadic basis. As a consequence, ownership of XEON common stock represents
a relatively illiquid investment. A substantial portion of the directors and
executive officers' net worth consists of their interests in XEON common stock.
The merger will enable directors, executive officers and other stockholders to
exchange illiquid securities of XEON for securities traded on the NASDAQ
National Market, which will allow them to achieve greater diversification of
their personal investment portfolios. In addition, Mr. John A. Schopf, Jr.,
XEON's President and Chief Executive Officer, and Mr. Wayne Snyder, XEON's
Executive Vice President, anticipate receiving substantial severance benefits as
a result of the merger. (See, "1999 Annual Meeting of Stockholders of
XEON -- Voting Securities and Principal Holders Thereof" -- and "Executive
Compensation."
RISK FACTORS. The success of the merger is subject to certain risks. A
description of these risks is found at "RISK FACTORS" starting on page 14 of
this Prospectus/Proxy Statement.
XEON'S REASONS FOR THE MERGER (PAGE 36). As part of an ongoing process, the
Board of Directors and management of XEON have studied and analyzed whether it
is in their stockholders' best interests to (1) continue to function as an
independent organization, (2) acquire or merge with other banks of a similar or
smaller size or (3) be acquired or enter into a business combination with a
larger, publicly traded financial institution. In early 1998 the Board and
management determined that significant investments in technology, data
processing systems, employee training, marketing expenditures, management and
product development as well as additional physical facilities were necessary to
continue XEON's growth as a high-performance, independent organization.
In the spring of 1998, the Board requested that Dain Rauscher Wessels
assist Nevada Banking Company in soliciting indications of interest from
potential acquirors. First
12
<PAGE> 14
Security Corporation and another company submitted written indications of
interest. The primary reasons for XEON's decision to proceed with First Security
Corporation's non-binding letter of intent included:
- the relative magnitude of the common stock consideration offered to
stockholders,
- the perceived level of First Security Corporation's interest in pursuing
the merger transaction,
- the likelihood that a transaction with First Security Corporation would
be consummated if mutually acceptable terms would be agreed upon,
- First Security Corporation's prior record of making acquisitions,
- the geographic and product synergy of the operations of Nevada Banking
Company and First Security Corporation and
- First Security Corporation's market capitalization and common stock
liquidity.
After XEON's November 6, 1998 Board meeting (the holding company
reorganization of Nevada Banking Company having been completed just three weeks
earlier), XEON and its legal and financial advisors negotiated the terms of the
merger agreement and related transaction documents with First Security
Corporation and its legal counsel.
In reaching its decision to recommend approval of the Merger, the XEON
Board considered a variety of factors, including
- the financial terms of the merger and the value of the consideration to
be received by XEON stockholders,
- the business and financial condition of First Security Corporation, the
nature of its franchise, its historic profitability, its business and
operating philosophy and its stock price performance,
- potential liquidity available to stockholders of XEON resulting from
receiving publicly traded shares of First Security Corporation,
- tax treatment of the exchange,
- Dain Rauscher Wessels' opinion concerning the fairness of the merger
consideration to the holders of XEON common stock from a financial point
of view,
RECOMMENDATION TO XEON STOCKHOLDERS (PAGE 42). The XEON Board of Directors
believes that the merger is in your best interests and unanimously recommends
that you vote FOR the proposal to approve the merger.
STOCKHOLDER VOTES REQUIRED TO APPROVE THE MERGER. The affirmative vote of
the holders of a majority of the outstanding shares of XEON common stock are
required to approve the merger and the transactions associated with it. Your
failure to return a signed Proxy Card will have the effect of a vote against the
merger and the transactions associated with it, although such action will not be
enough to perfect dissenter's rights under applicable Nevada law. Under
applicable law, the First Security stockholders are not entitled to vote on the
merger.
13
<PAGE> 15
RISK FACTORS
Certain risks are inherent in the merger and the business of First
Security. The material risks are highlighted below for the benefit of XEON
stockholders:
RISKS TO XEON STOCKHOLDERS RESULTING FROM THE EXCHANGE RATIO
The Exchange Ratio operates such that if the market price of First Security
common stock falls below $17.00 per share during a specified ten-day trading
period, the value of the shares that you receive at the time of the merger may
be less than the value of those shares at the time you execute the Proxy voting
form. In addition, changes in First Security's stock price during the ten-day
period will directly affect the exchange ratio and consequently the number of
First Security shares you will receive at closing. If the stock price increases
above $21.375 for that same ten-day trading period, the value of the shares that
you receive at the time of the merger may be more than the value of those shares
at the time you execute the Proxy voting form. (See, "Questions and Answers
About the Merger -- How is the Exchange Ratio calculated?" and "How many shares
of First Security common stock will I receive in exchange for my XEON shares?")
VOLATILITY OF STOCK PRICES
The market for First Security common stock is potentially volatile. The
trading price of First Security common stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements following acquisitions by First Security or its competitors,
changes in interest rates or prices of First Security's or its competitors'
financial products and services, changes in product mix, changes in revenue and
revenue growth rates for First Security as a whole or for geographic areas or
business units, and other events or factors. Statements or changes in opinions,
ratings or earnings estimates made by brokerage firms or industry analysts
relating to the markets in which First Security does business or relating to
First Security specifically have resulted, and could in the future result, in an
immediate and adverse effect on the market price of First Security common stock.
Statements by financial or industry analysts regarding the impact on First
Security's net income per share resulting from the merger and the extent to
which such analysts expect potential business synergies to affect reported
results in future periods can be expected to contribute to volatility in the
market price of First Security common stock.
ATTRACTION AND RETENTION OF EMPLOYEES
The continued growth and success of First Security depends significantly on
the continued service of highly skilled employees and managers. In particular,
First Security's success to date has depended to a significant extent upon a
number of key management employees, the loss of any of whom could have a
material adverse effect on First Security's business and results of operations.
Competition for these employees in today's marketplace, especially in the
financial services industries, is intense. First Security's ability to attract
and retain employees is dependent on a number of factors including its continued
ability to grant stock incentive awards. There can be no assurance that First
Security will be successful in continuing to recruit new personnel and to retain
existing personnel. The loss of one or more key employees or First Security's
inability to maintain existing employees, or to recruit new employees could have
a material adverse impact on First Security. In
14
<PAGE> 16
addition, First Security may experience increased compensation costs to attract
and retain skilled personnel.
IMPACT OF DATE CHANGES IN 1999 AND 2000
Some of the computer programs used by First Security in its internal
operations rely on time-sensitive software that was written using two digits
rather than four to identify the applicable year. These programs may recognize a
date using "00" as the year 1900 rather than the year 2000. These systems could
also recognize some combinations of "9" as calling for the end of the operation.
The use of 2000 as a leap year may also cause date change-related malfunctions
by computers. These date changes could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. First Security expects to successfully
implement its year 1999 and 2000 compliance program and does not believe that
the cost of such procedures will have a material effect on its results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in the completion of these procedures or that the cost
of such procedures will not exceed original estimates, either of which could
have a material adverse effect on future results of operations.
In addition to correcting the business and operating systems used by First
Security in the ordinary course of business as described above, First Security
is engaged in an assessment of its key product and service suppliers and loan
customers to determine their level of Year 2000 compliance. This includes
providers of key utility services such as electric power and telephone services.
There can be no assurance that First Security will not experience serious
disruptions in 2000 as a result of supplier problems and failures
notwithstanding the fact that First Security's own systems are Y2K compliant.
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of First Security's Charter and Bylaws could delay or
frustrate the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving First Security, even if such
events could be beneficial to its stockholders. For example, each share of First
Security common stock, including the shares to be issued to XEON stockholders in
the merger, has a right attached that entitles the stockholder to acquire a
share of a series of preferred stock under certain circumstances associated with
a potential change in control of First Security, a feature commonly referred to
as a "poison pill". Also the First Security Bylaws restrict the ability of a
stockholder to nominate directors or to present matters before a stockholders
meeting. The First Security certificate of incorporation contains a
supermajority voting provision commonly known as a "fair price" provision that
will make certain staged take-overs difficult. (See, "Information About First
Security -- Description of First Security's Capital Stock.")
15
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA FOR FIRST SECURITY AND XEON
The following tables present selected financial data of First Security and
XEON, for the periods indicated. The historical financial data as of and for the
five fiscal years shown were derived from audited financial statements. The data
presented below should be read in conjunction with the financial statements,
related notes and other financial information of XEON included elsewhere in this
Prospectus/Proxy Statement (see, Appendix D), and of First Security which are
incorporated by reference.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE FINANCIAL TABLES WHICH FOLLOW]
16
<PAGE> 18
FIRST SECURITY CORPORATION
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA(1)
FIRST SECURITY CORPORATION
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Interest Income................................ $ 1,420,660 $ 1,213,378 $ 1,039,391 $ 974,015 $ 801,659
Interest Expenses.............................. 716,961 587,439 485,328 469,812 322,035
Net Interest Income............................ 703,699 625,939 554,063 504,203 479,624
Provision for Loan Losses...................... 71,923 63,386 41,300 22,682 1,545
Noninterest Income............................. 474,390 357,157 306,444 270,638 202,043
Noninterest Expenses........................... 723,088 588,904 531,219 555,192 455,322
Income Before Taxes............................ 383,078 330,806 287,988 196,967 224,800
Provision for Income Taxes..................... 135,398 115,532 103,516 72,336 81,098
Net Income..................................... 247,680 215,274 184,472 124,631 143,702
PER COMMON SHARE DATA:
Earnings Per Share -- Basic.................... $ 1.32 $ 1.18 $ 1.03 $ 0.71 $ 0.83
Earnings Per Share -- Diluted.................. 1.28 1.14 1.00 0.69 0.81
Cash Dividends Declared........................ 0.52 0.44 0.38 0.33 0.31
Book Value per Common Share.................... 8.54 7.59 6.72 6.13 5.36
BALANCE SHEET ITEMS -- PERIOD END:
Loans, Net of Unearned Income.................. $14,013,417 $11,230,766 $ 9,697,351 $ 8,616,763 $ 8,442,282
Reserve for Loan Losses........................ 173,350 157,525 142,693 135,011 138,107
Total Assets................................... 21,689,088 18,151,783 15,456,649 13,529,699 12,602,149
Deposits....................................... 12,658,574 11,417,634 10,103,007 9,202,844 8,442,035
Long-Term Debt................................. 2,609,558 1,304,463 944,055 720,521 685,426
Shareholders' Equity........................... 1,595,495 1,400,846 1,217,840 1,082,995 937,368
PROFITABILITY RATIOS:
Return on Average Assets....................... 1.28% 1.35% 1.35% 0.98% 1.25%
Return on Average Stockholders' Equity......... 16.21 16.60 16.23 12.02 15.69
Net Interest Margin, FTE(2).................... 4.15 4.47 4.59 4.48 4.69
Net Interest Spread, FTE(2).................... 3.53 3.75 3.85 3.73 4.08
Operating Expense Ratio(3)..................... 60.84 59.27 61.18 70.89 66.03
Productivity Ratio(4).......................... 3.75 3.68 3.87 4.37 3.95
CAPITAL RATIOS:
Shareholders' Equity to Assets................. 7.36% 7.72% 7.88% 8.00% 7.44%
Tangible Common Equity Ratio................... 5.57 6.24 6.74 6.95 6.16
ASSET QUALITY RATIOS:
Reserve for Loan Losses at End of Period to:
Total Loans.................................. 1.24% 1.40% 1.47% 1.57% 1.64%
Nonaccruing Loans............................ 378.39 427.17 399.14 547.49 529.08
Nonperforming Assets at End of Period to:
Total Loans and Other Real Estate............ 0.35 0.40 0.48 0.43 0.42
Total Assets................................. 0.23 0.25 0.30 0.27 0.28
Total Equity................................. 3.10 3.20 3.81 3.40 3.81
Total Equity + Loan Loss Reserve............. 2.79 2.88 3.41 3.03 3.32
Net Loans Charged Off to Average Loans......... 0.49 0.51 0.41 0.30 0.11
RATIO OF EARNINGS TO FIXED CHARGES:(5)
Excluding Interest on Deposits................. 2.22x 2.41x 2.82x 2.23x 3.04x
Including Interest on Deposits................. 1.53x 1.56x 1.59x 1.42x 1.70x
</TABLE>
- -------------------------
Notes:
(1) Historical data has been restated where appropriate to reflect two separate
3-for-2 common stock splits in the form of 50% stock dividends paid in May
1997 and February 1998 and also for the May 1998 pooling-of-interests
acquisition of California State Bank.
(2) Fully Taxable Equivalent: an adjustment made to interest income to
facilitate comparison of interest income earned on tax-exempt or tax-favored
loans, leases and securities with interest earned subject to full taxation.
(3) Noninterest expenses/FTE net interest income plus noninterest income.
(4) Noninterest expenses/average assets.
(5) For purposes of computing the consolidated ratio of earnings to combined
fixed charges and preferred stock dividends, earnings represent net income
plus income taxes and fixed charges. Fixed charges, including interest on
deposits, include interest expense, capitalized interest, an amount equal to
the pretax earnings required to meet applicable preferred stock dividend
requirements and the interest factor included in rents.
17
<PAGE> 19
CAPITALIZATION OF FIRST SECURITY CORPORATION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
DEBT:
Federal Funds purchased and securities sold under agreements
to repurchase............................................. $3,747,084
Other short-term borrowings................................. 518,505
Long-term debt(1)........................................... 2,609,558
----------
Total Debt........................................ 6,875,147
----------
STOCKHOLDERS' EQUITY:
Series "A" $3.15 Cumulative Convertible Preferred Stock,
(9,208 shares issued)..................................... 484
Common Stock (par value $1.25, authorized 600,000,000
shares, 191,008,099 shares issued)(2)..................... 238,760
Paid-in surplus............................................. 181,906
Retained earnings........................................... 1,233,264
Accumulated other comprehensive income(3)................... 30,377
Common treasury stock, at cost (4,295,975 shares)........... (89,296)
----------
Total stockholders' equity........................ 1,595,495
----------
Total capitalization.............................. $8,470,642
==========
</TABLE>
- -------------------------
Notes:
(1) Being, with respect to FSCO, (in thousands), $28,750 of Medium Term Notes
due 1998 - 2003, $98,962 of 7.875% Senior Notes due 1999, $150,000 of 6.875%
Senior Notes due 2006, $75,000 of 7.5% Subordinated Notes due 2002, $325,000
of 5.875% Senior Notes due 2003, $125,000 of 7.0% Subordinated Notes due
2005 and $6,758 of floating rate notes due 1999. With respect to FSCO's
subsidiaries, $150,000 of 8.41% Subordinated Capital Income Securities due
2026; and $2,143,203 of Bank Notes and Federal Home Loan Bank borrowings
(FHLB borrowings mature in 1998 - 2000) and $309 of nonbank debt. FSCO's
subsidiaries obligations are direct obligations of such subsidiaries, and as
such constitute claims against such subsidiaries ranking prior to FSCO's
equity therein. Amounts referred to in this footnote (1) include current
portion of notes due. Such current portions are not included in the
long-term debt amount set forth in the table above.
(2) Shares issued and outstanding exclude 9,458,413 shares reserved for issuance
upon exercise of outstanding employee stock options, 377,586 shares reserved
for issuance upon exercise of conversion rights of preferred stock, 804,953
shares reserved for issuance under the dividend reinvestment and stock
purchase plan, 2,025,528 share reserved for issuance under FSCO's
Comprehensive Management Incentive Plan, and 1,449,000 shares reserved for
issuance under FSCO's Nonemployee Director Stock Option Plan.
(3) Accumulated other comprehensive income consists entirely of net unrealized
gains on securities available for sale, net of tax.
18
<PAGE> 20
XEON FINANCIAL CORP.
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
XEON FINANCIAL CORP.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 14,236,102 $ 11,128,603 $10,279,023 $ 4,510,452 $ 5,561,446
Investment securities.................. 23,277,425 20,431,148 14,636,837 13,257,015 10,051,021
Loans, net............................. 85,658,404 69,787,260 48,581,452 38,174,270 32,872,840
Other assets........................... 4,422,539 4,299,811 3,720,195 2,178,183 2,149,562
------------ ------------ ----------- ----------- -----------
Total assets.................... $127,594,470 $105,646,822 $77,217,507 $58,119,920 $50,634,869
============ ============ =========== =========== ===========
Deposits............................... $115,673,407 $ 96,377,700 $69,818,237 $53,220,122 $46,691,285
Other liabilities...................... 1,762,563 821,287 224,624 361,269 496,862
Stockholders' equity................... 10,158,500 8,447,835 7,174,646 4,538,529 3,446,722
------------ ------------ ----------- ----------- -----------
Total liabilities and
stockholders' equity.......... $127,594,470 $105,646,822 $77,217,507 $58,119,920 $50,634,869
============ ============ =========== =========== ===========
INCOME STATEMENT DATA:
Total interest income.................. $ 9,782,727 $ 7,930,635 $ 5,637,469 $ 5,099,281 $ 4,086,503
Total interest expense................. 2,875,813 2,541,787 1,781,081 1,502,004 1,009,845
------------ ------------ ----------- ----------- -----------
Net interest income............. 6,906,914 5,388,848 3,856,388 3,597,277 3,076,658
Provision for loan losses.............. 75,000 280,000 180,000 280,000 150,000
------------ ------------ ----------- ----------- -----------
Net interest income after
provision for loan losses..... 6,831,914 5,108,848 3,676,388 3,317,277 2,926,658
Noninterest income..................... 589,554 535,674 366,881 332,495 350,373
Noninterest expense.................... 4,968,259 3,946,322 3,030,869 2,379,806 2,347,568
------------ ------------ ----------- ----------- -----------
Income (loss) before income
taxes......................... 2,453,209 1,698,200 1,012,400 1,269,966 929,463
Income taxes........................... 725,925 596,806 352,824 465,459 381,797
------------ ------------ ----------- ----------- -----------
Net income(loss)................ $ 1,727,284 $ 1,101,394 $ 659,576 $ 804,507 $ 547,666
============ ============ =========== =========== ===========
SHARE DATA:
Net income(loss) per share............. $ 0.62 $ 0.40 $ 0.24 $ 0.43 $ 0.30
Weighted average number of shares
outstanding.......................... 2,807,622 2,779,315 2,722,875 1,853,874 1,841,963
Actual shares outstanding at end of
period............................... 2,828,840 2,787,640 2,760,190 1,879,754 1,850,532
Book value per share................... $ 3.59 $ 3.03 $ 2.60 $ 2.41 $ 1.86
Cash dividends declared per share...... $ 0.04 $ 0.02 $ -- $ -- $ --
RATIOS AND OTHER DATA:
Return on average assets............... 1.47% 1.19% 1.02% 1.47% 1.13%
Return on average equity............... 18.41 13.99 9.70 19.70 16.39
Dividend payout ratio.................. .06 .05 -- -- --
Average equity to average earning
assets............................... 8.75 9.31 11.46 8.14 7.53
Net yield on average earning assets.... 9.12 9.38 9.50 10.17 9.21
Average earning assets to average
interest bearing liabilities......... 1.36 1.30 1.30 1.36 2.91
Noninterest expense to average
assets............................... 4.24 4.25 4.67 4.35 4.82
Nonperforming assets as a percent of
total assets......................... 0.47 0.20 0.82 0.94 1.12
Allowance for loan losses to total
loans................................ 1.49 1.74 1.94 2.02 1.57
</TABLE>
19
<PAGE> 21
XEON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
XEON's principal asset is Nevada Banking Company common stock. Accordingly,
XEON's results of operations are primarily dependent upon the results of
operations of Nevada Banking Company. Nevada Banking Company conducts a general
commercial banking business, gathering deposits from the general public and
applying those funds to the origination of loans for commercial, consumer and
residential purposes.
XEON's profitability depends primarily on net interest income, which is the
difference between (a) interest income generated by interest-earning assets
(i.e., loans and investments) and (b) interest expense incurred on
interest-bearing liabilities (i.e., customer deposits and borrowed funds). Net
interest income is affected by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, as well as the relative amounts of interest-
earning assets and interest-bearing liabilities. If the total of
interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. Financial institutions have traditionally used interest rate spreads as
a measure of net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets" or "net interest
margin," which is net interest income divided by average interest-earning
assets.
To a lesser extent, XEON's profitability is also affected by such factors
as the level of non-interest income and expenses, the provision for loan losses,
and the effective tax rate. Non-interest income consists primarily of service
charges and other fees and income from the sale of investment securities.
Non-interest expenses consist of compensation and benefits, occupancy-related
expenses and other operating expenses.
XEON's management's discussion and analysis of earnings and related
financial data are presented herein to assist investors in understanding the
consolidated financial condition and results of operations of XEON for the
fiscal years ended December 31, 1998 and 1997. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere herein.
RESULTS OF OPERATIONS
Earnings per share was computed in accordance with Statement of Financial
Accounting Standards SFAS No. 128. This calculation was based on 2,807,622 and
2,779,315 weighted average shares outstanding for the years ended December 31,
1998 and 1997, respectively.
NET INTEREST INCOME
1998 COMPARED TO 1997. Net interest income for the year ended December 31,
1998 was $6,906,914, an increase of $1,578,066 or 28.17% over 1997 net interest
income. This increase was caused primarily by an increase in average earning
assets of $22,686,245, while average interest-bearing liabilities grew by
$13,634,427. At the same time, Nevada Banking Company's interest rate spread
remained constant at 5.47% in both years. Nevada Banking Company's net interest
margin increased in 1998 to 6.44% from 6.37% in 1997. The increase in net
interest margin was the result of a higher average loans-to-deposits ratio in
1998.
20
<PAGE> 22
1997 COMPARED TO 1996. Net interest income for the year ended December 31,
1997 was $5,388,848, an increase of $1,532,460 or 39.74% over 1996. This
increase was caused primarily by an increase in average earning assets of
$25,222,529, while average interest-bearing liabilities grew by $19,502,046. At
the same time, Nevada Banking Company's interest rate spread decreased to 5.47%
in 1997 from 5.59% in 1996. Nevada Banking Company's net interest margin also
decreased in 1997 to 6.37% from 6.50% in 1996. The change in interest rate
spread and net interest margin in 1997 compared to 1996 was principally the
result of increased competition for loans and the resulting decrease in loan
rates.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE TABLE WHICH FOLLOWS]
21
<PAGE> 23
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table sets forth
certain information relating to XEON's consolidated average interest-earning
assets and interest-bearing liabilities and reflects the average yield on assets
and average cost of liabilities for the years indicated. Such yields and costs
are derived by dividing income or expense by the average daily balance of assets
or liabilities, respectively, for the periods presented. During the periods
indicated, non-accruing loans, if any, are included in the net loan category.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997
------------------------------------- ------------------------------------
EFFECTIVE EFFECTIVE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
------------ ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate................. $ 31,403,424 $2,753,538 8.77% $22,082,743 $1,931,257 8.75%
Commercial.................. 39,805,551 3,996,448 10.04% 30,905,987 3,234,586 10.47%
Consumer.................... 9,287,159 1,537,245 16.55% 9,425,056 1,501,362 15.93%
------------ ---------- ----- ----------- ---------- -----
Total Loans Receivable.... 80,496,134 8,287,231(1) 10.30% 62,413,786 6,667,205(1) 10.68%
Cash-Interest earning......... 1,090,000 62,660 5.75% 1,154,109 68,922 5.97%
Securities:
FHLB Stock.................. 363,150 20,255 5.58% 151,519 4,670 3.08%
Taxable securities available
for sale.................. 12,852,211 787,329 6.13% 10,357,327 657,539 6.35%
Non-taxable securities
available for sale........ 7,301,123 361,030 4.94% 5,663,679 277,441 4.90%
------------ ---------- ----- ----------- ---------- -----
Total Securities.......... 20,516,484 1,168,614 5.70% 16,172,525 939,650 5.81%
Federal funds................. 5,167,022 264,222 5.11% 4,842,975 254,858 5.26%
------------ ---------- ----- ----------- ---------- -----
Total Earnings Assets..... 107,269,640 9,782,727 9.12% 84,583,395 7,930,635 9.38%
Non interest-earning assets... 9,841,765 8,230,889
------------ -----------
Total Assets.............. $117,111,405 $92,814,284
============ ===========
INTEREST-BEARING LIABILITIES:
Deposits:
DDA Interest Earning........ $ 44,972,761 $1,188,621 2.64% $31,657,124 $ 853,394 2.70%
Savings accounts............ 5,862,180 136,059 2.32% 5,340,560 130,450 2.44%
Certificates of deposit..... 26,522,287 1,472,498 5.55% 28,039,462 1,554,628 5.54%
------------ ---------- ----- ----------- ---------- -----
Total interest-earning
deposits................ 77,357,228 2,797,178 3.62% 65,037,146 2,538,472 3.90%
Borrowings.................... 1,372,041 78,635 5.73% 57,696 3,315 5.75%
------------ ---------- ----- ----------- ---------- -----
Total interest-bearing
liabilities............. 78,729,269 2,875,813 3.65% 65,094,842 2,541,787 3.91%
---------- ----------
Non interest-bearing
liabilities................. 28,999,043 19,844,497
Stockholders' equity.......... 9,383,093 7,874,945
------------ -----------
Total liabilities and
stockholders' equity.... $117,111,405 $92,814,284
============ ===========
Net interest income and
interest rate spread........ $6,906,914 5.47% $5,388,848 5.47%
========== ==========
Net interest margin(2)........ 6.44% 6.37%
Ratio of Average
Interest-Earning Assets to
Interest-Bearing
Liabilities................. 1.36 1.30
<CAPTION>
AVERAGE BALANCES AND INTEREST RATES FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1996
------------------------------------
EFFECTIVE
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST
----------- ---------- ---------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate................. $13,644,449 $1,267,178 9.29%
Commercial.................. 21,095,260 2,221,397 10.53%
Consumer.................... 6,863,249 1,132,969 16.51%
----------- ---------- -----
Total Loans Receivable.... 41,602,958 4,621,544(1) 11.11%
Cash-Interest earning......... 1,066,005 63,812 5.99%
Securities:
FHLB Stock.................. -- -- --
Taxable securities available
for sale.................. 9,833,524 594,287 6.04%
Non-taxable securities
available for sale........ 3,619,497 193,907 5.36%
----------- ---------- -----
Total Securities.......... 13,453,021 788,194 5.86%
Federal funds................. 3,238,882 163,919 5.06%
----------- ---------- -----
Total Earnings Assets..... 59,360,866 5,637,469 9.50%
Non interest-earning assets... 5,509,000
-----------
Total Assets.............. $64,869,866
===========
INTEREST-BEARING LIABILITIES:
Deposits:
DDA Interest Earning........ $18,024,352 $ 429,291 2.38%
Savings accounts............ 5,634,067 141,383 2.51%
Certificates of deposit..... 21,926,727 1,210,407 5.52%
----------- ---------- -----
Total interest-earning
deposits................ 45,585,146 1,781,081 3.91%
Borrowings.................... 7,650 0 0.00%
----------- ---------- -----
Total interest-bearing
liabilities............. 45,592,796 1,781,081 3.91%
----------
Non interest-bearing
liabilities................. 12,477,043
Stockholders' equity.......... 6,800,027
-----------
Total liabilities and
stockholders' equity.... $64,869,866
===========
Net interest income and
interest rate spread........ $3,856,388 5.59%
==========
Net interest margin(2)........ 6.50%
Ratio of Average
Interest-Earning Assets to
Interest-Bearing
Liabilities................. 1.30
</TABLE>
- -------------------------
(1) Income on loans includes loan fees of $552,026 for 1998, $698,937 for 1997
and $441,330 for 1996.
(2) Net interest margin is net interest income divided by average interest
earning assets.
22
<PAGE> 24
RATE/VOLUME ANALYSIS. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities, and changes in net interest income that are attributable to changes
in yields earned on interest-earning assets and rates paid on interest-bearing
liabilities. The table reflects the extent to which changes in interest income
and changes in interest expense are attributable to changes in volume (changes
in volume multiplied by the prior year rate), changes in rate (changes in rate
multiplied by prior year volume) and the combined impact of changes in rate and
changes in volume (changes in rate multiplied by changes in volume).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------------------- -----------------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
--------- ---------- -------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income attributable
to:
Loans*........................ $(241,586) $1,931,604 $(69,992) $1,620,026 $(177,407) $2,311,811 $ (88,743) $2,045,661
Cash-interest earning......... (2,576) (3,829) 143 (6,262) (151) 5,274 (13) 5,110
Investments................... (18,467) 252,391 (4,960) 228,964 (6,552) 159,332 (1,324) 151,456
Federal funds sold............ (7,207) 17,053 (482) 9,364 6,525 81,183 3,231 90,939
--------- ---------- -------- ---------- --------- ---------- --------- ----------
Total interest income....... (269,836) 2,197,219 (75,291) 1,852,092 (177,585) 2,557,600 (86,849) 2,293,166
--------- ---------- -------- ---------- --------- ---------- --------- ----------
Interest expense attributable
to:
DDA-interest bearing.......... (16,703) 358,955 (7,025) 335,227 56,598 324,696 42,809 424,103
Savings....................... (6,498) 12,741 (634) 5,609 (3,764) (7,365) 196 (10,933)
Certificates of deposit....... 2,102 (84,119) (113) (82,130) 5,305 337,437 1,479 344,221
Borrowings.................... (8) 75,517 (189) 75,320 438 6 2,869 3,313
--------- ---------- -------- ---------- --------- ---------- --------- ----------
Total interest expense...... (21,107) 363,094 (7,961) 334,026 58,577 654,774 47,353 760,704
--------- ---------- -------- ---------- --------- ---------- --------- ----------
Increase (decrease) in net
interest income............... $(248,729) $1,834,125 $(67,330) $1,518,066 $(236,162) $1,902,826 $(134,202) $1,532,462
========= ========== ======== ========== ========= ========== ========= ==========
</TABLE>
- -------------------------
* Income on loans includes loan fees of $552,026 for 1998, $698,937 for 1997 and
$441,330 for 1996.
PROVISION FOR LOAN LOSSES
1998 COMPARED TO 1997. The provision for loan losses was $75,000 in 1998, a
$205,000 or 73.21% decrease from 1997. The decrease in the provision for loan
losses was principally a result of sustained loan quality in the portfolio as
well as a higher than normal provision in 1997. Refer to Notes 1, 3 and 4 of
Notes to Consolidated Financial Statements for additional information.
1997 COMPARED TO 1996. The provision for loan losses was $280,000 in 1997,
compared to $180,000 in 1996, an increase of $100,000 or 55.55% over 1996. The
increase in the provision for loan losses was principally a result of increased
loan volume and anticipated future loan growth. Refer to Notes 1, 3 and 4 of
Notes to Consolidated Financial Statements for additional information.
NON-INTEREST INCOME
1998 COMPARED TO 1997. Total non-interest income was $589,554 for the year
ended December 31, 1998, an increase of $53,880 or 10.06% over 1997. Gains on
sales of securities increased $53,400 or 800.23% during 1998 as the bank took
advantage of the increase in value of the securities portfolio. Service charges
on demand accounts increased $29,771, or 16.66%, due to the growth in Nevada
Banking Company's demand deposit accounts ("DDA," or checking) during 1998 and
the accompanying growth in account-related fees, such as returned item fees.
23
<PAGE> 25
During the periods discussed herein, as a general matter management priced
deposits at rates competitive with rates offered by the leading commercial banks
in Nevada Banking Company's market area, which rates tend to be somewhat lower
than rates offered by thrift institutions in that market area. Nevada Banking
Company generally does not impose service charges and fees to the same extent as
other local institutions. Although a wider range of service charges and fees and
higher service charges and fees would yield more income for each dollar of
deposits, imposing service charges and fees on a basis equivalent to those
imposed by many other area commercial banks might adversely affect deposit
growth. To promote deposit growth and provide cross-selling opportunities to
customers, Nevada Banking Company has not adopted an aggressive fee structure.
Deposit growth was generated by developing strong customer relationships,
cross-selling deposit relationships to loan customers and obtaining increased
growth from branch offices opened in recent years. Non-interest bearing DDA
deposits grew $8,527,392 in 1998 to $32,834,442. Management intends to continue
promoting Nevada Banking Company's non-interest bearing deposit products in
order to obtain additional interest-free, lendable funds.
1997 COMPARED TO 1996. Total non-interest income was $535,674 for the year
ended December 31, 1997, an increase of $168,793, or 46%, over 1996.
Substantially all of the increase was attributable to increases in service
charges on demand accounts. Service charges on demand accounts increased $31,318
during 1997, or 21.25%, and overdraft fees increased $42,489 or 31.29%, due to
growth in the types of accounts. Nevada Banking Company realized nominal gains
on sales of assets during 1997. Other increases were attributable to increased
customer volume.
NON-INTEREST EXPENSE
1998 COMPARED TO 1997. Total non-interest expense was $4,968,259 in 1998,
an increase of $1,021,937 or 25.90% over 1997. The larger components of
non-interest expense included compensation and related benefits, which increased
$582,896, or 26.61%. The increase in compensation and related benefits expense
was due principally to increases in staff, higher pension and insurance benefit
costs and normal merit raises. The $219,638 increase during 1998 in office
occupancy and equipment expense, a 28.59% increase, was attributable in
significant part to the remodeling of the Stateline branch office and full year
operation of the Incline loan center and the Reno operations center.
Professional fees increased with additional legal expense incurred in connection
with establishment of XEON as the holding company for Nevada Banking Company in
1998.
1997 COMPARED TO 1996. Total non-interest expense was $3,946,322 in 1997,
an increase of $915,453 or 30.20% over 1996. The larger components of
non-interest expense included compensation and related benefits, which increased
$540,782, or 32.78%. The increase in compensation and related benefits expense
was due principally to increases in staff based upon a full year's operation of
the North Tahoe branch, higher pension and insurance benefit costs and normal
merit raises. The $138,377 increase during 1997 in office occupancy and
equipment expense, a 21.97% increase, was attributable in significant part to
the full year's operation of the North Tahoe branch.
The $236,324, or 31.44%, increase in other operating expense during 1997
reflects full-time operation of additional locations as well as significant
customer volume increases.
24
<PAGE> 26
FEDERAL INCOME TAXES
1998 COMPARED TO 1997. Federal income tax expense was approximately
$725,925 in 1998, compared to $596,806 in 1997 due to the increased level of
taxable income.
1997 COMPARED TO 1996. Federal income tax expense was approximately
$596,806 in 1997, compared to $352,824 in 1996, due principally to higher levels
of income.
FINANCIAL CONDITION
ASSETS. Total assets amounted to $127,594,470 at December 31, 1998,
compared to $105,646,822 at December 31, 1997, an increase of $21,947,648 or
20.77%. The growth in assets is attributable almost entirely to growth in Nevada
Banking Company's loan and deposit portfolios. Loan growth has been most
dramatic in commercial loans, which accounted for approximately 54% of the total
loan portfolio, while construction loans also contributed to loan growth. Total
loans (net of allowance for loan losses) at December 31, 1998 were $85,658,404,
compared to $69,787,260 at December 31, 1997, while total deposits at December
31, 1998 were $115,673,407, compared to $96,377,700 at December 31, 1997. Total
loan growth of $15,871,144, or 22.74%, lagged deposit growth of $19,295,707, or
20.02%, although not on a percentage basis. Accordingly, Nevada Banking Company
invested approximately $2,750,000 of the excess funds in its securities
portfolio.
Cash equivalents (cash and amounts due from banks and federal funds sold)
increased by $3,107,499, or 27.92%, during 1998, to a total of $14,236,102.
Increased year-end deposit activity accounted for the increase in cash
equivalents. (See, "Information About XEON.")
ALLOWANCE FOR LOAN LOSSES. The provision for loan losses represents a
charge to earnings for maintaining the allowance at a level management believes
is adequate. Management reviews the allowance monthly to ensure that the
allowance remains adequate to absorb potential losses identified by the
portfolio review process. Nevada Banking Company takes into account loan growth
and the level of delinquent and nonperforming loans in its review of the
portfolio, considering also such external factors as current and anticipated
economic conditions in the primary market area.
Nevada Banking Company's allowance for loan losses totaled $1,298,099 at
December 31, 1998 and $1,239,662 at December 31, 1997, representing 1.52% of
total net loans at December 31, 1998 and 1.78% of total net loans at December
31, 1997. Nevada Banking Company's nonperforming loans represented 38.23% of the
allowance at December 31, 1998, and 0.96% of the allowance at December 31, 1997.
Although management believes that it uses the best information available in
providing for possible loan losses and believes that the allowance was adequate
at December 31, 1998, future adjustments to the allowance could be necessary and
net earnings could be affected if circumstances and/or economic conditions
differ substantially from the assumptions used in making the initial
determinations.
CAPITAL
Stockholders' equity increased to $10,158,500 at December 31, 1998, due
primarily to XEON's earnings. As of December 31, 1998, XEON and Nevada Banking
Company were
25
<PAGE> 27
in compliance with applicable regulatory capital requirements, as shown in the
following table. (See "Supervision and Regulation -- Capital.")
<TABLE>
<CAPTION>
MINIMUM NECESSARY
TO BE MINIMUM NECESSARY TO BE
AT DECEMBER 31, 1998 WELL CAPITALIZED ADEQUATELY CAPITALIZED
-------------------- ----------------- -----------------------
<S> <C> <C> <C>
Total Risk-Based
Capital Ratio...... 12.4% 10.00% 8.00%
Tier 1 Risk-Based
Capital Ratio...... 11.2% 6.00% 4.00%
Leverage Ratio....... 8.1% 5.00% 3.00%
</TABLE>
As of December 31, 1998, XEON's ratio of total equity capital to totals
assets was 7.96%. Based on capital levels at December 31, 1998, Nevada Banking
Company qualifies as a "well-capitalized" institution, the highest of five tiers
under applicable regulatory definitions.
LIQUIDITY
Like other financial institutions, Nevada Banking Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments and
expenses. Control of cash flow requires that Nevada Banking Company anticipate
deposit flows and loan payments. The primary sources of funds are deposits,
principal and interest payments on loans, proceeds of loan sales, federal funds
and FHLB borrowings. These funds are used principally to originate loans.
At December 31, 1998, certificates of deposit represented 21.89% of total
deposits, while DDA (checking accounts) represented 28.39% and savings accounts
49.72%. Of the total $25,322,439 certificates of deposit at December 31, 1998,
certificates totaling $22.6 million will mature in 1999, and certificates
totaling $1.6 million mature in 2000. Together, these figures represent 95.6% of
the total certificates of deposit at December 31, 1998. Management believes
that, consistent with experience, the majority of maturing certificates of
deposit will be renewed at market rates of interest.
Nevada Banking Company has used advances from the FHLB of San Francisco as
a source of funds for its lending activity. The amount that may be obtained in
the form of advances from the FHLB is determined by a formula on a quarterly
basis. The formula is based upon the total amount of qualified single-family
mortgages in Nevada Banking Company's portfolio, as reported in Nevada Banking
Company's quarterly call report, the percentage of Nevada Banking Company's
total loan portfolio represented by single-family mortgages and the amount of
FHLB stock held by Nevada Banking Company. At December 31, 1998, Nevada Banking
Company had $1,000,000 outstanding FHLB advances. As of January 1, 1999, Nevada
Banking Company could have obtained additional advances from the FHLB of San
Francisco of approximately $6,610,997. (See, "Supervision and
Regulation -- Federal Home Loan Banks.") In addition, Nevada Banking Company may
also obtain funds from the Federal Reserve Bank of San Francisco through a
$960,000 overnight line of credit.
As of December 31, 1998, Nevada Banking Company had commitments to fund
approximately $10,850,315 of fixed-rate loans, and $14,628,955 of variable-rate
and adjustable-rate loans, compared to commitments at December 31, 1997 to fund
approximately $5,296,956 of fixed-rate loans and $23,642,258 of variable-rate
and
26
<PAGE> 28
adjustable-rate loans. Included within these commitments at December 31, 1998
are unused commercial lines of credit of $19,692,352 and standby letters of
credit of $735,419. Management believes Nevada Banking Company has adequate
resources to meet its normal funding requirements.
ASSET/LIABILITY MANAGEMENT
Like other financial institutions, Nevada Banking Company is subject to
interest rate risk. Nevada Banking Company's interest-earning assets could
mature or reprice more rapidly than, or on a different basis from, its
interest-bearing liabilities (primarily borrowings and deposits with short- and
medium-term maturities) in a period of declining interest rates. Although having
assets that mature or reprice more frequently on average than liabilities will
be beneficial in times of rising interest rates, such an asset/liability
structure will result in lower net interest income during periods of declining
interest rates.
Nevada Banking Company monitors its interest rate sensitivity position and
attempts to limit the exposure to interest rate risk. The bank's policy is that
the one-year cumulative interest rate sensitivity gap should generally be within
a range of negative 10% to positive 10%. As the following table illustrates, the
one-year gap was within policy limits.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE TABLE WHICH FOLLOWS]
27
<PAGE> 29
The following table illustrates the maturities or repricing of Nevada
Banking Company's assets and liabilities at December 31, 1998, based upon the
contractual maturity or contractual repricing dates of loans and the contractual
maturities of time deposits. Prepayment assumptions have not been applied to
fixed-rate mortgage loans. Allocation of deposits other than time deposits to
the various maturity and repricing periods is based upon management's best
estimate, taking into account, among other things, the proposed policy statement
issued by federal bank regulators on August 4, 1995.
<TABLE>
<CAPTION>
MATURING OR REPRICING PERIODS
--------------------------------------------------------------------
WITHIN 4 - 12 1 - 5 OVER 5
3 MONTHS MONTHS YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Adjustable-rate real estate
loans..................... $ 9,046,183 $ -- $ -- $ -- $ 9,046,183
Fixed-rate real estate
loans..................... 6,661,631 7,195,847 3,802,752 9,885 17,670,115
Commercial loans............ 7,288,388 11,301,434 15,057,292 13,306,607 46,953,721
Consumer loans.............. 1,217,345 2,338,431 3,697,913 315,949 7,569,638
Other loans................. 6,013,030 -- -- -- 6,013,030
Investments securities
available for sale........ 21,797,125 -- -- -- 21,797,125
Equity securities........... 390,900 -- -- -- 390,900
Interest-bearing deposits in
other banks............... 396,000 694,000 -- -- 1,090,000
Fed Funds................... 8,000,000 -- -- -- 8,000,000
----------- ----------- ----------- ----------- ------------
Total................ $60,810,602 $21,529,712 $22,557,957 $13,632,441 $118,530,712
=========== =========== =========== =========== ============
INTEREST-BEARING LIABILITIES:
Certificates of deposit..... $ 7,284,091 $15,339,207 $ 2,699,141 $ -- $ 25,322,439
Money market................ 32,553,126 -- -- -- 32,553,126
NOW accounts................ 18,573,215 -- -- -- 18,573,215
Passbook accounts........... 6,390,185 -- -- -- 6,390,185
FHLB Advances............... 1,000,000 -- -- -- 1,000,000
----------- ----------- ----------- ----------- ------------
Total................ $65,800,617 $15,339,207 $ 2,699,141 $ -- $ 83,838,965
=========== =========== =========== =========== ============
Interest Rate Sensitivity
Gap......................... $(4,990,015) $ 6,190,505 $19,858,816 $13,632,441 $ 34,691,747
Cumulative Interest Rate
Sensitivity Gap............. $(4,990,015) $ 1,200,490 $21,059,306 $34,691,747
Cumulative Interest Rate
Sensitivity Gap as a Percent
of Total Assets............. 3.91% 0.94% 16.50% 27.19%
</TABLE>
This analysis of interest-rate sensitivity has a number of limitations. The
"gap" analysis above is based upon assumptions concerning such matters as when
assets and liabilities will reprice in a changing interest rate environment.
Because these assumptions are no more than estimates, certain assets and
liabilities indicated as maturing or repricing within a stated period might
actually mature or reprice at different times and at different volumes from
those estimated. The actual prepayments and withdrawals experienced by Nevada
Banking Company in the event of a change in interest rates could deviate
significantly from those assumed in calculating the data shown in the table.
Certain assets, adjustable-rate loans for example, commonly have provisions that
limit changes in interest rates each time the interest rate changes and on a
cumulative basis over the life of the loan. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. The ability of many borrowers to service their debt could
diminish in the event of an interest rate increase. Therefore, the gap table
28
<PAGE> 30
above does not and cannot necessarily indicate the actual future impact of
general interest movements on net interest income.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (which is referred to hereinafter
as "FASB") issued Statement of Financial Accounting Standards, SFAS No. 130,
"Reporting Comprehensive Income" which is effective for fiscal years beginning
after December 15, 1997. Components of comprehensive income are net income and
all other non-owner changes in equity. SFAS No. 130 requires an entity to report
accumulated other comprehensive income separately from retained earnings and
additional paid-in capital in the financial statements in the equity section.
XEON's comprehensive income for the year ended December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income.............................................. $1,727,284 $1,101,394
Accumulated other comprehensive income:
Unrealized gain on securities available for sale...... 90,376 118,242
---------- ----------
Comprehensive income.................................... $1,817,660 $1,219,636
========== ==========
</TABLE>
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," with an effective date for years beginning after December
15, 1997. It redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a
corporation's operating segments. It also requires that comparative information
from earlier periods be restated to conform to the requirements of this
standard. The adoption of this statement did not result in additional
disclosures for XEON.
FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits," which is effective for fiscal years beginning after
December 15, 1997. This Statement provides for standardized disclosures of
benefit plans, dropping some information that is no longer useful (amending FASB
Statements No. 87, 88, and 106), and requiring additional information on changes
in benefit obligations and fair values of plan assets that will facilitate
financial analysis. This did not result in additional disclosures in XEON's
year-end financial statements.
FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" with an effective date for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize derivatives as either assets or liabilities at
fair value, with gains or losses determined depending on the intended use of the
derivative and its resulting designation. SFAS No. 133 will not be applied
retroactively to prior period financial statements. At the present time, XEON
has not fully analyzed the effect or timing of the adoption of this statement on
XEON's consolidated statements.
29
<PAGE> 31
IMPACT OF INFLATION AND CHANGING PRICES
XEON's consolidated financial statements and related data herein have been
prepared in accordance with generally accepted accounting principles, which
require measurement of financial condition and results of operations in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Because the primary assets and liabilities of XEON and Nevada Banking
Company are monetary in nature, changes in the general level of prices for goods
and services have a relatively minor impact on total expenses. Increases in
operating expenses such as salaries and maintenance are in part attributable to
inflation. However, interest rates have a far more significant effect than
inflation on the performance of financial institutions, including XEON. (See,
"-- Asset/Liability Management.")
YEAR 2000 READINESS DISCLOSURE
XEON is aware of the concern throughout the business community of reliance
upon computer software programs that do not properly recognize the year 2000 in
date formats, commonly referred to as the "Year 2000 Problem." XEON, and
especially Nevada Banking Company, use and are dependent upon data processing
systems and software to conduct business. Like other businesses, XEON and Nevada
Banking Company's business depends upon products and services provided by
others, whether in the area of information technology or other areas such as
security, environmental systems, power and communications. Failure to address
the Year 2000 Problem could cause service disruptions to customers, resulting in
adverse impacts to XEON's financial condition and results of operations.
An assessment of Nevada Banking Company's software, hardware, environmental
and other computer-controlled systems has been completed. Mission-critical
systems relating both to information technology and other technology have been
identified and prioritized. A written testing plan providing for the testing of
all mission-critical systems has been completed.
Testing of Nevada Banking Company's internal mission-critical systems, such
as the bank's wide area network, was substantially completed at the end of 1998.
The network is compliant with Year 2000, with the exception of necessary
replacement of several PCs. Concerning external mission-critical systems, Nevada
Banking Company's primary data-processing function is undertaken pursuant to a
contract with a data-processing firm that services banking institutions
nationwide. Nevada Banking Company has received group testing results from this
software and hardware provider, which was successful for Year 2000 compliance.
The bank is now in the process of verifying those results. All other third-
party vendors and software providers have been contacted to request that these
vendors demonstrate and represent that the products provided to Nevada Banking
Company are or will be Year 2000 compliant. Nevada Banking Company anticipates
that all testing will be complete, and all systems compliant or upgraded prior
to June 30, 1999.
The Federal Reserve Bank of San Francisco provides certain services for
Nevada Banking Company, including electronic funds transfer. Nevada Banking
Company has successfully tested the software and hardware used to transmit and
receive data from the San Francisco Federal Reserve Bank (Fedline).
Nevada Banking Company has also surveyed its entire customer base, accounts
payable vendors, and all loan customers to assess the risk posed by these
parties and to
30
<PAGE> 32
determine their readiness for Year 2000. Based on that survey, Nevada Banking
Company anticipates that there will not be significant Year 2000 risks created
by large borrowers or depositors. The bank has also evaluated the percent of
high-risk borrowers, and believes that the bank's allowance for loan loss
reserve is adequate in the event these high-risk borrowers experience Year 2000
problems.
XEON does not expect costs associated with prevention or remediation of the
Year 2000 Problem to be material. In general, XEON does not expect the Year 2000
Problem to affect materially XEON's financial condition or results of
operations.
The largest general risk to XEON and Nevada Banking Company concerning Year
2000 is the malfunction of the data processing system. If the data processing
system does not function properly, Nevada Banking Company is prepared to perform
functions manually. However, Nevada Banking Company has been assured by its
third-party data-processing vendor that the data processing firm's systems are
Year 2000 compliant. This firm has also undergone formal examinations conducted
by the FDIC, using the FFIEC examination guidelines.
XEON expects that there may be additional risks in the form of temporary
and periodic failures in utilities and communications, as well as liquidity
problems caused by large cash withdrawals and reductions in balances on deposit.
XEON and Nevada Banking Company have identified critical business processes that
may be affected by the Year 2000 problem and are in the process of developing
contingency plans for each identified critical business process. The bank is
actively seeking alternative sources of cash and funds to replace possible
withdrawals, and is taking steps to ensure customer confidence in Nevada Banking
Company's ability to meet the Year 2000 challenge. Contingency and business
resumption plans are scheduled to be completed by March 31, 1999. XEON and
Nevada Banking Company are prepared to perform functions manually if short-term
failures in the primary data processing, utilities or communications systems
occur.
31
<PAGE> 33
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of First
Security and XEON and combined per share data on an unaudited pro forma basis
after giving effect to the merger on a purchase basis assuming that the market
price for First Security common stock is $17.00 per share so that approximately
0.5996 shares of First Security common stock are issued in exchange for each
XEON Share. This data should be read in conjunction with the selected historical
financial data set forth herein and the historical financial statements of XEON
and the notes thereto that are incorporated herein by reference. The pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of the combined financial position or results of operations of future
periods or the results that actually would have been realized had the entities
been a single entity during the periods presented.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA (1,2,3)
---------------- ------------------
BASIC DILUTED BASIC DILUTED
----- ------- ------ --------
<S> <C> <C> <C> <C>
First Security:
Net income (loss) per common share.......... $1.32 $1.28 $0.79 $0.76
Book value per common share................. 8.54 5.10
XEON:
Net income (loss) per common share.......... $0.62 $0.53 $0.79 $0.76
Book value per common share 3.59 5.10
</TABLE>
- -------------------------
(1) The unaudited equivalent XEON pro forma share amounts are calculated by
multiplying the First Security combined pro forma per share amounts by the
Exchange Ratio. (See, "The Merger -- Conversion of Shares; Exchange Ratio.")
(2) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of common stock outstanding at the end of each
period. Pro forma book value per share is computed by dividing pro forma
stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of 1998.
(3) The pro forma book value does not give effect to First Security's pending
acquisition of Comstock Bancorp, Reno, Nevada or First Security's recently
completed acquisition of Van Kasper & Company, San Francisco, California.
First Security anticipates issuing not more than approximately 2,000,000 and
not less than 1,500,000 shares of common stock in the Comstock transaction
and 3,337,634 shares were issued in the Van Kasper & Company acquisition.
32
<PAGE> 34
COMPARATIVE MARKET PRICE AND DIVIDENDS INFORMATION
First Security common stock is quoted through the NASDAQ National Market
under the symbol "FSCO". The following table sets forth the high and low sales
price of First Security common stock for each quarter since the first quarter of
1996. The cash dividends declared per share for the calendar periods are also
indicated. The information presented below for First Security was obtained from
the National Association of Securities Dealers, Inc. ALL FIRST SECURITY NUMBER
OF SHARES AND PER SHARE INFORMATION ARE ADJUSTED FOR A NUMBER OF FIRST SECURITY
STOCK SPLITS TAKING PLACE IN THE PERIOD 1993-1998, THE MOST RECENT HAVING BEEN
PAID ON FEBRUARY 24, 1998. THIS INFORMATION HAS ALSO BEEN ADJUSTED FOR THE
POOLING OF INTERESTS MERGER INVOLVING FIRST SECURITY'S ACQUISITION OF CALIFORNIA
STATE BANK ON MAY 30, 1998.
<TABLE>
<CAPTION>
PRICE OF FIRST DIVIDENDS
SECURITY DECLARED PER
COMMON STOCK FIRST SECURITY
--------------- COMMON
HIGH LOW SHARE
------ ------ --------------
<S> <C> <C> <C>
1999
4/1/99 -- 4/20/99................................ $19.13 $17.88
First Quarter.................................... 23.75 17.56 $0.14
1998
Fourth Quarter................................... $23.31 $15.94 $0.13
Third Quarter.................................... 23.94 15.50 0.13
Second Quarter................................... 24.75 21.00 0.13
First Quarter.................................... 26.17 21.83 0.13
1997
Fourth Quarter................................... $27.92 $19.08 $0.11
Third Quarter.................................... 21.33 17.58 0.11
Second Quarter................................... 19.00 14.45 0.11
First Quarter.................................... 16.56 14.22 0.10
1996
Fourth Quarter................................... $15.17 $12.50 $0.10
Third Quarter.................................... 12.50 10.56 0.09
Second Quarter................................... 12.28 10.17 0.09
First Quarter.................................... 12.33 10.30 0.09
</TABLE>
The closing price of First Security common stock as reported on the NASDAQ
National Market on December 29, 1998, the last trading day prior to the public
announcement of the merger agreement was $21.75 per share. On December 29, 1998,
the last trading day before we announced the merger, XEON common stock closed at
$7.44 per share.
On April , 1999, the last practicable date prior to mailing this
Prospectus/Proxy Statement, the closing price for First Security common stock
was $ per share, and the closing price for XEON common stock was $ per
share.
First Security has paid cash dividends on its common and preferred stock
without reduction in amount for over 60 consecutive years. Since 1983, these
dividends have been paid quarterly. Future dividends on First Security common
stock will be determined by First Security's Board of Directors in light of
circumstances existing at the time, including
33
<PAGE> 35
the earnings and financial condition of First Security, and there is no
assurance that dividends will continue to be paid at current levels. No material
restrictions have been imposed on First Security's ability to pay dividends from
its earned surplus by bank regulations or applicable law. Payment of dividends
on the First Security common stock is also subject to the prior rights of First
Security's outstanding Preferred Stock.
XEON stockholders are advised to obtain current market quotations for First
Security common stock. No assurances can be given concerning the market price of
the First Security common stock before or after the date on which the merger is
consummated. The market price of First Security common stock will fluctuate
between the date of this Prospectus/Proxy Statement and the Closing Date and
thereafter. Because the market price of First Security common stock is subject
to fluctuation, the value of the shares of First Security common stock that XEON
stockholders will receive under the merger agreement may increase or decrease
prior to and following the Closing.
The public market for XEON common stock is very limited. Trading in XEON
common stock occurs on a sporadic basis. Beginning in December 1996, A.G.
Edwards & Sons, Inc. facilitated trades of Nevada Banking Company common stock
by matching interested buyers and sellers. Torrey Pines Securities, Inc. is
currently the principal market maker for XEON common stock. Nevada Banking
Company common stock began trading on the OTC Bulletin Board, an electronic
screen-based market maintained by the National Association of Securities
Dealers' subsidiary, NASD Regulation, Inc., on December 4, 1997 under the symbol
"NVBC." Since the October 1998 holding company reorganization of Nevada Banking
Company, XEON common stock has continued to trade under the symbol "NVBC" on the
OTC Bulletin Board. On December 29, 1998, the average of the bid and asked
prices for XEON common stock was $7.44 per share. On April , 1999, the closing
bid and asked prices for XEON common stock was $ bid and $
asked per share. These over-the-counter market quotations do not reflect retail
mark-up, mark-down or commissions and do not necessarily represent actual
transactions in XEON common stock. Because of the limited market for XEON common
stock, historical information concerning high and low bid and asked prices is
not included herein.
DIVIDENDS. The ability of First Security Corporation to pay dividends to
stockholders is subject to bank regulatory restrictions. (See, "Supervision and
Regulation -- Limits on Dividends and Other Payments.")
Because dividends from Nevada Banking Company are XEON's principal source
of income, dividends to stockholders of XEON depend upon receipt by XEON of
dividends from Nevada Banking Company. The ability of Nevada Banking Company to
pay dividends is restricted by bank regulation. (See, "Supervision and
Regulation -- Limits on Dividends and Other Payments.") Nevada Banking Company
has no formal dividend policy. Nevada Banking Company's first dividend ($.01 per
share) was paid to stockholders of record as of the end of June 1997. Nevada
Banking Company and, since the October 1998 holding company reorganization, XEON
have continued to pay quarterly cash dividends of $.01 per share since that
time. If the Merger is not consummated as expected, the Board of Directors will
continue from time to time to give consideration to the declaration and payment
of dividends based on consideration of such factors as XEON's and Nevada Banking
Company's earnings, capital position, financial prospects, need for funds and
similar factors.
34
<PAGE> 36
RESALE OF FIRST SECURITY SHARES RECEIVED IN THE MERGER
The shares of First Security common stock to be issued to XEON stockholders
in connection with the merger will be registered with the Securities and
Exchange Commission under the provisions of the Securities Act of 1933 ("the
Securities Act").
Resales of the First Security common stock received in connection with the
merger agreement will need to be in compliance with applicable state securities
laws and regulations, and this compliance will be the responsibility of the
selling or transferring stockholder. For most XEON stockholders, the First
Security shares received in the merger will be freely transferable.
First Security shares received by persons who are deemed to be "affiliates"
of XEON for purposes of Rule 145 under the Securities Act, may be resold by them
only in transactions permitted by such Rule, or as otherwise permitted under the
Securities Act. Rule 145 applies certain of the requirements and provisions of
Rule 144 (applicable to unregistered shares) to registered shares received by an
affiliate of a party to a merger transaction. Rule 144, in turn, applies certain
restrictions on method and amount of securities sales. As a condition to the
Closing on the merger agreement, each person who is so identified is required to
deliver to First Security at or prior to Closing a written agreement
satisfactory to counsel for First Security that such person and his or her
"associates" (as defined for purposes of Rule 145) will not offer to sell or
otherwise dispose of any shares of First Security common stock issued to such
person or his or her associates pursuant to the merger agreement in violation of
the Securities Act or the regulations thereunder.
THE MERGER
The following is a summary of certain provisions of the merger agreement, a
copy of which is attached hereto as Appendix A and incorporated herein by
reference. Such summary is qualified in its entirety by reference to the full
text of the merger agreement.
GENERAL
Subject to the terms and conditions of the merger agreement, XEON will
merge with and into First Security, and XEON's subsidiary, Nevada Banking
Company, will merge with and into First Security Bank of Nevada.
THE EFFECTIVE TIME
Promptly after all conditions to the merger agreement have been satisfied
or waived, the appropriate corporate filings pertaining to the merger or such
other documents as may be appropriate or necessary to effect the merger, will be
executed and filed in accordance with applicable Nevada law and applicable
Delaware law. At that time the merger will become effective.
MANAGEMENT OF XEON FOLLOWING THE MERGER
XEON and Nevada Banking Company will cease to exist following the merger.
Offices of Nevada Banking Company will become branches of First Security Bank of
35
<PAGE> 37
Nevada. All First Security Bank of Nevada offices are managed according to First
Security policies and procedures, and offer products and services authorized by
First Security.
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF XEON'S BOARD OF
DIRECTORS
In the early months of 1998, Nevada Banking Company was contacted by three
bank holding companies, each inquiring whether Nevada Banking Company would be
interested in discussing a potential merger transaction. As part of an ongoing
process, the Board of Directors and management of Nevada Banking Company had
been informally studying and analyzing whether the company should (i) continue
to function as an independent organization, (ii) acquire or merge with other
banks of a similar or smaller size or (iii) be acquired or enter into a business
combination with a larger publicly traded financial institution. The Board and
management determined that significant investments in technology, data
processing systems, employee training, marketing expenditures, management and
product development as well as additional physical facilities were necessary to
continue Nevada Banking Company's growth as a high-performance, independent
organization.
With no assurance that Nevada Banking Company could achieve sufficiently
profitable growth to compete independently in a consolidating marketplace, the
Board and management considered a strategy of growth through acquisition of
similarly situated financial institutions, meaning an institution of an asset
size smaller than or equal to Nevada Banking Company and facing many of the same
competitive challenges. In the consolidating financial services marketplace, the
Board and management believed increasingly large capital investments were
necessary to develop and maintain competitive products and services. For a
number of reasons, the Board and management considered it unlikely that Nevada
Banking Company could consummate transactions that would be materially additive
to stockholder values. These reasons included historically high acquisition
prices being paid to selling institutions, Nevada Banking Company's relatively
modest equity capital base and the relative illiquidity of and limited market
for Nevada Banking Company's common stock. The Board and management concluded
that merger with a larger, publicly traded organization was attractive, because
it would likely make Nevada Banking Company's franchise more competitive and
provide stockholders with potential liquidity for their investment.
In the Summer of 1998, the Board requested that Dain Rauscher Wessels
assist Nevada Banking Company in the preparation of a confidential information
memorandum that could be distributed to potential acquirers in a confidential
auction process. In early September 1998, Dain Rauscher Wessels contacted six
prospective acquirers for the purpose of initiating merger discussions. Four of
those entities executed confidentiality agreements and were provided a copy of
the confidential information memorandum. Two of these organizations submitted
written indications of interest to Dain Rauscher Wessels on the requested
September 30, 1998 due date. After reviewing the indications of interest, Nevada
Banking Company's Board elected to enter into a non-binding letter of intent
with First Security Corporation and to negotiate exclusively with First Security
Corporation for a 60-day period.
36
<PAGE> 38
The primary reasons for Nevada Banking Company's decision to proceed with
First Security Corporation's non-binding letter of intent included:
- the relative magnitude of the common stock consideration offered to
stockholders,
- the perceived level of First Security Corporation's interest in pursuing
the merger transaction,
- the likelihood that a transaction with First Security Corporation would
be consummated if mutually acceptable terms would be agreed upon,
- First Security Corporation's prior record of making acquisitions,
- the geographic and product synergy of the operations of Nevada Banking
Company and First Security Corporation, and
- First Security Corporation's market capitalization and related liquidity
in its common stock.
Prior to commencement of First Security Corporation's on-site due diligence
review, three senior executives of First Security Corporation were invited to
attend XEON's November 6, 1998 Board meeting to assess the respective
organizations' potential compatibility in a merger context (the holding company
reorganization of Nevada Banking Company having been completed just three weeks
prior to the November 6, 1998 meeting). At this meeting First Security
Corporation discussed its operating strategies, product offerings, geographic
markets and acquisition philosophy. First Security Corporation was subsequently
invited to conduct an on-site due diligence review. After the November 6, 1998
Board meeting, XEON and its legal and financial advisors negotiated the terms of
the merger agreement and related transaction documents with First Security and
its legal counsel.
At a special meeting of XEON's Board of Directors on December 29, 1998,
Dain Rauscher Wessels reviewed with the Board the events leading up to the
proposed merger. The Board's legal counsel discussed directors' fiduciary
obligations to XEON stockholders in connection with the proposed transaction and
summarized the terms of the proposed merger agreement. Dain Rauscher Wessels
delivered its opinion that the consideration to be received by XEON stockholders
would be fair from a financial point of view. By a unanimous vote of directors
present, XEON's Board of Directors approved the merger agreement and the related
documents. (See, "-- Opinion of Financial Advisor.")
In reaching its decision to recommend approval of the Merger, the XEON
Board considered a variety of factors. Among other factors, the Board
considered:
1. The financial terms of the merger, including the exchange ratio,
and the value of the consideration to be received by XEON
stockholders in relation to XEON's book value and earnings and
compared to consideration paid in comparable merger transactions.
2. The terms and conditions offered by other potential acquirors
involved in the sale process.
3. The business and financial condition of First Security Corporation,
the nature of its franchise, its historic profitability, its
business and operating philosophy and its stock price performance.
37
<PAGE> 39
4. Potential liquidity available to stockholders of XEON resulting
from receiving publicly traded shares of First Security
Corporation.
5. Tax treatment of the exchange -- a tax-deferred exchange of XEON
common stock for First Security Corporation common stock for
federal income tax purposes.
6. Dain Rauscher Wessels' opinion concerning the fairness of the
merger consideration to the holders of XEON common stock from a
financial point of view.
7. First Security Corporation's experience implementing and closing
bank acquisitions, and the likelihood that the required regulatory
approvals could be obtained to consummate the merger.
8. The likelihood that the merger with First Security Corporation
would make XEON a stronger entity, better able to serve the
convenience and needs of its community and customers as a result of
affiliation with a substantially larger banking institution,
offering access to greater financial and managerial resources and a
broader array of potential products, services and technologies.
9. Diversification of investment risk available to holders of XEON
common stock who would own shares in a larger, more geographically
diverse financial institution.
For the reasons set forth above, the Board of Directors of XEON unanimously
recommends that XEON stockholders vote "for" the merger agreement. The foregoing
discussion of the information and factors considered by the XEON Board is not
intended to be exhaustive, but it includes the material factors considered by
the Board in its decision to approve and recommend the merger. The Board did not
assign any relative or specific weights to the foregoing factors, and the
individual directors may have given differing weights to different factors.
OPINION OF XEON'S FINANCIAL ADVISOR
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, was
retained on April 14, 1998 to act as financial advisor to Nevada Banking Company
in connection with a possible sale or merger, and to provide an opinion to the
Board of Directors as to the fairness, from a financial point of view, of the
consideration to be received by stockholders in connection with any such sale or
merger. While Dain Rauscher Wessels acted as financial advisor, provided certain
analysis to the Board and assisted management in the negotiations between XEON
and First Security, Dain Rauscher Wessels was not requested to and did not make
any recommendation to the Board of Directors as to the form or amount of
consideration in connection with the merger. (See, "Background of and Reasons
for the Merger.")
Dain Rauscher Wessels rendered an opinion to the XEON Board that, as of
December 29, 1998, the consideration to be received in the merger by the holders
of XEON common stock is fair to such stockholders from a financial point of
view. A copy of the opinion of Dain Rauscher Wessels is attached as Appendix B
to this Prospectus/ Proxy Statement.
38
<PAGE> 40
There were no limitations imposed by XEON on the scope of Dain Rauscher
Wessels' investigation, and Dain Rauscher Wessels did solicit proposals from
multiple parties other than First Security regarding a potential sale or merger
of XEON with such parties. Dain Rauscher Wessels' opinion did not address XEON's
underlying business decision to proceed with the merger. As set forth in its
opinion, Dain Rauscher Wessels relied on, and did not independently verify, the
accuracy and completeness of the financial and other information furnished to it
by XEON. Dain Rauscher Wessels did not make an independent evaluation or
appraisal of the assets and liabilities of XEON or First Security, and did not
express any opinion regarding the liquidation value or regulatory compliance of
either entity. XEON stockholders are urged to read Dain Rauscher Wessels'
opinion in its entirety for a summary description of the procedures followed,
the factors considered and the assumptions made by Dain Rauscher Wessels in
rendering its opinion.
In connection with its opinion, Dain Rauscher Wessels, among other things:
(i) reviewed a draft of the merger agreement dated December 21, 1998 and drafts
of selected other documents related to the merger; (ii) visited the headquarters
of XEON and First Security; (iii) held discussions with certain members of the
management of XEON and First Security regarding the business, operations and
prospects of each company and their reasons for completing the merger; (iv)
reviewed certain business and financial information related to XEON, including
summary financial forecasts that had been prepared and provided by the
management of XEON; (v) reviewed certain publicly available documents filed by
First Security with the SEC pursuant to the Securities Exchange Act of 1934;
(vi) compared certain financial statistics of XEON and First Security with
statistics for other publicly traded companies deemed comparable; (vii) reviewed
price and trading data of the common stock of XEON; and (viii) to the extent
publicly available, compared the financial terms of the merger with those of
other transactions deemed comparable. Dain Rauscher Wessels used the foregoing
information to further its understanding of XEON and First Security and the
market for each company's common stock.
In conducting the review and in performing the analyses described below,
Dain Rauscher Wessels did not attribute any particular weighting to any
information or analysis considered by it, but rather made qualitative judgments
as to the significance and relevance of each factor and analysis. Accordingly,
Dain Rauscher Wessels believes that the information reviewed and the analyses
conducted must be considered as a whole and that considering any portion of such
information or analyses, without considering all of such information and
analyses, could create a misleading or incomplete view of the process underlying
its opinion.
In delivering its opinion to the XEON Board on December 29, 1998, Dain
Rauscher Wessels prepared and delivered to the XEON Board certain written
materials containing a summary of various analyses and information that Dain
Rauscher Wessels considered material to its opinion. The following is a summary
of certain of these materials:
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES -- XEON. Dain Rauscher
Wessels compared XEON's financial information and recent prices of XEON common
stock to similar information for 18 publicly traded banks headquartered in the
western United States with historical financial performance similar to XEON (the
"XEON Comparable Companies"). The XEON Comparable Companies were selected
because they (i) were headquartered in one of 11 western states, (ii) had total
assets of $500 million or less, (iii) had a ratio of nonperforming assets to
total assets of less than 1%, and (iv) had
39
<PAGE> 41
generated a return on average to assets in excess of 1% for the last twelve
months as of the last publicly reported date.
Dain Rauscher Wessels calculated valuation ratios based on published stock
prices for each of the XEON Comparable Companies. The valuation ratios were
based upon several variables, including earnings per share for the latest twelve
months ("LTM"), earnings per share ("EPS") estimated for the current and next
fiscal years, total assets, book value and tangible book value. The estimates of
EPS for the XEON Comparable Companies were based upon consensus earnings
estimates obtained from an independent reporting system that monitors estimates
prepared by research analysts from various investment firms.
Dain Rauscher Wessels compared the historical performance and expectations
for the XEON Comparable Companies with the performance and management's
expectations for future profitability of XEON. Based upon this comparison, Dain
Rauscher Wessels determined that the median valuation ratios for the XEON
Comparable Companies were the appropriate benchmarks against which the value of
XEON common stock should be measured; accordingly, Dain Rauscher Wessels
computed the same valuation ratios for XEON common stock based on (i) the
closing sale price for XEON common stock on December 28, 1998, and (ii) the
value per share to be received by XEON stockholders in connection with the
merger, calculated as of December 28, 1998, and compared such ratios to the
median valuation ratios for the XEON Comparable Companies. The following table
lists the results of this analysis:
<TABLE>
<CAPTION>
MULTIPLE FOR XEON
MEDIAN COMMON STOCK BASED UPON
FOR XEON --------------------------
COMPARABLE CLOSING PRICE MERGER
COMPANIES ON DEC. 28, 1998 PRICE
---------- ---------------- ------
<S> <C> <C> <C>
Valuation Variable:
Price/Book value........................ 1.94x 2.34x 3.21x
Price/Tangible book value............... 2.11 2.34 3.21
Price/Assets............................ 0.20 0.18 0.25
Price/LTM EPS........................... 13.9 14.9 20.4
Price/1998 EPS estimate................. 13.7 13.7 18.8
Price/1999 EPS estimate................. 12.2 11.7 16.0
</TABLE>
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES -- FIRST SECURITY. Dain
Rauscher Wessels compared First Security's financial information and recent
prices of First Security common stock to similar information for 17 selected
publicly traded regional banks, including: Associated Banc-Corp, City National,
Colonial BancGroup, Community First Bankshares, Compass Bancshares, Cullen/Frost
Bankers, Hibernia Corporation, KeyCorp, Marshall & Ilsley, Mercantile
Bancorporation, Pacific Century Financial, TCF Financial, UnionBanCal
Corporation, Union Planters Corporation, U.S. Bancorp, Westamerica
Bancorporation, and Zions Bancorporation (the "First Security Comparable
Companies").
Dain Rauscher Wessels calculated valuation ratios similar to those
described above for each of the First Security Comparable Companies. Dain
Rauscher Wessels compared the historical performance and expectations for the
First Security Comparable Companies with the performance and expectations for
future profitability of First Security. Based upon this comparison, Dain
Rauscher Wessels determined that the median valuation ratios for the First
Security Comparable Companies were the appropriate benchmarks against which the
value of First Security common stock should be measured; accordingly, Dain
Rauscher Wessels computed the same valuation ratios for First Security common
stock based on the
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closing sale price for First Security common stock on December 28, 1998, and
compared such ratios to the median valuation ratios for the First Security
Comparable Companies. The following table lists the results of this analysis:
<TABLE>
<CAPTION>
MEDIAN FOR
FIRST SECURITY
COMPARABLE FIRST
COMPANIES SECURITY
-------------- --------
<S> <C> <C>
Valuation Variable:
Price/Book value...................................... 2.34x 2.49x
Price/Tangible book value............................. 3.11 2.86
Price/Assets.......................................... 0.19 0.20
Price/LTM EPS......................................... 16.1 16.6
Price/1998 EPS estimate............................... 15.2 14.5
Price/1999 EPS estimate............................... 13.2 12.4
</TABLE>
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Dain Rauscher
Wessels reviewed and summarized the terms of relevant merger and acquisition
transactions, including 43 acquisitions of small-cap banks located throughout
the United States (the "National Bank Acquisitions") and 16 acquisitions of
banks of all sizes located in one of six western states (the "Regional Bank
Acquisitions"). In both cases, Dain Rauscher Wessels concentrated on
transactions that were announced after June 1, 1998, and those for which
relevant financial data were available.
For purposes of evaluating the First Security merger, valuation multiples
were calculated for each of the acquisitions based upon several variables,
including book value, tangible book value, assets, LTM earnings per share and
the ratio of the premium paid to tangible equity over core deposits. These
valuation multiples were then compared to the valuation multiples implied in the
First Security merger. The following table lists the results of Dain Rauscher
Wessels' analysis of selected merger and acquisition transactions:
<TABLE>
<CAPTION>
VALUATION RATIOS
-----------------------------------------------
PRICE PRICE TO PRICE PRICE PREMIUM
TO BOOK TANGIBLE TO TO LTM TO CORE
VALUE BOOK ASSETS EPS DEPOSITS
------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
National Bank Acquisitions (median).... 2.50x 2.50x 0.23x 19.3x 19.8%
Regional Bank Acquisitions (median).... 2.10 2.10 0.20 18.1 13.4
Implied in the Merger.................. 3.21 3.21 0.25 20.4 19.2
</TABLE>
CONTRIBUTION ANALYSIS. In addition to the valuation analyses described
above, Dain Rauscher Wessels performed an analysis of relative contribution of
XEON and First Security to the combined company on a historical pro forma
combined basis. This ratio was calculated for five balance sheet and six income
statement items which Dain Rauscher Wessels deemed relevant. Dain Rauscher
Wessels calculated that XEON would contribute between 0.61% to 0.95% of the pro
form combined company based upon certain balance sheet items, and would
contribute between 0.14% and 0.98% based upon certain income statement items.
Dain Rauscher Wessels then compared these ratios to the ratio of shares to be
held by existing XEON and First Security stockholders upon completion of the
merger. As of December 28, 1998, XEON stockholders would receive shares
representing 0.79% of the pro forma combined company.
Dain Rauscher Wessels did not assign any particular weight to the
individual analyses described above, which represent a summary of the material
analyses performed by Dain
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Rauscher Wessels. Dain Rauscher Wessels' determination regarding the fairness of
the merger is not based on a mathematical model but rather upon the body of
information obtained from such analyses and qualitative factors.
For its services as financial advisor and for rendering its opinion to the
XEON Board of Directors in connection with the transaction contemplated by the
merger agreement, XEON has paid Dain Rauscher Wessels $100,000. XEON has also
agreed to pay Dain Rauscher Wessels an additional $455,000 upon consummation of
the merger, based upon the implied value of the merger. In addition, XEON has
agreed to reimburse Dain Rauscher Wessels for its reasonable out-of-pocket
expenses and to indemnify Dain Rauscher Wessels against certain expenses and
liabilities arising in connection with its engagement, including liabilities
under the Securities Act of 1933 and the Securities Exchange Act of 1934.
Dain Rauscher Wessels was selected by XEON on the basis of its experience
in valuing securities in connection with mergers and acquisitions, knowledge of
XEON, and expertise in transactions involving financial institutions. Dain
Rauscher Wessels is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements. In the
ordinary course of business Dain Rauscher Wessels has published research and
made recommendations regarding the equity securities of First Security and other
companies in the financial services industry. Also, Dain Rauscher Wessels acts
as a market maker in the equity securities of First Security and other publicly
traded companies in the financial services industry and, accordingly,
periodically may have positions in such securities.
RECOMMENDATION OF XEON'S BOARD OF DIRECTORS
The XEON Board of Directors has unanimously adopted and approved the merger
agreement and the transactions contemplated thereby. The XEON Board of Directors
has unanimously determined that the merger is fair to and in the best interests
of XEON, its stockholders and holders of options. THE XEON BOARD OF DIRECTORS
THEREFORE RECOMMENDS A VOTE FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT
AND THE MERGER CONTEMPLATED THEREBY.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some of XEON's directors and officers have interests in the acquisition
that differ from, or are in addition to, their interests as stockholders of
XEON. The members of XEON's Board of Directors knew about these additional
interests and considered them when the Board of Directors approved the Agreement
and Plan of Reorganization and the merger contemplated thereby.
CHANGE-IN-CONTROL SEVERANCE AND OTHER BENEFITS. The merger will constitute
a change-in-control for purposes of the employment agreements with Nevada
Banking Company's officers, although Mr. John A. Schopf, Jr., XEON's President
and Chief Executive Officer and Treasurer, and Mr. Wayne Snyder, XEON's
Executive Vice President, are expected to serve as officers of First Security
Bank of Nevada following the merger of Nevada Banking Company with and into
First Security Bank of Nevada. In connection with the merger, Messrs. Schopf and
Snyder have entered into Agreements for Change-in-Control Severance Benefits
with XEON and Nevada Banking Company. The
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<PAGE> 44
Agreements for Change-in-Control Severance Benefits provide to Messrs. Schopf
and Snyder severance benefits in amounts generally consistent with the benefits
that would have been payable under the severance provisions of their employment
agreements, which are superseded by the Agreements for Change-in-Control
Severance Benefits to that extent. Under the Agreements for Change-in-Control
Severance Benefits, Mr. Schopf will be entitled to an aggregate severance
payment of $150,000 as a result of the merger, and Mr. Snyder will be entitled
to an aggregate severance payment of $150,000 as a result of the merger. (See,
"The 1999 Annual Meeting of XEON Stockholders -- Executive Compensation.")
EMPLOYMENT AGREEMENTS. Messrs. Schopf and Snyder anticipate serving as
officers of First Security Bank of Nevada pursuant to Employment Agreements. The
term of Mr. Schopf's Employment Agreement is six months. The term of Mr.
Snyder's Employment Agreement is two years. The Employment Agreements with First
Security Bank of Nevada provide for monthly base compensation of $10,833 for Mr.
Schopf, a base annual salary of $110,000 for Mr. Snyder, and continued country
club memberships for each of them. First Security Bank of Nevada has also agreed
to a $25,000 retention bonus payable to Mr. Snyder at commencement of his
employment, as well as granting Mr. Snyder an option to acquire 2,500 shares of
First Security Corporation stock at a price to be determined in accordance with
the First Security Comprehensive Management Incentive Plan. The option will vest
in equal installments over four years, the first 25% vesting one year after
commencement of Mr. Snyder's employment. Mr. Snyder will also be eligible for an
annual incentive bonus of up to 40% of his annual salary. Messrs. Schopf and
Snyder will also be entitled under the Employment Agreements to participate in
all fringe benefit, medical and life insurance, bonus, compensation, retirement,
stock option, pension and other plans sponsored for all employees of First
Security Corporation or First Security Bank of Nevada, with credit given for
vesting and eligibility purposes for service with Nevada Banking Company (but
without prior service credit for purposes of accrual of benefits under First
Security Corporation's retirement plan).
The Employment Agreements with First Security Bank of Nevada also contain
noncompete provisions. Each of Messrs. Schopf and Snyder will be prohibited from
competing with First Security Bank of Nevada in any commercial banking or trust
business or other financial service business. Under the Employment Agreements, a
business is considered to be in competition with First Security Bank of Nevada
if it is engaged in the commercial banking or trust business in Washoe and
Douglas Counties, Nevada. The noncompetition provisions apply to Mr. Snyder for
the term of his Employment Agreement. The noncompetition provisions apply to Mr.
Schopf for the term of his Employment Agreement and for a period of 18 months
thereafter. Mr. Schopf's Employment Agreement provides that he will receive
$210,000 in 18 equal monthly installments of $12,500 in consideration for his
agreement not to compete with First Security Bank of Nevada, which payments will
commence one month after expiration of the six-month term of Mr. Schopf's
Employment Agreement (or one month after termination of Mr. Schopf's service
with First Security Bank of Nevada, whichever first occurs).
INDEMNIFICATION. The merger agreement provides in sec. 6.13 that
indemnification currently available to directors, officers and employees of XEON
and Nevada Banking Company under the Articles of Incorporation, Bylaws or other
instruments of XEON or Nevada Banking Company will be continued by First
Security Corporation for a period of two years after completion of the merger.
Additionally, the merger agreement provides that
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<PAGE> 45
First Security Corporation will use commercially reasonable efforts to cause the
persons serving as directors and officers of XEON and Nevada Banking Company to
be covered for a period of two years after completion of the merger by Nevada
Banking Company directors' and officers' liability insurance for acts and
omissions occurring prior to completion of the merger.
SUBSTANTIAL PERSONAL INVESTMENTS. Directors and executive officers of XEON
own or have the right to acquire more than 39% of XEON's common stock. Although
XEON common stock is quoted on the OTC Bulletin Board, trading in XEON common
stock is very limited and occurs on a sporadic basis. As a consequence,
ownership of XEON common stock remains a relatively illiquid investment.
Recognizing that a substantial portion of their net worth consists of an
illiquid investment in XEON common stock, XEON's President and Chief Executive
Officer, Mr. John A. Schopf, Jr., and the other directors desire to achieve
greater diversification of their personal investment portfolios. Many of these
individuals have dedicated more than ten years to building Nevada Banking
Company into the profitable company that it is today. (See, "1999 Annual Meeting
of Stockholders of XEON -- Voting Securities and Principal Holders Thereof.")
For these and other reasons discussed in "Background of and Reasons for the
Merger," they and the other members of XEON's Board of Directors concluded that
merger of XEON with an institution that, like First Security Corporation, has an
established market for its equity securities, rather than maintaining XEON's
independence, is in the best interests of XEON's stockholders as a group, and in
the individual interests of directors and executive officers.
CONVERSION OF SHARES; EXCHANGE RATIO
In accordance with the merger agreement, each issued and outstanding share
of XEON common stock will be converted into the right to receive the merger
consideration (as defined below). Each XEON stockholder will cease to have any
rights as a XEON stockholder, except the right to receive the merger
consideration upon the terms and subject to the conditions set forth in the
merger agreement.
CERTAIN DEFINITIONS. The merger agreement provides for the conversion of
the XEON shares into shares of First Security common stock under an Exchange
Ratio that is somewhat complex. To understand the details of the Exchange Ratio,
the following definitions are provided:
"Average First Security Share Price" means the average of the closing
last sales prices per share of First Security common stock on the NASDAQ
National Market for the ten (10) consecutive trading days prior to the Closing
Date (such period referred to herein as the "Closing Calculation Period").
"XEON Share Price" means the quotient of (A) the sum of $33.6 million
divided by (B) the sum of, (1) the total number of issued and outstanding XEON
shares and (2) the total number of XEON shares subject to all vested XEON
Options.
"Exchange Ratio" means (in each case, rounded to the nearest one
one-hundred thousandth of a share and in each case, as adjusted to reflect any
split, combination, dividend or other distribution made prior to the effective
time of the merger),
(i) if the Average First Security Share Price is greater than or equal
to $21.375, the number determined by dividing the XEON Share Price
by $21.375;
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<PAGE> 46
(ii) if the Average First Security Share Price is less than or equal to
$17.00, the number determined by dividing XEON Share Price by
$17.00; and
(iii) if the Average First Security Share Price is greater than $17.00
and less than $21.375, the number determined by dividing the XEON
Share Price by Average First Security Share Price.
XEON OPTIONS
Each outstanding option to purchase XEON shares (a "XEON Option") issued
under each stock option plan, program, agreement or arrangement of XEON (each a
"XEON Stock Plan") that has previously vested or will have vested upon
consummation of the merger (a "Vested XEON Option") must be exercised prior to
closing of the merger. Each holder of a Vested XEON Option who shall elect in
writing at any time prior to closing shall be deemed to have received a number
of XEON shares of common stock with a value equal to (a) the difference between
the per share value of the XEON common stock as calculated pursuant to the
merger agreement and the option exercise price, (b) multiplied by the number of
shares obtainable upon the exercise of the option. This number of XEON shares
deemed to have been obtained will then be converted into shares of First
Security common stock at the Exchange Ratio. No fractional shares of First
Security XEON stock or First Security common stock will be issued upon the
exercise of a XEON option or the conversion of the XEON shares into First
Security common stock. Each XEON option holder who would otherwise have been
entitled to receive a fraction of a share of First Security common stock in
connection with the merger will receive, in lieu thereof, cash (without
interest) in an amount equal to such fraction multiplied by the Average First
Security Share Price. In connection with the cashless exercise of XEON Options,
each holder of Vested XEON Options, who has received such options for the
performance of services, may recognize ordinary income in an amount equal to the
fair market value of the net number of XEON shares issuable pursuant to the
cashless exercise procedure. Such income will be subject to income tax
withholding requirements at statutory rates.
Each XEON Option that is not exercised that has not and will not vest upon
consummation of the merger will be automatically canceled.
DISSENTING SHARES
Dissenting Shares will not be converted into or represent a right to
receive the merger consideration. A dissenting XEON stockholder will be entitled
to only such rights as are granted by applicable Nevada law. (See, "Rights of
Dissenting XEON Stockholders.")
EXCHANGE OF SHARES AND CERTIFICATES
First Security will deposit with the Exchange Agent for the benefit of the
XEON stockholders, for exchange through the Exchange Agent, (i) cash in an
amount sufficient to pay cash in lieu of fractional shares, and (ii)
certificates representing the shares of First Security common stock.
As soon as reasonably practicable after closing, the Exchange Agent will
mail to each holder of record of a certificate or certificates which represented
outstanding XEON shares (the "Certificates") whose shares were converted into
the right to receive shares of First Security common stock pursuant to the
merger agreement, (i) a letter of transmittal
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<PAGE> 47
(which will specify that delivery will be effected, and risk of loss and title
to the Certificates will pass, only upon delivery of the Certificates to the
Exchange Agent and will be in such form and have such other provisions as First
Security may reasonably specify), and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of First Security common stock, and cash in lieu of fractional shares of First
Security common stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by First
Security, together with such letter of transmittal, duly executed, and such
other documents as may reasonably be required by the Exchange Agent, the holder
of such Certificate will be entitled to receive in exchange therefor (i) a
certificate representing that whole number of First Security shares which such
holder has the right to receive pursuant to the provisions of Article III of the
merger agreement and (ii) cash in lieu of any fractional number of First
Security shares. Until surrendered each Certificate will be deemed to represent
only the right to receive upon such surrender the merger consideration and cash
in lieu of any fractional shares of First Security common stock. No interest
will be paid or accrue on any cash payable in lieu of any fractional shares of
First Security common stock.
XEON STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY HAVE
RECEIVED TRANSMITTAL LETTERS. XEON STOCKHOLDERS SHOULD NOT RETURN SHARE
CERTIFICATES WITH THEIR XEON PROXY VOTING FORMS.
FRACTIONAL SHARES
No certificates representing fractional shares of First Security common
stock will be issued upon the surrender for exchange of Certificates.
Each XEON stockholder who would otherwise have been entitled to receive a
fraction of a share of First Security common stock in connection with the merger
will receive, in lieu thereof, cash (without interest) in an amount equal to
such fraction multiplied by the Average First Security Share Price.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various customary representations and
warranties of XEON and Nevada Banking Company and similar customary
representations and warranties of First Security and First Security Bank of
Nevada. (See, Appendix A.)
CERTAIN COVENANTS
Pursuant to the merger agreement, XEON has made various customary
covenants, including that, during the period from December 29, 1998 until the
effective time of the merger, it and Nevada Banking Company will: (a) conduct
operations and business in the usual and ordinary course of business; (b) permit
First Security to make such additional investigation of the business and
properties of XEON as First Security deems reasonably necessary or advisable;
and (c) use best efforts to assist First Security in obtaining needed regulatory
approvals.
First Security and First Security Bank of Nevada will: (a) use their best
efforts to achieve regulatory approval of the merger; (b) provide directors and
officers of XEON indemnification against losses suffered as a result of such
persons' service as a director or
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<PAGE> 48
officer of XEON; and (c) file with the NASDAQ National Market a notification for
listing covering shares issuable in the merger.
CONDITIONS TO THE CLOSING
CONDITIONS TO THE OBLIGATIONS OF EACH PARTY. The respective obligation of
each party to effect the Closing is subject to the satisfaction or waiver at or
prior to the Closing of certain conditions including: (a) the absence of any
governmental prohibition or restriction on the Closing; (b) the absence of any
suit, action, investigation, inquiry or other proceeding seeking to prevent
consummation of the merger, if such suit may reasonably succeed; (c) the
effectiveness of all required consents and approvals from any governmental
entities; (d) the receipt by XEON and First Security of an opinion of counsel,
substantially to the effect that the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code; and (e) there
shall have been no "excess parachute payments" under Section 280G of the
Internal Revenue Code.
CONDITIONS TO THE OBLIGATIONS OF FIRST SECURITY. The obligation of First
Security and First Security Bank of Nevada to effect the Closing is further
subject to the satisfaction (or waiver by First Security) at or prior to the
Closing Date of the certain conditions including: the absence of any
developments or events having a material adverse effect on the information about
XEON, XEON maintaining a net worth of at least $9,000,000, subject to certain
adjustments, the approval of the merger by XEON stockholders, and the execution
and delivery of employment agreements with Messrs. Schopf and Snyder. In
addition, all options on XEON common stock must be exercised or cancelled.
TERMINATION
The merger agreement may be terminated at any time prior to the Closing:
(a) by the mutual consent of First Security and XEON;
(b) by either party under certain conditions if the Closing has not
taken place on or before August 29, 1999;
(c) by First Security upon written notice to XEON if a majority of the
XEON common stock does not approve the merger agreement, or if the merger
agreement is disapproved by a regulatory agency whose approval is legally
necessary;
(d) by either party upon certain breaches by the other party of any
representation, warranty, covenant or agreement set forth in the merger
agreement. In the event of the termination of the merger agreement, all of the
obligations and liabilities of the parties under the merger agreement shall
terminate.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND COVENANTS
Subject to certain exceptions set forth in the merger agreement, none of
the representations and warranties and covenants of XEON and First Security
contained in the merger agreement shall survive the Closing.
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<PAGE> 49
AMENDMENT, MODIFICATION AND WAIVER
The merger agreement may not be amended, modified or waived except by an
instrument or instruments in writing signed and delivered on behalf of each of
the parties to the merger agreement.
ACCOUNTING TREATMENT OF THE MERGER
First Security expects that the merger will be accounted for as a
"purchase" under generally accepted accounting principles. Purchase accounting
calls for First Security to recognize any premium it is paying for XEON as
"goodwill" which will affect some financial ratios of importance to regulators
and the investment community. Purchase accounting also allows First Security to
step up its basis in the assets of XEON for income tax purposes.
THE EFFECT OF THE MERGER ON XEON EMPLOYEE BENEFIT PLANS
All retirement and health insurance plans maintained by XEON or Nevada
Banking Company for the benefit of employees will remain in effect without
substantive change until the merger takes place, except as may be required by
applicable law in connection with the intended termination of these plans as
part of the merger. XEON and First Security will determine whether it is in the
best interests of the parties and the employees of XEON to terminate XEON's
401(k) Plan or to merge such plan into a First Security benefit plan; provided,
however, that no accounts will be permitted to roll-over to First Security's
401(k) plan without the express written consent of the trustee and sponsor of
First Security's 401(k) plan to such roll-over, which approval will not be given
in any event without receipt of such documentation from XEON as may be requested
by First Security, including, without limitation, an Internal Revenue Service
ruling obtained by XEON approving the roll-over and ensuring the qualification
of the First Security 401(k) plan if it accepts such roll-overs.
The current XEON health insurance plan likely will terminate when the
merger takes place. Subject to applicable law, all XEON employees retained after
the merger will be eligible to participate in the First Security health
insurance plan now in effect, in accordance with its terms.
REGULATORY APPROVALS
Consummation of the merger is conditioned on the receipt of all requisite
regulatory approvals, including prior approval of the Federal Reserve Board of
the merger and of the specific ability of First Security to own and operate XEON
under current federal banking regulatory parameters. There is no assurance that
the Federal Reserve Board will approve the merger, or as to when the Federal
Reserve will approve the merger. The Federal Reserve Board may impose conditions
on First Security in connection with an approval of this merger.
First Security, as an acquiring bank holding company, is required to file a
notice application with the Federal Reserve Board that describes the proposed
Merger and the proposed activities of First Security Bank of Nevada following
the merger, including the effect of First Security's ownership of Nevada Banking
Company on competition among entities that engage in such activities, the
identity of the parties involved in the transaction, a description of the public
benefits that may be expected from the proposal, a description
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<PAGE> 50
of the terms of the transaction, the sources of funds for the transaction and
other financial and managerial information. The information included in the
notice and other requests for information will allow the Federal Reserve Board,
when considering approval of the merger, to take into consideration the
financial and managerial resources and prospects of the existing and combined
institutions and the benefits that may be expected from the merger. The Federal
Reserve Board will, among other things, evaluate the adequacy of the capital and
management levels of the acquiring bank holding company both before and
following the proposed transaction.
The Federal Reserve Board may deny a request for approval of an acquisition
by a bank holding company if the Federal Reserve Board determines that the
transaction would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize a given business
activity in any part of the United States, or if the transactions effect in any
section of the country would be substantially to lessen competition or to tend
to create a monopoly, or if it would in any other manner result in a restraint
of trade, unless the Federal Reserve Board finds that the anticompetitive
effects of a transaction are clearly outweighed by the probable effects of the
transaction in providing benefits to the public.
Applicable federal law provides for the publication of notice and public
comment on notice applications filed with the Federal Reserve Board. The merger
may not be consummated until after Federal Reserve Board approval is obtained.
First Security filed its notice application with the Federal Reserve Board on
March 12, 1999.
In addition to the foregoing, the U.S. Department of Justice has or will
receive a copy of the notice application filed with the Federal Reserve Board
and will have 30 days within which to challenge the merger agreement on
antitrust grounds. First Security does not expect the U.S. Department of Justice
to challenge the Merger and believes that the Federal Reserve Board will approve
the Merger.
As of March 29, 1999, the Financial Institutions Division of the State of
Nevada approved the proposed merger transactions contingent upon receipt of
necessary approvals from the federal regulatory agencies.
There is no assurance that federal regulatory approvals will be received
timely or at all.
An approval by the Federal Reserve Board or the Nevada Division of
Financial Institutions reflects only the view that the transactions contemplated
by the Merger Agreement do not contravene applicable competitive standards
imposed by law, and that such transactions are consistent with regulatory
policies relating to safety and soundness. An approval by the Federal Reserve
Board or the Nevada Division of Financial Institutions is not an opinion by the
Federal Reserve Board or the Nevada Division of Financial Institutions that the
merger transactions are favorable to the XEON stockholders from a financial
point of view or that the Federal Reserve Board or the Nevada Division of
Financial Institutions has considered the adequacy of the terms of the
transactions; and an approval by the Federal Reserve Board or the Nevada
Division of Financial Institutions is not an endorsement or recommendation of
the Merger Agreement.
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<PAGE> 51
FEDERAL INCOME TAX ASPECTS
THE MERGER
The following is a summary of certain Federal income tax consequences of
the merger to the XEON stockholders that exchange such stock for First Security
common stock pursuant to the merger. This summary addresses only such
stockholders who hold First Security common stock received in exchange therefor
as a capital asset. This does not address all Federal income tax considerations
that may be relevant to particular stockholders in light of their individual
circumstances or to stockholders that are subject to special rules, such as
financial institutions, tax-exempt organizations, insurance companies, dealers
in securities, foreign stockholders, XEON stockholders who hold their XEON
shares as part of a straddle, hedging or conversion transaction, and
stockholders who acquired their XEON shares pursuant to the exercise of employee
stock options or otherwise as compensation. The following summary is based upon
the provisions of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), applicable Treasury Regulations thereunder, judicial decisions
and current administrative rulings, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis. Tax consequences under
state, local, foreign, and other laws are not addressed herein. Each stockholder
is advised to consult his or her tax advisor as to the particular facts and
circumstances which may be unique to such stockholder and also as to any estate,
gift, state, local or foreign tax considerations arising out of the merger.
No rulings have been or will be requested from the Internal Revenue Service
with respect to any matters discussed herein. There can be no assurances that
future legislation, regulations, administrative rulings or court decisions would
not alter the tax consequences set forth below. The obligation of each of First
Security and XEON to consummate the merger is conditioned on its receipt of an
opinion from Ray, Quinney & Nebeker, based on such facts, representations, and
assumptions as counsel may reasonably deem relevant (including certain
representations regarding the recognition of gains or losses by XEON
Stockholders), to the effect that the merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. The following summary assumes that the merger will be
consummated as described in the Agreement and Plan of Merger and this Proxy
Statement/Prospectus.
TREATMENT OF FIRST SECURITY AND XEON
No gain or loss will be recognized by First Security or XEON as a result of
the merger.
EXCHANGE OF XEON SHARES FOR FIRST SECURITY COMMON STOCK
Subject to the discussion of the "Taxation of the Option Holders" below,
(i) a holder of XEON shares whose XEON shares are exchanged in the merger into
First Security common stock will not recognize gain or loss, except to the
extent of cash, if any, received in lieu of fractional shares (see, "-- Cash in
Lieu of Fractional Shares" below), (ii) the aggregate tax basis of the First
Security common stock received by such holder will be equal to the aggregate tax
basis of the XEON shares exchanged therefor (excluding any portion of the
holder's basis allocated to fractional shares), and (iii) the holding period of
First Security common stock received will include the holding period of the XEON
shares exchanged therefor.
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TAXATION OF OPTION HOLDERS
As described in "The Merger -- Conversion of Shares-Exchange Ratio" and
"The Merger -- XEON Options," each Vested XEON Option may be exercised pursuant
to a cashless exercise procedure whereby each option holder who so agrees shall
be deemed to have received a number of XEON shares of common stock with a value
equal to (a) the difference between the per share value of the XEON common stock
as calculated pursuant to the merger agreement and the option exercise plan, (b)
multiplied by the number of shares obtainable upon the exercise of the option.
The number of XEON shares deemed to have been obtained will then be converted
into shares of First Security common stock at the Exchange Ratio. In connection
with such exercise, each holder of Vested XEON Options, who has received such
options for the performance of services, may recognize ordinary income in an
amount equal to the fair market value of the net number of XEON shares issuable
pursuant to the cashless exercise procedure. Such income will be subject to
income tax withholding requirements at the statutory rates. In addition, to the
extent certain stockholder approval requirements have not been satisfied, such
income may be subject to the excise tax provisions of Section 280G of the
Internal Revenue Code, applicable to "excess parachute payments".
CASH IN LIEU OF FRACTIONAL SHARES
A holder of XEON shares who receives cash in lieu of fractional shares of
First Security common stock will be treated as having received such fractional
shares pursuant to the merger, and then as having exchanged such fractional
shares for cash in a redemption by First Security. The amount of such gain or
loss will be equal to the difference between the ratable portion of the tax
basis of the XEON shares exchanged in the merger that is allocated to such
fractional shares and the cash received in lieu thereof. Any such capital gain
or loss will constitute long term capital gain or loss if such XEON shares have
been held by the holder for more than one year at the time of the consummation
of the merger. Generally, capital gain on assets held by individuals for more
than 12 months will be subject to tax at a rate not to exceed 20%.
DISSENTING XEON STOCKHOLDERS
A XEON stockholder who receives solely cash in exchange for XEON common
stock in the merger pursuant to the exercise of dissenter's rights under
applicable Nevada law will recognize capital gain or loss at the time of the
consummation of the merger equal to the difference between the tax basis of the
XEON shares surrendered and the amount of the cash received therefor. Such
capital gain or loss will constitute long-term capital gain or loss if such XEON
shares have been held for more than one year at the time of the consummation of
the merger. Generally, capital gain on assets held by individuals for more than
12 months will be subject to a tax at a rate not to exceed 20%.
THIS FEDERAL INCOME TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY AND MAY NOT
APPLY TO ALL XEON STOCKHOLDERS. XEON STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER.
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RIGHTS OF DISSENTING XEON STOCKHOLDERS
Holders of XEON common stock are entitled to exercise dissenters' rights
under Chapter 92A, Sections 92A.300 through 92A.500 of the Nevada Revised
Statutes. Option holders are not entitled in their capacities as option holders
to exercise dissenters' rights. A stockholder of XEON will be entitled to relief
as a dissenting stockholder if and only if he or she complies strictly with all
of the procedural and other requirements of Sections 92A.300 through 92A.500 of
the Nevada Revised Statutes. A copy of Sections 92A.300 through 92A.500 is
attached hereto as Appendix C. The following summary does not purport to be a
complete statement of the method of compliance with Sections 92A.300 through
92A.500. The following summary is qualified in its entirety by reference to the
copy of Sections 92A.300 through 92A.500 attached hereto as Appendix C.
NEVADA REVISED STATUTES SEC. 92A.380
Stockholders of a Nevada corporation have the right to dissent from certain
corporate actions in certain circumstances. According to Nevada Revised Statutes
sec. 92A.380.1(a)(1), these circumstances include consummation of a merger
requiring approval of the corporation's stockholders. Stockholders who are
entitled to dissent are also entitled to demand payment in the amount of the
fair value of their shares.
NEVADA REVISED STATUTES SEC. 92A.410 AND SEC. 92A.420
According to Nevada Revised Statutes sec. 92A.420.1, stockholders of XEON
who wish to assert dissenters' rights:
- must deliver to XEON BEFORE the vote is taken at the Annual Meeting
written notice of their intent to demand payment for their XEON common
stock if the merger is completed, and
- must not vote their shares in favor of the Agreement and Plan of
Reorganization.
Stockholders failing to satisfy these requirements will not be entitled to
dissenters' rights under Chapter 92A of the Nevada Revised Statutes.
NEVADA REVISED STATUTES SEC. 92A.430
A written dissenter's notice (a "DISSENTER'S NOTICE") will thereafter be
sent by the "SUBJECT CORPORATION" to all stockholders of XEON who satisfied
these two requirements (written notice of intent to demand payment and not
voting in favor of the merger). Nevada Revised Statutes sec. 92A.430.1. The
written dissenters' notice is required to be sent within 10 days after we
complete the merger. According to sec. 92A.335 of the Dissenters' Rights
Statute, XEON is deemed to be the "SUBJECT CORPORATION" before the merger
occurs, but First Security will be the "SUBJECT CORPORATION" after the merger
occurs. The Dissenter's Notice to be sent by First Security must include:
- a statement of where the demand for payment is to be sent and where and
when certificates for XEON common stock are to be deposited;
- a statement informing the holders of XEON common stock not represented by
certificates to what extent the transfer of such shares will be
restricted after the demand for payment is received;
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- a form for demanding payment. This form will require stockholders
asserting dissenters' rights to certify whether they acquired beneficial
ownership of the shares before the date when the terms of the merger were
announced to the news media or the stockholders (the "ANNOUNCEMENT DATE,"
which was December 30, 1998);
- a date by which the Subject Corporation must receive the demand for
payment, which may not be fewer than 30 or more than 60 days after the
date the Dissenter's Notice was delivered; and
- a copy of sec. 92A.300 through sec. 92A.500 of the Nevada Revised
Statutes.
NEVADA REVISED STATUTES SEC. 92A.440
XEON stockholders exercising dissenters' rights must thereafter
- demand payment;
- certify whether they acquired beneficial ownership of XEON common stock
before the December 30, 1998 Announcement Date; and
- deposit their certificates in accordance with the terms of the
Dissenter's Notice.
Nevada Revised Statutes sec. 92A.440.3 provides that stockholders of XEON
who fail to demand payment or deposit their certificates where required by the
dates set forth in the Dissenters' Notice will not be entitled to payment for
the shares as provided under Chapter 92A of the Nevada Revised Statutes. A
stockholder who desires to exercise dissenters' rights but who fails to follow
the foregoing procedures will not be entitled to demand payment of and receive
the fair value of his shares of XEON pursuant to the Dissenters' Rights Statute
included herewith as Appendix C. Instead, that stockholder would receive the
same merger consideration per share stockholders of XEON who do not exercise
dissenters' rights will receive.
NEVADA REVISED STATUTES SEC. 92A.460
First Security will be required under Nevada Revised Statutes
sec. 92A.460.1 to pay each dissenter who complied with sec. 92A.440 (demand for
payment; certification that he acquired the shares before the December 30, 1998
Announcement Date; and deposit of share certificates) the amount First Security
estimates to be the fair value of the dissenter's shares of XEON common stock,
plus accrued interest. The payment must be made by First Security within 30 days
after First Security receives the dissenter's demand for payment. The payment
must be accompanied by
- a copy of First Security's financial statements for the year ended
December 31, 1998 as well as First Security's most current interim
financial statements;
- a statement of First Security's estimate of the fair value of the
dissenter's shares of XEON common stock;
- an explanation of how interest was calculated;
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- a statement of the dissenter's rights to demand payment under
sec. 92A.480 of the Nevada Revised Statutes of the dissenter's estimate
of the value of the XEON common stock (discussed below); and
- a copy of sec. 92A.300 through sec. 92A.500 of the Nevada Revised
Statutes.
NEVADA REVISED STATUTES SEC. 92A.470
However, First Security may withhold payment from dissenters who became the
beneficial owners of shares of XEON common stock on or after the December 30,
1998 Announcement Date. Nevada Revised Statutes sec. 92A.470.1. If payment is
withheld in this fashion by First Security, it must estimate the fair value of
the dissenter's shares of XEON common stock (plus accrued interest) and offer to
pay this amount to each dissenter in full satisfaction of his demand. First
Security would have to send this offer to all dissenters with a statement of
First Security's estimate of the fair value of the shares of XEON common stock,
an explanation of how interest was calculated and a statement of the dissenters'
rights to demand payment under sec.92A.480 of the Nevada Revised Statutes.
NEVADA REVISED STATUTES SEC. 92A.480
Nevada Revised Statutes sec. 92A.480 provides that a dissenter who believes
that the amount paid under sec. 92A.460 or offered under sec. 92A.470 is less
than the full value of his shares of XEON common stock or that the interest due
is incorrectly calculated, may, within 30 days after First Security made or
offered payment for the shares, either (i) notify First Security in writing of
his own estimate of the fair value of the shares of XEON common stock and the
amount of interest due and demand payment of this estimate (less any payments
made under sec. 92A.460 of the Nevada Revised Statutes), or (ii) reject the
offer for payment made by First Security under sec. 92A.470 and demand payment
of the fair value of his shares and interest due.
NEVADA REVISED STATUTES SEC. 92A.490
If a demand for payment remains unsettled, First Security must commence a
court proceeding within 60 days after receiving a demand, petitioning the court
to determine the fair value of the shares of XEON common stock and accrued
interest. All dissenters whose demands remain unsettled would be made a party to
such proceeding, which would be conducted in the district court of Douglas
County, Nevada. If First Security fails to do so, it would be required under
sec. 92A.490 to pay the amount demanded to each dissenter whose demand remains
unsettled. Dissenters would be entitled to a judgment
- for the amount determined by the district court to represent the fair
value of their shares, plus accrued interest, less any amount paid
pursuant to sec. 92A.460 of the Nevada Revised Statutes; or
- for the amount determined by the district court to represent the fair
value of shares acquired on or after the December 30, 1998 Announcement
Date, plus accrued interest, if and to the extent First Security withheld
payment for those shares under sec. 92A.470.
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NEVADA REVISED STATUTES SEC. 92A.500
The district court would assess the costs of the proceedings against First
Security, unless the court finds that all or some of the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment. The court
may also assess against First Security or the dissenters the fees and expenses
of counsel and experts for the respective parties, in the amount the court finds
equitable.
THE REQUIRED DISSENTERS RIGHTS' PROCEDURE MUST BE FOLLOWED EXACTLY OR ANY
DISSENTERS' RIGHTS MAY BE LOST.
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INFORMATION ABOUT FIRST SECURITY
GENERAL
First Security is a Delaware-incorporated, multi-bank holding company
headquartered in Salt Lake City, Utah. At December 31, 1998, First Security and
its subsidiaries had total consolidated assets, deposits, and stockholders'
equity of $21.7 billion, $12.7 billion and $1.6 billion, respectively. Its main
executive offices are located at 79 South Main Street, Salt Lake City, Utah
84111, telephone 801-246-6000.
The principal assets of First Security are all of the capital stock of
First Security Bank, N.A. and First Security Bank of New Mexico, N.A., both of
which provide a broad range of banking, fiduciary, and other financial services.
Based on assets of approximately $15.0 billion at June 30, 1998, First Security
Bank, N.A. was ranked the 52nd largest commercial bank in the United States, and
is the largest bank in the State of Utah and the second largest bank in the
State of Idaho. First Security Bank, N.A. also has offices in Oregon and
Wyoming. At December 31, 1998 First Security Bank, N.A. had 244 branches. Based
on deposits of $1.1 billion at December 31, 1997, First Security Bank of New
Mexico, N.A. was ranked the 3rd largest bank in the State of New Mexico, and the
second largest in the Albuquerque market. It currently has 34 branches.
First Security also owns 100% of the outstanding capital stock of First
Security Bank of Nevada, a Nevada state bank, 100% of the shares of First
Security Bank of Southern New Mexico, N.A., a national bank headquartered in Las
Cruces, New Mexico, and 100% of the outstanding shares of First Security Bank of
California, N.A., a national bank headquartered in Irvine, California. In
addition, First Security has entered into an Agreement and Plan of
Reorganization to acquire Comstock Bancorp, a bank holding company located in
Reno, Nevada, and its wholly owned subsidiary, Comstock Bank, for a total amount
of $65 million payable in shares of First Security common stock and cash.
Assuming shareholder and federal regulatory agency approval, the Comstock
Bancorp merger is expected to close before or at about the same time as the
present transaction. Along with the banking organizations, First Security also
directly or indirectly owns the stock of various nonbank companies engaged in
businesses related to banking and finance, including management services,
securities brokerage, equipment leasing, insurance and investment management,
mutual funds, and a small business investment company. One of the nonbank
companies, First Security Van Kasper, is an investment banking company that was
only recently acquired by First Security on February 12, 1999.
In addition to its equity investment in subsidiaries, First Security
directly or indirectly raises funds principally to finance the operations of its
nonbank subsidiaries. A substantial portion of First Security's annual income is
typically derived from dividends directly from its bank and nonbank
subsidiaries, and from interest on loans to First Security's nonbank
subsidiaries.
COMPETITION
As noted above, First Security Bank, N.A. is the largest bank in Utah, the
second largest bank in Idaho, the 6th largest bank in Oregon, and the 5th
largest bank in Wyoming. As also noted, First Security Bank of New Mexico, N.A.
is the third largest bank in New Mexico (second largest in Albuquerque). In
California, Nevada, and
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Southern New Mexico, First Security's banks are smaller, more localized
competitors, with competition coming from a variety of larger banks and credit
unions.
First Security's banks compete with other banking organizations in the
states in which they operate on the basis of price, service and convenience.
Other types of financial institutions, such as savings banks, savings and loan
associations, and credit unions offer a wide range of deposit and loan services
(including commercial loans) and, in some instances, fiduciary services. First
Security's banks also compete with brokerage firms and mutual funds, which
provide the substantial equivalent of checking accounts, credit cards and
similar devices that strongly resemble deposit products. Major retailers compete
for loans by offering credit cards and retail installment contracts. It is
anticipated that competition from nonbank organizations will continue to grow.
DESCRIPTION OF FIRST SECURITY'S CAPITAL STOCK
The following statements are brief summaries of the material provisions
relating to First Security's preferred stock and First Security common stock and
are qualified in their entirety by the provisions of First Security's
Certificate of Incorporation, which has been filed with the Securities and
Exchange Commission. (See, "Comparative Rights of Stockholders.")
PREFERRED STOCK. The Certificate of Incorporation authorizes the issuance
of 400,000 shares of preferred stock with no par value ("Preferred Stock"). On
December 31, 1998, there were 9,208 shares of $3.15 Cumulative Convertible
Preferred Stock, Series "A" (the "Series A Preferred Stock") outstanding.
Holders of Series A Preferred Stock have the right to receive semi-annual
dividends at the annual rate of $3.15 per share. Such right is cumulative and
such dividends are payable before dividends may be paid on the First Security
common stock. The Series A Preferred Stock is convertible into the First
Security common stock at a ratio of 41.00625 shares of First Security common
stock for each share of Series A Preferred Stock. This conversion right is
subject to adjustment in certain events to protect against dilution of the
conversion rights attached to the Series A Preferred Stock. In the event of a
liquidation, dissolution or winding up of First Security, the holders of Series
A Preferred Stock are entitled to receive cash value of $52.50 per share plus
unpaid accumulated preferred dividends before any distribution is made to
holders of the First Security common stock. First Security may, at the option of
the Board of Directors, redeem the whole or any part of the outstanding Series A
Preferred Stock at the redemption price of $52.50 per share plus unpaid
accumulated preferred dividends.
Holders of First Security's Series A Preferred Stock are entitled to one
vote per share on all matters submitted to a vote of stockholders. Voting for
the election of directors is not cumulative. If at any time four or more
semi-annual dividends on the Series A Preferred Stock are in default, in whole
or in part, the holders of the Series A Preferred Stock as a class will be
entitled to elect four directors and the holders of the First Security common
stock will be entitled to elect the remaining directors. Holders of any
additional Preferred Stock hereafter issued may have such full or limited voting
rights as are provided by the Board of Directors.
The Board of Directors of First Security is authorized by the Certificate
of Incorporation to provide, without further stockholder action, for the
issuance of one or more series of preferred stock. The Board of Directors has
the power to fix various terms with respect to each series, including voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations, restrictions and
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redemption, conversion or exchangeability provisions. Holders of preferred stock
have no pre-emptive rights. The Series A Preferred Stock is not publicly traded.
COMMON STOCK. First Security is authorized to issue 600,000,000 shares of
First Security common stock with a par value of $1.25 per share. As of December
31, 1998, there were outstanding 186,712,124 (net of Treasury Stock) shares of
First Security common stock. (See, "First Security Corporation Selected
Financial Data, at page 16.) In addition, in connection with the acquisition of
Van Kasper & Company on February 12, 1999, First Security issued 3,337,634
shares of First Security common stock to former shareholders of Van Kasper &
Company. First Security has also agreed to issue not more than approximately
2,000,000 and not less than approximately 1,500,000 shares of common stock to
shareholders of Comstock Bancorp in exchange for their Comstock shares assuming
that such shareholders and federal regulators approve the Comstock acquisition.
Payment of dividends on the First Security common stock is subject to the prior
rights of First Security's outstanding Series A Preferred Stock.
The holders of First Security common stock are entitled to voting rights
for the election of directors and for other purposes, subject to the voting
rights of the holders of Preferred Stock conferred by law and to the specific
voting rights granted to each series of Preferred Stock and to voting rights
which may in the future be granted to subsequently created series of Preferred
Stock.
Holders of First Security common stock are entitled to receive dividends
when and if declared by the Board of Directors of First Security out of any
funds legally available therefor, and are entitled upon liquidation, after
claims of creditors and preferences of First Security's Series A Preferred Stock
and any other series of Preferred Stock hereafter authorized, to receive pro
rata the net assets of First Security. First Security common stock has no
pre-emptive or conversion rights.
STOCKHOLDER RIGHTS PLAN. As of August 28, 1990, First Security adopted a
Stockholder Rights Agreement ("the Plan") and the Board of Directors of First
Security on that date (a) declared a dividend of one "Right" for each share of
Common Stock held of record as of the close of business on September 8, 1989,
and (b) authorized the issuance of one Right to attach to each share of Common
Stock issued after September 8, 1989, and prior to the occurrence of certain
events described in the Plan. The Rights are attached to all Common Stock
certificates that were outstanding on September 8, 1989, or have been issued
since that date (including the shares of First Security common stock to be
issued to XEON stockholders), and no separate Rights Certificates have been or
will be distributed until the occurrence of certain events described in the
Rights Agreement. Until such separation, no Right may be exercised or traded
separately from the Common Stock certificate to which it is attached. Following
separation, the Rights may, depending upon the occurrence of certain events
described in the Rights Agreement, entitle the holders thereof to either
purchase or receive additional shares of Common Stock. Technical amendments were
made to the Plan twice between 1989 and October 28, 1998. The Rights will expire
at the close of business on August 28, 1999, unless earlier redeemed by First
Security in accordance with the terms of the Plan.
On October 26, 1998, First Security amended the price at which a registered
holder would be entitled to purchase from First Security one one-thousandth of a
share of First Security's Junior Series B Preferred Stock, without par value.
The Exercise Price had formerly been set at $100 per right (before adjustment
for First Security's 1991, 1992,
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1996, 1997 and 1998 3-for-2 stock splits, or $13.17 after split adjustments),
and has been amended so as to be set at $85 per right (after adjustment for such
stock splits).
The Board also adopted a new plan with legal and technical innovations over
the Plan (the "Successor Rights Plan") in its action on October 26, 1998. The
Successor Rights Plan will take effect upon the expiration of the existing
rights on August 28, 1999. There is no material difference between the Plan, as
now amended, and the Successor Rights Plan that will be effective upon the
expiration of the Plan. In connection with the Successor Rights Plan, the Board
declared a dividend of one right (a "Successor Right") for each outstanding
share of common stock payable on August 28, 1999 to the stockholders of record
as of that date.
First Security's rights plans are designed to protect the interests of
First Security's stockholders in the event of an unsolicited attempt to acquire
First Security, including a gradual accumulation of shares in the open market.
First Security believes that these plans provide protection against a partial or
two-tier tender offer that does not treat all stockholders equally and against
other coercive takeover tactics which could impair First Security's Board of
Directors' ability to represent First Security's stockholders fully. Management
believes that the Rights should also deter any attempt by a controlling
stockholder to take advantage of First Security through self-dealing
transactions. First Security's rights plans are not intended to prevent a
takeover of First Security. Issuing the Rights has no dilutive effect, does not
affect reported earnings per share, and does not change the way in which First
Security's shares are traded. However, the exercise of Rights by some but not
all of First Security's stockholders would have a dilutive effect on
nonexercising stockholders. Moreover, some may argue that the Plan has the
potential for "entrenching" current management by allowing current voting
stockholders to increase their voting shares, thus making a tender offer more
difficult and costly.
Shares of First Security common stock do not have cumulative voting rights.
First Security common stock is not subject to redemption by either First
Security or a stockholder, but there is no restriction on the repurchase by
First Security of shares of First Security common stock except for certain
regulatory limits.
First Security's Certificate of Incorporation provides that, in general, an
affirmative vote of not less than 80% of the outstanding shares of First
Security common stock is required to approve or authorize certain major
corporate transactions involving First Security and holders of more than 10% of
the First Security common stock (including certain mergers, substantial
dispositions of assets, liquidation or dissolution, or recapitalization). The
80% vote is not required in some such circumstances, including certain
transactions which have been approved in advance by a majority of the Board of
Directors, or where holders of First Security common stock receive a price per
share that satisfies the fairness criteria set forth in the Certificate of
Incorporation.
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INFORMATION ABOUT XEON
GENERAL
XEON was incorporated on February 13, 1998 for the purpose of becoming the
holding company for Nevada Banking Company. The holding company reorganization
was completed on October 15, 1998. XEON is a corporate entity legally separate
and distinct from Nevada Banking Company. However, a bank holding company is
expected to act as a source of financial strength to its subsidiary bank or
banks, according to policy of the Board of Governors of the Federal Reserve
System. (See, "Supervision and Regulation -- Regulation of Bank Holding
Companies.") The principal source of XEON's income is dividends from its wholly
owned subsidiary, Nevada Banking Company. There are certain regulatory
restrictions on the extent to which Nevada Banking Company may pay dividends or
otherwise provide funds to XEON. (See, "Supervision and Regulation -- Limits on
Dividends and Other Payments.") Currently, XEON has no operations independent of
Nevada Banking Company.
Nevada Banking Company was chartered as a Nevada banking corporation in
1980, and its first banking office opened in Stateline, Nevada in 1981. Nevada
Banking Company has grown by opening two new offices in attractive markets,
hiring experienced bankers and building relationships with local businesses. By
the end of 1998, Nevada Banking Company had grown to approximately $128 million
in total assets, total deposits of $116 million and stockholders' equity of $10
million. On December 31, 1998, Nevada Banking Company's Tier 1 capital ratio was
11.2%, its ratio of non-performing assets to total assets was 0.47% and the
ratio of Nevada Banking Company's allowance for loan losses to total loans was
1.49%. At December 31, 1998, XEON and Nevada Banking Company exceeded all
regulatory capital requirements.
Nevada Banking Company provides a focused core of banking services,
primarily for individuals and small to medium-sized businesses. Nevada Banking
Company makes commercial loans to small and medium-sized businesses located in
the market area, as well as secured loans for residential and commercial real
estate construction, consumer installment loans, including home equity loans,
and a variety of other loans and lease financing.
Nevada Banking Company offers a broad array of deposit products, including
checking and savings accounts and certificates of deposit. Although it attempts
to be competitive with other financial institutions, Nevada Banking Company
generally sets its interest rates on deposits based on those offered by the
leading commercial banks in the area, rather than those offered by the leading
thrift institutions.
Nevada Banking Company also maintains relationships with correspondent
banks and other independent financial institutions to provide other services as
requested by customers, including loan participations in circumstances in which
the requested loan amount exceeds Nevada Banking Company's legal lending limit.
MARKET AREA AND COMPETITION
Nevada Banking Company operates in Douglas and Washoe Counties in western
Nevada, including communities surrounding Lake Tahoe. Most of Nevada, including
the Lake Tahoe area, has experienced rapid growth in recent years, a product of
a strong business climate, increased recreational activity and the associated
increases in local
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population and service businesses. Reno in Washoe County is Nevada's
second-largest city. Home to seven major casinos and resorts, the local economy
in Nevada Banking Company's market area as a whole is highly dependent on the
gaming and tourism industries, although portions of Nevada Banking Company's
market area, including Gardnerville, are less dependent on tourism and
recreation than others. The Gardnerville area has a more diversified local
economy, with a variety of light manufacturing and service-based businesses. In
addition, state and local authorities are placing increasing emphasis on
development of industrial and manufacturing capabilities.
Nevada Banking Company's business is somewhat more seasonal than a typical
bank operating in other areas. Nevada Banking Company experiences its strongest
loan growth in mid to late summer of each year, principally because weather
conditions make construction difficult at other times and because commencement
of new construction between October 15th and May 15th is prohibited in the Lake
Tahoe basin. Deposits are somewhat seasonal as well, increasing with
recreational activity and tourism during the summer and winter months. The
Gardnerville office is less subject to seasonality in its deposit and lending
activity than the Lake Tahoe banking offices (the Stateline and Incline Village
offices).
The principal competitors of Nevada Banking Company within its market area
are other commercial banks, many of which have significantly greater financial
and other resources than Nevada Banking Company has and are therefore able to
offer more financial services than Nevada Banking Company can offer. In recent
years, competition has also come from mortgage banking companies, insurance
companies, securities firms and other non-FDIC-insured financial institutions.
Additionally, consolidation of the financial institutions industry in recent
years has increased the level of competition. Some of the competitors offer
products and services that are not offered by Nevada Banking Company. Some of
the competitors are not subject to the same kind and amount of regulatory
restrictions and supervision to which Nevada Banking Company is subject. Because
Nevada Banking Company is a community bank that is considerably smaller than
other commercial lenders in the area, Nevada Banking Company's legal lending
limit does not allow it to make commercial loans in amounts many competitors can
offer. To mitigate risks of loan concentration and take advantage of lending
opportunities for loans that exceed applicable lending limits of Nevada Banking
Company, from time to time Nevada Banking Company accommodates loan volumes in
excess of its lending limit through the sale of participations in loans to other
financial institutions.
Nevada Banking Company competes for loans principally through
responsiveness to customers and its ability to communicate effectively with them
and understand and address their needs. Nevada Banking Company competes for
deposits principally by offering customers personal attention, a variety of
banking services, attractive rates and strategically located banking facilities.
Nevada Banking Company seeks to provide high quality banking service to
professionals and small and mid-sized businesses, as well as individuals,
emphasizing quick and flexible responses to customer demands.
LENDING ACTIVITIES
Nevada Banking Company's primary lending activities are the origination of
(i) commercial loans, (ii) real estate construction loans, (iii) consumer
installment loans, including home equity loans, (iv) residential real estate
mortgage loans, and (v) other loans. Management believes that one of Nevada
Banking Company's strengths is its
61
<PAGE> 63
substantial experience with short-term financing, including both residential and
commercial construction lending. Although Nevada Banking Company occasionally
makes residential construction loans on a speculative basis (meaning
construction begins and construction financing is obtained before the house is
sold), the majority of Nevada Banking Company's construction loans represent
financing of pre-sold projects. The majority of Nevada Banking Company's
commercial construction loans relate to owner-occupied properties.
LOAN PORTFOLIO COMPOSITION AND ACTIVITY. The following tables set forth the
composition of the loan portfolio in dollar amounts and in percentages at
December 31, 1998 and 1997, along with a reconciliation to loans receivable,
net.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1998 1997
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Type of loan:
Commercial.......................... $46,953,721 54.82% $35,050,538 50.22%
Real estate -- construction......... 24,704,672 28.84 18,103,268 25.94
Consumer............................ 7,569,638 8.84 9,536,777 13.67
Real estate -- mortgage............. 2,011,627 2.35 2,463,058 3.53
Other loans......................... 6,013,030 7.02 6,148,236 8.81
----------- ------ ----------- ------
Total loans........................... 87,252,688 101.87 71,351,877 102.17
Less:
Undisbursed loans in progress....... 0 0 0 0
Unamortized loan origination fees,
net.............................. 296,185 .35 324,955 .39
Allowance for loan losses........... 1,298,099 1.52 1,239,662 1.78
----------- ------ ----------- ------
Net loans............................. $85,658,404 100.00% $69,787,260 100.00%
=========== ====== =========== ======
</TABLE>
The following table presents maturity information for the loan portfolio at
December 31, 1998. The table does not include prepayments or scheduled principal
repayments. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
<TABLE>
<CAPTION>
REAL ESTATE REAL OTHER
COMMERCIAL CONSTRUCTION CONSUMER ESTATE LOANS TOTAL
----------- ------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Amount Due:
Within 3 months...... $ 7,288,388 $ 7,699,047 $1,217,345 $ 12,316 $ 893,122 $17,110,218
3 months to 1 year... 11,301,434 14,038,574 2,338,431 152,179 1,060,773 28,891,391
After 1 year:
1 to 3 years......... 9,732,365 2,392,376 3,230,379 1,826,708 4,012,438 21,194,266
3 to 5 years......... 5,324,927 194,675 467,534 10,539 46,697 6,044,372
Over 5 years......... 13,306,607 380,000 315,949 9,885 0 14,012,441
----------- ----------- ---------- ---------- ---------- -----------
Total due after 1
year................. $28,363,899 $ 2,967,051 $4,013,862 $1,847,132 $4,059,135 $41,251,079
----------- ----------- ---------- ---------- ---------- -----------
Total amount due....... $46,953,721 $24,704,672 $7,569,638 $2,011,627 $6,013,030 $87,252,688
=========== =========== ========== ========== ========== ===========
</TABLE>
62
<PAGE> 64
The following table shows the dollar amount of all loans due after December
31, 1998 that have pre-determined interest rates and the dollar amount of all
loans due after December 31, 1998 that have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATES ADJUSTABLE RATES TOTAL
----------- ---------------- -----------
<S> <C> <C> <C>
Commercial.............................. $15,934,038 $31,019,683 $46,953,721
Real estate -- construction............. 15,906,742 8,797,930 24,704,672
Consumer................................ 7,376,377 193,261 7,569,638
Real estate -- mortgage................. 1,763,374 248,253 2,011,627
Other loans............................. 330,770 5,682,260 6,013,030
----------- ----------- -----------
Total......................... $41,311,301 $45,941,387 $87,252,688
=========== =========== ===========
</TABLE>
COMMERCIAL LOANS. Nevada Banking Company originates revolving loans for
operating and working capital support and term loans for commercial enterprises
in Nevada Banking Company's market area. Nevada Banking Company's commercial
loan portfolio consists of various types of loans to small businesses operating
in Nevada Banking Company's market area, including equipment financing,
mortgages on owner-occupied buildings and commercial lines of credit.
At December 31, 1998, commercial loans that were more than 90 days'
delinquent or nonaccruing totaled $460,263 in aggregate outstanding balances, or
0.98% of the commercial loan portfolio.
REAL ESTATE LOANS -- CONSTRUCTION LOANS. Nevada Banking Company originates
several different types of loans that it categorizes as construction loans,
including (i) residential construction loans to borrowers who will occupy the
premises upon completion of construction, (ii) residential construction loans to
builders, (iii) commercial construction loans and (iv) real estate acquisition
and development loans. Because of the complex nature of construction lending,
these loans are generally recognized as having a higher degree of risk than
other forms of real estate lending. The term of Nevada Banking Company's
construction loans are believed by management to be longer than average,
principally as a result of weather conditions in the market area and the large
loan amounts associated with residential construction projects.
Nevada Banking Company is active in lending on single-family residences to
borrowers who will occupy the home following completion of construction, or
"owner-built" construction. These loans are typically made with a nine- to
15-month construction term. These owner-built construction loans are made with
both fixed and adjustable interest rates. Upon completion of construction,
borrowers typically receive permanent mortgage loans from permanent mortgage
lenders to liquidate the construction loan.
Nevada Banking Company also lends to builders for the construction of
single-family residences as models or under contract for sale. Builder
construction loans are typically six to nine months in duration, and are usually
made with adjustable interest rates from one to one and one-half percent above
Nevada Banking Company's prime rate.
Nevada Banking Company makes construction loans to individuals and
businesses for the purpose of constructing commercial properties. These loans
are ordinarily made with a six- to twelve-month construction term. Upon
completion of construction, borrowers typically receive permanent mortgage loans
from permanent mortgage lenders to liquidate the construction loan.
Adjustable-rate commercial construction loans generally are made
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<PAGE> 65
with interest rates that adjust every three to five years. Variable-rate
commercial construction loans generally are made with interest rates that vary
according to changes in Nevada Banking Company's prime rate, with interest rates
ranging generally from one-half to one point over prime.
At December 31, 1998, there were no construction loans that had outstanding
balances more than 90 days' delinquent or nonaccruing.
CONSUMER LOANS. Nevada Banking Company offers several consumer loan
products: home equity loans, installment loans and overdraft protection for
checking account depositors. The bank does not currently do any indirect
lending.
Nevada Banking Company's home equity loan policy generally allows for a
loan of up to 80% of a property's appraised value less the principal balance of
the outstanding first mortgage loan. The interest rate generally ranges from
one-half to one and one-half percentage points over the prime rate, depending on
the size of the loan. Home equity loans are repayable monthly, with the monthly
payment calculated as 0.56% of the outstanding balance plus accrued interest.
Nevada Banking Company's home equity loans are generally written with three-year
maturities.
In addition to home equity loans, Nevada Banking Company offers installment
loans for the purchase of automobiles and other consumer purposes. The bank
lends for the purchase of both new and used automobiles, generally requiring a
minimum down payment of 15% from the borrower for a new car purchase and a
minimum of 20% down payment for a used car purchase. Installment loans are made
for other consumer purposes, generally on a secured basis, with fixed interest
rates and terms ranging from one to ten years.
Nevada Banking Company underwrites consumer loans in a manner designed to
assure compliance with applicable regulations and the bank's underwriting
standards. Payment history on applicants is very important on these smaller
loans, and is checked through in-house records as well as credit bureaus. On
automobile loans, the value of the collateral is checked through the N.A.D.A.
book (the "blue book") or another valuation service. The borrower's income must
be adequate to cover all of his or her debt payments and other monthly payment
obligations, including the proposed loan.
At December 31, 1998, Nevada Banking Company had approximately $7,569,638
in its consumer loan portfolio, which was 8.68% of total loans. Consumer loans
totaling approximately $36,000 were over 90 days' delinquent or nonaccruing on
that date.
REAL ESTATE LOANS -- MORTGAGE. A portion of Nevada Banking Company's
lending consists of origination of interim real estate mortgage loans secured by
1-to-4 family real estate located within the primary market area. Nevada Banking
Company does not originate any permanent 1-to-4 family mortgage loans. All real
estate mortgage loans originated by Nevada Banking Company are short term in
nature, primarily secured by residential properties. Management believes these
loans allow Nevada Banking Company to earn attractive yields and fees prior to
borrowers obtaining permanent financing.
Nevada Banking Company generally makes loans of up to 80% of the value of
the real estate and improvements securing such loans (the "loan-to-value" or
"LTV" ratio) on 1-to-4 family real estate. The bank's typical debt-to-income
ratio guideline for residential real estate mortgage loan approval is 28%
housing expense-to-income, and 36% total debt-to-income.
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<PAGE> 66
There were no loans at December 31, 1998 secured by residential real estate
that had outstanding balances more than 90 days' delinquent or nonaccruing.
OTHER LOANS. Nevada Banking Company also provides financing to acquire
residential and commercial building lots and provides loan facilities to develop
real estate for resale.
At December 31, 1998, Nevada Banking Company had approximately $6,013,030
of other loans, representing 6.89% of total loans. There were no loans in the
other-loan category over 90 days' delinquent or nonaccruing on December 31,
1998.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Nevada Banking Company
personnel and walk-in customers.
When a loan request is made, Nevada Banking Company reviews the
application, as well as credit bureau reports, appraisals, financial
information, verifications of income, and other documentation concerning the
creditworthiness of the borrower, as applicable to each loan type. The bank's
underwriting guidelines are set by senior management at the home office. Loan
applications are generally processed and underwritten at the home office.
At the time of an application for a residential mortgage loan, an appraisal
of the property and borrower credit report are ordered. In addition, the
borrower's employment, income and financial information are obtained and
verified. When all of the necessary information is received, the information is
reviewed and analyzed with reference to Nevada Banking Company's underwriting
worksheet, which includes pertinent data such as debt-to-income ratios, the
loan-to-value ratio, credit history highlights and details concerning funds
available for down payment and closing costs. Depending on the size of the loan
applied for, final approval is given by senior management or the Loan Committee.
At the time of application for a commercial loan, the commercial loan
officer will obtain financial information of the borrower, including business
financial statements and, as appropriate, personal financial statements and
income tax records. In those circumstances in which real estate will serve as
collateral for the commercial loan, an appraisal is ordered as well. Credit
reports are obtained for individual borrowers and business borrowers. If the
borrower has had previous borrowings from or deposit accounts with Nevada
Banking Company, payment and balance histories are reviewed as well. The
commercial loan officer analyzes the financial information and assesses the
borrower's ability to repay the proposed loan. The commercial loan officer will
also generally visit the business location or, in the case of real estate,
inspect the property.
INCOME FROM LENDING ACTIVITIES. Nevada Banking Company earns interest and
fee income from its lending activities. The bank receives fees for originating
loans, which fees, net of origination costs, are amortized over the life of the
respective loan. Nevada Banking Company also receives loan fees related to
existing loans, including late charges. Income from loan origination and
commitment fees and discounts varies with the volume and type of loans and
commitments made and with competitive and economic conditions. Note 1 to the
Consolidated Financial Statements included herein contains a discussion of the
manner in which loan fees and income are recognized for financial reporting
purposes.
NONPERFORMING LOANS
A loan is considered by Nevada Banking Company to be nonperforming when it
is 90 days' or more delinquent or, if sooner, when the bank has determined that
repayment of
65
<PAGE> 67
the loan in full is unlikely. Late charges on residential mortgages are assessed
if a payment is not received by the 15th day after the due date. Immediately
thereafter, any borrower whose payment was not received by this time is mailed a
past due notice.
When an advanced stage of delinquency appears on a real estate-secured loan
(generally about the 60th day of delinquency) and if repayment cannot be
expected within a reasonable amount of time or a repayment agreement has not
been entered into, Nevada Banking Company will provide the borrower with a
counseling letter detailing potential foreclosure proceedings. As of December
31, 1998, loans totaling approximately $496,000, or 0.58% of the total net loan
portfolio, were 90 days or more past due. As of December 31, 1998, the ratio of
nonperforming assets to total assets was 0.47%.
On December 31, 1998 Nevada Banking Company held approximately $98,000 of
real estate and other repossessed collateral acquired as a result of
foreclosure, voluntary deed, or other means. When the bank obtains such real
estate, it is classified as "other real estate owned" until it is sold. When
property is so acquired, it is recorded at the lower of cost (the unpaid
principal balance at the date of acquisition plus foreclosure and other related
costs) or fair value. Any subsequent write-down resulting therefrom is charged
to expense. Generally, unless the property is a one- to four-family residential
dwelling and well collateralized, interest accrual ceases in 90 days (but no
later than the date of acquisition) and the loan is classified as nonperforming.
All costs incurred from that date in maintaining the property are expensed.
"Other real estate owned" is appraised during the foreclosure process, prior to
the time of acquisition. Losses are recognized for the amount by which the book
value of the related mortgage loan exceeds the estimated net realizable value of
the property.
Not categorized as nonperforming loans are certain potential problem loans
that management believes are adequately secured and for which no material loss
is expected, but as to which certain circumstances could cause the borrowers to
be unable to comply with the existing loan repayment terms at some future date.
At December 31, 1998 potential problem loans totaled approximately $588,376.
Nevada Banking Company had nonaccrual loans totaling $496,263 at December
31, 1998 and $11,927 at December 31, 1997. Interest income that would have been
recognized if such loans had performed in accordance with contractual terms
totaled $55,686 for the year ended December 31, 1998, and $1,658 for the year
ended December 31, 1997. Interest income of $38,202 was recognized on such loans
during 1998.
66
<PAGE> 68
The following table summarizes nonperforming assets by category.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Commercial:
Nonaccrual............................................ $ 460,263 $ 0
Past due 90 days or more(1)........................... 0 0
Real estate -- construction:
Nonaccrual............................................ 0 0
Past due 90 days or more(1)........................... 0 0
Consumer:
Nonaccrual............................................ 36,000 11,927
Past due 90 days or more(1)........................... 0 0
Real estate -- mortgage:
Nonaccrual............................................ 0 0
Past due 90 days or more(1)........................... 0 0
Other loans and leases:
Nonaccrual............................................ 0 0
Past due 90 days or more(1)........................... 0 0
----------- -----------
Total nonperforming loans..................... 496,263 11,927
Other real estate owned................................. 97,913 198,241
----------- -----------
Total nonperforming assets.................... $ 594,176 $ 210,168
=========== ===========
Loans outstanding, net.................................. $85,658,404 $69,787,260
Allowance for loan losses to total loans................ 1.49% 1.74%
Nonperforming loans to total loans, net................. 0.58% 0.02%
Nonperforming assets to total assets.................... 0.47% 0.20%
Nonperforming loans to allowance for loan losses........ 38.23% 0.96%
</TABLE>
- -------------------------
(1) Represents accruing loans delinquent greater than 90 days which are
considered to be well secured by management and in the process of
collection.
ALLOWANCE FOR LOAN LOSSES. The amount of the allowance for loan losses is
based on management's analysis of risks inherent in the various segments of the
loan portfolio, management's assessment of known or potential problem credits
that have come to management's attention during the ongoing analysis of credit
quality, historical loss experience, current and anticipated economic conditions
and other factors. If actual circumstances and losses differ substantially from
management's assumptions and estimates, such allowance for loan losses might not
be sufficient to absorb all future losses, and net earnings could be adversely
affected. Loan loss estimates are reviewed periodically, and adjustments, if
any, are reported in earnings in the period in which they become known. In
addition, Nevada Banking Company maintains a portion of the allowance to cover
potential losses due to contingencies that have not been specifically
identified.
Although management believes that it uses the best information available to
make such determinations and that the allowance for loan losses is adequate at
December 31, 1998, future adjustments to the allowance may be necessary, and net
earnings could be affected, if circumstances or economic conditions differ
substantially from the assumptions used in making the initial determinations. A
downturn in the local economy and employment could result in increased levels of
nonperforming assets and charge-offs, increased provisions for loan losses and
reductions in income. Additionally, as an integral part of the examination
process bank regulatory agencies periodically review Nevada Banking Company's
allowance for loan losses. The banking agencies could require the
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<PAGE> 69
recognition of additions to the allowance based on their judgment of information
available to them at the time of their examination.
The following is a summary of Nevada Banking Company's loan loss experience
and selected ratios for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Allowance for loan losses (beginning of period)....... $ 1,239,662 $ 968,074
Loans charged off:
Commercial.......................................... 21,537 13,979
Real estate -- construction......................... 0 0
Consumer............................................ 5,662 1,766
Real estate -- mortgage............................. 0 0
Other loans and leases.............................. 0 0
----------- -----------
Total loans charged off..................... 27,199 15,745
Recoveries of loans previously charged off:
Commercial.......................................... 4,867 5,587
Real estate -- construction......................... 0 0
Consumer............................................ 5,769 1,746
Real estate -- mortgage............................. 0 0
Other loans and leases.............................. 0 0
----------- -----------
Total recoveries............................ 10,636 7,333
----------- -----------
Net loans charged off................................. 16,563 8,412
----------- -----------
Provision for loan losses............................. 75,000 280,000
----------- -----------
Allowance for loan losses (end of period)............. $ 1,298,099 $ 1,239,662
=========== ===========
Loans outstanding:
Average net......................................... $80,496,134 $62,413,786
End of period, net.................................. $85,658,404 $69,787,260
Ratio of allowance for loan losses to loans
outstanding at end of period........................ 1.52% 1.78%
</TABLE>
The following table sets forth an analysis of Nevada Banking Company's
allowance for loan losses at December 31, 1998 and 1997. Nevada Banking
Company's allowance is established based upon an assessment of individual watch
list loans with inherent weaknesses. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses that may occur within the loan category because the total loan
loss allowance is a valuation reserve applicable to the entire loan portfolio,
as such an unallocated reserve has been so designated. The allocation of the
loan loss allowance set forth in the following table has been prepared by Nevada
Banking Company solely for purposes of presentation in this Prospectus/Proxy
Statement. For purposes of this presentation, Nevada Banking Company's general
loan loss allowance has
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<PAGE> 70
been allocated to the various loan categories according to a weighting formula
that is based upon the composition of Nevada Banking Company's loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ ------------------------
ALLOCATED LOAN TYPE/ ALLOCATED LOAN TYPE/
LOAN TYPE RESERVE TOTAL LOANS RESERVE TOTAL LOANS
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commercial........................ $ 550,414 42.4% $ 444,293 35.9%
Real estate -- construction....... 232,415 17.9 205,832 16.6
Consumer.......................... 106,519 8.2 176,624 14.2
Real estate -- mortgage........... 16,289 1.3 27,475 2.2
Other............................. 157,462 12.1 175,438 14.2
Unallocated....................... 235,000 18.1 210,000 16.9
---------- ----- ---------- -----
$1,298,099 100.0% $1,239,662 100.0%
========== ===== ========== =====
</TABLE>
CLASSIFIED ASSETS. FDIC regulations governing classification of assets
require nonmember commercial banks, including Nevada Banking Company, to
classify their own assets and to establish appropriate general and specific
allowances for losses, subject to FDIC review. These regulations are designed to
encourage management to evaluate assets on a case-by-case basis and to
discourage automatic classifications. Assets classified as watch, substandard or
doubtful must be evaluated by management to determine a reasonable general loss
reserve, which is included in total capital for purposes of the bank's
risk-based capital requirement but which is not included in Tier 1 capital or in
capital under generally accepted accounting principles. Assets classified as
loss must either be written off or reserved for by a specific allowance, which
is not counted toward capital for purposes of any of the regulatory capital
requirements. As of December 31, 1998 assets classified as:
- watch totaled $420,591,
- assets classified as substandard totaled $664,048,
- assets classified as doubtful totaled $0, and
- assets classified as loss totaled $0,
for aggregate classified assets of $1,084,639.
INVESTMENTS
Investment securities provide a return on residual funds after lending
activities. Investments may be in interest-bearing deposits, U.S. Government and
agency obligations, state and local government obligations and
government-guaranteed, mortgage-backed securities. XEON and Nevada Banking
Company generally do not invest in securities that are rated less than
investment grade by a nationally recognized statistical rating organization. A
goal of XEON's and Nevada Banking Company's investment policy is to limit
interest-rate risk.
All securities-related activity is reported to the Board of Directors.
General changes in investment strategy are required to be reviewed and approved
by the Board. Senior management can purchase and sell securities in accordance
with XEON's and Nevada Banking Company's stated investment policy.
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<PAGE> 71
The following table sets forth the amortized cost of XEON's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury and other U.S. Government agency
obligations......................................... $14,662,704 $12,239,182
Municipal securities.................................. 6,999,531 6,611,665
Equity securities..................................... 390,300 312,831
----------- -----------
Total....................................... $22,052,535 $19,163,678
=========== ===========
</TABLE>
The following table reflects maturities of the investment securities at
December 31, 1998, all of which are available for sale.
<TABLE>
<CAPTION>
DUE IN ONE YEAR DUE AFTER ONE YEAR
OR LESS THROUGH FIVE YEARS
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipals.......................... $ 0 0% $1,221,672 7.531%*
U.S. Treasury and other U.S Government
agency obligations.................. 3,219,025 5.47 5,909,758 6.128
Equity Securities..................... 390,300 5.76 0 0
---------- ---- ---------- -----
Total....................... $3,609,325 5.50% $7,131,430 6.37%
========== ==========
</TABLE>
- -------------------------
* tax-equivalent yield
<TABLE>
<CAPTION>
DUE AFTER FIVE YEARS
THROUGH TEN YEARS DUE AFTER TEN YEARS
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD TOTAL
---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Municipals.......... $4,261,781 7.257%* $1,516,078 7.175%* $ 6,999,531
U.S. Treasury and
other U.S Government
agency
obligations......... 2,931,207 6.313% 2,602,714 7.227% 14,662,704
Equity Securities..... 0 0% 0 0% 390,300
---------- ----- ---------- ----- -----------
Total....... $7,192,988 6.87% $4,118,792 7.18% $22,052,535
========== ========== ===========
</TABLE>
- -------------------------
* tax-equivalent yield
SOURCE OF FUNDS
DEPOSIT ACCOUNTS. Savings deposits are a major source of funds. Nevada
Banking Company offers a variety of deposit products designed to attract both
short-term and long-term deposits, which are Nevada Banking Company's primary
source of funds for lending and investment. Nevada Banking Company deposit
accounts include commercial and individual checking and savings accounts, money
market accounts, NOW accounts and a
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<PAGE> 72
variety of certificate of deposit accounts. Nevada Banking Company also provides
travelers' checks, official checks, money orders, ATM services and IRA accounts.
Nevada Banking Company offers a large-balance deposit account product known as
the "Gold Mine Account," which may be opened with a minimum balance of $2,500.
At December 31, 1998, Gold Mine Accounts represented approximately $32,779,964,
or approximately 28.34%, of total deposit liabilities. Nevada Banking Company
does not solicit or accept brokered deposits.
The distribution of deposit accounts by type and rate is set forth in the
following table as of the indicated dates.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------
AVERAGE
AMOUNT YIELD PERCENT
------------ ------- -------
<S> <C> <C> <C>
Demand deposit accounts....................... $ 83,960,783 2.57% 72.58%
Savings accounts.............................. 6,390,185 2.25 5.53
------------ ----- ------
Total transaction accounts.......... 90,350,968 2.55 78.11
Certificates:
4.00% and less.............................. 429,067 2.76 0.38
4.01% - 5.00%............................... 3,092,493 4.65 2.67
5.01% - 6.00%............................... 19,711,016 5.36 17.04
6.01% - 7.00%............................... 2,016,161 6.14 1.74
7.01% and over.............................. 73,702 11.00 0.06
------------ ----- ------
Total certificates of deposit....... 25,322,439 5.3 21.89
------------ ----- ------
Total deposits...................... $115,673,407 3.15% 100.00%
============ ===== ======
</TABLE>
The following table sets forth the amount of time deposits that are
$100,000 or more, including certificates of deposit, by time remaining until
maturity.
<TABLE>
<CAPTION>
MATURITY PERIOD AT DECEMBER 31, 1998
--------------- --------------------
<S> <C>
Three months or less........................................ $ 4,059,954
Over three through six months............................... 5,547,338
Over six through 12 months.................................. 2,939,899
Over 12 months.............................................. 1,449,958
-----------
Total............................................. $13,997,149
===========
</TABLE>
BORROWINGS. Deposits and repayment of loan principal are the primary source
of funds for lending activities and other general business purposes. However,
when the supply of lendable funds or funds available for general business
purposes cannot meet the demand for loans or such general business purposes,
Nevada Banking Company can obtain funds through loans (advances) from the FHLB
of San Francisco. Advances from the FHLB are made on a secured basis. FHLB
advances have varying terms and repayment schedules. There can be a substantial
penalty for prepayment of advances. As necessary, Nevada Banking Company uses
FHLB advances to fund lending activities. (See, "Supervision and
Regulation -- Federal Home Loan Banks.") As of February 9, 1999 Nevada Banking
Company had no outstanding FHLB advances. Refer to Note 7 of Notes to
Consolidated Financial Statements for additional information regarding FHLB
advances. Nevada Banking Company also has arrangements to borrow additional
short-term funds from other commercial banks.
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<PAGE> 73
The following table sets forth the maximum amount of Nevada Banking
Company's FHLB advances and other borrowings outstanding at any month end during
the periods shown and the average aggregate balances of FHLB advances and other
borrowings for such periods:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Maximum amount outstanding:
FHLB advances....................................... $5,300,000 $2,500,000
Average amount of FHLB advances and Other borrowings
outstanding......................................... $1,372,041 $ 57,696
Weighted average interest rate of total Borrowings
based on quarter-end balances....................... 5.71% N/A
</TABLE>
The following table sets forth certain information as to FHLB advances and
other borrowings at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997
-------------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT INTEREST RATE AMOUNT INTEREST RATE
---------- ------------- ------ -------------
<S> <C> <C> <C> <C>
FHLB advances....................... $1,000,000 5.76% $0 N/A
Total borrowings.......... $1,000,000 5.76% $0 N/A
</TABLE>
PROPERTIES
The following table sets forth certain information regarding Nevada Banking
Company's offices. Each of the banking offices offers ATM and safe deposit
facilities. The Gardnerville and Stateline offices also offer drive-up teller
facilities.
<TABLE>
<CAPTION>
OWNED/ SQUARE YEAR
LOCATION LEASED FEET OPENED LEASE EXPIRATION DATE
-------- ------ ------ ------ ---------------------
<S> <C> <C> <C> <C>
MAIN OFFICE:
229 Kingsbury Grade Leased 8,000 1981 December 29, 2007
Stateline, Nevada 89449
BRANCHES:
Carson Valley Branch Owned 2,975 1984 N/A
1374 Highway 395
North Gardnerville, Nevada 89410
North Tahoe Branch
938 Tahoe Boulevard Leased 2,966 1996 December 31, 2000
Incline Village, Nevada 89450
</TABLE>
- -------------------------
(1) Nevada Banking Company has the right of first refusal and an option to
purchase the Incline Village branch property.
Nevada Banking Company also leases an executive loan office in Incline
Village, Nevada. The executive loan office handles loan processing and
servicing. Nevada Banking Company's electronic data processing and bookkeeping
functions are carried out in leased facilities in Reno, Nevada. Nevada Banking
Company is a member of the following ATM
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<PAGE> 74
networks: Novus, American Express, Cirrus, PLUS, MasterCard, VISA, SCS,
TransFund, CheckOKCard.
At December 31, 1998 the net book value of Nevada Banking Company's
investment in premises and equipment totaled $3,157,290. See Note 5 of the Notes
to Consolidated Financial Statements for additional information regarding
premises and equipment.
LEGAL PROCEEDINGS
From time to time XEON and Nevada Banking Company are involved in various
legal proceedings that are incidental to their business. In the opinion of
management, no current legal proceedings are material to the financial condition
of XEON or Nevada Banking Company, either individually or in the aggregate.
PERSONNEL
As of December 31, 1998 XEON and Nevada Banking Company had 63 full-time
equivalent employees. None of the employees is represented by a collective
bargaining group. Management considers its relations with employees to be
excellent.
SUPERVISION AND REGULATION
The following discussion of federal and state laws governing banks and bank
holding companies is a summary only and does not purport to be complete. The
following discussion is qualified in its entirety by reference to the particular
statutory and regulatory provisions discussed. Changes in applicable law or in
the policies of various regulatory authorities could have a material effect on
the business and prospects of First Security, First Security Bank of Nevada,
XEON and Nevada Banking Company.
Each of First Security and XEON is a bank holding company within the
meaning of the Bank Holding Company Act of 1956. As such, they are subject to
regulation, supervision and examination by the Board of Governors of the Federal
Reserve System, acting primarily through the Federal Reserve Bank of San
Francisco. First Security and XEON are required to file annual reports with the
Federal Reserve Board and to provide the Federal Reserve Board such additional
information as the Federal Reserve Board may require. Nevada Banking Company is
a Nevada-chartered commercial bank, and each of First Security's subsidiary
banks is a state-chartered or nationally chartered bank. As FDIC member
institutions, the deposits of First Security's subsidiary banks and Nevada
Banking Company are insured to a maximum of $100,000 per depositor through the
Bank Insurance Fund administered by the FDIC. As a Nevada-chartered, nonmember
bank, Nevada Banking Company is primarily regulated by the FDIC and the Nevada
Division of Financial Institutions. First Security's subsidiary banks are
regulated by the Federal Reserve Board or the Comptroller of the Currency and,
in the case of state-chartered institutions, by the state banking regulator
under the law of the state of their organization.
Both First Security and its subsidiary banks and XEON and Nevada Banking
Company are subject to federal and state banking laws. These federal and state
laws are intended to protect depositors, not stockholders. Federal and state
laws applicable to financial institution holding companies and their financial
institution subsidiaries regulate the range of permissible business activities,
investments, reserves against deposits, capital
73
<PAGE> 75
levels, lending activities and practices, the nature and amount of collateral
for loans, establishment of branches, mergers, dividends and a variety of other
important matters.
First Security's subsidiary banks and Nevada Banking Company are subject to
detailed, complex and sometimes overlapping federal and state statutes and
regulations in their routine banking operations. These statutes and regulations
include but are not limited to state usury and consumer credit laws, the Federal
Truth-in-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act
and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act and
the Community Reinvestment Act.
First Security's subsidiary banks and Nevada Banking Company are subject to
Federal Reserve Board regulations that require depository institutions to
maintain reserves against their transaction accounts (principally NOW and
regular checking accounts). Because required reserves are commonly maintained in
the form of vault cash or in a noninterest-bearing account (or pass-through
account) at a Federal Reserve Bank, the effect of the reserve requirement is to
reduce an institution's earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded
significantly the authority of federal agencies to regulate the activities of
federally chartered and state-chartered financial institutions and their holding
companies. The Federal Reserve Board and the FDIC have extensive authority to
prevent and to remedy unsafe and unsound practices and violations of applicable
laws and regulations by institutions and their holding companies. The agencies
may assess civil money penalties, issue cease-and-desist or removal orders, seek
injunctions, and publicly disclose such actions. In addition, the Superintendent
of the Nevada Division of Financial Institutions possesses enforcement powers in
order to address violations of Nevada banking law by Nevada-chartered banks.
REGULATION OF BANK HOLDING COMPANIES
Bank holding companies and their activities are subject to extensive
regulation by the Federal Reserve Board. The Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before (i) directly or indirectly acquiring ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, the acquiring company would own or control more than 5% of the
shares of the other bank or bank holding company (unless the acquiring company
already owns or controls a majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. The Federal
Reserve Board will not approve any acquisition, merger or consolidation that
would have a substantially anticompetitive result, unless the anticompetitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served. The
Federal Reserve Board also considers capital adequacy and other financial and
managerial factors in its review of acquisitions and mergers.
With certain exceptions, the Bank Holding Company Act also prohibits a bank
holding company from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. One principal exception to these prohibitions
allows the acquisition of interests in companies whose activities are found by
the Federal Reserve Board, by order or regulation, to be so closely
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<PAGE> 76
related to banking, managing, or controlling banks as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve Board
include consumer financial counseling, tax planning and tax preparation, futures
and options advisory services, check guaranty services, collection agency and
credit bureau services, and personal property appraisals. In approving
acquisitions by First Security of companies engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, including
the expected benefits to the public, such as greater convenience and increased
competition or gains in efficiency, which are weighed against the risks of
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices. The
Federal Reserve Board is also empowered to differentiate between activities
commenced de novo and activities commenced through acquisition of a going
concern.
The Federal Reserve Board has approved applications by bank holding
companies to engage, through nonbank subsidiaries, in certain securities-related
activities (underwriting of municipal revenue bonds, commercial paper,
consumer-receivable-related securities and one-to-four family mortgage-backed
securities), provided that the affiliates would not be "principally engaged" in
such activities for purposes of Section 20 of the Glass-Steagall Act. In limited
situations, holding companies have been permitted to underwrite and deal in
corporate debt and equity securities through such subsidiaries.
It is Federal Reserve Board policy that bank holding companies serve as a
source of strength for their subsidiary banking institutions. The Federal
Reserve Board considers the adequacy of a bank holding company's capital on
essentially the same risk-adjusted basis as capital adequacy is determined by
the FDIC at the bank subsidiary level. In the case of a bank holding company
with less than $150 million in total consolidated assets, the Federal Reserve
Board's regulations provide that the capital adequacy requirements will
generally be applied on a bank-only basis (rather than on a consolidated basis).
In general, bank holding companies are required to maintain a minimum ratio of
total capital to risk-weighted assets of 8% and Tier 1 capital (consisting
principally of stockholders' equity) of at least 4%. Bank holding companies are
also subject to a leverage ratio requirement. The minimum required leverage
ratio for the highest rated companies is 3%. The minimum required leverage ratio
for all other bank holding companies is 4% or higher. (See, "-- Capital.")
Subsidiary banks of a bank holding company are subject to restrictions
imposed by the Federal Reserve Act on extensions of credit to the bank holding
company or its subsidiaries, on investments in their securities and on the use
of their securities as collateral for loans to any borrower. These regulations
and restrictions could limit a bank holding company's ability to obtain funds
from a subsidiary bank for the bank holding company's cash needs, including
funds for payment of dividends, interest and operating expenses. Furthermore,
under the Bank Holding Company Act and regulations of the Federal Reserve Board,
a bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, neither First Security
Bank of Nevada nor Nevada Banking Company generally may require a customer to
obtain other services from the bank or its holding company as a condition to an
extension of credit to
75
<PAGE> 77
the customer, and may not require that customer to promise not to obtain other
services from a competitor.
FEDERAL DEPOSIT INSURANCE
The FDIC insures deposits of federally insured banks, savings banks and
savings associations and safeguards the safety and soundness of the banking
industry. Two separate insurance funds are maintained and administered by the
FDIC. In general, bank deposits are insured through the Bank Insurance Fund.
Deposits in FDIC member institutions are insured to a maximum of $100,000
per depositor. Banks are required to pay semiannual deposit insurance premium
assessments to the FDIC. In general terms, each institution is assessed
insurance premiums according to how much risk to the insurance fund the
institution represents. Well-capitalized institutions with few supervisory
concerns are assessed lower premiums than other institutions. Currently,
insurance fund assessments range from zero for well-capitalized institutions to
0.27% of deposits for institutions that are not well capitalized (with a
statutory minimum of $2,000 paid by all institutions). Nevada Banking Company's
current assessment rate is .003% annually, including payments by Nevada Banking
Company for interest on the FICO Bonds discussed below.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or any
condition imposed in writing by, or written agreement with, the FDIC. The FDIC
may also suspend deposit insurance temporarily during the hearing process for a
permanent termination of insurance if the institution has no tangible capital.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted
on September 30, 1996 provides that, beginning with semi-annual periods after
December 31, 1996, Bank Insurance Fund deposits will also be assessed to pay
interest on the bonds issued in the late 1980s by the Financing Corporation
("FICO BONDS"). The FICO Bonds were issued for the purpose of recapitalizing the
now defunct Federal Savings and Loan Insurance Corporation, which had been the
principal insurer of savings association deposits. For purposes of the
assessments to pay interest on the FICO Bonds, Bank Insurance Fund deposits will
be assessed at a rate of 20% of the assessment rate applicable to Savings
Association Insurance Fund deposits until December 31, 1999. After the earlier
of December 31, 1999 or the date on which the last savings association ceases to
exist, full pro rata sharing of FICO assessments will begin. The assessments to
pay interest on the FICO Bonds are not expected by First Security or XEON to
have a material effect on First Security or XEON or their subsidiary banks.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act was enacted
in 1994 to ease restrictions on interstate banking. The Riegle-Neal Act allows
the Federal Reserve Board to approve an application by an adequately capitalized
and adequately managed bank holding company to acquire a bank located in a state
other than the acquiring company's home state without regard to whether the
transaction is prohibited by the laws of any state. The Federal Reserve Board
may not approve the acquisition of a bank that has not been in existence for the
minimum time period (up to five years)
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<PAGE> 78
specified by the statutory law of the acquired, or "target," bank's state. The
Riegle-Neal Act also prohibits the Federal Reserve Board from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Riegle-Neal Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state that may be held or controlled by a bank or bank holding company if
the limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% statewide concentration
limit contained in the Riegle-Neal Act. Nevada Revised Statutes Sections 666.305
et seq. allow interstate bank merger transactions involving Nevada-chartered
banks, subject to approval by the State of Nevada.
Branching between states may be accomplished by merging commonly controlled
banks located in different states into one legal entity. Branching may also be
accomplished by establishing de novo branches or acquiring branches in another
state. A branch of an out-of-state bank operating in another state, or "host
state," is subject to the law of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and
establishment of branches.
The Riegle-Neal Act authorizes the FDIC to approve interstate branching de
novo by state-chartered banks solely in states that specifically allow for such
branching. The FDIC recently adopted regulations under the Riegle-Neal Act to
prohibit an out-of-state bank from using the new interstate branching authority
primarily for the purpose of deposit production. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities served by the out-of-state bank.
CAPITAL
The Federal Reserve Board and the FDIC employ similar risk-based capital
guidelines in their examination and regulation of bank holding companies and
financial institutions. If capital falls below the minimum levels established by
the guidelines, the bank holding company, bank or savings bank may be denied
approval to acquire or establish additional banks or non-bank businesses or to
open new facilities. Failure to satisfy applicable capital guidelines could
subject a banking institution to a variety of enforcement actions by federal
regulatory authorities, including the termination of deposit insurance by the
FDIC and a prohibition on the acceptance of "brokered deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury,
which have a 0% risk-weight. Off-balance sheet items are also taken into account
in the calculation of risk-based capital, with each class of off-balance sheet
item being converted to a balance sheet equivalent according to established
"conversion factors." From these computations, the total of risk-weighted assets
is derived. Risk-based capital ratios therefore state capital as a percentage of
total risk-weighted assets and off-balance sheet items. The ratios established
by guideline are minimums only.
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Current risk-based capital guidelines require all bank holding companies
and banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
common stockholders' equity, qualifying perpetual preferred stock (within limits
and subject to certain conditions, particularly if the preferred stock is
cumulative preferred stock), and minority interests in equity accounts of
consolidated subsidiaries, less intangibles. Tier 2 capital includes: (i) the
allowance for loan losses up to 1.25% of risk-weighted assets; (ii) any
qualifying perpetual preferred stock exceeding the amount that may be included
in Tier 1 capital; (iii) hybrid capital instruments; (iv) perpetual debt; (v)
mandatory convertible securities and (vi) subordinated debt and intermediate
term preferred stock of up to 50% of Tier 1 capital. Total capital is the sum of
Tier 1 and Tier 2 capital, less reciprocal holdings of other banking
organizations, capital instruments and investments in unconsolidated
subsidiaries.
The FDIC has added a market risk component to the capital requirements of
nonmember banks and savings banks. The market risk component could require
additional capital for general or specific market risk of trading portfolios of
debt and equity securities and other investments or assets. The FDIC's
evaluation of an institution's capital adequacy takes account of a variety of
other factors as well, including interest rate risks to which the institution is
subject, the level and quality of an institution's earnings, loan and investment
portfolio characteristics and risks, risks arising from the conduct of
nontraditional activities and a variety of other factors. Accordingly, the
FDIC's final supervisory judgment concerning an institution's capital adequacy
could differ significantly from the conclusions that might be drawn from the
absolute level of an institution's risk-based capital ratios. Therefore,
institutions generally are expected to maintain risk-based capital ratios that
exceed the minimum ratios discussed above. This is particularly true for
institutions contemplating significant expansion plans and institutions that are
subject to high or inordinate levels of risk. Moreover, although the FDIC does
not impose explicit capital requirements on holding companies of institutions
regulated by the FDIC, the FDIC can take account of the degree of leverage and
risks at the holding company level. If the FDIC determines that the holding
company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may
require the subsidiary institution(s) to maintain additional capital or the FDIC
may impose limitations on the subsidiary institution's ability to support its
weaker affiliates or holding company.
The Federal Reserve Board and the FDIC have also established a minimum
leverage ratio of 3%. However, for bank holding companies and financial
institutions seeking to expand and for all but the most highly rated banks and
bank holding companies, the Federal Reserve Board and the FDIC expect an
additional cushion of at least 100 to 200 basis points. The leverage ratio
represents Tier 1 capital as a percentage of total assets, less intangibles. At
December 31, 1998, First Security, First Security Bank of Nevada, XEON and
Nevada Banking Company were in compliance with all regulatory capital
requirements.
In order to resolve the problems of undercapitalized institutions and to
prevent a recurrence of the banking crisis of the 1980s and early 1990s, the
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system known as "prompt corrective action." Under the prompt corrective action
provisions and implementing regulations, every institution is classified into
one of five categories, depending on (i) its
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<PAGE> 80
total risk-based capital ratio, Tier 1 risk-based capital ratio and leverage
ratio and (ii) certain subjective factors. The categories are: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." A financial institution's
operations can be significantly affected by its capital classification. For
example, an institution that is not "well capitalized" generally is prohibited
from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market, and the holding company of any
undercapitalized institution must guarantee, in part, certain aspects of the
institution's capital plan. Financial institution regulatory agencies generally
are required to appoint a receiver or conservator shortly after an institution
enters the category of weakest capitalization. The Federal Deposit Insurance
Corporation Improvement Act of 1991 also authorizes the regulatory agencies to
reclassify an institution from one category into a lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. Undercapitalized institutions are required to take certain
specified actions in order to increase their capital or otherwise decrease the
risks to the federal deposit insurance funds.
The following table illustrates the capital and prompt corrective action
guidelines applicable to First Security and its banking subsidiaries and to XEON
and Nevada Banking Company, as well as their total risk-based capital ratios,
Tier 1 capital ratios and leverage ratios as of December 31, 1998.
<TABLE>
<CAPTION>
MINIMUM MINIMUM
NECESSARY NECESSARY TO BE
AT TO BE WELL ADEQUATELY
DECEMBER 31, 1998 CAPITALIZED CAPITALIZED
----------------- ----------- ----------------------
<S> <C> <C> <C>
FIRST SECURITY CORPORATION AND
SUBSIDIARIES:
Total Risk-Based Capital Ratio... 11.31% 10.00% 8.00%
Tier 1 Risk-Based Capital
Ratio.......................... 9.10% 6.00% 4.00%
Leverage Ratio................... 6.90% 5.00% 4.00%
XEON AND NEVADA BANKING COMPANY
Total Risk-Based Capital Ratio... 12.4% 10.00% 8.00%
Tier 1 Risk-Based Capital
Ratio.......................... 11.2% 6.00% 4.00%
Leverage Ratio................... 8.1% 5.00% 3.00%
</TABLE>
LIMITS ON DIVIDENDS AND OTHER PAYMENTS
The ability of a bank holding company to obtain funds for the payment of
dividends and for other cash requirements is dependent on the amount of
dividends that may be declared by its subsidiary banks. A state-chartered bank's
ability to pay dividends may be affected both by state banking laws and federal
banking agencies' capital adequacy guidelines. Moreover, regulatory authorities
are authorized to prohibit banks and bank holding companies from paying
dividends if payment of dividends would constitute an unsafe and unsound banking
practice. XEON is not subject directly to the Nevada banking statutes that
regulate the payment of dividends. However, because the ultimate source of
dividends to stockholders of XEON is dividends received from Nevada Banking
Company, dividends payable to stockholders of XEON depend on the earnings of
Nevada Banking Company, Nevada Banking Company's financial condition, Nevada
Banking Company's need for funds and applicable government policies and
regulations.
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In general, the directors of a Nevada-chartered bank may declare out of net
profits a dividend or distribution in an amount the directors judge expedient,
provided that (i) at least 10% of net profit from the prior fiscal year is
transferred to surplus and (ii) the bank's surplus equals or exceeds the bank's
initial stockholders' equity. A Nevada-chartered bank is prohibited from paying
a dividend in excess of its undivided profits unless the bank's stockholders'
equity is at least equal to 6% of the bank's total deposit liabilities. Under
the general corporation law provisions of the Nevada Revised Statutes (to which
both XEON and Nevada Banking Company are subject), in no event may a corporation
pay dividends if, after giving effect to payment of the dividend, the
corporation would be unable to pay its debts as they become due or the
corporation's assets would be less than the sum of its total liabilities plus
the amount that would be needed to satisfy the preferential rights (if any) upon
dissolution of stockholders whose preferential rights are superior to those
receiving the dividend distribution.
Under the Federal Deposit Insurance Act and prompt corrective action
regulations of the FDIC, Nevada Banking Company would be prohibited from making
any capital distributions if, after the distribution, Nevada Banking Company
would have (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%. Nevada Banking Company currently satisfies all of its regulatory
capital requirements.
The Federal Reserve Board's policy statement governing payment of cash
dividends provides that a bank holding company should not pay cash dividends on
common stock unless (i) the organization's net income for the past year is
sufficient to fully fund the dividends and (ii) the prospective rate of earnings
retention appears consistent with the organization's capital needs, asset
quality and overall financial condition. For small bank holding companies (those
with less than $150 million in assets), the Federal Reserve Board's position is
that such companies should not pay dividends so long as they have a
debt-to-equity ratio of 1:1 or greater.
TRANSACTIONS WITH AFFILIATES
Although Nevada Banking Company is not a member bank of the Federal Reserve
System, under the Federal Deposit Insurance Act it is required to comply with
Sections 23A and 23B of the Federal Reserve Act (pertaining to transactions with
affiliates) in the same manner and to the same extent as member banks. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. Generally, Sections 23A and 23B of the
Federal Reserve Act (i) limit the extent to which a bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus, and (ii) require
that all such transactions be on terms substantially the same, or at least as
favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes making loans, purchasing
assets, issuing a guarantee and other similar types of transactions.
First Security's subsidiary banks' and Nevada Banking Company's authority
to extend credit to executive officers, directors and greater than 10%
stockholders, as well as entities such persons control, is subject to Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal
Reserve Board. Among other things, these laws require insider loans to be made
on terms substantially similar to those offered to unaffiliated
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individuals, place limits on the amount of loans a bank may make to such persons
based, in part, on the bank's capital position, and require certain approval
procedures to be followed. Under Section 22(h), loans to an executive officer,
director, or greater than 10% stockholder (a "principal stockholder") of a bank,
and certain affiliated entities of either, together with all other outstanding
loans to such persons and affiliated entities, may not exceed the bank's
loans-to-one-borrower limit, which in general terms is 15% of tangible capital
but can be higher in certain circumstances. Section 22(h) also prohibits loans
in excess of the greater of 5% of capital or $25,000 to directors, executive
officers and principal stockholders, and their respective affiliates, unless the
loans are approved in advance by a majority of the board of directors, with any
"interested" director not participating in the voting. A violation of these
restrictions could result in the assessment of substantial civil monetary
penalties, the imposition of a cease-and-desist order or other regulatory
sanctions.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act of 1977 (the "CRA") and implementing
regulations of the banking agencies, a financial institution has a continuing
and affirmative obligation (consistent with safe and sound operation) to meet
the credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires that bank regulatory
agencies conduct regular CRA examinations and provide written evaluations of
institutions' CRA performance. The CRA also requires that an institution's CRA
performance rating be made public. CRA performance evaluations are based on a
four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and
Substantial Noncompliance.
At the most recent CRA examination of Nevada Banking Company, concluded in
September 1998, Nevada Banking Company received a CRA performance rating of
"Outstanding." Although CRA examinations occur on a regular basis, CRA
performance evaluations are used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations are
considered in evaluating applications for such things as mergers, acquisitions
and applications to open branches. Over the twenty years that the CRA has
existed, and particularly in the last few years, institutions have faced
increasingly difficult regulatory obstacles and public interest group objections
in connection with their regulatory applications, including institutions that
have received the highest possible CRA ratings.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks serve as credit sources for their members. As a
member of the FHLB of San Francisco, Nevada Banking Company is required to
maintain an investment in the capital stock of the FHLB of San Francisco in an
amount calculated by reference to the member institution's assets and the amount
of loans, or "advances," from the FHLB. Nevada Banking Company is in compliance,
with an investment in FHLB of San Francisco stock of $390,300 at December 31,
1998.
Nevada Banking Company obtains funds from the FHLB of San Francisco
pursuant to a "Blanket Agreement for Advances and Security Agreement." (See,
"Information About XEON -- Source of Funds.") At origination or renewal of a
loan or advance, the
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Federal Home Loan Banks are required to obtain and maintain a security interest
in one or more of the following kinds of collateral: fully disbursed, whole
mortgage loans on improved residential property or securities representing a
whole interest in such loans; securities issued, insured or guaranteed by the
United States Government or an agency thereof; deposits in any FHLB; or other
real estate-related collateral (up to 30% of the member's capital) acceptable to
the FHLB, if the collateral has a readily ascertainable value and the FHLB can
perfect its security interest.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
NEVADA BANK REGULATION
Nevada law prescribes the permissible investments and activities of Nevada
banks, including the types of loans and investments such institutions may make.
The ability of Nevada-chartered banks to engage in state-authorized activities
is also subject to oversight and approval by the FDIC. The State of Nevada also
has approval authority over establishment of branches and mergers involving or
acquisitions of control of Nevada banks, and Nevada may also initiate
supervisory or enforcement actions against a Nevada bank. If any of the grounds
set forth in Nevada law exists for doing so, the State of Nevada may place a
Nevada bank in conservatorship or receivership.
MONETARY POLICY
The earnings of financial institutions are affected by the policies of
regulatory authorities, including monetary policy of the Federal Reserve Board.
An important function of the Federal Reserve System is regulation of aggregate
national credit and money supply. The Federal Reserve Board accomplishes these
goals with measures such as open market dealings in securities, establishment of
the discount rate on bank borrowings and changes in reserve requirements against
bank deposits. These methods are used in varying combinations to influence
overall growth and distribution of financial institutions' loans, investments
and deposits, and they also affect interest rates charged on loans or paid on
deposits. Monetary policy is influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance and fiscal policies of the United States government. Federal Reserve
Board monetary policy has had a significant effect on the operating results of
financial institutions in the past, and it can be expected to influence
operating results in the future.
BANK REGULATORY DEVELOPMENTS
The laws and regulations affecting banks and bank holding companies have
changed significantly over recent years. Additional changes can be expected in
the future. Like administrations before it, the current administration has
considered consolidation of bank regulatory responsibilities now administered by
four separate banking agencies. Over the same time period, Congress has proposed
additional restrictions on the powers of bank holding companies, thrift holding
companies and their affiliates, as well as expanded powers for bank holding
companies, thrift holding companies and their affiliates, including securities-
and insurance-related powers.
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COMPARATIVE RIGHTS OF STOCKHOLDERS
Upon consummation of the merger, the XEON stockholders will become
stockholders of First Security whose rights will (i) cease to be defined and
governed by Nevada law and will be defined and governed by applicable Delaware
law and (ii) cease to be defined and governed by the articles of incorporation
and bylaws of XEON and will be defined and governed by the First Security
Certificate of Incorporation and the First Security Bylaws. Certain provisions
of the First Security Certificate of Incorporation and the First Security Bylaws
alter the rights of stockholders from those that XEON stockholders presently
have and also alter certain powers of management. These provisions are
summarized below. This summary is qualified in its entirety by reference to the
First Security Certificate of Incorporation, the First Security Bylaws, the
Restated Articles of Incorporation of XEON (the "XEON Articles"), the Bylaws of
XEON (the "XEON Bylaws") and applicable law. In addition, First Security could
implement certain other changes by amending the First Security Certificate of
Incorporation or the First Security Bylaws.
CERTAIN DIFFERENCES BETWEEN NEVADA AND DELAWARE CORPORATE LAWS
Applicable Delaware law governs the rights of First Security stockholders
and will govern the rights of XEON stockholders who become stockholders of First
Security. The Nevada corporate laws and applicable Delaware law differ in many
respects. Certain of the significant differences that could materially affect
the rights of XEON stockholders are discussed below.
AUTHORIZED CAPITAL STOCK
XEON. Under XEON's Articles of Incorporation, the aggregate number of
shares which it is authorized to issue is 5,000,000 shares of Common Stock, no
par value. All shares of XEON common stock are identical in rights and have one
vote. The holders of XEON common stock are entitled to such dividends as may be
declared from time to time by the XEON Board of Directors from funds available
therefor, subject to certain restrictions, and upon liquidation are entitled to
receive pro rata all assets of XEON available for distribution to such holders
after provision for liabilities.
FIRST SECURITY. Under First Security's Certificate of Incorporation, First
Security is authorized to issue 600,000,000 shares of common stock and 400,000
shares of preferred stock. All shares of First Security common stock are
identical in rights and have one vote. All shares of preferred stock also have
one vote.
The First Security common stock to be issued in the merger will be newly
issued from authorized and unissued First Security common stock. The First
Security common stock, when delivered pursuant to the merger agreement, will be
duly authorized and validly issued, fully paid and non-assessable, which status
will be supported by an opinion of First Security's counsel.
First Security's Certificate of Incorporation provides that its Board of
Directors can issue preferred stock in one or more series and with such terms
and at such times and for such consideration as the First Security Board of
Directors may determine. The authority of the First Security Board of Directors
includes the determination or fixing of the following with respect to shares of
any series thereof: (a) the number of shares and designation or title thereof;
(b) rights as to dividends; (c) whether and upon what terms the shares are to be
redeemable; (d) rights and preferences of the holders upon the
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liquidation, dissolution or winding up of First Security; (e) whether the shares
are to be subject to a retirement or sinking fund; (f) whether and upon what
terms the shares are convertible; (g) the voting rights, if any; (h) whether the
issuance of any additional shares of a series shall be subject to restrictions
as to issuance or as to the powers, preferences or rights of any other series;
and (i) any other preferences, privileges, powers or relative rights specified
by the Board of Directors.
On August 28, 1990, First Security's Board of Directors adopted a
Stockholder Rights Plan whereby each First Security stockholder is issued rights
to acquire a new class of junior preferred stock, which rights could also be
expanded by the First Security Board of Directors to allow the purchase of
additional shares of First Security under certain circumstances involving the
acquisition of certain amounts of First Security stock by a third party. (See,
"Information About First Security -- Description of First Security's Capital
Stock -- Common Stock.")
DIRECTORS
NUMBER. XEON's Articles of Incorporation provide that the number of its
directors shall be not less than 7 nor more than 15, with the exact number to be
set from time to time by the Board of Directors. Currently, XEON has 10
directors. First Security's Bylaws provide that the number of its directors
shall be not less than six nor more than thirty, with the exact number to be
established from time to time by resolution of the Board of Directors.
Currently, First Security has 20 directors.
ELECTION. Both applicable Nevada law and applicable Delaware law provide
that members of the board of directors are elected by a plurality vote of the
stockholders, with each share being entitled to one vote, unless the articles or
certificate of incorporation provide otherwise.
REMOVAL. Applicable Nevada law provides that one or more directors of a
corporation may be removed with or without cause, by the vote of stockholders
representing not less than two-thirds of the voting power of the issued and
outstanding stock entitled to vote, subject to certain conditions. These
conditions include certain voting requirements applicable to corporations having
cumulative voting rights and to the removal of a member of a board who is
elected by a single class. The XEON Board of Directors is not classified. XEON
stockholders may not cumulate votes for directors.
Under applicable Delaware law any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors. Applicable Delaware law
also provides additional requirements for the removal of a member of a board
which is classified as to term or elected by a single class or elected by
classes possessing cumulative voting rights. However, these additional
requirements do not apply to First Security, as the Board of Directors of First
Security is not classified and none of First Security's shares of capital stock
possesses any cumulative voting rights.
INDEMNIFICATION. Both the Nevada and applicable Delaware laws provide that
a director, employee, officer or agent of a corporation may be indemnified
against liability (other than in an action by or in the right of the
corporation) and other costs incurred by such person in connection with such
proceeding, provided such person acted in good faith and in a manner such person
reasonably believed to be in, and not opposed to, the best interests of the
corporation, and, with respect to any criminal proceeding, had no reason to
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believe the conduct was unlawful. For actions or suits brought by or in the name
of the corporation, both the Nevada and applicable Delaware laws provide that a
director, employee, officer or agent of a corporation may be indemnified against
expenses incurred by such person in connection with such proceeding if such
person acted in good faith and in a manner such person reasonably believed to be
in, or at least not opposed to, the best interests of the corporation, except
that if such person is adjudged to be liable to the corporation, such person can
be indemnified if and only to the extent that a court determines that despite
the adjudication of liability, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses as
the court shall deem proper. On the other hand, if he/she prevails,
indemnification is mandatory. See the following subsection captioned "Directors'
and Officer's Liability" for a discussion of the differences in the standards of
liability for XEON directors compared to First Security directors.
Both applicable Delaware law and applicable Nevada law provide that the
determination of whether an officer or director is entitled to indemnification
(that is, whether or not the person has met the statutory standard of conduct
required for indemnification) is to be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who are not parties to the
action, suit or proceeding in question, or (2) if such a quorum is not
obtainable or if a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
First Security's Articles of Incorporation, as amended, provide for
indemnification of such persons to the full extent allowed by applicable law.
XEON has similar broad indemnification provisions.
DIRECTOR'S AND OFFICER'S LIABILITY. The Nevada and Delaware Statutes both
allow a corporation to include, in its articles or certificate of incorporation,
a provision that limits or eliminates the personal liability of an officer
(Nevada only) or a director to the corporation and its stockholders for monetary
damages for such person's breach of fiduciary duty, provided that such provision
may not so limit a director's liability (i) for a breach of his or her duty of
loyalty to the corporation (Delaware only); (ii) for acts or omissions not in
good faith or involving fraud (Nevada only), intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends, certain stock
repurchases or redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit (Delaware only).
These provisions have the effect of protecting a corporation's directors
against personal liability from breaches of their duty of care. First Security,
with the approval of its stockholders, amended its Certificate of Incorporation
to include such provisions in 1989. XEON's Articles of Incorporation contain a
similar provision.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of First
Security, First Security has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by First Security of expenses incurred or paid by a director, officer or
controlling person of the registrant in a successful defense of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, First Security will, unless in
the opinion of its counsel
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the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
TRANSACTIONS INVOLVING INTERESTED DIRECTORS. Applicable Delaware law states
that a transaction involving an interested director of a Delaware corporation is
not void or voidable if (a) the director's interest in the transaction is
disclosed to the board and a majority of the disinterested directors approve it,
(b) the interest is disclosed to the stockholders and the transaction is
approved by a majority of the stockholders, or (c) the transaction is fair to
the corporation. Applicable Nevada law contains a similar provision, except that
the board of directors may approve the transaction only if the vote is
sufficient without counting the vote of the interested directors.
REPURCHASE AND REDEMPTION OF SHARES
Applicable Delaware law permits a corporation to redeem or repurchase any
of its shares for cash, other property or a promissory note except when the
capital of the corporation is impaired, or when such repurchase or redemption
would impair any capital of the corporation. Applicable Nevada law is silent on
this point.
PAYMENT OF DIVIDENDS TO STOCKHOLDERS
Holders of XEON common stock are entitled to share ratably in such cash
dividends as may be declared from time to time by XEON's Board of Directors out
of funds legally available therefor, subject to certain restrictions. Under
applicable Nevada law, XEON may only declare dividends on its capital stock if
the corporation would not be rendered insolvent.
Applicable Delaware law allows a corporation, subject to any restrictions
in its certificate of incorporation, to declare and pay dividends upon its
shares of capital stock either out of its surplus (as determined under the
statute) or, in the event there is no such surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year. Further restrictions on dividends apply in the event a corporation has
issued shares possessing a preference upon the distribution of assets. The
ability of a Delaware corporation to pay dividends on, or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis. First Security's
restated Certificate of Incorporation grants to the Board of Directors the power
to declare dividends on its Common Stock, subject to any dividend or sinking
fund requirements pertaining to its Preferred Stock. First Security is also
subject to restrictions on its dividend paying ability under banking laws.
ASSESSMENTS
All outstanding shares of XEON and First Security are fully paid and
nonassessable.
PREEMPTIVE RIGHTS
XEON stockholders do not have a preemptive right to acquire unissued
shares, treasury shares or securities convertible into such shares unless
provided otherwise in the Articles of Incorporation. Delaware law does not
provide for preemptive rights unless
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expressly provided in the Certificate of Incorporation. First Security's
Certificate does not provide for preemptive rights.
AMENDMENTS TO ARTICLES OR CERTIFICATE OF INCORPORATION
Applicable Delaware law permits the board of directors of a Delaware
corporation to adopt a resolution of its own volition setting forth a proposed
amendment to the corporation's certificate of incorporation and directing that
such proposed amendments be submitted to a vote at a meeting of stockholders.
Upon the written request of the holders of not less than 10% of the shares
entitled to vote upon a proposed amendment, the board of directors is required
to adopt a resolution setting forth the requested amendment and directing that
the amendment be submitted to a vote at a meeting of stockholders.
Applicable Nevada law similarly permits the board of directors of a Nevada
corporation to adopt a resolution proposing changes to the corporation's
articles of incorporation and directing that such proposed amendments be
submitted to a vote at a stockholders' meeting.
The voting requirements for stockholder approval of proposed amendments
under applicable Nevada law and applicable Delaware law both generally require a
majority vote of the shares entitled to vote on such amendments.
AMENDMENTS TO BYLAWS
Applicable Nevada law provides that, unless the power to amend a
corporation's bylaws is reserved to its stockholders by its articles of
incorporation, the bylaws may be amended by the Board of Directors. XEON has
made no such reservation.
Applicable Delaware law provides that stockholders may amend the bylaws of
a corporation, provided that the corporation may, in its articles of
incorporation, also confer such power upon the board of directors. First
Security's Certificate of Incorporation expressly authorizes its Board of
Directors to amend its Bylaws.
STOCKHOLDER APPROVAL OF MERGERS AND OTHER BUSINESS COMBINATIONS
Applicable Nevada law requires that any proposed exchange, merger or
consolidation of a corporation must be approved by the holders of a majority of
the outstanding shares entitled to vote.
Applicable Delaware law provides that a merger, consolidation, sale, lease
or exchange of all or substantially all of its assets may be effected upon a
vote of the holders of a majority of a corporation's outstanding shares.
Delaware law does not require a stockholder vote of the surviving corporation in
a merger if (a) the merger does not amend the existing certificate of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged or becomes a treasury share of the surviving
corporation, and (c) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to such issuance.
In February 1988, applicable Delaware law was amended to prohibit certain
business combinations (generally mergers, consolidations and sales of 10% or
more of a corporation's assets) between Delaware corporations and "Interested
Stockholders." As defined under applicable Delaware law, Interested Stockholders
are persons who alone, or
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together with their affiliates, beneficially own 15% or more of the outstanding
stock of a corporation. Applicable Delaware law bars business combinations
between an Interested Stockholder and the corporation for a period of three
years after any such person or group has become an Interested Stockholder.
Applicable Delaware law contains exceptions to the prohibition which allows such
combinations if, as a result of the transaction which causes a person to become
an Interested Stockholder, such person owns 85% or more of the outstanding
voting stock (with certain exceptions). Another provision exempts from the
coverage of applicable Delaware law any transaction approved by the
corporation's board of directors and two-thirds of the outstanding voting stock
not held by the Interested Stockholder. First Security's Certificate of
Incorporation provides for super-majority voting requirements in certain cases
of non-consensual merger votes.
Applicable Nevada law similarly prohibits such business combinations
between Nevada corporations and interested stockholders for a period of 3 years
after the interested stockholder's date of acquiring shares unless the
combination or the purchase of the shares, made by the interested stockholder is
approved by the board of directors. Applicable Nevada law also prohibits such
business combinations after the expiration of 3 years after the interested
stockholder's date of acquiring shares unless the combination meets the
requirements specified in Section 78.439 for director and stockholder approvals
or Sections 78.441 to 78.444 inclusive with respect to the consideration to be
received in the combination by all stockholders other than the interested
stockholder. Applicable Nevada law defines interested stockholders to include
persons who, alone or together with affiliates, beneficially own 10% of the
outstanding stock of the corporation. A Nevada corporation may opt out of the
application of these provisions under certain circumstances. XEON's Articles of
Incorporation provide that the Nevada statute governing combinations with
interested stockholders shall apply to XEON.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt out of the application of these provisions under
certain circumstances. XEON has not opted out of the application of this
statute. Applicable Delaware law contains no such provision.
Nevada law does not require a stockholder vote of the surviving corporation
in a merger if (a) the merger does not amend the existing articles of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to such issuance.
RIGHTS OF DISSENTING STOCKHOLDERS
Sections 92A.300 to 92A.500 of applicable Nevada law provide statutory
appraisal rights to certain stockholders who may dissent from certain corporate
reorganizations such as mergers or sales of all or substantially all of the
institution's assets. Under applicable Nevada law, stockholders are not entitled
to dissenters' rights in the event of a merger if, on the Record Date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting at which the plan of merger is to be acted on, the shares are listed on
a national securities exchange, included in the NASDAQ National Market System,
or are held by at least 2,000 stockholders of record, unless an exception
applies.
Applicable Delaware law provides appraisal rights only in the case of a
statutory merger, consolidation or sale of substantially all the assets of a
corporation, except that
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such rights are not available in cases in which the corporation is to be the
surviving corporation and no vote of its stockholders is required for such
transaction or, unless otherwise provided in the certificate of incorporation,
in cases in which the consideration for such transaction is shares of stock
listed on a national securities exchange or held of record by more than 2,000
stockholders, unless such stockholders are required by the terms of the merger,
consolidation or sale to accept anything other than shares of stock of the
surviving corporation, shares of stock of another corporation which are all
listed or held by such number of record holders, cash in lieu of fractional
shares of such stock, or any combination thereof. The Certificate of
Incorporation of First Security does not provide for greater appraisal rights
than those set forth in applicable Delaware law.
First Security stockholders are not entitled to dissent from or vote on the
merger.
ANNUAL MEETINGS OF STOCKHOLDERS
Applicable Delaware law authorizes the Delaware Chancery Court to order a
Delaware corporation to hold an election of directors upon an application by any
stockholder or director if an annual meeting of the stockholders has not been
held for 13 months. Applicable Nevada law authorizes a Nevada Court to similarly
order the election of directors of a Nevada corporation upon application by a
stockholder who holds not less than 15% of the voting power if an annual meeting
of stockholders has not been held for 18 months.
SPECIAL MEETINGS OF STOCKHOLDERS
Applicable Nevada law provides that special meetings of a corporation's
stockholders may be called by the board of directors, the holders of at least
one-tenth of all the votes entitled to be cast on the subject matter of the
meeting, or by such other persons as are designated in the corporation's
articles of incorporation or bylaws. XEON's Bylaws authorize the Chairman and
the President to call a special meeting.
Under applicable Delaware law, special meetings of stockholders of a
corporation may be called by the board of directors or by such persons as are
authorized by the corporation's certificate of incorporation or bylaws. First
Security's Bylaws provide that such meetings may also be called by the
President, and shall be called by the President or the Secretary at the written
request of stockholders owning not less than a majority of all shares issued and
outstanding and entitled to vote on any proposal to be submitted to the meeting.
Applicable Nevada law is similar to applicable Delaware law concerning meetings
of stockholders in general, although applicable Nevada law is silent as to any
distinction between regular and special meetings of stockholders.
STOCKHOLDER CONSENT TO ACTION WITHOUT A MEETING
Under applicable Nevada law, any action which may be taken at any meeting
of stockholders may be taken without a meeting and a vote if a written consent
stating the action is signed by a majority of the stockholders entitled to vote
with respect to the subject matter thereof, unless the corporation's articles of
incorporation provide otherwise. XEON's articles of incorporation do not
restrict this right.
Applicable Delaware law provides that, unless otherwise provided in the
certificate of incorporation, any action which may be taken at any meeting of
stockholders may be taken without a meeting, prior notice or a vote, if written
consents setting forth the action taken
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are signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to take such action if the action were
taken at a meeting. First Security's Certificate of Incorporation does not
prohibit such actions by written consent.
STOCKHOLDER INSPECTION OF RECORDS
Applicable Delaware law grants every stockholder the right to inspect a
Delaware corporation's stockholder register and other books and records.
Applicable Nevada law states that any stockholder who holds at least 5% of the
outstanding stock or a person who has been a stockholder of record for at least
six months immediately preceding his demand is entitled to inspect the
corporation's articles of incorporation, bylaws and stock ledger.
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THE 1999 ANNUAL MEETING OF XEON STOCKHOLDERS
DATE, TIME AND PLACE
This Prospectus/Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of XEON for use at the 1999
Annual Meeting of Stockholders of XEON. The 1999 Annual Meeting of Stockholders
will be held at the main office of XEON, 229 Kingsbury Grade, Stateline, Nevada
on Tuesday, June 8, 1999, at 8:00 a.m. Pacific Time.
PURPOSE
At the 1999 Annual Meeting of Stockholders, holders of XEON common stock,
without par value, will be asked to vote upon a proposal to approve and adopt
the Agreement and Plan of Reorganization dated as of December 29, 1998 by and
between First Security Corporation, its subsidiary First Security Bank of
Nevada, XEON and its subsidiary Nevada Banking Company. The merger agreement
provides that XEON will merge with and into First Security Corporation, a
Delaware corporation, and that First Security Corporation will be the surviving
corporation.
Stockholders will also be asked to consider and vote upon election of
directors to serve until the 2000 Annual Meeting of Stockholders or until the
merger of XEON with and into First Security Corporation is completed. Lastly,
stockholders of XEON will be asked to consider and vote upon ratification of the
Board of Directors' appointment of Kafoury, Armstrong & Co. to serve as
independent auditors of XEON for the year ending December 31, 1999.
ALL INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT RELATING TO
FIRST SECURITY CORPORATION HAS BEEN FURNISHED BY FIRST SECURITY
CORPORATION, AND ALL INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT RELATING TO XEON HAS BEEN FURNISHED BY XEON. THE PARTY
FURNISHING INFORMATION IS RESPONSIBLE FOR ITS ACCURACY.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The record date for the determination of XEON stockholders entitled to
notice of and to vote at the 1999 Annual Meeting of Stockholders has been fixed
by the Board of Directors of XEON as the close of business on April 30, 1999. As
of the April 30, 1999 record date, there were 2,828,840 shares of XEON common
stock issued and outstanding. The XEON common stock was held of record on that
date by approximately 295 stockholders. Holders of XEON common stock on the
April 30, 1999 record date are entitled to one vote per share on each matter to
be acted upon at the 1999 Annual Meeting of Stockholders. Stockholders of XEON
are not entitled to vote cumulatively in the election or removal of directors or
otherwise. Holders of XEON common stock on the record date are entitled to
exercise dissenters' rights on the proposal to approve and adopt the merger
agreement. (See, "Rights of Dissenting Stockholders.")
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of XEON
common stock is required to adopt the merger agreement. Accordingly, the
affirmative vote of
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approximately 1,414,421 shares of XEON common stock is required to adopt the
merger agreement. Failure to vote is equivalent to voting against the merger
agreement. Of the 2,828,840 shares of XEON common stock issued and outstanding
on the April 30, 1999 record date, directors and executive officers of XEON are
entitled to vote 1,027,778 shares, representing approximately 36.33% of the XEON
common stock. (See, "-- Voting Securities and Principal Holders Thereof.")
Directors of XEON are elected by plurality vote, meaning the nominees
receiving the greatest number of votes are elected. Therefore, abstentions will
have no effect on the election of directors.
VOTING AND REVOCATION OF PROXIES
XEON stockholders are requested to complete, date and sign the accompanying
proxy card and return it promptly in the accompanying postage-prepaid envelope.
Shares represented by valid proxies will be voted at the 1999 Annual
Meeting of Stockholders in accordance with the instructions noted thereon. If no
instructions are given, proxies will be voted FOR adoption of the merger
agreement, FOR election of nominees identified herein to serve as directors and
FOR ratification of the Board of Directors' appointment of Kafoury, Armstrong &
Co. to serve as independent auditors. Proxies solicited hereby may be used at
the 1999 Annual Meeting of Stockholders and any adjournment thereof only and
will not be used for any other meeting.
Unless revoked, the shares represented by proxies will be voted at the 1999
Annual Meeting of Stockholders. Stockholders who execute proxies retain the
right to revoke them at any time before completion of the meeting, but
revocation will not affect a vote previously taken. The presence of a
stockholder at the meeting will not automatically revoke such stockholder's
proxy. A stockholder may revoke a proxy at any time prior to its exercise by
- delivering to the Secretary of XEON a written notice of revocation prior
to the meeting;
- delivering to the Secretary prior to the meeting a duly executed proxy
bearing a later date; or
- attending the meeting and filing a written notice of revocation with the
Secretary.
Any written notice revoking a proxy should be delivered to Ms. Julie L.
Kidd, Secretary of XEON, 229 Kingsbury Grade, Stateline, Nevada 89449.
QUORUM; BROKER NON-VOTES
The required quorum for the transaction of business at the meeting is a
majority of the shares of XEON common stock issued and outstanding on the April
30, 1999 record date, whether represented in person or by proxy. If a quorum is
not obtained, or if fewer shares of XEON common stock than the number required
are voted in favor of the merger agreement, the 1999 Annual Meeting of
Stockholders may be postponed or adjourned to permit additional time for
soliciting and obtaining additional proxies or votes. At any subsequent
reconvening of the meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the 1999 Annual
Meeting of Stockholders, except for any proxies that have been effectively
revoked or withdrawn.
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Abstentions and broker non-votes will be counted as present for purposes of
determining whether there is a quorum at the 1999 Annual Meeting of
Stockholders, but will not be voted. Because adoption of the merger agreement
requires the affirmative vote of the holders of a majority of the outstanding
shares of XEON common stock, abstentions and broker non-votes will have the same
effect as votes against adoption of the merger agreement. Directors of XEON are
elected by plurality vote. Therefore, abstentions will have no effect on the
election of directors.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table indicates the beneficial ownership of Common Stock as
of April 20, 1999 (i) by directors and executive officers of XEON, (ii) by each
person who is known by XEON to own beneficially more than 5% of the outstanding
shares of XEON common stock (showing the owner's address as well), and (iii) by
all directors and executive officers of XEON as a group. Unless otherwise
indicated, voting power and investment power are exercised solely by the person
named or are shared with members of his or her household. For purposes of the
table, a person is considered to own beneficially any shares with respect to
which he or she exercises sole or shared voting or investment power, plus the
number of shares the individual has the right to acquire within 60 days. Shares
deemed to be outstanding are calculated on the basis of 2,828,840 outstanding
shares plus the number of shares a person or group has the right to acquire
within 60 days.
[THIS SPACE LEFT BLANK INTENTIONALLY; SEE TABLE WHICH FOLLOWS]
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<PAGE> 95
Under the terms of XEON's Stock Option Plan, all outstanding options became
vested and exercisable upon announcement of the proposed merger on December 30,
1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON PERCENT OF
STOCK OWNED COMMON
NAME OF BENEFICIAL OWNER BENEFICIALLY OPTION SHARES STOCK
------------------------ ------------ ------------- ----------
<S> <C> <C> <C>
David E. Barnett, Director............... 38,732 3,800 1.50%
Milos S. Begovich, Director.............. 15,100 9,000 (1)
Troy Bowser, Director.................... 890 12,000 (1)
The Chipman First Family Limited
Partnership............................ 210,526 -- 7.44%
P.O. Box 7216
Incline Village, Nevada 89542
Edward C. Coppin, Director............... 54,104 0 1.91%
D. Leonard Detrick, Director............. 72,758 0 2.57%
Ursula K. Prebezac, Senior Vice
President.............................. 17,216(2) 50,000 2.33%
John A. Schopf, Jr., Director, President
and Chief Executive Officer............ 404,336(2)(3) 100,000 17.22%
458 Seminole Court
Zephyr Cove, Nevada 89448
Carol I. Sesser, Director................ 5,422 2,000 (1)
Wayne Snyder, Director and Executive Vice
President.............................. 38,684(2) 80,000 4.08%
Ronald W. Vogel, Director and Chairman of
the Board.............................. 376,868(4) 0 13.32%
1460 Club View Terrace
Los Altos, California 94024
Philip W. Weidinger, Director............ 3,668 7,800 (1)
All directors and executive officers as a
group (11 persons)..................... 1,027,778 264,600 41.78%
</TABLE>
- -------------------------
(1) Less than one percent.
(2) Includes shares of XEON common stock allocated to these officers' accounts
under Nevada Banking Company's Employee Stock Ownership Plan.
(3) Of these shares, approximately 320,000 are pledged to the party from whom
Mr. Schopf acquired shares in 1998. Mr. Schopf acquired 320,000 shares of
XEON common stock in March 1998 from an incorporator of Nevada Banking
Company pursuant to an Agreement for Sale of Stock and a related January 25,
1993 Stock Option and Voting Trust Agreement. The purchase price was
represented by a promissory note, which is secured by a pledge of all
320,000 shares to the seller. In the event of Mr. Schopf's death before
payment in full of the promissory note obligation, the Agreement for Sale of
Stock grants to the seller (Miller Properties, a Nevada limited partnership
and affiliate of the incorporator from whom Mr. Schopf purchased the 320,000
shares) an option to repurchase all 320,000 shares.
(4) Includes 40,000 shares held by Mr. Vogel's son and 40,000 shares held by Mr.
Vogel's daughter. Mr. Vogel exercises voting power over such shares.
On the date the merger agreement was executed, certain stockholders of XEON
entered into a Stockholder Voting Agreement with First Security Corporation as
an
94
<PAGE> 96
inducement for First Security Corporation to enter into the merger agreement.
The Stockholder Voting Agreement requires the shareholders who have executed the
Stockholder Voting Agreement to
- vote their XEON common stock in favor of the merger;
- vote against any other acquisition proposal involving a change in control
of XEON or similar transaction (other than the merger with and into First
Security Corporation); and
- vote against any other transaction that is inconsistent with the
obligation of XEON to consummate the merger.
The stockholders who executed the Stockholder Voting Agreement are Mr. John
A. Schopf, Jr., Director, President and Chief Executive Officer, and Mr. Ronald
W. Vogel, Director and Chairman of the Board. Together, these stockholders own
or exercise voting power over approximately 781,204 shares of XEON common stock,
or 27.62% of the voting power.
ELECTION OF DIRECTORS (PROPOSAL 2)
Under Article SIXTH of XEON's Articles of Incorporation, the Board of
Directors may consist of no fewer than seven and no more than 15 directors. The
Board of Directors is empowered to change the number of directors from time to
time within that range by a vote of no less than 75% of the whole Board. The
number of directors is currently fixed at ten. All directors of XEON are elected
annually and hold office until the following annual meeting or until their
successors are elected and qualified. The Board of Directors of XEON and the
Board of Directors of Nevada Banking Company are comprised of the same
individuals, serving identical terms as directors of XEON and Nevada Banking
Company. If elected by stockholders at the 1999 Annual Meeting of Stockholders,
the individuals identified herein as nominees will serve as directors until the
merger is consummated. If the merger is not consummated, the nominees will serve
as directors until the 2000 Annual Meeting of Stockholders or until their
successors are elected and qualified.
The proxies solicited hereby cannot be voted for a greater number of
persons than the number of nominees identified herein. Section 9 of the Bylaws
of XEON provides that any stockholder desiring to make a nomination for the
election of directors at a meeting of stockholders must submit written notice
not more than 60 days prior to the date of the meeting and not more than 10 days
after the date notice of the meeting is sent to stockholders. Stockholders
desiring to make a nomination must also provide certain information relating to
the nomination. Failure to comply with the advance notice requirements will
prevent such nominations from being considered.
Except as may be otherwise noted herein, there are no family relationships
among any of the directors or executive officers. No director was selected or
serves pursuant to any arrangement or understanding with any other person.
Except as may be disclosed herein, none of the directors and executive officers
of XEON serves as a director of any company that has a class of securities
registered under, or which is subject to the periodic reporting requirements of,
the Securities Exchange Act of 1934 or any investment company registered under
the Investment Company Act of 1940. None of the directors or executive officers
of XEON has been involved in any legal proceedings concerning bankruptcy, either
individually or in respect of any businesses with which they have been involved,
nor have
95
<PAGE> 97
any of such persons been convicted of any crime, excluding traffic violations
and similar minor offenses.
The following table identifies the individuals nominated to serve as
directors until the 2000 Annual Meeting of Stockholders. The table also
identifies the executive officers of XEON and Nevada Banking Company:
<TABLE>
<CAPTION>
POSITION WITH XEON AND
DIRECTOR NOMINEES AGE DIRECTOR SINCE NEVADA BANKING COMPANY
----------------- --- -------------- ----------------------
<S> <C> <C> <C>
David E. Barnett.................. 58 1993 Director
Milos S. Begovich................. 72 1985 Director
Troy Bowser....................... 53 1988 Director
Edward C. Coppin.................. 59 1996 Director
D. Leonard Detrick................ 73 1996 Director
John A. Schopf, Jr. .............. 50 1983 Director, President and Chief
Executive Officer
Carol I. Sesser................... 61 1995 Director
Wayne Snyder...................... 51 1995 Director and Executive Vice
President
Ronald W. Vogel................... 64 1980 Director and Chairman of the Board
Philip W. Weidinger............... 45 1989 Director
</TABLE>
<TABLE>
<CAPTION>
POSITION WITH XEON AND
EXECUTIVE OFFICERS AGE OFFICER SINCE NEVADA BANKING COMPANY
------------------ --- ------------- ----------------------
<S> <C> <C> <C>
John A. Schopf, Jr. .............. 50 1983 Director, President and Chief
Executive Officer
Wayne Snyder...................... 51 1992 Director and Executive Vice
President
Ursula K. Prebezac................ 38 1988 Senior Vice President
</TABLE>
DAVID E. BARNETT. Since 1968, Mr. Barnett has been the principal of Barnett
& Associates, a management consulting firm located in Tahoe Paradise,
California. Mr. Barnett is a Certified Public Accountant.
MILOS S. BEGOVICH. Since 1971, Mr. Begovich has been President of Sharkey's
Nugget, Inc., a casino located in Gardnerville, Nevada.
TROY BOWSER. A real estate broker, Mr. Bowser has been the majority owner
of Coldwell Banker Bowser Realty, located in Zephyr Cove, Nevada, since 1980.
Mr. Bowser was a director of the Tahoe Douglas Chamber of Commerce from 1983-84.
EDWARD C. COPPIN. Prior to his retirement in 1993, Mr. Coppin had been an
educator with the Washoe County School District for thirty years. Mr. Coppin is
a retired Colonel in the United States Air Force Reserve, having served for 29
years with the United States Air Force and the Nevada Air National Guard.
D. LEONARD DETRICK. The founding President of the Northern California
Utility Contractors Association, Mr. Detrick was also the founder of Detrick
Construction Co., which he managed from 1952 until he retired in 1977.
JOHN A. SCHOPF, JR. Mr. Schopf's career in banking began in 1967. He has
served as President and Chief Executive Officer and director of Nevada Banking
Company since 1983. Prior to joining Nevada Banking Company, Mr. Schopf served
as Senior Vice President of First National Bank in Canon City, Colorado.
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<PAGE> 98
CAROL I. SESSER. Mrs. Sesser is President and owner of Tahoe Basin
Container Service, Inc., South Tahoe Refuse Co., Inc. and Douglas Disposal waste
management firms doing business in the Tahoe and Douglas County area.
WAYNE SNYDER. Mr. Snyder joined Nevada Banking Company in 1990 and has
served as Executive Vice President since 1992. Mr. Snyder has more than twenty
years of banking experience, including ten years' service with First National
Bank in Canon City, Colorado. Mr. Snyder is a former member of the City Council
of Canon City, Colorado.
RONALD W. (BUD) VOGEL. Mr. Vogel is a private investor. One of Nevada
Banking Company's founders, Mr. Vogel was a member of Nevada Banking Company's
original Board of Directors. He also owns Vogel Management, a property
management firm located in Mountain View, California.
PHILIP W. WEIDINGER. Since 1985, Mr. Weidinger has been the principal of
Weidinger Public Relations, a public relations firm located in Incline Village,
Nevada.
URSULA K. PREBEZAC. Ms. Prebezac joined Nevada Banking Company in 1983, and
in 1995 she was promoted to her present position of Senior Vice President. Ms.
Prebezac has more than 20 years of banking experience, formerly employed by
Glastonbury Bank & Trust in Glastonbury, Connecticut.
REMUNERATION OF DIRECTORS
In addition to reimbursement of reasonable expenses of attendance at Board
and committee meetings, each director receives monthly cash compensation in the
amount of $500 for service on the Board of Directors and committees thereof. No
cash compensation is paid to directors of XEON in addition to the compensation
such persons receive as directors of Nevada Banking Company. However, each
director who is not also an officer or employee of XEON or Nevada Banking
Company has been granted Non-Qualified Stock Options under XEON's Stock Option
Plan.
BOARD COMMITTEES
In intervals between meetings of the full Board of Directors, the Executive
Committee possesses and may exercise the power of the full Board of Directors in
the management and direction of XEON's affairs in all cases in which specific
direction shall not have been given by the full Board of Directors, except as
may otherwise be provided by applicable law and except insofar as the Board of
Directors shall have delegated power to another committee. The Executive
Committee consists of Messrs. John A. Schopf, Jr., Wayne Snyder, Ronald W.
Vogel, Edward C. Coppin and David E. Barnett.
The directors eligible to serve on the Audit Committee are those who are
not also officers or employees of XEON or Nevada Banking Company. The Audit
Committee is charged with examining or superintending the examination or audit
of XEON's assets, liabilities and results of operations on at least an annual
basis, reporting the results thereof to the Board of Directors. The Audit
Committee consists of Messrs. Ronald W. Vogel, Edward C. Coppin and David E.
Barnett.
97
<PAGE> 99
EXECUTIVE COMPENSATION
None of XEON's executive officers has received any cash remuneration from
XEON in addition to compensation received for service to Nevada Banking Company.
The following tables show compensation for services in all capacities for the
fiscal years ended December 31, 1998, 1997, and 1996 for the President and Chief
Executive Officer and any other executive officer who received compensation in
excess of $100,000 during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------- ----------------------- -------
($) (#)
($) RESTRICTED SECURITIES ($) ($)
NAME AND ($) ($) OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) COMPENSATION(3) AWARDS OPTIONS PAYOUTS COMPENSATION(4)
------------------ ---- --------- -------- --------------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John A. Schopf,
Jr................. 1998 $100,490 $206,027 -- 0 0 0 $2,862
President and Chief 1997 $ 92,185 $152,000 -- 0 0 0 $2,812
Executive Officer 1996 $ 89,716 $ 77,838 -- 0 100,000 0 $2,691
Wayne Snyder......... 1998 $ 77,708 $122,687 -- 0 0 0 $3,093
Executive Vice 1997 $ 74,575 $ 90,939 -- 0 0 0 $2,996
President 1996 $ 72,685 $ 45,411 -- 0 80,000 0 $2,907
Ursula K. Prebezac... 1998 $ 67,730 $ 43,041 -- 0 0 0 $2,691
Senior Vice 1997 $ 65,000 $ 31,000 -- 0 0 0 $2,996
President 1996 $ 57,879 $ 15,295 -- 0 50,000 0 $2,315
</TABLE>
- -------------------------
(1) Includes amounts deferred at the election of the named executive officers
pursuant to the 401(k) Plan of Nevada Banking Company.
(2) Represents the bonus earned under the Deferred Bonus Plan. A portion of the
bonus was deferred by Messrs. Schopf and Snyder, the remainder taken in
cash. Ms. Prebezac and Mr. Snyder deferred half of their bonuses in each
year, taking the other half in the form of a cash bonus. In 1996, Mr. Schopf
took ten percent (10%) of his bonus in the form of cash, deferring the
remainder. In 1997, $27,047 of Mr. Schopf's bonus was paid in cash, and the
remainder of the bonus was deferred.
(3) Perquisites and other personal benefits did not exceed the lesser of $50,000
or 10% of total salary and bonus.
(4) Includes matching contributions of Nevada Banking Company under its 401(k)
Plan. For Mr. Schopf, the matching contribution was $2,142 in 1998, $2,812
in 1997 and $2,691 in 1996. For Mr. Snyder, the matching contribution under
the 401(k) Plan was $2,316 in 1998, $2,996 in 1997 and $2,907 in 1996. For
Ms. Prebezac, the matching contribution under the 401(k) Plan was $2,014 in
1998, $2,996 in 1997 and $2,315 in 1996. Also includes discretionary
contributions made by Nevada Banking Company under the Employee Stock
Ownership Plan, which was adopted September 30, 1998. Allocations under the
Employee Stock Ownership Plan to the accounts of the named executives for
1998 are as follows: Mr. Schopf $720; Mr. Snyder $777; and Ms. Prebezac
$677.
The preceding table does not reflect severance benefits expected to become
payable as a result of the proposed merger by First Security. (See,
" -- Employment Agreements.") The table also does not reflect acceleration of
benefits under the Nevada Banking Company 1996 Stock Option Plan or Nevada
Banking Company's Deferred Bonus Plan expected to result from the proposed
merger with First Security. (See, "-- Stock Option Plan" and "-- Deferred Bonus
Plan.")
98
<PAGE> 100
STOCK OPTION PLAN. Effective May 15, 1996 Nevada Banking Company
implemented the Nevada Banking Company 1996 Stock Option Plan (the "Stock Option
Plan"). Upon completion of the holding company reorganization of Nevada Banking
Company on October 15, 1998, XEON adopted the Stock Option Plan. At that time,
all unexercised options to purchase shares of Nevada Banking Company common
stock became options to purchase shares of XEON common stock, with the same
terms, conditions and exercise prices.
Under the Stock Option Plan, Qualified and Non-Qualified Stock Options have
been and may be granted to officer and employee participants. Non-Qualified
Stock Options have been and may be granted to directors of XEON as well. A
Qualified Stock Option, also known as an "Incentive Stock Option," is an option
that satisfies the terms of Section 422 of the Internal Revenue Code of 1986.
All other options granted under the Stock Option Plan are Non-Qualified Stock
Options.
Although Non-Qualified Stock Options may be granted to directors, officers
and employees, XEON's practice to date has been to issue Qualified Stock Options
to officers and employees, and Non-Qualified Stock Options to directors who are
not also officers or employees of XEON and Nevada Banking Company. Non-Qualified
Stock Options are granted to directors based upon the number of meetings of the
Board of Directors, Executive Committee, Asset and Liability Management
Committee, Loan Committee and Marketing Committee attended. Non-Qualified Stock
Options to acquire 200 shares are granted to each director attending each such
meeting, except for directors who are also officers or employees of XEON and
Nevada Banking Company. The Stock Option Plan is administered by the Executive
Committee of the Board of Directors, which has the authority (i) to make grants
of options under the Stock Option Plan, (ii) to determine the terms and
conditions thereof, including the number of shares subject to option, the
exercise price and duration of options, and (iii) to make all other
determinations that are necessary or advisable for the administration of the
Stock Option Plan.
A total of 550,000 shares of XEON have been reserved for issuance as
Qualified Stock Options, and 282,272 shares of XEON have been reserved for
issuance as Non-Qualified Stock Options. As of March 1, 1999, options to acquire
467,200 shares of XEON common stock remain issued and outstanding under the
Stock Option Plan, of which 432,600 are subject to Qualified Stock Options and
34,600 are subject to Non-Qualified Stock Options. The option exercise price
under the Stock Option Plan can be no less than the fair market value of the
XEON common stock as of the date of grant (adjusted for subsequent stock
splits). For this purpose, fair market value is the average of the bid and asked
for the XEON common stock on the date of grant, according to the market maker
for XEON common stock.
Qualified Stock Options vest in five equal annual installments. Once
vested, Qualified Stock Options may be exercised at any time during their term,
which may not exceed 10 years from the date of grant (5 years if the option
holder owns more than 10% of XEON's common stock). Non-Qualified Stock Options
are fully vested from the date of grant and may be exercised at any time on or
after the date of grant, but in any event within 10 years after the date of
grant.
99
<PAGE> 101
The following table provides a range of exercise prices of Xeon's Stock
Option plans, along with the remaining contractual life in which to exercise the
options at December 31, 1998:
QUALIFIED STOCK OPTION PLAN
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED
AVERAGES OPTIONS EXERCISABLE
REMAINING ------------------------------
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.38 - $2.99 334,000 2.37 $2.375 130,900 $2.375
$3.00 - $4.99 36,500 3.45 3.301 4,500 3.438
$5.00 - $6.99 30,000 3.88 5.000 6,000 5.000
$7.00 - $9.24 2,900 4.70 7.034 -- --
$9.25 - $9.63 26,300 4.32 9.380 -- --
------- ---- ------ ------- ------
432,600 2.71 $3.123 141,400 $2.520
======= ==== ====== ======= ======
</TABLE>
NON-QUALIFIED STOCK OPTION PLAN
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------
WEIGHTED
AVERAGES OPTIONS EXERCISABLE
REMAINING ------------------------------
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.38 - $3.06 34,600 7.80 $2.673 34,600 $2.673
====== ==== ====== ====== ======
</TABLE>
The Stock Option Plan provides that outstanding options not yet vested and
exercisable become fully vested and exercisable upon public announcement of a
merger, business combination or reorganization in which XEON is not the
surviving corporation or a change in control of XEON. Public announcement of the
proposed merger occurred on December 30, 1998. Accordingly, all outstanding
options not vested by that date became vested and exercisable in full on
December 30, 1998.
Under the terms of the Stock Option Plan, outstanding options may be
exercised within 90 days after the public announcement of a merger, business
combination or reorganization in which XEON will not be the surviving
corporation or other change in control of XEON. If not exercised within that
90-day period (on or by March 30, 1999), the Executive Committee of the Board of
Directors, which acts as Administrator of the Stock Option Plan, and the option
holder may agree either (i) to cancel the unexercised portion of the option and
to pay the option holder the difference between (x) the closing price of the
XEON common stock on the day before completion of the merger, business
combination, reorganization or change in control and (y) the option exercise
price or (ii) to assign the option and all rights and obligations under the
option to the successor entity, which will be First Security.
Under Section 3.3 of the merger agreement, XEON and First Security have
agreed that all outstanding options that have vested may be exercised at any
time prior to completion of the merger. The exercise will take the form of a
"cashless exercise," meaning option holders will not have to pay the option
exercise price in cash. Instead,
100
<PAGE> 102
option holders will be deemed to have received a number of shares of XEON common
stock with an aggregate value equal to (i) the difference between the per share
value of XEON common stock and the option exercise price per share, (ii)
multiplied by the number of shares acquirable upon exercise of the option.
Option holders will not have to take any action to accomplish the cashless
exercise. But they are being asked by XEON to agree to this cashless exercise
procedure.
The following table shows the number of shares of XEON common stock
acquired during 1998 or acquirable upon exercise of options by the individual(s)
named in the Summary Compensation Table. The table also indicates the extent to
which such options were exercisable at December 31, 1998, as well as the
approximate value of such options based on the estimated fair market value of
XEON common stock at December 31, 1998.
<TABLE>
<CAPTION>
SECURITIES UNDERLYING VALUE OF
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Schopf,
Jr................. 0 $0 100,000 0 $675,000 --
Wayne Snyder......... 0 $0 80,000 0 $540,000 --
Ursula K. Prebezac... 0 $0 50,000 0 $337,500 --
</TABLE>
- -------------------------
(1) In general, a stock option is "in the money" when the stock's fair market
value exceeds the option exercise price. Value of unexercised options equals
the estimated fair market value of a share acquirable upon exercise of an
option at December 31, 1998, less the exercise price per share, multiplied
by the number of shares acquirable upon exercise of the options. XEON common
stock is quoted on the OTC Bulletin Board, but is not actively traded.
Solely for purposes of the table and for no other purpose, XEON has
estimated the per share fair market value of XEON common stock at December
31, 1998 as $9.125, the average of the bid and asked prices on December 30,
1998, the last trading day in 1998. The foregoing figure is an estimate only
and does not reflect actual transactions in XEON common stock. The estimate
does not necessarily reflect the price stockholders could obtain upon sale
of their stock or the price at which shares of XEON common stock may be
acquired, nor should such estimate be taken to represent management or the
Board of Directors' estimate of the intrinsic value or fair market value of
the shares of XEON common stock.
DEFERRED BONUS PLAN. Effective December 31, 1993, the Bank adopted a
Deferred Bonus Plan for the purpose of providing deferred compensation for a
select group of management and highly compensated employees. The plan is not
qualified under Section 401 of the Internal Revenue Code of 1986. Participants
in the Deferred Bonus Plan are immediately vested in deferred bonus amounts (and
earnings thereon) in excess of 50% of their bonus allocation (discussed
hereinafter) each year. The remainder of the deferred bonus allocation vests at
the rate of 10% annually, becoming fully vested after ten years of service from
the December 31, 1993 effective date of the Deferred Bonus Plan. Vested plan
benefits are paid on the earliest of 10 years from the effective date of the
Deferred Bonus Plan, termination of employment, death or permanent disability.
Selected by the Board of Directors at inception of the Deferred Bonus Plan,
three officers of Nevada Banking Company are participants in the Deferred Bonus
Plan: Messrs. Schopf and Snyder and Ms. Prebezac. Benefits are paid out of
Nevada Banking Company's general assets set aside in a Deferred Bonus Trust.
Benefits payable under the Deferred Bonus Plan consist of an annual bonus
determined according to a formula set forth in the Deferred Bonus Plan document.
Under
101
<PAGE> 103
the Deferred Bonus Plan, the bonus consists of cash in an amount equal to 15% of
Nevada Banking Company's net earnings in excess of $325,375. For this purpose,
"net earnings" means net income before taxes, increased or decreased by the
corresponding increase or decrease in the reserve for loan losses in the
preceding year (except that the minimum earnings figure of $325,375 is
calculated without adjustment for increases or decreases in the loan loss
reserve). Under the terms of the Deferred Bonus Plan, Mr. Schopf is entitled to
55% of such bonus, Mr. Snyder 33%, and Ms. Prebezac 12%.
The Deferred Bonus Plan provides for full vesting on an accelerated basis
in the event that, within twelve months after (and as a result of) a change in
control of Nevada Banking Company, a participant's employment with Nevada
Banking Company is terminated or the participant's duties, responsibilities or
compensation are reduced, followed by termination of the participant. The merger
with First Security will constitute a change in control of Nevada Banking
Company for this purpose, although Messrs. Schopf and Snyder and Ms. Prebezac
are expected to continue to serve as officers of First Security Bank of Nevada
following the merger of Nevada Banking Company with and into First Security Bank
of Nevada.
RETIREMENT PLAN AND EMPLOYEE STOCK OWNERSHIP PLAN. Since May 1994 Nevada
Banking Company has maintained a qualified cash or deferred compensation plan
under Section 401(k) of the Internal Revenue Code of 1986. Under the 401(k)
Plan, employees may elect to defer up to 12% of their salary, subject to limits
established by the Internal Revenue Service. Until adoption of Nevada Banking
Company's Employee Stock Ownership Plan, Nevada Banking Company was required to
make matching contributions of 50% of the first 4% of employee contributions
under the 401(k) Plan. As amended in connection with adoption of the Employee
Stock Ownership Plan, Nevada Banking Company may make discretionary matching
contributions to the 401(k) Plan, but it is no longer required to make matching
contributions.
In order to promote thrift on employees' part and to align their interests
with those of stockholders, on September 30, 1998, Nevada Banking Company
adopted an Employee Stock Ownership Plan ("ESOP"). The ESOP became effective
retroactively to January 1, 1998. Because the ESOP was adopted so recently,
Nevada Banking Company has made nominal contributions under the ESOP.
In general, all employees over age 21 who have at least one year of service
with Nevada Banking Company are participants in the ESOP. The ESOP provides for
annual discretionary contributions in cash or in kind by Nevada Banking Company,
based upon Nevada Banking Company's profits for each year. Discretionary
contributions are allocated to each participant's account according to (i) the
percentage each participant's annual compensation bears to the total
compensation of all participants, in the case of "basic contributions" under the
ESOP, and (ii) according to the percentage each participant's elective deferral
of compensation under Nevada Banking Company's 401(k) bears to the total
elective deferrals of all participants, in the case of "matching contributions"
under the ESOP. Annual discretionary contributions of Nevada Banking Company
become vested to a participant's account in five equal annual installments, the
first 20% vesting after two years of continuous service following the date of
effectiveness of the ESOP and 100% vesting after six years. Benefits also become
100% vested upon a participant's retirement, death or disability or upon
termination of the ESOP. Nevada Banking Company's discretionary contributions
are invested primarily in common stock of XEON. Participants have the right to
direct voting by the ESOP trustee of shares of XEON common stock held in their
accounts.
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The merger agreement provides that First Security will use its best efforts
to convert employees' rights under XEON's and Nevada Banking Company's employee
benefit plans to First Security's benefit plans, and to allow benefits under
those plans to be "rolled over" to benefit plans maintained by First Security.
Until that occurs, XEON's and Nevada Banking Company's benefit plans will be
continued, including the ESOP and the 401(k) Plan.
EMPLOYMENT AGREEMENTS. Mr. Schopf serves as President and Chief Executive
Officer pursuant to a May 15, 1996 employment agreement. The employment
agreement has a term of ten years and provides for annual salary of $89,849,
subject to increase in the discretion of Nevada Banking Company's Board of
Directors. The employment agreement provides for a payment of $225,000 if Mr.
Schopf is terminated without cause. The employment agreement provides also for
payment of $225,000 to Mr. Schopf if, within six months following a change in
control, (i) he is terminated, except for cause, or (ii) he terminates his
employment based on his determination that the policies and procedures of Nevada
Banking Company's Board of Directors are unacceptable.
Mr. Snyder serves as Executive Vice President of Nevada Banking Company
pursuant to a May 15, 1996 employment agreement that is essentially identical to
the employment agreement of Mr. Schopf. However, the base salary of Mr. Snyder
is $72,685 annually, subject to increase in the discretion of Nevada Banking
Company's Board of Directors. Likewise, the payment provided in the employment
agreement in the event of termination of Mr. Snyder without cause is $150,000,
and the termination payment provided by the employment agreement following a
change in control is $150,000.
For purposes of Messrs. Schopf and Snyder's employment agreements, a change
in control is defined as an event involving one transaction or a related series
of transactions in which (i) Nevada Banking Company issues new securities or
sells existing securities equal to 33% or more of the issued and outstanding
stock of Nevada Banking Company to any individual, firm, partnership or other
entity, including a group, (ii) Nevada Banking Company issues securities equal
to 33% or more of the issued and outstanding stock of Nevada Banking Company in
connection with a merger, consolidation or other business combination, (iii)
Nevada Banking Company is acquired in a merger or other business combination
transaction in which Nevada Banking Company is not the surviving corporation or
(iv) 50% or more of Nevada Banking Company's consolidated assets or earning
power are sold or transferred.
The merger will constitute a change-in-control for purposes of the
employment agreements with Nevada Banking Company's officers, although Messrs.
Schopf and Snyder are expected to serve as officers of First Security Bank of
Nevada following the merger of Nevada Banking Company with and into First
Security Bank of Nevada. In connection with the merger, Messrs. Schopf and
Snyder have entered into Agreements for Change-in-Control Severance Benefits
with XEON and Nevada Banking Company. The Agreements for Change-in-Control
Severance Benefits supersede their employment agreements. Under the Agreements
for Change-in-Control Severance Benefits, Mr. Schopf will be entitled to an
aggregate severance payment of $150,000 as a result of the merger, and Mr.
Snyder will be entitled to an aggregate severance payment of $150,000 as a
result of the merger.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Nevada Banking Company has deposit and lending relationships with certain
directors and officers of XEON and Nevada Banking Company, as well as with their
affiliates. All
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loans to directors, officers and their affiliates were made in the ordinary
course of business, on substantially the same terms (including interest rates
and collateral) as those prevailing at the time for comparable transactions with
other persons, and did not involve more than the normal risk of collectability
or present other unfavorable features. Refer to Note 20 of Notes to Consolidated
Financial Statements of XEON included elsewhere herein.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ELECTION
OF EACH OF THE NOMINEES NAMED HEREIN.
RATIFICATION OF INDEPENDENT AUDITOR (PROPOSAL 3)
XEON's independent auditor for the fiscal year ended December 31, 1998 was
Kafoury, Armstrong & Co. The Board of Directors has selected Kafoury, Armstrong
& Co. to be its independent auditor for the fiscal year ending December 31,
1999. This appointment is being presented to the stockholders for ratification.
One or more members of the firm of Kafoury, Armstrong & Co. are expected to
be present at the 1999 Annual Meeting of Stockholders. The representative(s) of
the independent auditor will have the opportunity to make a statement if
desired, and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
RATIFICATION OF THE APPOINTMENT OF KAFOURY, ARMSTRONG & CO. AS
INDEPENDENT AUDITOR FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999
EXPENSES; SOLICITATION OF PROXIES
The cost of solicitation of proxies will be borne by XEON. Brokerage
houses, nominees, fiduciaries and other custodians are requested to forward
soliciting materials to beneficial owners. XEON will reimburse brokerage firms
and other custodians, nominees and fiduciaries for reasonable expenses incurred
by them in sending proxy material to the beneficial owners of XEON common stock.
In addition to solicitation by mail, directors, officers and employees of
XEON and Nevada Banking Company may solicit proxies from the stockholders of
XEON personally or by telephone, telegram or other forms of communication.
However, they will not be specifically compensated for such services.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the 1999
Annual Meeting of Stockholders other than those matters described above in this
Prospectus/ Proxy Statement. However, if any other matters should properly come
before the meeting, it is intended that proxies in the accompanying form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the proxies, including matters relating to the conduct of the
meeting.
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LEGAL MATTERS
Ray, Quinney & Nebeker, P.C, Salt Lake City, Utah, will pass upon certain
other matters with respect to the merger for First Security and First Security
Bank of Nevada, including the legality of the First Security common stock to be
issued in the merger. As of April 9, 1999, attorneys at Ray, Quinney & Nebeker,
as a group, were beneficial owners of no more than 4% of the total outstanding
First Security common stock and held no XEON shares. A stockholder of Ray,
Quinney & Nebeker is the daughter of the Chairman and Chief Executive Officer of
First Security. Another stockholder acts as Assistant Secretary of First
Security.
The law firm of Grady & Associates, Cleveland, Ohio, will pass upon certain
matters in connection with the merger for XEON.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998 incorporated by reference
in this Prospectus/ Proxy Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
Representatives of Kafoury, Armstrong & Company are expected to be present
at the XEON Annual Meeting of Stockholders. Such representatives will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
WHERE YOU CAN FIND MORE INFORMATION
First Security has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 under the Securities Act of 1933. The Form
S-4 Registration Statement registers the distribution of First Security
securities to be issued to XEON stockholders in the merger. The Form S-4
Registration Statement, including attached exhibits and schedules, contains
additional relevant information about First Security common stock. The rules and
regulations of the Securities and Exchange Commission allow us to omit certain
information included in the Form S-4 Registration Statement from this
Prospectus/Proxy Statement.
In addition, First Security files reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy that information at the following
locations of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois
60661-2511
</TABLE>
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You may also obtain copies of this information by mail from the Public
Reference Section of the Securities and Exchange Commission, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, at prescribed rates.
The Securities and Exchange Commission also maintains an Internet world
wide web site that contains reports, proxy and proxy statements and other
information regarding issuers that, like First Security, file electronically
with the Securities and Exchange Commission. The address of that site is
http://www.sec.gov.
The Securities and Exchange Commission allows First Security to
"incorporate by reference" information into this Prospectus/Proxy Statement.
This means that we can disclose important information to you by referring you to
another document filed separately with the Securities and Exchange Commission.
The information incorporated by reference is considered to be a part of this
Prospectus/Proxy Statement, except for any information that is superseded by
information that is included directly in this document.
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus/Proxy Statement incorporates by reference the documents
listed below that First Security has previously filed with the Securities and
Exchange Commission. These documents contain important information about First
Security and its financial affairs.
FIRST SECURITY (Securities and Exchange Commission File No. 1-6906):
(a) Annual Report on Form 10-K for the year ended December 31, 1998;
(b) Proxy Statement dated March 29, 1999; and
(c) Description of First Security Common Stock, included in First
Security's Registration Statement on Form S-3, filed with the
Commission on September 13, 1991 (Commission File Number 33-42784).
All documents filed by First Security under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this
Prospectus/Proxy Statement and prior to the date of the XEON Annual Meeting
shall be deemed to be incorporated by reference in this Prospectus/Proxy
Statement and to be a part hereof from the date of filing such documents. These
documents include periodic reports, such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any other subsequently filed document which is also
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement, as so modified or superseded,
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus/Proxy Statement. The information relating to First Security
contained in this Prospectus/Proxy Statement should be read together with the
information in the documents incorporated by reference.
Copies of any First Security documents, other than exhibits to such
documents, that are incorporated by reference but not presented herein or
delivered herewith are available without charge to any person to whom this
Prospectus/Proxy Statement is delivered upon
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written or oral request to First Security, Attention: Brad D. Hardy, Executive
Vice President and Chief Financial Officer, Suite 200, 79 South Main Street,
Salt Lake City, Utah 84111, telephone number (801) 246-6000. In order to ensure
timely delivery of such documents prior to the Annual Meeting of XEON, any
request should be received on or before , 1999. Copies of such
documents will also be available upon request thereafter until the effective
time of the merger.
A copy of XEON's audited financial statements is attached as Appendix D to
this Prospectus/Proxy Statement.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST SECURITY OR XEON. THIS PROSPECTUS/PROXY STATEMENT DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE
SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT OR THE SOLICITATION OF A
PROXY IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER,
SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS/PROXY STATEMENT, NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED
PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE AFFAIRS OF FIRST SECURITY OR XEON OR ANY OF THEIR
RESPECTIVE SUBSIDIARIES SINCE THE DATE OF THIS PROSPECTUS/PROXY STATEMENT.
ALL INFORMATION CONTAINED OR INCORPORATED IN THIS PROSPECTUS/PROXY
STATEMENT WITH RESPECT TO FIRST SECURITY WAS SUPPLIED BY FIRST SECURITY. ALL
INFORMATION CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT WITH RESPECT TO XEON
WAS SUPPLIED BY XEON. ALTHOUGH NEITHER FIRST SECURITY NOR XEON KNOWS OF ANY
INFORMATION INDICATING THAT ANY STATEMENTS OR INFORMATION HEREIN RELATING TO THE
OTHER PARTY ARE INACCURATE OR INCOMPLETE, NEITHER FIRST SECURITY NOR XEON CAN
WARRANT THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS OR INFORMATION AS THEY
RELATE TO THE OTHER PARTY.
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APPENDIX A
MERGER AGREEMENT
<PAGE> 110
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF DECEMBER 29, 1998
BY AND AMONG
FIRST SECURITY CORPORATION,
FIRST SECURITY BANK OF NEVADA,
XEON FINANCIAL CORP.
AND
NEVADA BANKING COMPANY
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TABLE OF CONTENTS
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ARTICLE I THE MERGER........................................ 3
1.1 The Merger......................................... 3
1.2 Directors and Officers of the Surviving
Corporation........................................... 4
1.3 Subsequent Actions................................. 4
ARTICLE II THE BANK MERGER.................................. 5
2.1 The Bank Merger.................................... 5
2.2 Directors and Officers of the Surviving Bank....... 6
2.3 Subsequent Actions................................. 6
2.4 Conversion of Shares............................... 7
ARTICLE III CONVERSION OF SECURITIES........................ 7
3.1 Conversion of Common Stock of Merging Entities..... 7
(a) Conversion of Bancorp Common Stock............ 7
(b) Certain Definitions........................... 8
(c) FSC Stock..................................... 9
3.2 The Merging Banks.................................. 9
(a) FSB Common Stock.............................. 9
(b) Bank Common Stock............................. 9
3.3 Options............................................ 9
3.4 Dissenting Shares.................................. 10
3.5 Exchange of Shares and Certificates................ 11
(a) Exchange Agent................................ 11
(b) Exchange Procedures; Transfer of Shares....... 11
(c) Distributions with Respect to Unexchanged
Shares.......................................... 13
(d) No Further Ownership Rights in Bancorp Common
Stock; No Transfer Following the Closing
Date.......................................... 13
(e) Fractional Shares............................. 14
(f) Termination of Exchange Fund.................. 14
(g) No Liability.................................. 15
(h) Investment of Exchange Fund................... 15
ARTICLE IV COVENANTS OF BANCORP AND BANK.................... 15
4.1 Conduct of Business Pending the Closing............ 15
(a) Change in Capital Stock; Issuance of Shares... 16
(b) Options, Warrants, and Rights................. 16
(c) Dividends..................................... 16
(d) Purchase of Shares............................ 17
(e) Benefit Plans................................. 17
(f) Conduct of Business........................... 17
(g) Acquisitions and Mergers...................... 18
(h) Liens; Indebtedness; Increase in Compensation,
etc............................................. 18
(i) Amendments to Charter, etc.................... 18
4.2 Investigation; Access.............................. 19
4.3 Regulatory Approvals............................... 20
4.4 Termination of Employee Benefit Plans.............. 21
4.5 Information for Proxy Statement.................... 21
4.6 Environmental Reports.............................. 21
4.7 Notification of Actions............................ 22
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ARTICLE V REPRESENTATIONS AND WARRANTIES OF BANCORP AND
BANK.............................................. 22
5.1 Organization, Conduct of Business, etc............. 22
5.2 Capitalization..................................... 23
5.3 Options, SARs, Warrants, etc....................... 23
5.4 Authorization; Validity of Agreement............... 24
5.5 Bancorp and Bank Reports........................... 24
5.6 Bancorp and Bank Financial Statements; No
Undisclosed Liabilities............................... 25
5.7 Environmental Matters.............................. 26
5.8 Loan Loss Reserves................................. 27
5.9 Title to Properties................................ 28
5.10 Absence of Defaults............................... 28
5.11 Absence of Material Adverse Changes............... 29
5.12 Actions, Proceedings and Investigations........... 29
5.13 Absence of Brokerage Commissions, etc............. 30
5.14 Material Contracts................................ 30
5.15 Compliance With Laws; Documentations.............. 31
5.16 Employee Benefits................................. 33
5.17 Repurchase Agreements............................. 37
5.18 Taxes and Tax Returns............................. 37
5.19 Consents and Approvals............................ 37
5.20 Insurance......................................... 38
5.21 Disclosure........................................ 38
ARTICLE VI COVENANTS, REPRESENTATIONS AND WARRANTIES OF FSC
AND FSB.......................................... 39
6.1 Organization, Conduct of Business, etc............. 39
6.2 Authorization and Validity of Agreement............ 40
6.3 FSC Reports........................................ 40
6.4 FSC Financial Statements; Tax Returns.............. 40
6.5 Absence of Material Adverse Changes................ 41
6.6 Absence of Defaults Under Agreements............... 42
6.7 Actions, Proceedings, and Investigations........... 42
6.8 Regulatory Approvals............................... 42
6.9 FSC Common Stock................................... 43
6.10 Registration of Shares............................ 43
6.11 Notification of Actions........................... 44
6.12 NASDAQ/NMS Listing................................ 44
6.13 Indemnification................................... 44
6.14 Ongoing Credit Review............................. 45
6.15 Limitation on FSC's Conduct Prior to the Effective
Time.................................................. 45
ARTICLE VII PROXY STATEMENT; SHAREHOLDER MEETINGS........... 47
7.1 Proxy Statement.................................... 47
7.2 Bancorp Meeting.................................... 47
7.3 Bank and FSB Action By Unanimous Written Consent... 48
ARTICLE VIII CONDITIONS OF CLOSING.......................... 49
8.1 Conditions of Closing For All Parties.............. 49
(a) Regulatory Approval........................... 49
(b) Registration Statement, etc. ................. 49
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(c) No Injunction, etc. .......................... 50
(d) Tax Opinions.................................. 50
(e) Section 280G.................................. 50
8.2 Conditions of Closing for FSC and FSB.............. 50
(a) Shareholder Approval.......................... 50
(b) Bancorp and Bank Resolutions; Corporate
Documents....................................... 51
(c) Bancorp and Bank Representations and
Warranties...................................... 51
(d) Comfort Letters............................... 51
(e) Opinion of Bancorp and Bank Counsel........... 52
(f) Affiliate's Letter............................ 52
(g) Condition of Bank............................. 52
(h) Employment Agreements......................... 54
(i) Condition of Properties....................... 54
(j) Options....................................... 55
8.3 Conditions of Closing For Bancorp and Bank......... 55
(a) FSC and FSB Representations and Warranties.... 55
(b) Opinion of FSC Counsel........................ 55
(c) FSC Resolutions; Corporate Documents.......... 56
(d) Shareholder Approval.......................... 56
(e) Fairness Option............................... 56
ARTICLE IX CLOSING OF MERGER................................ 56
9.1 Closing............................................ 56
9.2 Filing of Certificate of Merger and Articles of
Merger................................................ 57
ARTICLE X TERMINATION....................................... 57
10.1 Termination....................................... 58
10.2 Effect of Termination............................. 59
ARTICLE XI ADDITIONAL COVENANTS............................. 59
11.1 Employee Matters.................................. 59
11.2 Costs............................................. 60
11.3 Instruments of Transfer, etc. .................... 61
11.4 Notices........................................... 61
11.5 Amendments........................................ 63
11.6 Entire Agreement.................................. 63
11.7 Assignment........................................ 64
11.8 Counterparts...................................... 64
11.9 Exclusive Merger Agreement........................ 64
11.10 Public Statements................................ 65
11.11 Confidentiality.................................. 65
11.12 Nonsurvival of Representations, Warranties and
Agreements............................................ 65
11.13 Alternative Structure............................ 66
11.14 Third Parties.................................... 66
11.15 Severability..................................... 66
11.16 Captions......................................... 67
11.17 Definition of Material Adverse Effect............ 67
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EXHIBITS
Exhibit A -- Certificate of Merger (Delaware)
Exhibit B -- Articles of Merger (Nevada)
SCHEDULES
Schedule 4.1(d) -- Purchase of Shares
Schedule 4.2 -- Investigation; Access
Schedule 5.1 -- Organization, Conduct of Business
Schedule 5.2 -- Capitalization
Schedule 5.3 -- Options
Schedule 5.5 -- Bank Reports
Schedule 5.6 -- Financial Statements
Schedule 5.7 -- Environmental Matters
Schedule 5.9 -- Title to Properties
Schedule 5.10 -- Absence of Defaults
Schedule 5.11 -- Material Adverse Changes
Schedule 5.12 -- Litigation, Etc.
Schedule 5.14 -- Material Contracts
Schedule 5.15 -- Compliance with Law
Schedule 5.16 -- Employee Benefit Plans
Schedule 5.18 -- Taxes
Schedule 5.19 -- Consents
Schedule 5.20 -- Insurance
Schedule 8.2(d) -- Comfort Letters
Schedule 8.2(e) -- Opinion of Bank and Bancorp
Schedule 8.2(f) -- Affiliate's Letter
Schedule 8.2(h-1) -- Schopf Employment Agreement
Schedule 8.2(h-2) -- Snyder Employment Agreement
Schedule 8.3(b) -- Opinion of FSC and FSB
iv
<PAGE> 115
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization, dated as of the 29th day of
December, 1998 (this "Agreement"), is made and entered into by and among FIRST
SECURITY CORPORATION, a Delaware corporation ("FSC"), FIRST SECURITY BANK OF
NEVADA, a bank organized under the laws of Nevada ("FSB"), XEON FINANCIAL CORP.,
a Nevada corporation ("Bancorp"), and NEVADA BANKING COMPANY, a bank organized
under the laws of Nevada ("Bank").
RECITALS:
A. FSC is a corporation duly organized and existing under the laws of the
State of Delaware, with its principal place of business located in Salt Lake
City, Utah. FSC is authorized by its Articles of Incorporation to issue (i)
400,000 shares of preferred stock, each of no par value ("FSC Preferred Stock"),
18,052 of which are designated as Class A Preferred Stock, of which 9,251 were
issued and outstanding on November 30, 1998, and (ii) 600,000,000 shares of
common stock, each of $1.25 par value ("FSC Common Stock"), of which as of
November 30, 1998, there were 189,662,397 (net of Treasury) shares issued and
outstanding ("Basic Shares").
B. FSB is a bank duly organized under the laws of the State of Nevada, with
its principal place of business located in Las Vegas, Nevada. FSB is authorized
by its Articles of Incorporation to issue 5,000,000 shares of common stock, each
of $1.00 par value ("FSB Common Stock"), of which as of the date of this
Agreement there were 4,329,161 shares issued and outstanding. FSC owns
beneficially and of record all of the issued and outstanding shares of FSB
Common Stock.
C. Bancorp is a corporation duly organized and existing under the laws of
the State of Nevada, with its principal place of business located in Stateline,
Nevada. Bancorp is authorized by its Articles of Incorporation to issue
5,000,000 shares of common stock, without par value ("Bancorp Common Stock"), of
which there were 2,828,840 shares issued and outstanding on November 30, 1998,
and options outstanding for 467,300 shares as of such date (the "Options").
D. Bank is a bank incorporated under the laws of the State of Nevada,
having its principal place of business located in Stateline, Nevada. Bank is
authorized by its Articles of Incorporation to issue 5,000,000 shares of common
stock, each of $1.25 par value ("Bank Common Stock"), of which as of the date of
this Agreement there were 2,828,840 shares issued and outstanding. Bancorp owns
beneficially and of record all of the issued and outstanding shares of Bank
Common Stock.
E. The parties hereto desire that Bancorp be merged with and into FSC (the
"Merger") pursuant to this Agreement and that certain Certificate of Merger in
the form attached hereto as Exhibit A (the "Certificate of Merger") and that
immediately after the Merger, Bank be merged with and into FSB (the "Bank
Merger") pursuant to this Agreement and those certain Articles of Merger
attached hereto as Exhibit B (the "Bank Articles of Merger").
A-1
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AGREEMENT:
NOW, THEREFORE, in consideration of foregoing and the respective
representations, warranties, covenants, agreements and conditions set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, covenant and agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
(a) Pursuant to the laws of the States of Delaware and Nevada, and subject
to the terms and conditions of this Agreement, at the effective time of the
Certificate of Merger (the "Effective Time"), FSC and Bancorp (sometimes
referred to herein as the "Merging Entities") shall consummate the Merger
pursuant to which (a) Bancorp shall be merged with and into FSC, and the
separate corporate existence of Bancorp shall thereupon cease; (b) FSC shall be
the successor or surviving corporation in the Merger and shall continue to be
governed by the laws of the State of Delaware (the "Surviving Corporation"); and
(c) the separate corporate existence of FSC with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger,
except as set forth in this Article I. FSC, as the Surviving Corporation, shall
thereupon and thereafter possess all the rights, privileges, powers and
franchises, of a public as well as a private nature, and shall be subject to all
restrictions, disabilities and duties of the Merging Entities; and all property,
real, personal and mixed and all debts due to the Merging Entities on whatever
account, including subscriptions for shares and all other things in action or
belonging to the Merging Entities shall be taken and deemed to be vested in FSC
without further act or deed. FSC shall thenceforth be responsible for all the
debts, liabilities and duties of each of the Merging Entities and may be
prosecuted to judgment as if the Merger had not taken place, or FSC may be
substituted in place of the Merging Entities and neither the rights of creditors
nor any liens upon any property of either shall be impaired by the Merger.
(b) As of the Effective Time, the certificate of incorporation of FSC as in
effect immediately prior to the Merger shall be the certificate of incorporation
of the Surviving Corporation until thereafter amended as provided by law and
such certificate of incorporation. As of the Effective Time, the bylaws of FSC
as in effect immediately prior to the Effective Time shall be the bylaws of the
Surviving Corporation until thereafter amended as provided by law and such
bylaws of the Surviving Corporation.
1.2 Directors and Officers of the Surviving Corporation. The directors and
officers of the Surviving Corporation at the Effective Time shall be the
directors and officers of FSC as of immediately prior to the Effective Time, and
shall serve in their respective positions until their successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the certificate of incorporation and
the bylaws of the Surviving Corporation.
1.3 Subsequent Actions. If, at any time after the Merger, FSC shall
consider or be advised that any deeds, bills of sale, assignments, assurances,
or any other actions or things are necessary or desirable to vest, perfect, or
confirm of record or otherwise in FSC its right, title, or interest in, to, or
under any of the rights, properties, or assets of Bancorp
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acquired or to be acquired by FSC as a result of or in connection with the
Merger, or otherwise to carry out this Agreement, the officers and directors of
FSC shall be authorized to execute and deliver, in the name and on behalf of
Bancorp or otherwise, all such deeds, bills of sale, assignments, and
assurances, and to make and do, in the name and on behalf of Bancorp or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect, or confirm any right, title, and interest in, to, and under such
rights, properties, or assets in FSC or otherwise to carry out this Agreement.
ARTICLE II
THE BANK MERGER
2.1 The Bank Merger.
(a) Immediately after but essentially concurrently with the Merger, and
pursuant to the laws of the State of Nevada, and subject to the terms and
conditions of this Agreement, at the time that the Bank Articles of Merger
become effective, FSB and Bank (sometimes collectively referred to herein as the
"Merging Banks") shall consummate the Bank Merger pursuant to which (a) the Bank
shall be merged with and into FSB, immediately after but essentially
concurrently with the Merger, and the separate corporate existence of Bank shall
thereupon cease; (b) FSB shall be the successor or surviving bank in the Merger
and shall continue to be governed by the laws of the State of Nevada (sometimes
referred to herein as the "Surviving Bank"); and (c) the separate corporate
existence of FSB with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Bank Merger, except as set forth in
this Article II. FSB, as the Surviving Bank, shall thereupon and thereafter
possess all the rights, privileges, powers and franchises, of a public as well
as a private nature, and shall be subject to all restrictions, disabilities and
duties of the Merging Banks, and all property, real, personal and mixed and all
debts due to the Merging Banks on whatever account, including subscriptions for
shares and all other things in action or belonging to the Merging Banks shall be
taken and deemed to be vested in FSB without further act or deed. FSB shall
thenceforth be responsible for all the debts, liabilities and duties of each of
the Merging Banks and may be prosecuted to judgment as if the Bank Merger had
not taken place, or FSB may be substituted in place of the Merging Banks and
neither the rights of creditors nor any liens upon any property of either shall
be impaired by the Bank Merger.
(b) As of the effective time of the Bank Merger, the articles of
incorporation of FSB as in effect immediately prior to the Bank Merger shall be
the articles of incorporation of the Surviving Bank without amendment until
thereafter amended as provided by law and such articles of incorporation. As of
the effective time of the Bank Merger, the bylaws of FSB as in effect
immediately prior to the Bank Merger shall be the bylaws of the Surviving Bank
without amendment until thereafter amended as provided by law and such bylaws.
2.2 Directors and Officers of the Surviving Bank. The directors and
officers of the Surviving Bank at the effective time of the Bank Merger shall be
the directors and officers of FSB as of immediately prior to the Bank Merger and
shall serve in their respective positions until their successors shall have been
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the articles of incorporation and the
bylaws of the Surviving Bank.
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2.3 Subsequent Actions. If, at any time after the Bank Merger, FSB shall
consider or be advised that any deeds, bills of sale, assignments, assurances,
or any other actions or things are necessary or desirable to vest, perfect, or
confirm of record or otherwise in FSB its right, title, or interest in, to, or
under any of the rights, properties, or assets of Bank acquired or to be
acquired by FSB as a result of or in connection with the Bank Merger, or
otherwise to carry out this Agreement, the officers and directors of FSB shall
be authorized to execute and deliver, in the name and on behalf of Bank or
otherwise, all such deeds, bills of sale, assignments, and assurances, and to
make and do, in the name and on behalf of Bank or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect, or confirm
any right, title, and interest in, to, and under such rights, properties, or
assets in FSB or otherwise to carry out this Agreement.
2.4 Conversion of Shares. The manner and basis of converting the shares of
the Merging Banks shall be as set forth in Article III, below.
ARTICLE III
CONVERSION OF SECURITIES
3.1 Conversion of Common Stock of Merging Entities.
(a) Conversion of Bancorp Common Stock. In accordance with this Agreement,
as of the Effective Time, by virtue of the Merger and without any further action
on the part of the holders of any shares of Bancorp Common Stock, each issued
and outstanding share of Bancorp Common Stock (of which there shall be no more
than 3,296,140 shares fully diluted and assuming all Options shall have been
exercised), other than shares as to which dissenters' rights are perfected
("Dissenting Shares") and all rights in respect thereof, shall be converted,
ipso facto, into the right to receive the Merger Consideration.
As of the Effective Time, all such shares of Bancorp Common Stock,
including all option shares, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist. Each holder of a
certificate representing any shares of Bancorp Common Stock shall cease to have
any rights with respect thereto, except the right to receive, upon the surrender
of any such certificates, the Merger Consideration upon the terms and subject to
the conditions set forth herein.
(b) Certain Definitions
"Average FSC Share Price" shall mean the average of the last sales prices
per share of FSC Common Stock on the Nasdaq National Market for the ten
(10) consecutive trading days preceding the Closing Date (such period
referred to herein as the "Closing Calculation Period"); subject to the
following:
(i) if the Average FSC Share Price is greater than or equal to
$21.375, the Average FSC Share Price shall be $21.375; and
(ii) if the Average FSC Share Price is less than or equal to $17.00,
the Average FSC Share Price shall be $17.00.
"Bancorp Share Price" shall mean, subject to adjustment pursuant to Section
8.2(g), below, $33,600,000 divided by (i) the total number of issued and
outstanding shares of Bancorp Common Stock, plus (ii) the total number of
shares of Bancorp Common Stock subject to all Vested Options.
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"Exchange Ratio" shall mean (in each case, rounded to the nearest one
thousandth of a share) that number of shares of FSC Common Stock (rounded
to the nearest one thousandth) determined as follows:
Bancorp Share Price
Average FSC Share Price
"Merger Consideration" for each share of Bancorp Common Stock being
converted into shares of FSC Common Stock shall mean that number of duly
authorized, validly issued, fully paid and nonassessable shares of FSC
Common Stock equal to the Exchange Ratio; provided, however, if, prior to
the Effective Time, FSC should split, reclassify or combine the FSC Common
Stock, or pay a stock dividend or other stock distribution in FSC Common
Stock, as of a record date prior to the Effective Time, appropriate
adjustment or adjustments (rounded to four digits to the right of the
decimal point) will be made to the Exchange Ratio and the total number of
shares of FSC Common Stock to be issued in the transaction so as to
maintain the proportional interest in FSC Common Stock which the
shareholders of Bancorp would otherwise have received.
(c) FSC Stock. All shares of FSC Common Stock which are outstanding
immediately prior to the Merger shall continue to be outstanding after the
Merger.
3.2 The Merging Banks.
(a) FSB Common Stock. All shares of FSB Common Stock which are outstanding
immediately prior to the Bank Merger shall continue to be outstanding
immediately after the Bank Merger
(b) Bank Common Stock. As of the Effective Time, each issued and
outstanding share of Bank Common Stock and all rights in respect thereof shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and no FSB Common Stock or FSC Common Stock shall be
delivered in exchange therefore.
3.3 Options. (a) Immediately prior to the Effective Time, each then
outstanding Option issued under each stock option plan, program, agreement or
arrangement of Bancorp (each a "Bancorp Stock Plan") that has previously vested
prior to the Merger (a "Vested Option") shall be exercised pursuant to a
cashless exercise procedure whereby each holder of a Vested Option shall be
entitled to receive on a net basis that number of shares of Bancorp Common Stock
equal to X in the following formula:
<TABLE>
<S> <C> <C>
X = A(B - C)
--------
B
</TABLE>
Where A equals the number of shares of Bancorp Common Stock subject to such
Vested Option, B equals the Bancorp Share Price and C equals the strike price of
such Vested Option. The aggregate number of shares so issuable with respect to
all Vested Options shall be referred to herein as the "Bancorp Option Shares."
At the Effective Time, each Bancorp Option Share shall be converted into shares
of FSC Common Stock pursuant to Section 3.1 for the account of the holder of
such Vested Option.
3.4 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary,
Dissenting Shares shall not be converted into or represent a right to receive
the Merger Consideration
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pursuant to Section 3.1 hereof, but the holder thereof shall be entitled to only
such rights as are granted by the NGCL.
(b) Notwithstanding the provisions of Section 3.4. (a) above, if any holder
of shares of Bancorp Common Stock who demands appraisal of such holder's shares
of Bancorp Common Stock under the NGCL effectively withdraws or loses (through
failure to perfect or otherwise) his or her right to appraisal, then as of the
Effective Time or the occurrence of such event, whichever later occurs, such
holder's shares of Bancorp Common Stock shall automatically be converted into
and represent only the right to receive the Merger Consideration as provided in
Section 3.1. hereof, without interest, upon surrender of the certificate or
certificates representing such shares of Bancorp Common Stock pursuant to
Section 3.5 hereof.
(c) Bancorp shall give FSC (i) prompt notice of any written demands for
appraisal or payment of the fair value of any shares of Bancorp Common Stock,
withdrawals of such demands, and any other instruments served on the Bancorp
pursuant to the NGCL. Except with the prior written consent to FSC, Bancorp
shall not voluntarily make any payment with respect to any demands for
appraisal, settle or offer to settle any such demands.
3.5 Exchange of Shares and Certificates.
(a) Exchange Agent. As of the Effective Time, FSC shall deposit with First
Chicago Trust Company of New York or such other bank or trust company as may be
designated by FSC (the "Exchange Agent"), for the benefit of the holders of
shares of Bancorp Common Stock, for exchange in accordance with this Article
III, through the Exchange Agent, (i) cash in an amount sufficient to pay cash in
lieu of fractional shares, and (ii) certificates representing the shares of FSC
Common Stock issuable pursuant to Section 3.1. hereof in exchange for
outstanding shares of Bancorp Common Stock (the "Exchange Fund").
(b) Exchange Procedures; Transfer of Shares. As soon as reasonably
practicable after the Effective Time, the Exchange Agent shall mail to each
holder of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Bancorp Common Stock (the
"Certificates") whose shares were converted into the right to receive shares of
FSC Common Stock pursuant to Section 3.1. hereof (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as FSC
may reasonably specify and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of FSC
Common Stock, and cash in lieu of fractional shares of FSC Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by FSC, together with documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor (i) a certificate representing
that whole number of shares which such holder has the right to receive pursuant
to the provisions of this Article III and (ii) cash in lieu of any fractional
number of shares as contemplated by this Section 3.5, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of ownership
of Bancorp Common Stock which is not registered in the transfer records of
Bancorp, a certificate representing the proper number of shares of FSC Common
Stock may be issued to a person other than the person in whose name the
Certificate so surrendered is registered, if such Certificate shall be properly
endorsed or otherwise be in proper form for transfer and
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the person requesting such payment shall pay any transfer or the taxes required
by reason of the issuance of shares of FSC Common Stock to a person other than
the registered holder of such Certificate or establish to the satisfaction of
FSC that such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 3.5, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration and cash in lieu of any fractional shares of
FSC Common Stock as contemplated by this Section 3.5. No interest shall be paid
or accrue on any cash payable in lieu of any fractional shares of FSC Common
Stock.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to FSC Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of FSC Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to Section 3.5(e) hereof, until the surrender of such Certificate in accordance
with this Article III. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be applied to the holder of the
certificate representing whole shares of FSC Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of any
cash payable in lieu of a fractional share of FSC Common Stock to which such
holder is entitled pursuant to Section 3.5(e) and the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of FSC Common Stock, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to such surrender and a payment
date subsequent to such surrender payable with respect to such whole shares of
FSC Common Stock.
(d) No Further Ownership Rights in Bancorp Common Stock; No Transfer
Following the Closing Date. All shares of FSC Common Stock issued upon the
surrender for exchange of Certificates in accordance with the terms of this
Article III (including any cash paid pursuant to Section 3.5(e) hereof) shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to the shares of Bancorp Common Stock theretofore represented by such
Certificates, and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of Bancorp
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation or the Exchange Agent for any reason, they shall be canceled and
exchanged as provided in this Article III, except as otherwise provided by law.
(e) Fractional Shares.
(i) No certificates representing fractional shares of FSC Common Stock
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests shall not entitle the owner thereof to vote or
to any other rights of a stockholder of FSC.
(ii) Notwithstanding any other provision of this Agreement, each
holder of shares of Bancorp Common Stock converted pursuant to the Merger
who would otherwise have been entitled to receive a fraction of a share of
FSC Common Stock (after taking into account all Certificates delivered by
such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to (A) such fraction multiplied by (B) the Average FSC Share
Price.
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(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months after
the Effective Time shall be delivered to FSC, upon demand, and any holders of
the Certificates who have not theretofore complied with this Article III shall
thereafter look only to FSC for payment of their Bancorp Common Stock, any cash
in lieu of fractional shares of FSC Common Stock and any dividends or
distributions with respect to FSC Common Stock.
(g) No Liability. None of FSC, FSB, Bank or the Exchange Agent shall be
liable to any person in respect of any shares of FSC Common Stock (or dividends
or distributions with respect thereto) or cash from the Exchange Fund delivered
to a public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to seven
years after the Effective Time, or immediately prior to such earlier date on
which any shares of FSC Common Stock, any cash in lieu of fractional shares of
FSC Common Stock, or any dividends or distributions with respect to FSC Common
Stock in respect of such Certificate would otherwise escheat to or become the
property of any Governmental Entity, any such shares, cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation free and clear
of all claims or interest of any person previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund, as directed by FSC, on a daily basis. Any
interest and other income resulting from such investments shall be paid to FSC.
ARTICLE IV
COVENANTS OF BANCORP AND BANK
4.1 Conduct of Business Pending the Closing. Except as otherwise
contemplated hereby, between the date hereof and the Effective Time, or the time
when this Agreement terminates as provided herein, each of Bancorp and Bank
shall conduct its respective operations and business in the usual and ordinary
course of business and consistent with past practice and use their commercially
reasonable efforts to retain for the benefit of FSC and FSB the continuing
services of the present officers and employees of Bank and Bancorp, to preserve
the goodwill of customers and others having business relations with Bank and
Bancorp, to preserve the deposit levels of Bank, to preserve the benefits of all
contractual relationships with others and to keep in force at least at their
present limits all policies of insurance currently in effect. Without limiting
the generality of the foregoing, and except as otherwise specifically permitted
by this Agreement, during the period from the date hereof to the Effective Time,
neither Bank nor Bancorp shall, without the prior written authorization of the
Chairman or President of FSC:
(a) Change in Capital Stock; Issuance of Shares. Make any change in their
authorized capital stock, or issue, agree to issue or permit Bank or Bancorp to
become obligated to issue any shares of their capital stock, or securities
convertible into their capital stock, except that Bancorp may issue shares of
Bancorp Common Stock upon the exercise of outstanding Options described in
Schedule 5.3.
(b) Options, Warrants, and Rights. Grant or issue any options, warrants or
other rights, including stock appreciation rights, of any kind relating to the
purchase of shares of their capital stock, or securities convertible into their
capital stock (Bancorp and Bank hereby represent and warrant that, except for
the Options outstanding as of the date
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hereof, no options, warrants, stock appreciation rights or other rights to
purchase shares of their capital stock are outstanding on the date hereof);
(c) Dividends. Declare or pay any dividends or other distributions on any
shares of their capital stock; provided, however, that Bank may declare
dividends to Bancorp in accordance with normal practices and to cover expenses
associated with the transactions hereunder and Bancorp may pay dividends to
shareholders consistent with past practice;
(d) Purchase of Shares. Except for 2,000 shares of Bancorp Common Stock
purchased on or about September 28, 1998 by Bank under Bank's employee stock
ownership plan as a 1998 contribution (of which approximately 327 shares shall
constitute the first quarter 1999 contribution to such plan) as set forth in
Schedule 4.1(d), purchase or otherwise acquire, or agree to acquire, any shares
of their stock, other than in a fiduciary capacity;
(e) Benefit Plans. Except as required by law or, with the consent of FSC,
to terminate the employee benefit plans identified in Schedule 5.16 incident to
the integration of Bank's employees into the employee benefit plans offered by
FSC or FSB, enter into or amend any pension, retirement, stock option, stock
appreciation, profit sharing, deferred compensation, consultant, bonus, group
insurance or similar benefit plan in respect of any of their directors, officers
or other employees;
(f) Conduct of Business. Except as contemplated by this Agreement, take or
omit to take any action which (i) causes Bancorp or Bank not to conduct their
respective businesses in a manner consistent with normal business practices,
including with respect to the securities or asset portfolios of Bank, (ii) has a
material and adverse effect on the financial condition (present or prospective),
businesses, properties, assets or operations of Bancorp and Bank (the parties
hereto recognize that the operation of Bancorp and Bank until the Effective Time
is the responsibility of Bancorp and Bank and their respective Boards of
Directors and officers; nevertheless, Bancorp and Bank shall keep FSC advised of
all important changes in the financial condition (present or prospective),
business, properties, assets or operations of Bancorp and Bank);
(g) Acquisitions and Mergers. Acquire or merge with any other company or
acquire any branch or other significant part of the assets of any other company;
(h) Liens; Indebtedness; Increase in Compensation, etc. Except in the
ordinary course of business, (i) mortgage, pledge or subject to a lien or any
other encumbrance any of their respective assets, dispose of any of their
respective assets other than the automobile identified in Schedule 5.16, incur
or cancel any indebtedness or claims, purchase or lease any assets having a
purchase price or lease cost, in the aggregate, of more than $20,000.00, or (ii)
except for the two Agreements for Change-in-Control Severance Benefits set forth
in Schedule 5.16 hereto, increase any compensation or benefits payable to their
respective officers or employees, except to pay routine merit increases in
accordance with past practices and costs associated with the transactions
contemplated under this Agreement. Notwithstanding the restrictions contained in
this section, Bancorp or Bank may grant individual annual increases to officers
and employees for 1999 in accordance with past practices up to a total of 5% of
the total annual compensation of all officers and employees, which amount shall
not in any event exceed $99,000, and continue during 1999 non-executive officer
incentive compensation arrangements in accordance with past practice.
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(i) Amendments to Charter, etc. Amend their respective Articles of
Incorporation or make any material amendments to their respective Bylaws which
would interfere in any manner with the transactions contemplated by this
Agreement.
4.2 Investigation; Access. Each of Bancorp and Bank shall diligently
endeavor to (i) take or cause to be taken all action required under this
Agreement on its part to be taken as promptly as practicable so as to permit the
consummation of the transactions contemplated by this Agreement at the earliest
possible date and cooperate fully with FSC and FSB to that end, including,
without limitation, providing to FSC and FSB, and their respective employees,
accountants and counsel, access to Bancorp's and Bank's books, records, reports,
tax returns and facilities and to its employees, accountants, and counsel;
provided, however, that such investigation to be conducted by FSC and FSB shall
be performed in such a manner which will not unreasonably interfere with the
normal operations, or customer or employee relations, of Bancorp and Bank and
shall be in accordance with procedures established by the parties having due
regard for the foregoing, and (ii) furnish all necessary information for
inclusion in any applications relating to the consents, approvals and
permissions of regulatory authorities referred to in Article VIII.
To facilitate the investigations of Bancorp and Bank to be conducted by FSC
and FSB, Bancorp and Bank shall deliver to FSC, as soon as reasonably possible,
(i) a list setting forth all of the classified, criticized and non-performing
assets of Bank ("Classified Assets") as identified by Bank or by the most recent
examination by Bank's federal or state bank examiner, along with an explanation
of management's response for dealing with such assets, (ii) a list of all loans
which are more than thirty (30) days past due ("Past Due Loans"), and (iii) Bank
management's analysis of expected losses to be incurred with respect to the
loans (assets) identified in items (i) and (ii).
From execution of the Agreement until Closing, Bancorp and Bank shall
deliver to FSC (i) monthly reports which summarize the loan and lease and the
deposit activity of Bank for the previous month, and (ii) a report detailing any
changes to the Classified Assets or Past Due Loans.
FSC covenants and agrees that FSC and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning Bancorp and Bank received from any of them (except to
the extent that such documents or information are a matter of public record or
require disclosure in the Proxy Statement/Prospectus, the Registration Statement
on Form S-4 to be filed by FSC pursuant to Section 6.10, or any of the public
information of any applications required to be filed with any governmental or
regulatory agency to obtain the approvals and consents required to effect the
transactions contemplated hereby), and if the transactions contemplated herein
are not consummated, such confidence shall be maintained and all such documents
shall be returned to Bancorp.
4.3 Regulatory Approvals. Bancorp and Bank shall (i) use their best
efforts in good faith to assist FSC in obtaining all necessary regulatory
approvals and taking or causing to be taken all other action required under this
Agreement on its or their part to be taken as promptly as practicable so as to
permit the consummation of the transactions contemplated by this Agreement at
the earliest possible date, and cooperate fully with FSC and FSB to that end,
and (ii) furnish all necessary information for inclusion in any applications
relating to the consents, approvals, and permissions of regulatory authorities
referred to in Article VIII. Bancorp and Bank shall have the right to review all
applications to such regulatory authorities before the filing thereof and to
comment upon the form of such
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applications and the information contained therein. Bancorp and Bank know of no
reasons why the transactions contemplated by this Agreement should not be
approved by the regulatory authorities.
4.4 Termination of Employee Benefit Plans. On or before the Effective
Time, Bancorp and FSC shall determine whether it is in the best interests of the
parties hereto and the employees of Bancorp and Bank to terminate the employee
benefit plans (as described in Section 5.16) or to merge such plans into an
appropriate FSC benefit plan. FSC will cooperate in such determination to enable
the plan participants to "roll-over" any benefits of said plans into any
existing benefit plan maintained by FSC as to which such benefits may be
transferred without necessity of material amendment to, or adverse effect on
qualification of, such FSC plan and provided further that FSC incurs no expense
or other adverse result in allowing such rollover of benefits.
4.5 Information for Proxy Statement. Upon request by FSC, Bancorp and Bank
shall timely prepare and deliver to FSC, in such form required by rules and
regulations of the United States Securities and Exchange Commission (the "SEC"),
all information, descriptions, accounting reports and schedules (including
audited financial statements in the form required by Regulation S-X of the SEC,
as may be required) and other materials required for preparation and filing of
the Registration Statement contemplated by Section 6.10 of this Agreement.
4.6 Environmental Reports. Within twenty (20) days of execution of this
Agreement, Bancorp and Bank shall cause to be prepared, by firms reasonably
acceptable to FSC, Phase I Environmental Reports with respect to real property
owned by Bancorp and Bank, including Bank's branch facilities and assets held by
Bank as other assets, other real estate owned or as in-substance foreclosure. In
the event a Phase I report indicates that Bancorp or Bank may be a potentially
liable party for remedial action under any environmental laws (as such term is
defined in Section 5.7 below), then Bancorp and Bank shall cause Phase II
Environmental Reports to be prepared detailing any possible exposure under such
laws. The cost of said Phases I and II Environmental Reports and the cost of any
remedial action determined to be necessary by such reports shall be borne by
Bancorp and Bank. Bank shall make available to FSC any Phase I Environmental
Reports which it has obtained on real property-secured loans.
4.7 Notification of Actions. Bancorp and Bank covenant and agree to
immediately notify FSC and FSB in the event of any action which materially
affects any of the covenants set forth in this Article IV.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BANCORP AND BANK
As an inducement to FSC and FSB to enter into this Agreement, and in
addition to any representations and warranties made elsewhere in this Agreement,
Bancorp and Bank jointly and severally represent and warrant to and agree with
FSC and FSB as of the date of this Agreement and as of the Closing Date as
follows:
5.1 Organization, Conduct of Business, etc. Each of Bancorp and Bank (i)
is duly organized and validly existing and in good standing under the laws of
the State of Nevada, (ii) has all requisite power and authority (corporate and
other) to own its properties and conduct its business as now being conducted,
(iii) is duly qualified to do business and is in
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good standing in each jurisdiction in which the character of the properties
owned or leased by it therein or in which the transaction of its business makes
such qualification necessary, except where failure to so qualify would not have
a Material Adverse Effect on Bancorp or Bank or their respective businesses,
operations, properties, assets or condition (financial or otherwise), and (iv)
is not transacting business, or operating any properties owned or leased by it
in violation of any provision of federal or state law or any rule or regulation
promulgated thereunder, which violation would have a Material Adverse Effect, as
defined in Section 11.17 below, on Bancorp or Bank or their respective
businesses, operations, properties, assets or condition (financial or
otherwise). Except as set forth on Schedule 5.1, and other than Bancorp's
ownership of the Bank, neither Bancorp nor Bank own any equity interest in any
other business organization and neither Bancorp nor Bank is a party to any joint
venture or similar enterprise.
5.2 Capitalization. The authorized capital stock of Bank consists solely
of 5,000,000 shares of Bank Common Stock. As of the date hereof, there are
2,828,840 shares of Bank Common Stock issued and outstanding. Bancorp owns,
beneficially and of record, all of the issued and outstanding shares of Bank
Stock. The authorized capital stock of Bancorp consists solely of 5,000,000
shares of Bancorp Common Stock. As of the date hereof, there are 2,828,840
shares of Bancorp Common Stock issued and outstanding. The outstanding shares of
Bancorp Common Stock and the holders of record thereof are identified on
Schedule 5.2 hereto. All of the outstanding shares of capital stock of each of
Bank and Bancorp have been duly authorized and are validly issued, fully paid
and nonassessable.
5.3 Options, SARs, Warrants, etc. Schedule 5.3 identifies the holders of
each of the Options, the number of Options held by each holder of Options and
the Option exercise price with respect thereto. Except for the Options, there
are no outstanding stock appreciation rights or options, warrants, calls, units
or commitments of any kind relating to the issuance, sale, purchase or
redemption of, or securities convertible into, capital stock of Bank or Bancorp.
5.4 Authorization; Validity of Agreement. Each of Bancorp and Bank has the
corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Board of Directors of
Bancorp and Bank, has been duly executed and delivered on behalf of Bancorp and
Bank, and, subject to approval by the shareholders of Bancorp, constitutes a
valid and binding agreement of Bancorp and Bank, enforceable against each in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, liquidation, receivership, conservatorship, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles.
5.5 Bancorp and Bank Reports. Since January 1, 1995, each of Bancorp and
Bank has filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that were required to be
filed with the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), Federal Deposit Insurance Corporation (the "FDIC") and the
Nevada Financial Institutions Division (the "Division"). All such reports and
statements filed by Bancorp or Bank with the Federal Reserve Board, the FDIC,
the Division and other applicable state securities or banking authorities are
collectively referred to herein as the "Bank Reports." As of their respective
dates, the Bank Reports complied in all material respects with all the statutes,
rules and regulations enforced or promulgated by the regulatory authority with
which they were filed and did not and as of the date hereof do not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to
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make the statements therein, in light of the circumstances under which they are
made, not misleading. Except as set forth on Schedule 5.5, since January 1,
1995, no regulatory agency, including the Federal Reserve Board, the FDIC and
the Division, has criticized in any significant manner, the management or
operation of Bancorp or Bank, cited Bancorp or Bank for a violation of law, or
imposed any mandatory action by Bancorp or Bank to bring such party in
compliance with applicable rules and regulations.
5.6 Bancorp and Bank Financial Statements; No Undisclosed
Liabilities. Bank's audited Balance Sheets as of December 31, 1996 and December
31, 1997, and its audited Statements of Income and Statements of Cash Flow for
the years ended December 31, 1996 and December 31, 1997, and Bank's and
Bancorp's unaudited interim Balance Sheet for the period ended September 30,
1998, heretofore delivered to FSC (hereinafter the "Financial Statements"), were
prepared in accordance with generally accepted accounting principles
consistently applied (except for such interim statement which requires year-end
adjustments) and present fairly Bancorp's and Bank's financial condition,
results of operations and changes in cash flow as of such dates.
Bancorp and Bank will provide to FSC on a monthly basis prior to the
Effective Time all interim financial statements relating to Bancorp and Bank
customarily prepared by Bancorp or Bank.
Except as and to the extent stated in the Financial Statements delivered or
to be delivered pursuant to this Section 5.6 and in Schedule 5.6, and except for
those liabilities incurred in the normal course of Bancorp's or the Bank's
business, neither Bancorp nor Bank has any material liabilities or obligations,
secured or unsecured (whether accrued, absolute, contingent or otherwise), and
whether due or to become due, including but not limited to liabilities on
account of taxes, other governmental charges or lawsuits subsequently brought.
Except as set forth on Schedule 5.6, there are no suits, actions or proceedings
pending or, to the knowledge of Bancorp or Bank or any of their directors or
officers, threatened, or any contingent liability which would give rise to any
right of indemnification on the part of any director or officer of Bancorp or
Bank or his or her heirs, executors or administrators, as against Bancorp or
Bank or any successor to the business of Bancorp or Bank.
5.7 Environmental Matters. For purposes of this Section 5.7, the term
"environmental laws" shall include all state and federal laws designed to
protect human health or the environment, as amended from time to time, and all
regulations promulgated thereunder, including, without limitation, the Clean Air
Act, 42 U.S.C.A. sec.sec. 7401, et seq., the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C.A. sec.sec. 9601, et seq.,
the Federal Water Pollution Control Act, 33 U.S.C.A. sec.sec. 1251, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C.A. sec.sec. 6901, et seq., and
the Toxic Substances Control Act, 15 U.S.C.A. sec.sec. 2601, et seq. "Hazardous
substance" shall include all petroleum products as well as any toxic or
hazardous material, hazardous waste or other hazardous or regulated substance
defined in or regulated by any environmental law.
Except as set forth in Schedule 5.7, to the best knowledge of Bancorp and
Bank after due inquiry, neither Bancorp or Bank, nor any property of Bancorp or
Bank, is subject to any pending or potential claim, liability or obligation to
any person arising under any environmental law. With respect to the real
property owned or leased by Bancorp and
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Bank (including other real estate), to the best knowledge of Bancorp and Bank
after due inquiry:
(a) No such property is presently contaminated by, and no such
property has ever been used or is presently being used by any person to
generate, manufacture, refine, transport, treat, store, handle or dispose
of, any hazardous substance in any regulated form or quantity.
(b) No such property has ever contained or presently contains, or has
been used or is being used by any person for storage of, asbestos,
ureaformaldehyde foam insulation, PCB's, dioxins, mercury, lead or uranium
(or other heavy metal) products or tailings, or any other hazardous
substance in any regulated form or quantity, whether contained in
construction or fill materials or used or stored thereon or therein.
(c) Neither Bancorp, Bank nor any other tenant or occupant of any such
property has received a summons, citation, directive, letter, notice of
violation, request for information or other communication, written or oral,
from any local, state or federal agency concerning any possible intentional
or unintentional action or omission on the part of any person which has
resulted in the possible release of any hazardous substance affecting such
property or concerning any other possible violation of any environmental
law affecting the property.
(d) To the extent any permit, approval or registration is or has been
required to be obtained or maintained under any environmental law with
respect to any such property, any improvement of or on any such property or
any activity occurring on any such property, each such permit, approval or
registration has been obtained and is in good standing. In addition, all
such permits, approvals and registrations have been disclosed to FSC in
writing.
(e) No such property contains or has ever contained any storage tank
used or intended for use to store any hazardous substance.
5.8 Loan Loss Reserves. The reserves for possible loan losses and net loan
charge-offs of Bank as established from time to time by Bank are adequate under
generally accepted accounting principles. Such reserves comply in all material
respects with all loan loss requirements or guidelines applied to Bank by any
governmental authorities having jurisdiction with respect thereto.
5.9 Title to Properties. Except as reflected in the Financial Statements
delivered or to be delivered pursuant to Section 5.6, and except as set forth on
Schedule 5.9, Bancorp and Bank own, free and clear of any liens, claims,
charges, options, or other encumbrances, all of the property, real, personal or
mixed, reflected in the Financial Statements and all property acquired since
such date. Except as set forth in Schedule 5.9, neither Bancorp nor Bank has
received any notice of violation of any applicable zoning regulation, ordinance
or other law, order, regulation or requirement relating to its operations or its
properties. To Bank's knowledge, there are no such violations of material nature
and all buildings and structures used by Bancorp and Bank substantially conform
with all applicable ordinances, codes and regulations. Except as set forth in
Schedule 5.9, in Bancorp's and Bank's opinion, all such properties which are
material to the business or operations of Bancorp and Bank are in a good state
of maintenance and repair and are adequate for its current uses and purposes.
During each of the past three calendar years, Bancorp and Bank and their
properties have been insured for customary risks with customary limits,
deductibles, and exclusions, including but not limited to Bankers Blanket Bond,
and such insurance
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protection continues in effect as of the date hereof. Bancorp and Bank have
delivered to FSC true and correct copies of all deeds, title insurance policies
and surveys each has with respect to the real property owned by them and copies
of all leases with respect to real property leased by them.
5.10 Absence of Defaults. The execution of this Agreement and the Bank
Articles of Merger does not and performance of the transactions contemplated by
them will not (assuming Bancorp shareholder approval and applicable regulatory
approval) (a) violate the provisions of the Articles of Incorporation or Bylaws
of either Bancorp or Bank, or (b) except as disclosed on Schedule 5.10, violate
the provisions of or place either Bancorp or Bank in default under any
agreement, indenture, mortgage, lien, lease, contract, instrument, order,
judgment, decree, ordinance, statute, or regulation to which either Bancorp or
Bank is subject, to which any property of either Bancorp or Bank is subject, or
to which either Bancorp or Bank is a party, which violations or defaults would
in the aggregate have a Material Adverse Effect on the business, operations,
properties, assets, or condition (financial or otherwise) of either Bancorp or
Bank.
5.11 Absence of Material Adverse Changes. Except as set forth on Schedule
5.11, since December 31, 1997, there has been no change, and no development
involving a reasonably foreseeable prospective change, in or affecting the
financial condition (present or prospective), businesses, properties, assets or
operations (present or prospective) of Bancorp and Bank that either individually
or in the aggregate has had or is likely to have a Material Adverse Effect on
Bancorp or Bank. Since December 31, 1997, Bancorp and Bank have conducted their
respective businesses only in the ordinary course and consistent with past
banking standards.
5.12 Actions, Proceedings and Investigations. Set forth on Schedule 5.12
hereto is a complete and accurate listing of all litigation, administrative or
other proceeding to which Bancorp or Bank is a party, except for such
proceedings in which Bank is seeking to collect on a loan or lease transaction
and no counterclaim or similar claim has been filed against Bank. There are no
actions, proceedings or investigations pending, or, to the knowledge of the
executive officers of Bank and Bancorp, threatened or contemplated against or
relating to Bancorp or Bank or any of their respective properties or assets (and
said officers are not aware of any facts that would give rise to any such
claim), which would have a Material Adverse Effect on the financial condition
(present or prospective), businesses, properties, assets or operations (present
or prospective) of Bancorp or Bank, or the ability of Bancorp or Bank to
consummate the Merger and Bank Merger contemplated hereby.
5.13 Absence of Brokerage Commissions, etc. Except for Bancorp's agreement
with Dain Rauscher Wessels, the details of which have been disclosed to FSC, all
negotiations relative to this Agreement and the transactions contemplated hereby
have been carried on by Bancorp and Bank directly with FSC and FSB without the
participation or intervention of any other person, firm or corporation employed
or engaged by or on behalf of Bancorp and Bank in such a manner as to give rise
to any valid claim against Bancorp or Bank, or FSC or FSB, for a brokerage
commission, finder's fee or like payment.
5.14 Material Contracts. Except for those documents listed on Schedule
5.14 hereto, copies of which documents have been provided by Bancorp and Bank to
FSC, Bancorp and Bank is not a party to or bound by any commitment, agreement or
other instrument which (i) is material to the business, operations, properties,
assets or financial condition of Bancorp or Bank; (ii) limits the freedom of
Bancorp or Bank to compete in
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any line of business or with any person; or (iii) requires Bank to transfer
funds (other than in the ordinary course of business) to, make an investment in
or guarantee the debt of any entity. Except as set forth in Schedule 5.14,
neither Bancorp or Bank is a party to any contract or agreement, including but
not limited to any lease, service contract or employment agreement which (i)
provides for a remaining term in excess of two (2) years from and after the date
hereof, and (ii) provides for a total payment thereunder in excess of
$15,000.00. Neither Bancorp nor Bank is in default, and there has not occurred
any event that with the lapse of time or giving of notice or both would
constitute such a default, in any respect which has or may have a Material
Adverse Effect on the business, operations, properties, assets or financial
condition of Bancorp or Bank under any of the agreements or other instruments
referred to in this Section 5.14.
5.15 Compliance With Laws; Documentation.
(a) Except as set forth on Schedule 5.15, to the best knowledge of Bancorp
and Bank, after due inquiry: the conduct by Bancorp and Bank of their respective
businesses does not violate or infringe any domestic or foreign laws, statutes,
ordinances, rules or regulations, the enforcement of which, individually or in
the aggregate, would have a Material Adverse Effect on the business, operations,
properties, assets or condition (financial or otherwise) of Bancorp or Bank; and
Bancorp and Bank each has complied in all material respects with every local,
state or federal law or ordinance, and every regulation or order issued
thereunder, now in effect and applicable to Bancorp and Bank governing or
pertaining to fair housing, anti-redlining, equal credit opportunity, truth-in-
lending, real estate settlement procedures, fair credit reporting and every
other prohibition against unlawful discrimination in residential lending, or
governing consumer credit, including, but not limited to, the Consumer Credit
Protection Act, Truth-in-Lending Law, and in particular Regulation Z promulgated
by the Federal Reserve Board, and the Real Estate Settlement Procedures Act of
1974.
(b) All loans, leases, contracts and accounts receivable (billed and
unbilled), security agreements, guarantees and recourse agreements of Bank as
held in its portfolio, or as sold into the secondary market, represent and are
valid and binding obligations of their respective parties and debtors,
enforceable in accordance with their respective terms, each is based on a valid,
binding and enforceable contract(s) or commitment(s), each of which has been
executed and delivered in full compliance, in form and substance, with any and
all federal, state or local laws applicable to Bank, or to the other party or
parties to the contract(s) or commitment(s), including without limitation the
Truth-in-Lending Act, Regulations Z and U of the Federal Reserve Board, laws and
regulations providing for non-discriminatory practices in the granting of loans
or credit, applicable usury laws, laws imposing lending limits, and each has
been administered in full compliance with all applicable federal, state or local
laws or regulations. Except as set forth on Schedule 5.15, all Uniform
Commercial Code filings, or filings of trust deeds, or of lien or other security
interest documentation that are required by any applicable federal, state or
local government laws and regulations to perfect the security interests referred
to in any and all of such documents or other security agreements have been made,
and all security interests under such deeds, documents or security agreements
have been perfected, and all contracts have been entered into or assumed in full
compliance with all applicable material legal or regulatory requirements.
(c) To the best knowledge of Bancorp and Bank, all loan files of Bank are
complete and accurate in all material respects and have been maintained in
accordance with good banking practice.
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(d) All notices of default, foreclosure proceedings or repossession
proceedings against any real or personal property collateral have been issued,
initiated and conducted by Bank in full formal and substantive compliance with
all applicable federal, state or local laws and regulations, and no loss or
impairment of any security interest, or exposure to meritorious lawsuits or
other proceedings against Bancorp and Bank, has been or will be suffered or
incurred by Bancorp and Bank.
(e) To the best knowledge of Bancorp and Bank, Bank is not in violation of
any applicable servicer or other requirement of the FHA, VA, FNMA, GNMA, FHLMC
or any private mortgage insurer which insures any loans owned by Bank or as to
which Bank has sold to other investors, the effect of which violation,
individually or in the aggregate, would have a Material Adverse Effect on the
business, operations, properties, assets or condition (financial or other) of
Bank, and with respect to such mortgage loans Bank has not done or failed to do,
or caused to be done or omitted to be done, any act the effect of which act or
omission impairs or invalidates (i) any FHA insurance or commitments of the FHA
to insure, (ii) any VA guarantee or commitment of the VA to guarantee, (iii) any
private mortgage insurance or commitment of any private mortgage insurer to
insure, (iv) any title insurance policy, (v) any hazard insurance policy, or
(vi) any flood insurance policy required by the National Flood Insurance Act of
1968, as amended, to the material detriment of Bank.
(f) Bank is not knowingly engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying any margin stock.
5.16 Employee Benefits.
(a) Schedule 5.16 contains a true and complete list of each employee
benefit, compensation or welfare benefit plan, program or agreement maintained
or contributed to or required to be contributed to by Bancorp or Bank (the
"Plans"). Neither Bancorp nor Bank has any formal plan or commitment, whether
legally binding or not, to create any additional Plan or modify or change any
existing Plan that would affect any employee or terminated employee of Bancorp
or Bank.
(b) Except as set forth in Schedule 5.16, there are no employment
agreements entered into by Bancorp or Bank and no other deferred compensation or
salary continuation agreements or commitments maintained or agreed to by Bancorp
or Bank.
(c) With respect to each of the Plans, Bancorp and Bank have heretofore
delivered to FSC true and complete copies of each of the following documents:
(i) each Plan and related trust, if any, (including all amendments thereto);
(ii) annual report and actuarial report, if required to be filed under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), for the
last two (2) years and the latest financial statement, if any, for each such
Plan; (iii) the most recent summary plan description, together with each summary
of material modifications, required under ERISA; (iv) the most recent
determination letter received from the Internal Revenue Service ("IRS") with
respect to each Plan that is intended to be qualified under Section 401 of the
Internal Revenue Code of 1986, as amended (the "Code"); and (v) information
which identifies (x) all asserted or unasserted claims arising under any Plan,
(y) all claims presently outstanding against any Plan, (z) a description of any
future compliance action required with respect to any Plan under ERISA, or
federal or state law.
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(d) Except with respect to pending 1998 year-end contributions, if any,
made consistent with past practices and as disclosed on Schedule 5.16, all
required contributions have been, or will be, made with respect to each Plan on
or prior to the date of this Agreement and have been properly recorded on the
Financial Statements. Except with respect to pending 1998 year-end
contributions, if any, made consistent with past practices and as disclosed on
Schedule 5.16, each trust associated with the Plans, if any, is fully funded as
of the date of this Agreement. Schedule 5.16 sets forth the amount of monthly
payments due and owing for each month that the Bank's 401(k) Plan, Employee
Stock Ownership Plan and Deferred Bonus Plan are continued and the amount of
liability for claims if Bancorp or Bank were to terminate such plans and the
costs involved in any such termination. There are no other material liabilities
that would be incurred in connection with the termination of the Plans.
(e) Each of the Plans has been operated and administered since inception in
all material respects in accordance with applicable laws, including, but not
limited to, ERISA and the Code and each of the Plans that is intended to be
"qualified" within the meaning of Section 401(a) of the Code is so qualified.
The Plans are legally valid and binding and in full force and effect.
(f) All amendments required under the Code have been made by Bancorp or
Bank and approved by the IRS with respect to each Plan on or prior to the date
of this Agreement.
(g) Except as set forth in Schedule 5.16, no Plan provides benefits,
including, without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees beyond their retirement or
other termination of service (other than (A) coverage mandated by applicable
law, (B) death benefits or retirement benefits under any "employee pension
plan," as that term is defined in Section 3(2) of ERISA, (C) deferred
compensation benefits accrued as liabilities on the books of Bancorp or Bank, or
(D) benefits the full cost of which is borne by the current or former employee
(or his or her beneficiary)).
(h) There are no pending or, to Bancorp's or Bank's knowledge, threatened
or anticipated claims (other than routine claims for benefits) by, on behalf of
or against any of the Plans or any trusts related thereto.
(i) Except as set forth in Schedule 5.16, the consummation of the
transactions contemplated by this Agreement will not (either alone or upon the
occurrence of any additional acts or events) (A) entitle any current or former
employee of Bancorp or Bank to severance pay, employment compensation or any
other payment, benefit or award, or (B) accelerate or modify the time of payment
or vesting, or increase the amount of any benefit, award or compensation due any
such employee.
(j) Neither Bancorp nor Bank has ever had liabilities to the Pension
Benefit Guaranty Corporation ("PBGC"). No material liability to the PBGC has
been or will be incurred by Bank or other trade or business under "common
control" with Bancorp or Bank (as determined under Section 414(c) of the Code)
(each a "Common Control Entity") on account of any termination of a Plan subject
to Title IV of ERISA. On and after September 2, 1974, no filing has been made by
Bancorp or Bank (or any Common Control Entity) with the PBGC (and no proceeding
has been commenced by the PBGC) to terminate any Plan subject to Title IV of
ERISA maintained, or wholly or partially funded, by Bank (or any Common Control
Entity). Neither Bancorp, Bank nor any
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Common Control Entity, has (i) ceased operations at a facility so as to become
subject to the provisions of Section 4062(e) of ERISA, (ii) withdrawn as a
substantial employer so as to become subject to the provisions of Section 4063
of ERISA, (iii) ceased making contributions on or before the Closing Date to any
Plan subject to Section 4064(a) of ERISA to which Bancorp or Bank (or any Common
Control Entity) made contributions during the five years prior to the Closing
Date, or (iv) made a complete or partial withdrawal from a multi-employer 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).
5.17 Repurchase Agreements. Bank has, as of the date hereof, and as of the
Closing Date will have, valid and perfected first position security interests in
all government securities subject to repurchase agreements, and, to the
knowledge of Bancorp and Bank, as of the date hereof, the value of the
collateral securing each such repurchase agreement equals or exceeds the amount
of the debt secured by such collateral under such agreement.
5.18 Taxes and Tax Returns. Bank has delivered (or will deliver within
five (5) days of execution of this Agreement) true and correct copies of all tax
returns filed for the years ending 1995, 1996, and 1997. Bancorp and Bank have
filed all federal, state and local tax returns and forms (including but not
limited to forms 1099), which are required by law to be filed or delivered as of
the date hereof and have paid all taxes which have become due. Except as set
forth in Schedule 5.18, to the best knowledge of Bancorp and Bank, after due
inquiry, Bank has timely filed all currency transaction reports required by the
Bank Secrecy Act, as amended, has timely filed all information returns required
by Sections 6041, 6041A, 6042, 6045, 6049, 6050H, and 6050J of the Code; and has
exercised due diligence in obtaining certified taxpayer identification numbers
as required pursuant to Treasury Regulation 35a.9999. Where payment of such
taxes is not required to be made as of the date hereof, Bancorp and Bank have
set up an adequate reserve or accrual for the payment of all taxes required to
be paid in respect of the periods covered by such returns.
5.19 Consents and Approvals. Except for (i) the filing of applications and
notices, as applicable, with the State of Nevada, the FDIC and/or the Federal
Reserve Board and approval of such applications, (ii) the filing of the Bank
Articles of Merger with the Nevada Secretary of State and the filing of the
Certificate of Merger with the respective Secretaries of State of Delaware and
Nevada, and (iii) the consents and approvals set forth in Schedule 5.19, no
consents or approvals of, or filings or registration with, any governmental
entity or with any third party are necessary in connection with (A) the
execution and delivery by Bancorp and Bank of this Agreement or (B) the
consummation by Bancorp and Bank of the transactions contemplated by this
Agreement.
5.20 Insurance. Schedule 5.20 contains a true, complete and correct
description of all material policies of fire, liability, production, completion
bond, errors and omissions, workmen's compensation and other forms of insurance
owned or held by Bancorp and Bank, copies of which have previously been
delivered to FSC. All such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the Closing Date
have been paid, and no notice of cancellation or termination has been received
with respect to any such policy. During the last three years neither Bancorp nor
Bank has been refused any insurance with respect to its assets or operations,
nor has its coverage been limited, by any insurance carrier to which it has
applied for any such insurance or with which it has carried insurance.
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5.21 Disclosure. No representation or warranty by Bancorp or Bank
contained in this Agreement, nor any statement or certificate furnished or to be
furnished by Bancorp or Bank to FSC or FSB or their representatives in
connection herewith or pursuant hereto, contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
required to make the statements herein or therein contained not misleading or
necessary in order to provide a prospective purchaser of the business of Bancorp
and Bank with adequate information as to Bancorp and Bank and their condition
(financial or otherwise), properties, assets, liabilities, business and
prospects, and Bancorp and Bank have disclosed to FSC and FSB in writing all
material adverse facts known to them relating to same.
ARTICLE VI
COVENANTS, REPRESENTATIONS AND WARRANTIES OF FSC AND FSB
As an inducement to Bancorp and Bank to enter into this Agreement, and in
addition to any representations and warranties made elsewhere in this Agreement,
FSC and FSB jointly and severally covenant, represent and warrant to and agree
with Bancorp and Bank as of the date of this Agreement and as of the Closing
Date as follows:
6.1 Organization, Conduct of Business, etc. FSC and FSB (i) are each duly
organized and validly existing and in good standing under the laws of Delaware
(in the case of FSC), or the State of Nevada (in the case of FSB), (ii) have all
requisite power and authority (corporate and other) to own their respective
properties and conduct their respective businesses as now being conducted, (iii)
are each duly qualified to do business and are in good standing in each
jurisdiction in which the character of the properties owned or leased by them
therein or in which the transaction of their respective businesses makes such
qualification necessary, except when failure to so qualify would not have a
Material Adverse Effect on FSC and its consolidated subsidiaries, and (iv) are
not transacting business, or operating any properties owned or leased by any of
them, in violation of any provision of federal or state law or any rule or
regulation promulgated thereunder, which violation would have a Material Adverse
Effect on FSC and its consolidated subsidiaries.
6.2 Authorization and Validity of Agreement. FSC and FSB each have the
corporate power and authority to execute and deliver this Agreement. This
Agreement has been duly and validly approved by the Executive Committee of the
Board of Directors of FSC and the Board of Directors of FSB, has been duly
executed and delivered on their behalf, and constitutes a valid and binding
agreement of each of FSC and FSB, enforceable in accordance with its terms,
subject to approval of the sole shareholder of FSB and ratification by the Board
of Directors of FSC.
6.3 FSC Reports. Since January 1, 1995, FSC and its consolidated
subsidiaries have filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that were required to
be filed with (i) the SEC, including but not limited to Form 10-K, Form 10-Q,
Form 8-K and proxy statements, (ii) the Federal Reserve Board, (iii) the Office
of the Comptroller of the Currency (the "OCC"), (iv) the FDIC, and (v) other
applicable state securities or banking authorities. All such reports and
statements filed with the SEC, the Federal Reserve Board, the OCC, the FDIC, and
other applicable state securities or banking authorities are collectively
referred to herein as the "FSC Reports." As of their respective dates, to the
best knowledge of the officers of FSC,
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the FSC Reports complied in all material respects with all the statutes, rules
and regulations enforced or promulgated by the regulatory authority with which
they were filed and did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
6.4 FSC Financial Statements; Tax Returns. FSC's Consolidated Balance
Sheets as of December 31, 1996 and December 31, 1997, and its Consolidated
Statements of Income and Consolidated Statements of Cash Flow for the years then
ended, heretofore delivered to Bancorp and Bank, were prepared in accordance
with generally accepted accounting principles consistently applied and present
fairly its consolidated financial condition, results of operations and changes
in financial position as of such dates and for such periods. FSC will provide a
copy of its Consolidated Balance Sheet and its Consolidated Statement of Income
and Consolidated Statement of Cash Flow as of December 31, 1998 when available.
FSC has filed all federal, state and local tax returns and forms (including but
not limited to Forms 1099), which are required by law to be filed or delivered
as of the date hereof and have paid all taxes which have become due. Where
payment of such taxes is not required to be made as of the date hereof, FSC has
set up an adequate reserve or accrual for the payment of all taxes required to
be paid in respect of the periods covered by such returns.
Except as and to the extent stated in the FSC Financial Statements provided
by FSC to Bancorp and Bank and except for those liabilities incurred in the
normal course of FSC's or any of its subsidiaries' respective businesses, FSC
and its consolidated subsidiaries do not have any material liabilities or
obligations, secured or unsecured (whether accrued, absolute, contingent or
otherwise).
6.5 Absence of Material Adverse Changes. Since December 31, 1997, there
has been no change, and no development involving a reasonably foreseeable
prospective change, in or affecting the financial condition (present or
prospective), businesses, properties or operations of FSC and its consolidated
subsidiaries that either individually or in the aggregate has had or is likely
to have a Material Adverse Effect on FSC and its consolidated subsidiaries.
6.6 Absence of Defaults Under Agreements. Neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereby will conflict with or result in a breach of or constitute a default under
any provision of FSC's or FSB's respective Articles of Incorporation, Bylaws, or
any agreement to which FSC or FSB is a party or by which either of them is bound
or to which any of their respective properties is subject, or result in the
creation of any liens or encumbrances upon their respective assets, and no
consents or waivers thereunder are required to be obtained in connection with
the transactions contemplated hereby, except for the approval of required
regulatory authorities and of the shareholders of FSB and Bank.
6.7 Actions, Proceedings, and Investigations. Except as set forth in FSC's
filings with the SEC, there are no actions, proceedings or investigations
pending, or to the knowledge of the executive officers of FSC, threatened or
contemplated, against or relating to FSC or any of its consolidated
subsidiaries, or any of their respective properties, which would have a Material
Adverse Effect on the financial condition (present or prospective), businesses,
properties or operations of FSC and its consolidated subsidiaries, or the
ability of FSC or FSB to consummate the Merger contemplated hereby.
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6.8 Regulatory Approvals. FSC and FSB shall (i) use their best efforts in
good faith to obtain all necessary regulatory approvals and to take or cause to
be taken all other action required under this Agreement on their part to be
taken as promptly as practicable so as to permit the consummation of the
transactions contemplated by this Agreement at the earliest possible date, and
cooperate fully with Bancorp and Bank to that end, and (ii) furnish all
necessary information for inclusion in any applications relating to the
consents, approvals, and permissions of regulatory authorities referred to in
Article VIII. FSC knows of no reasons why the transactions contemplated by this
Agreement should not be approved by the regulatory authorities. FSC shall give
Bancorp prompt notice of receipt of the regulatory approvals referred to in
Section 8.1(a) and shall provide Bancorp with copies of any written comments by
any regulatory authorities regarding or relating to the non-confidential
portions of the regulatory applications filed in connection with the
transactions contemplated hereby.
6.9 FSC Common Stock. All of the outstanding FSC Common Stock is duly
authorized and validly issued, fully paid and nonassessable. The FSC Common
Stock to be issued and delivered pursuant to the Merger, when issued as
contemplated hereby, shall be duly authorized, validly issued, fully paid and
nonassessable.
6.10 Registration of Shares. FSC will use its best efforts to cause a
Registration Statement on Form S-4 or other appropriate form (the "Registration
Statement") to be filed and declared effective under the Securities Act of 1933,
as amended (the "1933 Act"), with respect to the FSC Common Stock which is to be
issued in connection with the transactions contemplated by this Agreement, which
Registration Statement, at the time it becomes effective, and at the Effective
Time, shall in all material respects conform to the requirements of the 1933 Act
and the General Rules and Regulations of the SEC under said Act (the "1933
Rules"), and the FSC Common Stock to be issued by FSC in connection with the
Merger shall be duly qualified or exempted, as the case may be, under applicable
state Blue Sky securities laws in those states in which Bancorp has informed FSC
that its shareholders reside. FSC will furnish to Bancorp, its counsel,
accountants and investment bankers drafts of Registration Statement filings
sufficiently in advance of filing so as to afford a reasonable opportunity for
review and comment.
6.11 Notification of Actions. FSC and FSB covenant and agree to
immediately notify Bancorp and Bank in the event of the breach of any of the
covenants set forth in this Article VI.
6.12 NASDAQ/NMS Listing. FSC shall take all actions necessary to assure
that the shares of FSC Common Stock to be issued in the Merger will be approved
for listing on the National Association of Security Dealers Automatic Quotation,
National Market System ("NASDAQ/NMS") prior to the Closing Date.
6.13 Indemnification. FSC agrees that all rights to indemnification or
exculpation now existing in favor of the directors and officers of Bancorp and
Bank as provided in their respective charters, bylaws, indemnification
agreements or otherwise in effect as of the date hereof with respect to matters
occurring prior to the Effective Time shall, to the greatest extent permitted by
Delaware law and the organizational documents of FSC as in effect, survive the
Merger and shall continue in full force and effect for a period of two (2)
years. If FSC or any of its successors or assigns (i) shall consolidate with or
merge into any other corporation or entity and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii) shall
transfer all or substantially all of its properties and assets to any
individual, corporation or other entity, then, and in each such
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case, FSC shall use its commercially reasonable efforts to cause such successor
and assigns of FSC to assume the obligations set forth in this Section 6.13
FSC shall use its commercially reasonable efforts to cause the persons
serving as officers and directors of Bancorp and Bank immediately prior to the
Effective Time to be covered for a period of two (2) years after the Effective
Time by the current policies of directors' and officers' liability insurance
maintained by Bank with respect to acts or omissions occurring prior to the
Effective Time which were committed by such officers and directors in their
capacity as such (provided that FSC may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no less
advantageous to such officers and directors); provided, however, that FSC shall
not be obligated to make annual premium payments for such insurance to the
extent such premiums exceed 150% of the premiums paid as of the date hereof by
Bank for such insurance.
6.14 Ongoing Credit Review. With respect to its ongoing credit review of
Bank between the date hereof and the Effective Time, FSC covenants and agrees
that it shall apply the same credit review procedure and credit standards it
used in the initial credit review and that in its ongoing credit review it will
only seek a change of a grade on a Bank loan (or lease) from the initial review
if there has been a demonstrable adverse change in the credit, or the borrower
or guarantor (or collateral supporting the credit) has suffered a Material
Adverse Effect.
6.15 Limitation on FSC's Conduct Prior to the Effective Time. Between the
date hereof and the Effective Time or the time when this Agreement terminates as
provided herein, FSC shall not, without prior written consent of Bancorp, take
any action which would or is reasonably likely to (i) adversely affect the
ability of FSC to obtain any necessary approvals of any governmental entity
required for the transactions contemplated hereby; (ii) adversely affect FSC's
ability to perform its covenants and agreements under this Agreement; or (iii)
result in any of the conditions to the performance of FSC's obligations
hereunder not being satisfied.
ARTICLE VII
PROXY STATEMENT; SHAREHOLDER MEETINGS
7.1 Proxy Statement. FSC (with the assistance of Bancorp and Bank) shall
prepare the Registration Statement, as provided in Paragraph 6.10 above, which
Registration Statement will include a Proxy Statement to be used with respect to
providing shareholders' notice of the shareholder meetings for Bancorp and Bank,
respectively. Bancorp and Bank represent and warrant that the information they
provide for use in the Proxy Statement will comply in all material respects with
the requirements of the Securities Exchange Act of 1934 (the "1934 Act") and the
applicable rules and regulations promulgated by the SEC under such Act (the
"1934 Rules"), and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein not misleading, except that Bancorp and Bank
make no representation with respect to information furnished by FSC or FSB
expressly for inclusion in the Proxy Statement. FSC and FSB represent and
warrant that the Proxy Statement will comply in all material respects with the
requirements of the 1934 Act and the applicable 1934 Rules, and will not contain
an untrue statement of a material fact or omit to state a material fact required
to be stated
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therein or necessary to make the statements contained therein not misleading,
except that FSC and FSB make no representation with respect to information
furnished in writing by Bancorp and Bank expressly for inclusion in the Proxy
Statement.
7.2 Bancorp Meeting. This Agreement shall be submitted for approval,
ratification and confirmation by the shareholders of Bancorp at a meeting
thereof to be called in accordance with the applicable provisions of law and
held as promptly as practicable after the execution of this Agreement and in no
event later than the expiration of forty-five (45) days without the filing of
any post-effective amendment to the Registration Statement to be filed by FSC
pursuant to Paragraph 6.10, following the effectiveness of said Registration
Statement. Bancorp will mail the Proxy Statement prepared by FSC as part of the
Registration Statement to its shareholders for purposes of the meeting of its
shareholders. Consistent with the exercise of their fiduciary duties to
shareholders, the Board of Directors of Bancorp shall recommend to the
shareholders that the shareholders approve the Agreement and the transactions
contemplated therein.
7.3 Bank and FSB Action By Unanimous Written Consent. This Agreement shall
be submitted to the sole shareholder of each of Bank and FSB for approval,
ratification and confirmation pursuant to an Action by Unanimous Written Consent
in accordance with the applicable provisions of law as promptly as practicable
after the execution of this Agreement, and in no event later than the expiration
of forty-five (45) days without the filing of any post-effective amendment to
the Registration Statement to be filed by FSC pursuant to Paragraph 6.10,
following the effectiveness of said Registration Statement. FSC owns
beneficially and of record all of the issued and outstanding shares of FSB
Common Stock and will vote all of such shares in favor of this Agreement.
Bancorp owns all of the issued and outstanding shares of Bank Common Stock and
will vote all of such shares in favor of this Agreement.
ARTICLE VIII
CONDITIONS OF CLOSING
8.1 Conditions of Closing For All Parties.
The consummation of the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Regulatory Approval. All consents, approvals and permissions and
the satisfaction of all of the requirements prescribed by law, including
but not limited to the consents, approvals and permissions of all
applicable regulatory authorities which are necessary to the carrying out
of the Bank Merger and Merger as described in this Agreement, shall have
been procured; provided, however, the approvals referred to in this
subparagraph (a) shall not have imposed any significant conditions which
FSC and FSB on the one hand, or Bancorp and Bank, on the other, reasonably
deem to be materially disadvantageous or burdensome. An approval shall be
deemed to be materially disadvantageous or burdensome if the approval
includes a condition which, in the reasonable opinion of the Board of
Directors of FSC, would have a Material Adverse Effect on the anticipated
economic and business benefits to FSC of the transactions contemplated by
this Agreement.
(b) Registration Statement, etc. The FSC Common Stock to be issued by
FSC hereunder shall be the subject of the Registration Statement and to
qualification or
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exemption under state securities laws as appropriate. The Registration
Statement shall have been declared effective and shall not be subject to a
stop order or any threatened stop order. Such FSC Common Stock shall have
been included for listing in the NASDAQ/NMS subject to official notice of
issuance.
(c) No Injunction, etc. There shall not have been instituted any
litigation, regulatory proceeding or other matter which challenges the
legality or effectiveness of the transactions contemplated hereby or seeks
an order, decree or injunction enjoining or prohibiting the consummation of
the Merger.
(d) Tax Opinions. Bancorp and FSC shall have received from Ray,
Quinney & Nebeker, counsel to FSC, an opinion reasonably satisfactory to
them, respectively, to the general effect that the Merger shall not result
in the recognition of gain or loss for federal income tax purposes by
Bancorp or FSC, nor shall the issuance of the FSC Common Stock result in
the recognition of gain or loss by the holders of Bancorp Common Stock who
receive such stock in connection with the Merger, dated prior to the date
the Prospectus is first mailed to the shareholders of Bancorp and such
opinion shall not have been withdrawn or modified in any material respect.
(e) Section 280G. There shall have been no payments received by any
person as a result of the transactions contemplated hereby that would
constitute an "excess parachute payment" within the meaning of Section 280G
of the Code.
8.2 Conditions of Closing For FSC and FSB. The obligation of FSC and FSB,
respectively, to consummate the transactions contemplated by this Agreement is
conditioned upon the following:
(a) Shareholder Approval. A majority of the shareholders of Bancorp
shall have approved this Agreement and the Merger contemplated hereby
(unless a higher percentage of the outstanding shares of Bancorp must
approve the transaction under the Articles of Incorporation or Bylaws of
Bancorp). Bancorp, as the sole shareholder of Bank, shall approve the
Agreement and the Bank Merger.
(b) Bancorp and Bank Resolutions; Corporate Documents. Each of Bancorp
and Bank shall have delivered to FSC and FSB (i) a copy of its Articles of
Incorporation as certified by the Nevada Secretary of State; (ii) a copy of
its bylaws certified by its corporate secretary, (iii) a certificate of
good standing dated as of the Closing Date, issued by the appropriate
governmental agency, (iv) certified copies of resolutions duly adopted by
its Board of Directors approving this Agreement and, in the case of the
Board of Directors of Bancorp, directing the submission thereof to a vote
of the shareholders of Bancorp, and (v) certified copies of resolutions
duly adopted by the shareholders of Bancorp (owning the outstanding shares
as required by subparagraph (a) above) approving this Agreement and the
Merger, all as contemplated hereby.
(c) Bancorp and Bank Representations and Warranties. Unless waived in
writing by FSB and FSC, the representations and warranties of Bancorp and
Bank contained in this Agreement shall be true and correct on and as of the
Closing Date with the same effect as though made on and as of such date.
Except as otherwise contemplated by this Agreement, Bancorp and Bank shall
have performed in all material respects all of its obligations and
agreements hereunder theretofore to be performed by it. FSC and FSB shall
have received at the Closing a certificate to the foregoing effect dated as
of the Closing Date and executed on behalf of Bancorp and Bank by one of
their duly authorized executive officers.
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(d) Comfort Letters. FSC shall have received letters from Kafoury,
Armstrong & Co., dated (i) the effective date of the Registration Statement
and (ii) shortly prior to the Effective Time, in form and substance
satisfactory to FSC, with respect to Bancorp's and Bank's financial
condition, which letters shall be based upon customary specified procedures
undertaken by such firm. The "comfort letters" contemplated hereby shall
include, but not be limited to, those matters identified in Schedule 8.2(d)
attached hereto.
(e) Opinion of Bancorp and Bank Counsel. Unless waived in writing by
FSC and FSB, FSC and FSB shall have received at the Closing from Grady &
Associates, special counsel to Bancorp and Bank, and other counsel to
Bancorp and Bank acceptable to FSC, written opinions, dated the Closing
Date, substantially in the form of Schedule 8.2(e) hereto.
(f) Affiliate's Letter. Unless waived in writing by FSC, FSC shall
have received a letter from each person who, in the opinion of Bancorp and
its counsel (who shall be entitled to rely on written certificates of such
persons), is an "affiliate" (as that term is defined in Rule 405
promulgated by the SEC under the 1933 Act) of Bancorp in the form attached
hereto as Schedule 8.2(f). Such "affiliate's" letter shall include
covenants with respect to compliance with the rules and regulations of the
SEC for any public reoffering or sale of the FSC Common Stock to be issued
under the terms of this Agreement to such affiliate.
(g) Condition of Bank. FSB shall have determined, based on an audit
and review by its officers, accountants and legal counsel, conducted prior
to the execution of this Agreement and updated as of the Closing Date, as
provided below, that (i) the assets, books, records and operations of Bank
are in reasonably satisfactory condition and will not adversely impact FSB
after consummation of the Merger; (ii) based on the review of the assets,
books, records and operations of Bank by FSC, there are no liabilities
(existing, threatened or contingent) which FSC, in its discretion,
determines to be unacceptable, as determined by reference to Articles IV
and V of this Agreement; (iii) the methodology for determining and the
allowance for loan and lease losses of Bank as determined by the grading of
Bank loans and leases by FSC, is adequate in all material respects; (iv)
the net earnings after taxes for the years ended 1995, 1996 and 1997 are as
reported in the Financial Statements delivered to FSC pursuant to Section
5.6; and (v) as of the Closing Date, the net worth of Bancorp and Bank,
calculated in accordance with generally accepted accounting principles, and
after accrual or payment of the expenses incurred by Bancorp and Bank with
respect to the Bank Merger and Merger, including but not limited to
auditor's, attorney's and investment banker's fees and expenses incurred
with respect to employee severance payments and/or termination or freezing
of any employee Plan, as defined in Section 5.16, but before pay-in of the
exercise strike price for the Options, will exceed $9,000,000 (exclusive of
unrealized securities gains or losses pursuant to FASB 115 for the period
from January 1, 1998 through the Closing).
In the event FSB determines, and Bank agrees, that certain loans or assets
should be written down or charged off or that additions to the provision for
loan losses should be made, as contemplated by subparagraphs (ii) and (iii) of
this Section 8.2(g), Bank agrees to take such actions as are appropriate under
the circumstances and the net worth requirement set forth in this paragraph as a
condition to Closing shall be determined after the taking of such actions.
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Any charge-offs, other asset write-downs or additions to the allowance for
loan loss or other financial adjustments at or prior to the Closing made at the
request, in writing, of FSC or FSB, for the convenience of FSC or FSB, and not
required by said subparagraphs (ii) and (iii) of this 8.2(g), which charge-offs
or additions Bank agrees to make, shall not reduce net worth for purposes of
satisfaction of the net worth condition set forth in this Section 8.2(g).
With respect to the credit review to be conducted by FSC and FSB hereunder,
FSC and FSB covenant and agree that the update credit review of Bank by FSC and
FSB shall be conducted approximately fifteen (15) business days prior to the
Closing Date. In conducting the update credit review, FSC and FSB agree that
they shall apply the same credit review procedures and credit standards they
used in the initial credit review and that in their update review they will only
seek a change of a grade on a Bank loan (or lease) from the initial review if
there has been a demonstrable adverse change in the credit, or the borrower or
guarantor (or collateral supporting the credit) has suffered a material adverse
event. A demonstrable adverse change or a material adverse event shall be
defined by reference to the term Material Adverse Effect.
(h) Employment Agreements. John A. Schopf, Jr. and Wayne Snyder shall
have each executed and delivered an Employment Agreement in the forms set
forth as Schedules 8.2(h-1) and 8.2(h-2), respectively, attached hereto and
incorporated herein.
(i) Condition of Properties. FSC shall have determined, based on the
Phase I and Phase II Environmental Reports, as provided in Section 4.6
above, that there are no liabilities (existing, threatened or outright)
associated with the real properties owned by Bancorp or Bank which are
unacceptable. Such determination shall be made by FSC within forty-five
(45) days of receipt of such Phase I and Phase II Environmental Reports
delivered to FSC under Section 4.6, above.
(j) Options. All Options shall have been exercised or terminated and
Bancorp's Stock Option Plan(s) shall have been terminated.
8.3 Conditions of Closing For Bancorp and Bank. The obligation of Bancorp
and Bank to consummate the transactions contemplated by this Agreement is
conditioned upon the following:
(a) FSC and FSB Representations and Warranties. Unless waived in
writing by Bancorp and Bank, the representations and warranties of FSC and
FSB contained in this Agreement shall be correct on and as of the Closing
Date with the same effect as though made on and as of such date, except for
changes which are not, in the aggregate, material and adverse to the
financial condition, businesses, properties or operations of FSC and its
consolidated subsidiaries, and, except as otherwise contemplated by this
Agreement, FSC and FSB shall have performed in all material respects all of
their obligations and agreements hereunder theretofore to be performed by
them. Bancorp and Bank shall have received at the Closing a certificate to
the foregoing effect dated the Closing Date and executed on behalf of FSC
and FSB by one of their duly authorized executive officers.
(b) Opinion of FSC Counsel. Unless waived in writing by Bancorp and
Bank, Bancorp and Bank shall have received at the Closing from Ray, Quinney
& Nebeker, a written opinion, dated the Closing Date, substantially in the
form of Schedule 8.3(b) hereto.
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(c) FSC Resolutions; Corporate Documents. FSC shall have delivered to
Bancorp a certified copy of resolutions duly adopted by the Board of
Directors of FSC approving this Agreement, the Merger and the Bank Merger,
all as contemplated hereby. FSC shall deliver to Bancorp (i) a copy
certified by the Delaware Secretary of State's Office of FSC's Certificate
of Incorporation; (ii) a copy of FSC's Bylaws certified by the Corporate
Secretary; and (iii) a certificate of good standing dated as of the Closing
Date, issued by the Delaware Secretary of State's office.
(d) Shareholder Approval. Under the Delaware General Corporation Law,
FSC shareholder approval is not required for the Merger. FSC, as the sole
shareholder of FSB, shall approve the Agreement and the Bank Merger. A
majority of the shareholders of Bancorp shall have approved this Agreement
and the Merger.
(e) Fairness Opinion. Bancorp shall have previously received a letter
from Dain Rauscher Wessels dated as of a date within five (5) days of the
mailing of the Bancorp Proxy Statement to the shareholders of Bancorp, to
the effect that the transactions contemplated by this Agreement are fair
from a financial point of view to the shareholders of Bancorp.
ARTICLE IX
CLOSING OF MERGER
9.1 Closing. Unless the Agreement is earlier terminated in accordance with
Article X, below, the closing of the transactions contemplated herein (the
"Closing") shall take place at 10:00 a.m. on a date to be agreed upon by the
parties, and if such date is not agreed upon by the parties, the Closing shall
occur on the fifth business day after satisfaction or waiver of all of the
conditions precedent set forth in Article VIII and the expiration of the
required waiting period following approval of FSC's application to the Federal
Reserve Bank of San Francisco and the Nevada Financial Institutions Division, if
any, relating to the Merger and the Bank Merger but in no event later than
thirty (30) days after the expiration of such period (the "Closing Date"), at
the offices of Ray, Quinney & Nebeker, 79 South Main Street, Salt Lake City,
Utah 84111.
9.2 Filing of Certificate of Merger and Articles of Merger.
(a) Bancorp and FSC shall execute a certificate of merger in substantially
the form attached hereto as Exhibit A and shall cause such certificate of merger
to be filed with the Delaware Secretary of State's Office and the Nevada
Secretary of State's Office on the Closing Date or as soon thereafter as
practicable. The Effective Time of the Merger shall be on such date as the
Delaware Secretary of State and the Nevada Secretary of State, under their
respective rules and regulations, deems the Merger effective.
(b) Bank and FSB shall execute articles of merger in substantially the form
attached hereto as Exhibit B and shall cause such articles of merger to be
approved by the Nevada Financial Institutions Division and filed with the Nevada
Secretary of State's office, on the Closing Date or as soon thereafter as
practicable. The Bank Merger shall take effect on such date as the Nevada
Secretary of State, under rules and regulations governing such office, deems the
Bank Merger effective, but in any event shall be effective after the Effective
Time of the Merger.
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ARTICLE X
TERMINATION
10.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time:
(a) by mutual consent of the Executive Committee and Board of
Directors of FSC and FSB, respectively, and the Boards of Directors of
Bancorp and Bank; or
(b) by the Boards of Directors of FSC and FSB, respectively, or the
Boards of Directors of Bancorp and Bank at any time after the expiration of
nine (9) months from the date hereof, if the Bank Merger and Merger shall
not theretofore have been consummated by the failure to satisfy the
conditions to Closing not within the control of the electing party; or
(c) by Bancorp and Bank, upon written notice to FSC and FSB at any
time if any representation or warranty of FSC and FSB contained in this
Agreement was materially incorrect when made or becomes materially
incorrect on or prior to the Closing Date, or if FSC or FSB fail to comply
with any of their respective covenants contained in this Agreement, and the
same is not cured within thirty (30) days after notice of such inaccuracy
or noncompliance; or
(d) by FSC and FSB upon written notice to Bancorp and Bank at any time
if any representation or warranty of Bancorp and Bank contained in this
Agreement was materially incorrect when made or becomes materially
incorrect on or prior to the Closing Date, or if Bancorp and Bank fail to
comply with any of its covenants contained in this Agreement, and the same
is not cured within thirty (30) days after notice of such inaccuracy or
noncompliance;
(e) by FSC and FSB, upon written notice to Bancorp and Bank at any
time if a majority of Bancorp's shareholders (or such higher level mandated
by the Articles of Incorporation or Bylaws of Bancorp) does not approve the
Merger contemplated hereby, or if such Merger is disapproved by any
governmental authority whose approval is necessary;
(f) by either Bancorp or FSC, if Bancorp shall have failed to act or
refrain from doing any act as required under this Agreement pursuant to
Section 11.9.
10.2 Effect of Termination. In the event of termination and abandonment
hereof pursuant to the provisions of Section 10.1, this Agreement shall become
void and have no force or effect, except that Sections 10.2, 11.2, 11.9 and
11.11 shall survive the termination. Such termination shall not relieve any
party of any liability for damages arising out of its willful breach of any
provision of this Agreement for any default prior to such termination.
ARTICLE XI
ADDITIONAL COVENANTS
11.1 Employee Matters. FSC shall use its best efforts to effect a
conversion of Bank employees to FSC benefit plans within twelve (12) months of
the Effective Date (the "Conversion Period"). During the Conversion Period, FSC
shall continue the Plans (as described in Section 5.16) for the benefit of the
employees of Bank pending termination or merger of the Plans into FSC benefit
plans. Upon conversion to FSC benefit plans, Bank
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employees shall be entitled to participate in such FSC benefit plans in
accordance with the terms thereof and in accordance with FSC policy. For
purposes of determining each such Bank employee's eligibility and vesting under
such FSC benefit plans, FSC shall recognize such Bank employee's service with
Bank beginning on the date such Bank employee commenced employment with Bank;
provided, however, that with respect to the FSC 401(k) plan, prior service
credit shall be given only for such period as Bank's 401(k) plan has been in
existence; and, provided further that prior service credit shall not be given
for purposes of accrual of benefits under the FSC retirement plan. FSC also
covenants and agrees that any pre-existing condition, limitation or exclusion in
its health plans shall not apply to Bank employees or their covered dependents
who are covered under similar Bank health plans on the Closing Date and who
elect coverage under FSC's health plans at the time such Bank employees are
first given the option to enroll in FSC's health plans.
FSC will use its best efforts to enable the Plan participants to
"roll-over" any benefits of the Plans into an existing benefit plan maintained
by FSC as to which such benefits may be transferred without cost to FSC, or
necessity of material amendment to, or adverse effect on qualification of, such
FSC plan; provided, however, that no accounts shall be permitted to roll-over to
FSC's 401(k) plan without the express written consent of the trustee and sponsor
of FSC's 401(k) plan, in its sole discretion, to such roll-over, which approval
shall not be given in any event without receipt of such documentation from
Bancorp and Bank as may be requested by FSC prior to Closing, including, without
limitation, an Internal Revenue Service ruling obtained by Bancorp approving the
roll-over and ensuring the qualification of the FSC 401(k) plan if the FSC
401(k) plan accepts such roll-overs.
11.2 Costs. Each of the parties to this Agreement shall pay its own
charges and costs incurred or to be incurred in connection with the execution
and performance of this Agreement. Except as provided in Section 11.9, below, in
the event of a willful breach of a material agreement or covenant contained
herein by either Bancorp and Bank, on the one hand, or FSC and FSB, on the
other, which breach either directly or indirectly results or would result in a
failure to consummate the Bank Merger and Merger, and which breach cannot be
cured or is not cured within thirty (30) days after written notice of such
breach is given to the party committing such breach, the party causing such
breach shall be liable to the other party for damages for an amount not to
exceed $1,500,000; provided, further, that in the event of a termination of this
Agreement under Section 10.1(f), above, Bancorp shall pay to FSC a termination
fee of $1,500,000. Either party may elect to forego the recovery of damages and
pursue its right to the specific performance or enforcement of the terms and
provisions of this Agreement.
11.3 Instruments of Transfer, etc. Each of the parties hereto shall
cooperate with the other parties in every way in carrying out the transactions
contemplated herein, in delivering instruments to perfect the conveyances,
assignments and transfers contemplated herein, and in delivering all documents
and instruments reasonably deemed necessary or useful by counsel for any party
hereto.
11.4 Notices. All notices, requests, consents and demands shall be given
to or made upon the parties at their respective addresses set forth below, or at
such other address as a party may designate in writing delivered to the other
parties. Unless otherwise agreed in this Agreement, all notices, requests,
consents and demands shall be given or made by personal delivery, by confirmed
air courier, by facsimile transmission ("fax"), with a copy to follow by first
class mail, or by certified first class mail, return receipt requested, postage
prepaid, to the party or parties addressed as aforesaid. If sent by confirmed
air courier,
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such notice shall be deemed to be given upon the earlier to occur of the date
upon which it is actually received by the addressee or the business day upon
which delivery is made at such address as confirmed by the air courier (or if
the date of such confirmed delivery is not a business day, the next succeeding
business day). If mailed, such notice shall be deemed to be given upon the
earlier to occur of the date upon which it is actually received by the addressee
or the second business day following the date upon which it is deposited in a
first-class postage-prepaid envelope in the United States mail addressed as
aforesaid. If given by fax, such notice shall be deemed to be given upon the
date it is actually received by the addressee, as confirmed by the fax activity
report generated upon transmission of such fax.
(a) If to FSC and FSB, to:
First Security Bank of Nevada
530 Las Vegas Blvd. S
Las Vegas, Nevada 89101
Attn: David J. Smith, President
and Chief Executive Officer
Fax Number (702) 385-8705
With a copy to:
First Security Corporation
79 South Main Street
Salt Lake City, Nevada 84111
Attn: Brad D. Hardy, Esq.
Executive Vice-President & General Counsel
Fax Number: (801) 359-6928
With a copy to:
Sylvia I. Iannucci, Esq.
Ray, Quinney & Nebeker
400 Deseret Building
79 South Main Street
Salt Lake City, Utah 84111
Fax Number: (801) 532-7543
(b) If to Bancorp and Bank, to:
Nevada Banking Company
229 Kingsbury Grade
Stateline, Nevada 89449
Attn: John A. Schopf, Chief Executive Officer
Fax Number: (702) 588-5129
With a copy to:
XEON Financial Corp.
229 Kingsbury Grade
Stateline, Nevada 89449
Attn: John A. Schopf, Chief Executive Officer
Fax Number: (702) 588-5129
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With a copy to:
Francis X. Grady, Esq.
Grady & Associates
20800 Center Ridge Road, Suite 116
Rocky River, Ohio 44116-4306
Fax Number: (440) 356-7254
Each party hereto shall notify promptly the other in writing of the
occurrence of any event which will or may result in the failure to satisfy the
conditions specified in Article VIII hereof. Between the date of this Agreement
and the Closing Date, each party hereto will advise the other of the
satisfaction of such conditions as they occur.
11.5 Amendments. Prior to the Effective Time, any provision of this
Agreement, except for Section 3.1 which establishes the Exchange Ratio, may be
amended or modified at any time, either before or after its approval, if any, by
the shareholders of any party to this Agreement, by an agreement in writing
between the parties hereto approved by their respective Boards of Directors (or
Executive Committee in the case of FSC) and executed in the same manner as this
Agreement.
11.6 Entire Agreement. This Agreement and all exhibits and schedules
hereto and other documents incorporated or referred to herein, contain the
entire agreement of the parties and there are no representations, inducements or
other provisions other than those expressed in writing. No modification, waiver
or discharge of any provision of or breach of this Agreement shall (i) be
effective unless it is executed in writing by the party effecting such
modification, waiver or discharge, or (ii) affect the right of either party
hereto thereafter to enforce any other provision or to exercise any right or
remedy in the event of a breach by a party hereto, whether or not similar.
11.7 Assignment. This Agreement may not be assigned by any party hereto
except with the prior written consent of the other parties.
11.8 Counterparts. Any number of counterparts of this Agreement may be
signed and delivered and each shall be considered an original and together they
shall constitute one agreement.
11.9 Exclusive Merger Agreement. Bancorp, Bank, and the Board of Directors
of Bancorp covenant and agree that, between the date hereof and the date of the
meeting of the Shareholders of Bancorp described in Article VII hereof, they
will not, either directly or indirectly, solicit or attempt to procure offers
relating to the merger or acquisition of Bancorp or Bank with or by any entity
not a party to this Agreement, or negotiate or enter into any agreements
relating to the merger or acquisition of Bancorp or Bank with or by any such
third party, and such persons further agree to use his or her best efforts to
obtain the approval of the Merger by the Shareholders of Bancorp.
Notwithstanding the foregoing, neither Bancorp, Bank nor any of their respective
officers or directors shall be required by this Section 11.9 to take or refrain
from taking any action if to do so would, in the written opinion of Bancorp's
legal counsel, violate the duties imposed by law on the Bancorp directors or
officers to the Bancorp shareholders.
11.10 Public Statements. No party to this Agreement shall issue any press
release or other public statement concerning the transactions contemplated by
this Agreement without first providing the other parties hereto with a written
copy of the text of such release or statement and obtaining the consent of the
other parties respecting such release
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or statement, which consent will not be unreasonably withheld. The consent
provided for in this Section 11.10 shall not be required if the delay necessary
to obtain such consent would preclude the timely issuance of a press release or
public statement as required by law. The provisions of this Section 11.10 shall
not be construed as prohibiting the filing of copies of this Agreement or
descriptions of this Agreement with regulatory agencies as to which regulatory
approvals are contemplated by this Agreement.
11.11 Confidentiality. Each party shall use all information that it
obtains from the others pursuant to this Agreement solely for the effectuation
of the transactions contemplated by this Agreement or for other purposes
consistent with the intent of this Agreement and shall not use any of such
information for any other purpose, including, without limitation, the
competitive detriment of the other parties. Each party shall maintain as
strictly confidential all information it learns from the others and shall, upon
expiration or termination of this Agreement, return promptly to the other
parties all documentation (and copies thereof) provided by them or made
available by third parties. Each party may disclose such information to its
respective affiliates, counsel, accountants, tax advisors and consultants. This
provision shall not prohibit the use or disclosure of confidential information
pursuant to court order or which has otherwise become publicly available.
11.12 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties and agreements in this Agreements or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 3.1(a), 3.4, 3.5, 6.10,
6.13, 11.10 and 11.11, the Employment Agreements in the form of Schedules
8.2(h-1) and 8.2(h-2) and the agreements of the Affiliates contained in the
letters referred to in Section 8.2(f).
11.13 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, prior to the Closing, the parties may mutually
agree to revise the structure of the Bank Merger and the Merger and related
transactions provided that each of the transactions comprising such revised
structure shall (i) not change the amount or form of consideration to be
received by the holders of Bancorp Common Stock, (ii) be capable of consummation
in as timely a manner as the structure contemplated herein and (iii) not
otherwise be prejudicial to the interest of the stockholders of Bancorp. This
Agreement and any related documents shall be appropriately amended in order to
reflect any such revised structure.
11.14 Third Parties. Except with respect to Article III, Sections 6.13 and
11.1 which are intended to benefit the shareholders, employees, officers and
directors of Bancorp, each party hereto intends that this Agreement shall not
benefit or create any right or cause of action to any person other than parties
hereto. As used in this Agreement, the term "parties" shall refer only to FSC,
FSB, Bancorp or Bank as the context may require.
11.15 Severability. Except to the extent that application of this Section
11.15 would have a Material Adverse Effect on either party, any term or
provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining terms and provisions of this Agreement or affecting the validity
or enforceability of any of the terms or provisions of this Agreement in any
other jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
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11.16 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement.
11.17 Definition of "Material Adverse Effect". As used in this Agreement,
"Material Adverse Effect" shall mean with respect to a person, a Material
Adverse Effect upon (A) the business, financial condition, operations, or
prospects of such person, or (B) the ability of such person to timely perform
its obligations under the Agreement and to timely consummate the Merger;
provided, however, that in determining whether a Material Adverse Effect has
occurred there shall be excluded any effect on the referenced party the cause of
which is (i) any change in banking or similar laws, rules or regulations of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) any change in generally accepted accounting principles or
regulatory accounting principles applicable to banks or their holding companies
generally, (iii) any action or omission of FSC or Bancorp or any subsidiary of
either of them taken with the prior written consent of FSC or Bancorp, as
applicable, or permitted by this Agreement, and (iv) any changes in general
economic conditions affecting banks or their holding companies generally.
[This Space Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first set forth above.
FIRST SECURITY CORPORATION
By /s/ MORGAN J. EVANS
------------------------------------
Morgan J. Evans,
President and Chief Operating
Officer
FIRST SECURITY BANK OF NEVADA
By /s/ DAVID J. SMITH
------------------------------------
David J. Smith,
President and Chief Executive
Officer
XEON FINANCIAL CORP.
By /s/ JOHN A. SCHOPF, JR.
------------------------------------
John A. Schopf, Jr.
President and Chief Executive
Officer
NEVADA BANKING COMPANY
By /s/ JOHN A. SCHOPF, JR.
------------------------------------
John A. Schopf, Jr.
President and Chief Executive
Officer
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APPENDIX B
OPINION OF DAIN RAUSCHER WESSELS
<PAGE> 151
May , 1999
The Board of Directors
XEON Financial Corp.
229 Kingsbury Grade
Stateline, NV 89449
To the Board of Directors:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the common stockholders of XEON Financial
Corp., a Nevada corporation (the "Company"), of the consideration to be received
by such stockholders pursuant to the terms of the proposed merger (the "Merger")
of the Company with and into First Security Corporation, a Delaware corporation
("FSC"). Under the terms of the Agreement and Plan of Reorganization by and
between FSC and the Company (the "Merger Agreement"), at the effective time of
the Merger each outstanding share of the Company's common stock will be
converted into the right to receive a fraction of a share of FSC common stock,
to be determined using a formula included in the Merger Agreement. Based upon
the closing price of FSC common stock on December 28, 1998, each outstanding
share of the Company's common stock would be converted into approximately $10.14
of FSC common stock. The Merger is intended to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended.
Dain Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain
Rauscher Wessels"), as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities and private placements. In the ordinary course of
business Dain Rauscher Wessels has published research and made recommendations
regarding the equity securities of FSC and other companies in the financial
services industry. Also, Dain Rauscher Wessels acts as a market maker in the
equity securities of FSC and other publicly traded companies in the financial
services industry and, accordingly, periodically may have positions in such
securities. Dain Rauscher Wessels was engaged to act as the Company's financial
advisor in connection with the Merger. We will receive a fee for providing this
opinion and a fee for our advisory services. A substantial portion of our
advisory fee is contingent upon consummation of the Merger. In addition, we will
be indemnified against certain liabilities that may arise from activities
related to our engagement.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have reviewed (i) a draft of the Merger Agreement dated
December 21, 1998 and drafts of other selected other documents related to the
Merger; (ii) certain financial and operating information supplied to us by the
Company, including certain historical audited financial statements, certain
internal unaudited financial information, and certain summary financial
projections relating to the Company; and (iii) certain publicly available
information regarding FSC. We have visited the corporate offices of the Company
and FSC and made inquiries of the management of each company regarding the past
and current business operations, financial condition, and future prospects of
each company. In addition, we have held discussions with management of both the
Company and FSC to understand the reasons for completing the Merger.
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We have analyzed the historical reported market prices and trading activity
of the common stocks of the Company and FSC. We have compared financial and
stock market information on the Company and FSC to similar information for
certain publicly traded companies in the financial services industry. We have
also reviewed, to the extent publicly available, the terms of selected relevant
mergers and acquisitions, analyzed the general economic outlook for companies in
the financial services industry, and performed other studies and analyses as we
considered appropriate.
In conducting our review and in rendering our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independent verification of such information. The Company has advised us
that it does not publicly disclose internal financial information of the type
provided to us and that such information was prepared for financial planning
purposes and not with the expectation of public disclosure. We have relied upon
the assurances of the management of the Company that the financial planning data
and other business outlook information provided to us has been prepared on a
reasonable basis and in accordance with industry practice and reflects the best
currently available estimates. We have further relied upon the assurances of
management of both the Company and FSC that they are not aware of any facts that
would make the information supplied to us, or publicly available, inaccurate or
misleading. We have assumed that the final form of the Merger Agreement will be
substantially similar to the last draft reviewed by us, without modification of
material terms or conditions by the Company or FSC.
In arriving at our opinion, we did not make an independent appraisal of the
assets or liabilities of the Company or FSC, and we do not express an opinion
regarding the liquidation value, solvency or regulatory compliance of either
company separately, or the combined companies following the Merger. Furthermore,
we do not express any opinion as to the prices at which shares of the Company's
common stock or shares of FSC may trade following the date of this opinion, at
the closing of the Merger, or at any time in the future. Our opinion is based
solely on information available to us on or before the date hereof, and reflects
general market, economic, financial, monetary, and other conditions as of such
date. We have not undertaken to reaffirm or revise this opinion or otherwise
comment upon any events occurring after the date hereof.
This opinion is directed to and is for the use and benefit of the Board of
Directors of the Company and is rendered to the Board of Directors in connection
with its consideration of the Merger. This opinion is limited to the fairness to
common stockholders of the Company, from a financial point of view, of the
consideration to be received by such stockholders in connection with the Merger,
and does not address the Company's underlying business decision to proceed with
the Merger. This opinion does not constitute a recommendation to any stockholder
of the Company as to how such stockholder should vote with respect to the
Merger.
This letter may not be reproduced, quoted, published, or referred to in any
manner, nor shall any public reference to Dain Rauscher Wessels be made, without
our prior written consent, except that the Company may include this opinion in
the Company's proxy statement relating to the Merger to be distributed to
stockholders and in related filings with the Securities and Exchange Commission,
provided that any such disclosure shall first be submitted to Dain Rauscher
Wessels for its approval.
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Based upon and subject to the foregoing, and other matters that we
considered relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the common stockholders of the Company pursuant
to the terms of the Merger is fair to such stockholders from a financial point
of view.
Very truly yours,
/s/ DAIN RAUSCHER WESSELS
DAIN RAUSCHER WESSELS
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APPENDIX C
EXTRACTS FROM NEVADA LAWS CONCERNING DISSENTERS' RIGHTS OF XEON STOCKHOLDERS
<PAGE> 155
QUALIFICATIONS OF AND PROCEDURES
FOR DISSENTING STOCKHOLDERS
NEVADA REVISED STATUTES SEC.92A
92A.300 DEFINITIONS. As used in Nevada Revised Statutes ("NRS") 92A.300 to
92A.500, inclusive, unless the context otherwise requires, the words and terms
defined in NRS 92A.305 to 92A.335, inclusive, have the meanings ascribed to them
in those sections.
92A.305 "BENEFICIAL STOCKHOLDER" DEFINED. "Beneficial stockholder" means a
person who is a beneficial owner of shares held in a voting trust or by a
nominee as the stockholder of record.
92A.310 "CORPORATE ACTION" DEFINED. "Corporate action" means the action of
a domestic corporation.
92A.315 "DISSENTER" DEFINED. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.410 to
92A.480, inclusive.
92A.320 "FAIR VALUE" DEFINED. "Fair value," with respect to a dissenter's
shares, means the value of the shares immediately before the effectuation of the
corporate action to which he objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be inequitable.
92A.325 "STOCKHOLDER" DEFINED. "Stockholder" means a stockholder of record
or a beneficial stockholder of a domestic corporation.
92A.330 "STOCKHOLDER OF RECORD" DEFINED. "Stockholder of record" means the
person in whose name shares are registered in the records of a domestic
corporation or the beneficial owner of shares to the extent of the rights
granted by a nominee's certificate on file with the domestic corporation.
92A.335 "SUBJECT CORPORATION" DEFINED. "Subject corporation" means the
domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective or
the surviving or acquiring entity of that issuer after the corporate action
becomes effective.
92A.340 COMPUTATION OF INTEREST. Interest payable pursuant to NRS 92A.300
to 92A.500, inclusive, must be computed from the effective date of the action
until the date of payment, at the average rate currently paid by the entity on
its principal bank loans or, if it has no bank loans, at a rate that is fair and
equitable under all of the circumstances.
92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC LIMITED PARTNERSHIP. A
partnership agreement of a domestic limited partnership or, unless otherwise
provided in the partnership agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the partnership interest of a
dissenting general or limited partner of a domestic limited partnership are
available for any class or group of partnership interests in connection with any
merger or exchange in which the domestic limited partnership is a constituent
entity.
92A.360 RIGHTS OF DISSENTING MEMBER OF DOMESTIC LIMITED-LIABILITY COMPANY.
The articles of organization or operating agreement of a
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domestic limited-liability company or, unless otherwise provided in the articles
of organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity.
92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC NONPROFIT CORPORATION.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior
notice, but within 30 days after the effective date of the merger, resign
from membership and is thereby excused from all contractual obligations to
the constituent or surviving corporations which did not occur before his
resignation and is thereby entitled to those rights, if any, which would
have existed if there had been no merger and the membership had been
terminated or the member had been expelled.
2. Unless otherwise provided in its articles of incorporation or
bylaws, no member of a domestic nonprofit corporation, including, but not
limited to, a cooperative corporation, which supplies services described in
chapter 704 of NRS to its members only, and no person who is a member of a
domestic nonprofit corporation as a condition of or by reason of the
ownership of an interest in real property, may resign and dissent pursuant
to subsection 1.
92A.380 RIGHT OF STOCKHOLDER TO DISSENT FROM CERTAIN CORPORATE ACTIONS AND
TO OBTAIN PAYMENT FOR SHARES.
1. Except as otherwise provided in NRS 92A.370 to 92A.390, a
stockholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the domestic
corporation is a party:
(1) If approval by the stockholders is required for the merger
by NRS 92A.120 to 92A.160, inclusive, or the articles of
incorporation and he is entitled to vote on the merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent under NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic
corporation is a party as the corporation whose subject owner's
interests will be acquired, if he is entitled to vote on the plan.
(c) Any corporate action taken pursuant to a vote of the
stockholders to the event that the articles of incorporation, bylaws or
a resolution of the board of directors provides that voting or nonvoting
stockholders are entitled to dissent and obtain payment for their
shares.
2. A stockholder who is entitled to dissent and obtain payment under
NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his
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entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.
92A.390 LIMITATIONS ON RIGHT OF DISSENT: STOCKHOLDERS OF CERTAIN CLASSES OR
SERIES; ACTION OF STOCKHOLDERS NOT REQUIRED FOR PLAN OF MERGER.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the
record date fixed to determine the stockholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or exchange is to
be acted on, were either listed on a national securities exchange, included
in the national market system by the National Association of Securities
Dealers, Inc., or held by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the
shares provide otherwise; or
(b) The holders of the class or series are required under the plan
of merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in
lieu of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the
plan of merger or exchange, were either listed on a national
securities exchange, included in the national market system by
the National Association of Securities Dealers, Inc., or held
of record by at least 2,000 holders of owner's interests of
record; or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of
paragraph (b).
2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require
action of the stockholders of the surviving domestic corporation under NRS
92A.130.
92A.400 LIMITATIONS ON RIGHT OF DISSENT: ASSERTION AS TO PORTIONS ONLY TO
SHARES REGISTERED TO STOCKHOLDER; ASSERTION BY BENEFICIAL STOCKHOLDER.
1. A stockholder of record may assert dissenter's rights as to fewer
than all of the shares registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
subject corporation in writing of the name and address of each person on
whose behalf he asserts dissenter's rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which
he dissents and his other shares were registered in the names of different
stockholders.
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2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of
the stockholder of record to the dissent not later than the time the
beneficial stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the
beneficial stockholder or over which he has power to direct the vote.
92A.410 NOTIFICATION OF STOCKHOLDERS REGARDING RIGHT OF DISSENT.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, the notice of the meeting
must state that stockholders are or may be entitled to assert dissenters'
rights under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a
copy of those sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders,
the domestic corporation shall notify in writing all stockholders entitled
to assert dissenters' rights that the action was taken and send them the
dissenter's notice described in NRS 92A.430.
92A.420 PREREQUISITES TO DEMAND FOR PAYMENT FOR SHARES.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is
taken, written notice of his intent to demand payment for his shares if
the proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1
is not entitled to payment for his shares under this chapter.
92A.430 DISSENTER'S NOTICE: DELIVERY TO STOCKHOLDERS ENTITLED TO ASSERT
RIGHTS; CONTENTS.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall
deliver a written dissenter's notice to all stockholders who satisfied the
requirements to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and
when certificates, if any, for shares must be deposited:
(b) Inform the holders of shares not represented by certificates to
what extent the transfer of the shares will be restricted after the
demand for payment is received;
(c) Supply a form for demanding payment that includes the date of
the first announcement to the news media or to the stockholders of the
terms of the
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proposed action and requires that the person asserting dissenter's
rights certify whether or not he acquired beneficial ownership of the
shares before that date;
(d) Set a date by which the subject corporation must receive the
demand for payment, which may not be less than 30 nor more than 60 days
after the date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
92A.440 DEMAND FOR PAYMENT AND DEPOSIT OF CERTIFICATES; RETENTION OF RIGHTS
OF STOCKHOLDER.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for
this certification; and
(c) Deposit his certificates, if any, in accordance with the terms
of the notice.
2. The stockholder who demands payment and deposits his certificates,
if any, before the proposed corporate action is taken retains all other
rights of a stockholder until those rights are canceled or modified by the
taking of the proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter.
92A.450 UNCERTIFICATED SHARES: AUTHORITY TO RESTRICT TRANSFER AFTER DEMAND
FOR PAYMENT; RETENTION OF RIGHTS OF STOCKHOLDER.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares
not represented by a certificate retains all other rights of a stockholder
until those rights are canceled or modified by the taking of the proposed
corporate action.
92A.460 PAYMENT FOR SHARES: GENERAL REQUIREMENTS.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced
by the district court:
(a) Of the county where the corporation's registered office is
located; or
(b) At the election of any dissenter residing or having its
registered office in this state, of the county where the dissenter
resides or has its registered office. The court shall dispose of the
complaint promptly.
C-5
<PAGE> 160
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a
fiscal year ending not more than 16 months before the date of payment, a
statement of income for that year, a statement of changes in the
stockholders' equity for that year and the latest available interim
financial statements, if any:
(b) A statement of the subject corporation's estimate of the fair
value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under
NRS 92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive.
92A.470 PAYMENT FOR SHARES: SHARES ACQUIRED ON OR AFTER DATE OF DISSENTER'S
NOTICE.
1. A subject corporation may elect to withhold payment from a
dissenter unless he was the beneficial owner of the shares before the date
set forth in the dissenter's notice as the date of the first announcement
to the news media or to the stockholders of the terms of the proposed
action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate
of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment
pursuant to NRS 92A.480.
92A.480 DISSENTER'S ESTIMATE OF FAIR VALUE: NOTIFICATION OF SUBJECT
CORPORATION; DEMAND FOR PAYMENT OF ESTIMATE.
1. A dissenter may notify the subject corporation in writing of his
own estimate of the fair value of his shares and the amount of interest
due, and demand payment of his estimate, less any payment pursuant to NRS
92A.460, or reject the offer pursuant to NRS 92A.470 and demand payment of
the fair value of his shares and interest due, if he believes that the
amount paid pursuant to NRS 92A.460 or offered pursuant to NRS 92A.470 is
less than the fair value of his shares or that the interest due is
incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for
his shares.
92A.490 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: DUTIES OF SUBJECT
CORPORATION; POWERS OF COURT; RIGHTS OF DISSENTER.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject
C-6
<PAGE> 161
corporation does not commence the proceeding within the 60-day period, it
shall pay each dissenter whose demand remains unsettled the amount
demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it
shall commence the proceeding in the county where the registered office of
the domestic corporation merged with or whose shares were acquired by the
foreign entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the
proceeding as in an action against their shares. All parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or any amendment thereto. The dissenters are
entitled to the same discovery rights as parties in other civil
proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to
a judgment:
(a) For the amount, if any, by which the court finds the fair value
of his shares, plus interest, exceeds the amount paid by the subject
corporation; or
(b) For the fair value, plus accrued interest, of his
after-acquired shares for which the subject corporation elected to
withhold payment pursuant to NRS 92A.470.
92A.500 LEGAL PROCEEDING TO DETERMINE FAIR VALUE: ASSESSMENT OF COSTS AND
FEES.
1. The court in a proceeding to determine fair value shall determine
all of the costs of the proceeding, including the reasonable compensation
and expenses of any appraisers appointed by the court. The court shall
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters
if the court finds the subject corporation did not substantially comply
with the requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor
of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously or not in
good faith with respect to the rights provided by NRS 92A.300 to
92A.500, inclusive.
C-7
<PAGE> 162
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and
that the fees for those services should not be assessed against the subject
corporation, the court may award to those counsel reasonable fees to be
paid out of the amounts awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the
proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P.
68 or NRS 17.115.
C-8
<PAGE> 163
APPENDIX D
XEON FINANCIAL STATEMENTS
<PAGE> 164
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
INDEPENDENT AUDITOR'S REPORT................................ D-1
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition............ D-2
Consolidated Statements of Income......................... D-3
Consolidated Statements of Changes in Stockholders'
Equity................................................. D-4
Consolidated Statements of Cash Flows..................... D-5
Notes to Consolidated Financial Statements................ D-6
</TABLE>
<PAGE> 165
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of XEON Financial Corp. and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of XEON Financial Corp. and Subsidiary as of December 31, 1998 and
1997 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XEON
Financial Corp. and Subsidiary as of December 31, 1998 and 1997 and the results
of its operations and cash flows for each of the three years ended December 31,
1998, in conformity with generally accepted accounting principles.
/s/ Kafoury, Armstrong & Co.
Reno, Nevada
January 22, 1999
D-1
<PAGE> 166
XEON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998, AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents
Cash................................................ $ 6,236,102 $ 5,781,603
Federal funds sold.................................. 8,000,000 5,347,000
------------ ------------
14,236,102 11,128,603
------------ ------------
Interest-bearing deposits in domestic financial
institutions........................................ 1,090,000 1,090,990
Securities available for sale......................... 21,797,125 19,027,327
Loans, net of allowance for credit losses of
$1,298,099 and $1,239,662 in 1998 and 1997,
respectively........................................ 85,658,404 69,787,260
Premises and equipment................................ 3,157,290 2,663,404
Stock in Federal Home Loan Bank, at cost.............. 390,300 312,831
Other assets.......................................... 1,265,249 1,636,407
------------ ------------
Total Assets................................ $127,594,470 $105,646,822
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand (non-interest bearing)....................... $ 32,834,442 $ 24,307,050
Savings, money market and NOW....................... 57,516,526 42,309,901
Time, $100,000 and over............................. 13,997,149 11,167,734
Other time.......................................... 11,325,290 18,593,015
------------ ------------
Total Deposits.............................. 115,673,407 96,377,700
------------ ------------
Accrued liabilities................................... 762,563 821,287
Federal Home Loan Bank borrowings..................... 1,000,000 --
------------ ------------
Total Liabilities........................... 117,435,970 97,198,987
------------ ------------
Stockholders' equity:
Common stock -- no par value; authorized 5,000,000
shares; issued and outstanding 2,828,840 shares
and 2,787,640 shares at December 31, 1998 and
1997, respectively............................... -- --
Surplus............................................. 7,001,232 5,142,163
Retained earnings................................... 3,066,892 3,187,430
Accumulated other comprehensive income, net of
applicable deferred income taxes of $41,581, and
$58,238 at December 31, 1998 and 1997,
respectively..................................... 90,376 118,242
------------ ------------
Total Stockholders' Equity.................. 10,158,500 8,447,835
------------ ------------
Total Liabilities and Stockholders'
Equity.................................... $127,594,470 $105,646,822
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-2
<PAGE> 167
XEON FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................... $8,287,231 $6,667,205 $4,621,544
Interest on securities available for sale.... 1,168,614 939,650 788,194
Interest on federal funds sold............... 264,222 254,858 163,919
Interest on deposits with banks.............. 62,660 68,922 63,812
---------- ---------- ----------
Total Interest Income................ 9,782,727 7,930,635 5,637,469
---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits......................... 2,797,178 2,541,787 1,781,081
Interest on FHLB borrowings.................. 78,635 -- --
---------- ---------- ----------
Total Interest Expense............... 2,875,813 2,541,787 1,781,081
---------- ---------- ----------
Net Interest Income....................... 6,906,914 5,388,848 3,856,388
Provision for credit losses.................... 75,000 280,000 180,000
---------- ---------- ----------
Net Interest Income After Provision for
Credit Losses........................... 6,831,914 5,108,848 3,676,388
---------- ---------- ----------
OTHER INCOME
Overdraft and other fees..................... 321,024 350,315 207,105
Service charges on deposits.................. 208,457 178,686 147,368
Gain (loss) on sale of securities............ 60,073 6,673 12,408
---------- ---------- ----------
Total Other Income................... 589,554 535,674 366,881
---------- ---------- ----------
OTHER EXPENSES
Salaries and employee benefits............... 2,773,211 2,190,315 1,649,533
Occupancy expense............................ 551,766 449,733 392,026
Equipment expense............................ 436,050 318,445 237,775
Other operating expenses..................... 1,207,232 987,829 751,535
---------- ---------- ----------
Total Other Expense.................. 4,968,259 3,946,322 3,030,869
---------- ---------- ----------
Net Income Before Provision for Income
Taxes................................... 2,453,209 1,698,200 1,012,400
Provision for Federal Income Taxes............. 725,925 596,806 352,824
---------- ---------- ----------
Net Income................................ $1,727,284 $1,101,394 $ 659,576
========== ========== ==========
Basic Earnings per Share.................. $ 0.62 $ 0.40 $ 0.24
========== ========== ==========
Diluted Earnings per Share................ $ 0.53 $ 0.34 $ 0.21
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-3
<PAGE> 168
XEON FINANCIAL CORP. AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
---------------------- RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS INCOME STOCK EQUITY
--------- ---------- ---------- ---------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995, as
previously reported............... 947,231 $1,184,039 $1,856,851 $1,468,245 50,354 $(20,960) $ 4,538,529
Adjustment in connection with
pooling of interest............. -- (1,184,039) 1,184,039 -- -- -- --
--------- ---------- ---------- ---------- ------- -------- -----------
BALANCES, December 31, 1995, as
restated.......................... 947,231 -- 3,040,890 1,468,245 50,354 (20,960) 4,538,529
--------- ---------- ---------- ---------- ------- -------- -----------
Comprehensive income:
1996 net income................. -- -- -- 659,576 -- -- 659,576
Unrealized gain (loss) on
securities available for sale,
net of applicable taxes and
reclassification adjustment... -- -- -- -- (77,694) -- (77,694)
Total comprehensive
income...................
-----------
581,882
-----------
Sale of treasury stock, 17,629
shares.......................... -- -- 14,196 -- -- 69,541 83,737
Purchase of stock for the
Treasury, 17,300 shares......... -- -- -- -- -- (82,550) (82,550)
Sale of common stock.............. 439,889 -- 2,089,473 -- -- -- 2,089,473
Expenses related to sale of common
stock........................... -- -- (36,425) -- -- -- (36,425)
--------- ---------- ---------- ---------- ------- -------- -----------
BALANCES, December 31, 1996......... 1,387,120 -- 5,108,134 2,127,821 (27,340) (33,969) 7,174,646
--------- ---------- ---------- ---------- ------- -------- -----------
Comprehensive income:
1997 net income................. -- -- -- 1,101,394 -- -- 1,101,394
Unrealized gain (loss) on
securities available for sale,
net of applicable taxes and
reclassification adjustment... -- -- -- -- 145,582 -- 145,582
-----------
Total comprehensive
income................... 1,246,976
-----------
Sale of treasury stock, 7,025
shares.......................... -- -- 2,204 -- -- 33,969 36,173
Stock options exercised........... 6,700 -- 31,825 -- -- -- 31,825
Cash dividends declared........... -- -- -- (41,785) -- -- (41,785)
--------- ---------- ---------- ---------- ------- -------- -----------
BALANCES, December 31, 1997......... 1,393,820 -- 5,142,163 3,187,430 118,242 -- 8,447,835
--------- ---------- ---------- ---------- ------- -------- -----------
Comprehensive income:
1998 net income................. -- -- -- 1,727,284 -- -- 1,727,284
Unrealized gain (loss) on
securities available for sale,
net of applicable taxes and
reclassification adjustment... -- -- -- -- (27,866) -- (27,866)
-----------
Total comprehensive
income................... 1,699,418
-----------
Stock options exercised........... 35,500 -- 109,669 -- -- -- 109,669
Stock dividend declared........... 1,399,520 -- 1,749,400 -- -- -- --
Cash dividends declared........... -- -- -- (98,422) -- -- (98,422)
--------- ---------- ---------- ---------- ------- -------- -----------
BALANCE, December 31, 1998.......... 2,828,840 $ -- $7,001,232 $3,066,892 90,376 $ -- $10,158,500
========= ========== ========== ========== ======= ======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE> 169
XEON FINANCIAL CORP. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and loan fees received......................... $ 9,774,057 $ 7,739,038 $ 5,612,841
Other income received................................... 522,733 426,464 354,473
Cash paid to suppliers and employees.................... (4,603,139) (3,421,072) (3,080,657)
Interest paid........................................... (2,881,118) (2,512,195) (1,760,344)
Taxes paid.............................................. (809,013) (290,402) (448,815)
------------ ------------ ------------
Net Cash Provided by Operating Activities.......... 2,003,520 1,941,833 677,498
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits
with banks............................................ 990 (96,990) 98,000
Proceeds from maturities of securities available for
sale.................................................. 240,000 295,000 500,000
Proceeds from sales of securities available for sale.... 5,557,088 4,239,854 6,323,904
Principal paydowns on securities available for sale..... 3,843,551 1,428,800 1,823,733
Purchase of securities available for sale............... (12,394,887) (11,481,664) (10,356,051)
Purchase of Federal Home Loan Bank stock................ (77,469) (312,831) --
Net increase in loans................................... (15,946,145) (21,190,343) (10,790,672)
Cash paid for property and equipment.................... (933,021) (760,674) (1,209,874)
Proceeds from the sale of property and equipment........ 33,350 -- --
Proceeds from sale of other real estate owned........... 100,328 186,974 54,345
Net cash received for other assets...................... 358,890 -- (4,656)
------------ ------------ ------------
Net Cash Used by Investing Activities.............. (19,217,325) (27,691,874) (13,561,271)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits.............. 8,527,392 10,225,097 1,819,888
Net increase (decrease) in savings and NOW deposits..... 15,206,625 12,373,006 7,905,734
Net increase (decrease) in time deposits, $100,000 and
over.................................................. 2,829,415 2,758,792 3,787,328
Net increase (decrease) in other time deposits.......... (7,267,725) 1,202,568 3,085,165
Net increase (decrease) in FHLB borrowings.............. 1,000,000 -- --
Proceeds from sale of common and treasury stock......... 109,669 67,998 2,136,785
Purchase of treasury stock.............................. -- -- (82,550)
Dividends paid.......................................... (84,072) (27,846) --
------------ ------------ ------------
Net Cash Provided by Financing Activities.......... 20,321,304 26,599,615 18,652,350
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 3,107,499 849,574 5,768,577
CASH AND CASH EQUIVALENTS, Beginning of Year.............. 11,128,603 10,279,029 4,510,452
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of Year.................... $ 14,236,102 $ 11,128,603 $ 10,279,029
============ ============ ============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income............................................ $ 1,727,284 $ 1,101,394 $ 659,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 412,534 293,452 206,578
Provision for loan losses........................ 75,000 280,000 180,000
Loss (gain) on transfer of other real estate
owned and repossessed property................. -- (102,537) --
Loss (gain) on sale of securities................ (60,073) (6,673) (12,408)
Loss (gain) on sale of premises and equipment.... (6,748) --
Decrease (increase) in interest receivable....... (8,669) (191,597) (24,628)
Decrease (increase) in prepaid expenses.......... (79,391) 29,372 (194,977)
Increase (decrease) in accrued liabilities....... (56,417) 538,422 (136,643)
------------ ------------ ------------
$ 2,003,520 $ 1,941,833 $ 677,498
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE> 170
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation:
On October 15, 1998, XEON Financial Corp. ("XEON") acquired Nevada Banking
Company (the "Bank") in a business combination accounted for as a pooling of
interest. Nevada Banking Company became a wholly owned subsidiary of XEON
through the exchange of 2,821,240 shares of XEON's common stock for 100% of the
outstanding shares of the Bank. Significant intercompany accounts and
transactions have been eliminated in the consolidation. The accompanying
financial statements for 1998 are based on the assumption that the companies
were combined for the entire year, and financial statements of prior years have
been restated to give effect to the combination.
Nature of Operations:
Nevada Banking Company is a Nevada State Chartered Bank. Nevada Banking
Company grants real estate, construction, commercial and installment loans to
customers primarily in the Lake Tahoe/Gardnerville area. The Bank also grants
loans in the Stateline-Wendover and Las Vegas, Nevada areas. Although the Bank
has a diversified loan portfolio with sufficient collateral on a significant
portion of that portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the economic conditions in these areas.
The accounting and reporting policies of XEON Financial Corp. and
Subsidiary (Company) are in conformity with generally accepted accounting
principles and general practices within the banking industry. The following is a
description of the most significant of these policies.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
Company's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available to them
D-6
<PAGE> 171
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
at the time of their examination. Because of these factors, it is reasonably
possible that the allowances for losses on loans and foreclosed real estate may
change materially in the near term.
Cash:
Cash includes cash on hand, amounts due from banks with original maturities
of three months or less and money market funds.
Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents includes
cash and federal funds sold.
Investment in Securities:
Management adopted Statement of Financial Accounting Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, on
January 1, 1994 and, therefore, determines the appropriate classification of
securities at the time of purchase. For the years ended December 31, 1998, 1997
and 1996, the Company had no investments classified as trading or held to
maturity securities.
The Company's investments in securities are classified and accounted for as
follows:
SECURITIES AVAILABLE FOR SALE. Securities available for sale consist of
bonds, notes and debentures not classified as trading securities nor as
securities to be held to maturity. Premiums and discounts are recognized
in interest income using the interest method over the period to
maturity.
Unrealized holding gains and losses, net of tax, on securities available
for sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
Loans:
Loans, including the unamortized balance of loan origination, commitment,
and other fees and costs are stated at the principal amount outstanding. Net
deferred loan fees and the allowance for credit losses are shown as reductions
of loans.
Allowance for Credit Losses:
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, current economic conditions, the
risk characteristics of various categories of loans and other pertinent factors.
Credits deemed uncollectible are
D-7
<PAGE> 172
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
charged to the allowance. Provisions for credit losses and recoveries on loans
previously charged off are added to the allowance.
Loan Origination Fees:
Loan origination and commitment fees in excess of certain related costs are
being deferred and amortized as an adjustment of the related loan's yield, over
the contractual life of the loan using methods that approximate the effective
interest method. Amortization of deferred loan fees is discontinued when a loan
is placed on nonaccrual status.
Premises and Equipment:
Premises and equipment including leasehold improvements are stated at cost
less accumulated depreciation and amortization. Provisions for depreciation and
amortization included in operating expenses are computed according to the
straight-line method. Estimated useful lives range from two to twenty years for
furniture, fixtures, equipment and leasehold improvements and forty years for
buildings. Maintenance, repairs and minor replacements are expensed when
incurred. Gains and losses on routine dispositions are reflected in current
operations.
Other Real Estate Owned:
Other real estate owned is included in other assets on the balance sheets
and includes foreclosures, property acquired in forgiveness of debt, and
property initially purchased for expansion but now being marketed for sale.
These properties are generally carried at the lower of cost or current appraisal
adjusted for writedowns mandated by Nevada statute. Losses arising from the
acquisition of property in full or partial satisfaction of loans are treated as
loan losses.
Income Taxes:
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
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.
Interest Income on Loans:
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans including unamortized fees
is discontinued when, in the opinion of management, there is an indication that
the borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received.
D-8
<PAGE> 173
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Advertising Costs:
The Company incurs expenses for nondirect response advertising. The costs
associated with the advertisements are capitalized when incurred and expensed
when the advertisement takes place.
Dividends:
In accordance with Nevada Revised Statutes, the Company's dividend policy
prohibits payments of dividends in excess of its retained earnings.
Off Balance Sheet Financial Instruments:
In the ordinary course of business, the Company has entered into off
balance sheet financial instruments consisting of commitments to extend credit
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
Earnings Per Share:
The Company employs the weighted average method to compute earnings per
share.
Reclassification:
The prior years' financial statements have been reclassified where
applicable, to conform to the current year presentation.
NOTE 2 -- INVESTMENT SECURITIES:
In conjunction with the adoption of SFAS No. 115, the investment securities
portfolio at December 31, 1998 and 1997 was comprised of securities classified
as available for sale, resulting in securities being carried at market value
adjusted for amortization of premiums
D-9
<PAGE> 174
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
and accretions of discounts. The amortized cost and fair values of investment
securities available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Government and Agency
Securities............... $ 1,543,272 $ 17,628 $ (3,684) $ 1,557,216
Municipal Securities........ 6,999,531 186,371 (19,684) 7,166,218
Mortgage-backed
Securities............... 13,119,432 40,857 (86,598) 13,073,691
----------- -------- --------- -----------
$21,662,235 $244,856 $(109,966) $21,797,125
=========== ======== ========= ===========
December 31, 1997:
U.S. Treasury Securities.... $ 149,950 $ 50 $ -- $ 150,000
U.S. Government and Agency
Securities............... 2,048,210 7,663 (4,258) 2,051,615
Municipal Securities........ 6,611,665 175,976 (181) 6,787,460
Mortgage-backed
Securities............... 10,041,022 39,076 (41,846) 10,038,252
----------- -------- --------- -----------
$18,850,847 $222,765 $ (46,285) $19,027,327
=========== ======== ========= ===========
</TABLE>
The amortized cost and fair values of investment securities available for
sale by expected maturity at December 31, 1998 are shown below. Maturities of
mortgage-backed securities are classified in accordance with the contractual
repayment schedules. Expected maturities will differ from the contractual
maturities reported above, because debt security issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
---------------------------------
AMORTIZED FAIR
COST VALUE YIELD
----------- ----------- -----
<S> <C> <C> <C>
December 31, 1998:
Within one year........................... $ 3,389,093 $ 3,372,298 5.748
After one year but within five years...... 7,131,431 7,162,360 5.920
After five years but within ten years..... 7,192,988 7,312,735 5.407
After ten years........................... 3,948,723 3,949,732 6.337
----------- ----------- -----
$21,662,235 $21,797,125 5.798
=========== =========== =====
</TABLE>
Investment securities available for sale with a carrying value of
$1,301,568 and $0, at December 31, 1998 and 1997, respectively, were pledged to
secure public deposits and for other purposes required or permitted by law.
Proceeds from sales of investment securities available for sale during 1998
were $5,557,088. Gross gains and losses on those sales were $66,024 and $5,951,
respectively.
Proceeds from sales of investment securities available for sale during 1997
were $4,239,854. Gross gains and losses on those sales were $12,932 and $6,259,
respectively.
D-10
<PAGE> 175
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Proceeds from sales of investment securities available for sale during 1996
were $6,323,904. Gross gains and losses on those sales were $39,532 and $27,124,
respectively.
NOTE 3 -- LOANS:
The composition of the Company's loan portfolio at December 31, 1998 and
1997 is summarized below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Real estate -- mortgage................... $ 2,011,627 $ 2,463,058
Real estate -- construction............... 24,704,672 18,103,268
Commercial................................ 46,953,721 35,050,538
Installment............................... 7,569,638 9,536,777
All other loans........................... 6,013,030 6,148,236
----------- -----------
87,252,688 71,351,877
Deferred loan fees........................ (296,185) (324,955)
----------- -----------
$86,956,503 $71,026,922
=========== ===========
</TABLE>
Loans with a carrying value of approximately $10,471,000 and $11,794,000 at
December 31, 1998 and 1997, respectively, were pledged to secure the line of
credit with FHLB. (See, Note 7.)
NOTE 4 -- ALLOWANCE FOR CREDIT LOSSES:
Changes in the allowance for credit losses for the years ended December 31,
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
BALANCE, Beginning of Year................. $1,239,662 $ 968,074 $789,744
---------- ---------- --------
Loans charged off........................ (27,199) (15,745) (13,227)
Recoveries of loans previously charged
off................................... 10,636 7,333 11,557
---------- ---------- --------
Net loans charged off................. (16,563) (8,412) (1,670)
Amounts charged to operating
expense............................. 75,000 280,000 180,000
---------- ---------- --------
BALANCE, End of Year....................... $1,298,099 $1,239,662 $968,074
========== ========== ========
</TABLE>
Impairment of loans having carrying values of $496,263 and $11,927 at
December 31, 1998 and 1997, respectively, has been recognized in conformity with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures. The total allowance for credit losses related to
those loans was $125,300 and $5,000 at December 31, 1998 and 1997, respectively.
For impairment recognized in conformity with SFAS No. 114, the entire change in
present value of expected cash flows is reported as provision for credit losses
in the same manner in which impairment initially was recognized or as a
reduction in the amount of provision for credit losses that otherwise would be
reported.
D-11
<PAGE> 176
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
During 1998 and 1997, the average recorded investment in impaired loans was
insignificant. The amount of interest income recognized during 1998 and 1997 on
impaired loans was approximately $0, since cash receipts on impaired loans are
recognized as a reduction of the loan investment.
The risk of loss varies with the type of loan being made and the financial
condition of the borrower throughout the term of the loan.
NOTE 5 -- PREMISES AND EQUIPMENT:
Premises and equipment consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land........................................ $ 225,000 $ 225,000
Leasehold improvements...................... 1,222,186 1,103,459
Furniture, fixtures and equipment........... 2,201,285 2,341,835
Building.................................... 610,072 622,527
---------- ----------
4,258,543 4,292,821
Less: Accumulated depreciation............ 1,101,253 1,629,417
---------- ----------
$3,157,290 $2,663,404
========== ==========
</TABLE>
Depreciation expense was $412,534, $293,452 and $206,578, for the years
ended December 31, 1998, 1997, and 1996, respectively.
NOTE 6 -- DEPOSITS:
At December 31, 1998, the scheduled maturities of CDs of $100,000 and over
are as follows:
<TABLE>
<S> <C>
1999.......................................... $12,547,191
2000.......................................... 639,518
2001.......................................... 269,614
2002.......................................... 540,826
2003 and thereafter........................... --
-----------
$13,997,149
</TABLE>
NOTE 7 -- INVESTMENT IN AND ADVANCES FROM FEDERAL HOME LOAN BANK:
In 1997, the Bank became a member of the Federal Home Loan Bank (FHLB) and
as such, was required to invest in FHLB stock.
In 1997, the Bank was also eligible to obtain advances from the FHLB, up to
$8,000,000. At December 31, 1998, $1,000,000 was owed to FHLB, with no amounts
outstanding at December 31, 1997. The line of credit accrues interest at an
average rate of 5.76% and matures in February 8, 1999. The line is secured by
specific mortgage loans pledged to the FHLB. (See, Note 3.)
D-12
<PAGE> 177
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 -- CAPITAL STRUCTURE:
The Company has one class of stock -- common stock. Stockholders are
entitled to one vote per share owned. In addition, stockholders are entitled to
receive dividends and share in distribution of the corporation upon either
partial or final liquidation or dissolution.
In 1996, the Company implemented a Qualified and Non-Qualified Stock Option
Plan. (See, Note 14.)
NOTE 9 -- OTHER OPERATING EXPENSES:
The major categories of other operating expenses for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Office supplies.......................... $ 212,737 $199,830 $161,820
Professional services.................... 175,058 135,328 123,643
Business development..................... 129,980 80,113 59,815
Other operating expenses................. 689,467 572,558 406,257
---------- -------- --------
$1,207,232 $987,829 $751,535
========== ======== ========
</TABLE>
NOTE 10 -- INCOME TAXES:
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Current federal income tax expense....... $ 742,582 $525,101 $392,303
Deferred federal income tax expense...... (16,657) 71,705 (39,406)
---------- -------- --------
$ 725,925 $596,806 $352,897
========== ======== ========
</TABLE>
A reconciliation of income tax at the statutory rate to the Bank's
effective rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate......................................... 34.0% 34.0% 34.0%
Compensation on stock options.......................... (0.8)% 0.0% 0.0%
Tax-exempt interest income............................. (5.0)% (5.4)% (7.0)%
Book gain in excess of tax gain on fixed assets
disposed of.......................................... (1.4)% 0.0% 0.0%
Earnings on deferred bonus trust....................... 0.2% 0.2% 0.0%
Excess of financial reporting provision for credit
losses over tax basis................................ 1.0% 5.4% 6.4%
Other, net............................................. 1.5% 0.9% 1.5%
---- ---- ----
29.6% 35.1% 34.9%
==== ==== ====
</TABLE>
D-13
<PAGE> 178
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Deferred income taxes result from temporary differences in the basis of
assets and liabilities for financial reporting and income taxes. The source of
these temporary differences and their resulting effect on income tax expense are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Provision for credit losses................ $(25,500) $(95,200) $(61,200)
Change in valuation allowance.............. 14,590 62,223 29,652
Depreciation............................... 8,393 30,804 31,956
Valuation of available-for-sale
securities............................... (14,140) 73,878 (39,814)
-------- -------- --------
$(16,657) $ 71,705 $(39,406)
======== ======== ========
</TABLE>
Significant components of the deferred tax liabilities and assets at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................ $162,587 $154,194
Valuation of available-for-sale
securities............................... 45,863 60,003
-------- --------
208,450 214,198
-------- --------
Deferred tax assets:
Excess of financial reporting provision
for credit losses over tax basis....... 411,474 385,974
Less: Valuation allowance................ 244,606 230,015
-------- --------
166,868 155,969
-------- --------
Net deferred tax liability.......... $ 41,582 $ 58,239
======== ========
</TABLE>
NOTE 11 -- OPERATING LEASES:
The Company leases its main branch building under a non-cancelable
operating lease that expires December 29, 2007. The agreement provides for
minimum lease payments with a renewal option. Minimum lease payments adjust
annually (each January) based on the Consumer Price Index.
The Company leases its Incline Village branch building under a
non-cancelable operating lease that expires December 31, 2000. The agreement
provides for minimum lease payments, right of first refusal and an option to
purchase the property. Minimum lease payments are adjusted upward three percent
annually.
The Company leases the space for its operations center under a
non-cancelable operating lease that expires July 31, 2000. Minimum lease
payments are adjusted upward annually (each August).
The Company leases its Incline Village branch loan office under a
non-cancelable operating lease that expires May 31, 2001. Minimum lease payments
are comprised of monthly base rent plus proportionate share of the common area
maintenance costs. Base rent is adjusted by a minimum of three percent to a
maximum of five percent annually.
D-14
<PAGE> 179
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following is a schedule of future minimum lease payments required under
these leases:
<TABLE>
<S> <C>
Year Ending December 31:
1999......................................... $ 292,598
2000......................................... 284,362
2001......................................... 217,271
2002......................................... 206,976
2003......................................... 206,976
Later years.................................. 827,904
----------
$2,036,087
==========
</TABLE>
Rent expense was $305,979, $264,583 and $224,221 for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 12 -- STOCK DIVIDEND
The Company declared a 100% stock dividend to shareholders of record as of
February 20, 1998. All references to number of shares, number of stock options
and per share information, except for authorized shares, have been adjusted to
reflect the stock dividend on a retroactive basis to all prior periods
presented.
NOTE 13 -- EARNINGS PER SHARE:
Basic earnings per share and diluted earnings per share have been computed
based on the following:
<TABLE>
<CAPTION>
1998
-------------------------------
COMMON
INCOME SHARES
NUMERATOR DENOMINATOR EPS
---------- ----------- ----
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders.... $1,727,284 2,807,622 $.62
====
Dilutive Effect of Potential Common Stock:
Stock options.............................. -- 467,200
---------- ----------
Diluted EPS:
Income available to common shareholders
after assumed conversions of dilutive
securities.............................. $1,727,284 3,274,822 $.53
========== ========== ====
</TABLE>
D-15
<PAGE> 180
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1997
-------------------------------
COMMON
INCOME SHARES
NUMERATOR DENOMINATOR EPS
---------- ----------- ----
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders.... $1,101,394 2,779,315 $.40
====
Dilutive Effect of Potential Common Stock:
Stock options.............................. -- 448,600
---------- ----------
Diluted EPS:
Income available to common shareholders
after assumed conversions of dilutive
securities.............................. $1,101,394 3,227,915 $.34
========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------
COMMON
INCOME SHARES
NUMERATOR DENOMINATOR EPS
---------- ----------- ----
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders.... $ 659,576 2,722,875 $.24
====
Dilutive Effect of Potential Common Stock:
Stock options.............................. -- 384,800
---------- ----------
Diluted EPS:
Income available to common shareholders
after assumed conversions of dilutive
securities.............................. $ 659,576 3,107,675 $.21
========== ========== ====
</TABLE>
NOTE 14 -- STOCK OPTION PLAN:
The Company implemented a Qualified Stock Option Plan effective May 15,
1996 that provides for a maximum of 450,000 shares to be granted to qualified
participants. On July 15, 1998, the Board approved the transfer of 100,000
shares from the non-qualified stock option plan to the qualified stock option
plan, providing for a maximum of 550,000 shares authorized. The option price is
not to be less than the fair market value of the common stock on the date of
grant. Each option is exercisable by the optionee at any time within five years
from the date of the grant; however, the ability to exercise the options vest at
the rate of 20% annually. At December 31, 1998 and 1997, 147,860 options and
78,000 options, respectively, were eligible to be exercised by the optionee.
D-16
<PAGE> 181
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
Activity in the Qualified Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PER SHARE
OF SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1995.............. -- --
Granted....................................... 360,000 2.375
Exercised..................................... -- --
Cancelled..................................... -- --
------- -----
Outstanding at December 31, 1996.............. 360,000 2.375
Granted....................................... 70,000 4.018
Exercised..................................... -- --
Cancelled..................................... 20,000 2.375
------- -----
Outstanding at December 31, 1997.............. 410,000 2.655
Granted....................................... 31,300 9.145
Exercised..................................... 8,600 2.662
Cancelled..................................... 100 9.625
------- -----
Outstanding at December 31, 1998.............. 432,600 3.123
======= =====
</TABLE>
The Company also implemented a Non-Qualified Stock Option Plan effective
May 15, 1996 for the board members for their participation in regularly
scheduled board and committee meetings. On July 15, 1998, the Board approved the
transfer of 100,000 shares from the non-qualified stock option plan to the
qualified stock option plan resulting in a reduction of total options available
under the non-qualified stock option plan to 282,272. Each board member may be
granted 200 options for attendance at board meetings and 200 options for
attendance at committee meetings.
Activity in the Non-Qualified Stock Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER PER SHARE
OF SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding at December 31, 1995.............. -- --
Granted....................................... 24,800 2.375
Exercised..................................... -- --
Cancelled..................................... -- --
------- -----
Outstanding at December 31, 1996.............. 24,800 2.375
Granted....................................... 27,200 2.375
Exercised..................................... 13,400 2.375
Cancelled..................................... -- --
------- -----
Outstanding at December 31, 1997.............. 38,600 2.375
Granted....................................... 28,600 3.063
Exercised..................................... 32,600 2.662
Cancelled..................................... -- --
------- -----
Outstanding at December 31, 1998.............. 34,600 2.673
======= =====
</TABLE>
D-17
<PAGE> 182
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The Company applies APB Opinion 25 in accounting for its stock compensation
plan. Accordingly, no compensation cost has been recognized in 1998, 1997 or
1996. Had compensation cost been determined on the basis of fair value pursuant
to SFAS No. 123, Accounting for Stock-Based Compensation, net income and
earnings per share would have been reduced as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Net income:
As reported........................... $1,727,284 $1,101,394 $659,576
========== ========== ========
Pro forma............................. $1,494,604 $ 937,749 $647,476
========== ========== ========
Basic earnings per share:
As reported........................... $ .62 $ .40 $ .24
========== ========== ========
Pro forma............................. $ .53 $ .34 $ .24
========== ========== ========
Diluted earnings per share:
As reported........................... $ .53 $ .34 $ .21
========== ========== ========
Pro forma............................. $ .46 $ .29 $ .21
========== ========== ========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
an option-pricing model with the following weighted-average assumptions used for
grants in 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield................................. 0.0% 0.0% 0.0%
Expected volatility............................ 85.31% 53.57% 11.39%
Risk free interest rate........................ 4.68% 6.20% 6.20%
Expected lives................................. 5 years 5 years 5 years
</TABLE>
NOTE 15 -- DEFERRED BONUS PLAN:
The Company adopted a Deferred Bonus Plan effective as of December 31,
1993, which is an unfunded, deferred compensation program for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees. The program is not qualified under Section 401 of the
Internal Revenue Code. Participants are vested in all deferred bonus amounts and
earnings thereon in excess of 50% of their allocation of the bonus for each
year. The remainder of the bonus allocation deferred vests at 10% per year and
is fully vested after ten years of service from the effective date of this plan.
Vested plan benefits shall be paid upon the earlier of 10 years from the
effective date of this Plan, termination of employment, death, or permanent
disability. All Plan benefits are to be paid from the general assets of the
Company set aside in the Deferred Bonus Trust.
NOTE 16 -- EMPLOYEE BENEFIT PLAN:
Effective May 1994, the Company maintains a qualified cash or deferred
compensation plan under Section 401(k) of the Internal Revenue Code. Under the
Plan, employees may elect to defer up to twelve percent (12%) of their salary,
subject to Internal Revenue Code limits. The Company contributes a matching
fifty percent (50%) of the employees'
D-18
<PAGE> 183
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
contributions; not to exceed eight percent (8%) of the employees' salaries. On
September 30, 1998, the Plan was amended to change the Plan's provisions
governing employer matching contributions from the fixed formula presented in
the preceding sentence. Effective October 1, 1998, employer matching
contributions made in relation to employee salary deferrals will be
discretionary by the employer. Company contributions to the Plan charged to
operations were not material for the years ended December 31, 1998, 1997 and
1996.
NOTE 17 -- EMPLOYEE STOCK OWNERSHIP PLAN:
Effective January 1, 1998, the Company adopted an Employee Stock Ownership
Plan (ESOP), the purpose of which is to enable all employees who meet certain
minimum hour and other requirements, to participate in the Plan and share in the
growth of the Company through acquisition of stock. Contributions to this Plan
are at the discretion of the Company's management and are in the form of company
stock. All shares of the Company stock contributed, 2,000 shares for the year
ended December 31, 1998, are contributed at their fair value, and are accounted
for as a reduction of income in the year accrued.
NOTE 18 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the ordinary course of business, the Company enters into various types
of transactions which involve financial instruments with off-balance sheet risk.
These instruments include commitments to extend credit and standby letters of
credit and are not reflected in the accompanying balance sheet. These
transactions may involve, to varying degrees, credit and interest rate risk in
excess of the amount, if any, recognized in the balance sheet.
The Bank has not incurred any losses on its commitments in 1998, 1997 or
1996 and management does not anticipate any loss to result from these
commitments; however, in case of default, legal action may be required to
enforce its rights to collateral pledged to secure these commitments. The Bank's
off-balance sheet credit risk exposure is the contractual amount of commitments
to extend credit and standby letters of credit. The Bank applies the same credit
standards to these contracts as it uses in its lending process, including the
requirement for collateral.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Financial instruments whose
contractual amount represented
risk:
Commitments to extend credit..... $24,743,859 $27,425,616 $17,468,231
=========== =========== ===========
Standby letters of credit........ $ 735,419 $ 1,513,598 $ 350,500
=========== =========== ===========
</TABLE>
NOTE 19 -- CONTINGENCIES AND COMMITMENTS:
Because of the nature of its business, the Company is often a defendant in
legal actions. Based upon advice of counsel, management does not anticipate that
the final outcome of any litigation in process or anticipated will have a
materially adverse effect on its operations or financial condition.
D-19
<PAGE> 184
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20 -- RELATED PARTY TRANSACTIONS:
At December 31, 1998, 1997 and 1996 officers, directors and significant
shareholders of the Company were indebted to the Company in the aggregate
amounts of $733,340, $669,972 and $710,285, respectively. New loans to such
related parties amounted to $507,477, $30,075 and $540,004; and repayments
amounted to $444,109, $70,388 and $658,542 during the years ended December 31,
1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, deposits of
its officers, directors and significant shareholders totaled $1,760,376 and
$2,123,527, respectively.
The loans mentioned above were made on substantially the same terms,
including interest rates, as those prevailing at the time for comparable
transactions with other persons who were not directors, officers or significant
shareholders, and did not involve more than a normal risk of collectability or
present other unfavorable features.
Certain directors, officers and significant shareholders of the Company and
their associates were customers of, and had other transactions with, the
customers in the ordinary course of business during 1998, 1997 and 1996.
The Company is a party to the sale leaseback concerning the property which
comprises the main branch at 229 Kingsbury Grade, Stateline, Nevada. The lessor
is indebted to the Company for $1,110,987 with monthly payments of $9,763.
Details of the lease are contained in Note 11.
NOTE 21 -- REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on the 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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of January 31, 1997, the most recent notification from the Federal
Deposit Insurance Company categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as
D-20
<PAGE> 185
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the table
below.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS
------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets).............................. $11,199,033 12.4% $$7,237,819 $ 8.0% $$9,047,274 $ 10.0%
Tier I Capital (to Risk Weighted
Assets).............................. $10,068,124 11.2% $$3,618,909 $ 4.0% $$5,428,364 $ 6.0%
Tier I Capital (to Average Assets)..... $10,068,124 8.1% $$3,730,080 $ 3.0% $$6,216,800 $ 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets).............................. $ 9,248,747 12.6% $$5,882,581 $ 8.0% $$7,353,226 $ 10.0%
Tier I Capital (to Risk Weighted
Assets).............................. $ 8,329,594 11.3% $$2,941,291 $ 4.0% $$4,411,936 $ 6.0%
Tier I Capital (to Average Assets)..... $ 8,329,594 8.1% $$4,116,440 $ 4.0% $$5,145,550 $ 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets).............................. $ 8,170,061 16.6% $$3,941,526 $ 8.0% $$4,926,907 $ 10.0%
Tier I Capital (to Risk Weighted
Assets).............................. $ 7,201,987 14.6% $$1,970,763 $ 4.0% $$2,956,144 $ 6.0%
Tier I Capital (to Average Assets)..... $ 7,201,987 9.9% $$2,908,440 $ 4.0% $$3,635,550 $ 5.0%
</TABLE>
NOTE 22 -- CONCENTRATION OF CREDIT:
The majority of the Company's loans and commitments have been granted to
customers in the Company's market area. Most all borrowers are also depositors
of the Company. The concentrations of credit by type of loan are set forth in
Note 3. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. The Company, as a matter of policy, does not
extend credit to any single borrower or group of related borrowers in excess of
their legal lending limit at the time the loan is originated.
NOTE 23 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107 Disclosures about Fair Values of Financial
Instruments,requires disclosure of information about the fair value of financial
instruments for which it is practicable to estimate a value, whether or not
required in the statement of condition. Whenever possible, quoted market prices
are used to estimate fair values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Therefore, in many cases, the estimated fair values may not be realized
in an immediate sale of the instruments.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate of the
estimated fair value amounts is not intended to represent the underlying value
of the Corporation.
D-21
<PAGE> 186
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents:
The carrying amounts reported in the statement of financial condition for
cash and cash equivalents approximate those assets' fair value.
Interest-Bearing Deposits:
Fair values for interest-bearing deposits in domestic financial
institutions are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable instruments.
Available for Sale Securities:
Fair values for investment in available for sale securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for comparable
instruments.
Federal Home Loan Bank Stock:
The fair value of the Federal Home Loan Bank stock is based on cost, which
approximates market.
Loans Receivable:
For variable rate loans the reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values of fixed rate loans are estimated using discounted cash flow analysis,
based on interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include judgments
regarding future expected loss experience and risk characteristics. Accrued
interest receivable approximates its fair value.
Deposit Liabilities:
The fair values disclosed for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date (carrying amounts). The
carrying amounts of variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at the reporting date. The
fair values for fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities on
such time deposits. The carrying amount of accrued interest payable approximates
fair value.
D-22
<PAGE> 187
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents..... $ 14,236,102 $ 14,236,102 $ 11,128,603 $ 11,128,603
Interest-bearing deposits..... 1,090,000 1,090,000 1,090,990 1,090,990
Available for sale
securities................. 21,797,125 12,797,125 19,027,327 19,027,327
Federal Home Loan Bank
stock...................... 390,300 390,300 312,831 312,831
Loans receivable, net......... 85,658,404 88,841,000 69,787,260 72,221,000
------------ ------------ ------------ ------------
Total Asset Financial
Instruments.............. $123,171,931 $126,354,527 $101,347,011 $103,780,751
============ ============ ============ ============
Liabilities:
Deposits...................... $115,673,407 $115,899,000 $ 96,377,700 $ 96,531,000
Federal Home Loan Bank
Borrowings................. 1,000,000 1,000,000 -- --
------------ ------------ ------------ ------------
Total Liability Financial
Instruments.............. $116,673,407 $116,899,000 $ 96,377,700 $ 96,531,000
============ ============ ============ ============
</TABLE>
The carrying amounts in the preceding table are included in the statement
of financial condition under the applicable captions.
NOTE 24 -- PARENT COMPANY STATEMENTS:
The parent company was formed during 1998, therefore, no parent company
statements are presented for years prior to 1998.
<TABLE>
<S> <C>
Condensed Balance Sheet:
Assets:
Cash................................................... $ 88
Investment in subsidiary............................... 10,158,412
Due from subsidiary.................................... 28,288
-----------
Total Assets...................................... $10,186,788
===========
Liabilities and Stockholders' Equity:
Liabilities:
Dividends payable...................................... $ 28,288
-----------
Stockholders' equity...................................... 10,158,500
-----------
Total Liabilities and Stockholders' Equity........ $10,186,788
===========
Condensed Statement of Income:
Revenues:
Cash dividends from bank subsidiary.................... $ 65,788
Income from subsidiary................................. 1,698,907
-----------
Total Revenues.................................... 1,764,695
-----------
</TABLE>
D-23
<PAGE> 188
XEON FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<S> <C>
Expenses:
Other expenses......................................... $ 37,411
-----------
Total Expenses.................................... 37,411
-----------
Income before income taxes............................. 1,727,284
Income tax benefit/(expense)........................... --
-----------
Net Income........................................ $ 1,727,284
===========
Condensed Statement of Cash Flows:
Cash flows from operating activities
Cash paid to suppliers............................ $ (36,375)
Interest paid..................................... (1,036)
Dividends received................................ 37,500
-----------
Net Cash Provided by Operating Activities.............. 89
-----------
Cash flows from investing activities
Purchase of stock of subsidiary............................. (20,938)
-----------
Net Cash Used by Investing Activities.................. (20,938)
Cash flows from financing activities
Proceeds from sale of common stock.......................... $ 20,937
-----------
Net Cash Provided by Financing Activities.............. 20,937
Net Increase in Cash and Cash Equivalents.............. 88
Cash and Cash Equivalents, Beginning of Year................ --
-----------
Cash and Cash Equivalents, End of Year...................... $ 88
===========
Reconciliation of Net Income to Net Cash Provided by
Operating Activities
Net income................................................ $ 1,727,284
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed earnings of subsidiary................... (1,698,907)
Change in due from subsidiary.......................... (28,288)
-----------
$ 89
===========
</TABLE>
NOTE 25 -- OTHER MATTERS:
On December 30, 1998, XEON Financial Corp. announced it had reached an
agreement to be acquired by First Security Corporation. The acquisition is
contingent upon stockholder and regulatory approval.
D-24
<PAGE> 189
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware contains detailed
provisions on indemnification of directors and officers of a Delaware
corporation against expenses, judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with litigation.
The Certificate of Incorporation of First Security Corporation provides for
indemnification of directors and officers to the full extent permitted or
allowed by the laws of the State of Delaware, as such laws exist or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the registrant to provide broader indemnification
rights than permitted or allowed by Section 145). The registrant also insures
its officers and directors to the full extent permitted by Section 145.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The Registration Statement includes the following Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
2 Agreement and Plan of Reorganization dated as of December
29, 1998, by and among First Security Corporation, First
Security Bank of Nevada, XEON Financial Corp. and Nevada
Banking Company (included as Appendix A to the
Prospectus/Proxy Statement.
3(1) Certificate of Incorporation, as amended (Exhibit 3.1 to
First Security's Registration Statement on Form S-4, Reg
#333-30045, filed July 24, 1990, incorporated by reference).
3(2) Bylaws of First Security, as amended Jan. 26, 1998 (Exhibit
3.2 to First Security's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
4(1) No instruments defining the rights of holders of long-term
debt of First Security and its subsidiaries have been
included as exhibits because the total amount of
indebtedness authorized under any such instrument does not
exceed 10% of the total assets of First Security and its
subsidiaries on a consolidated basis.
4(2) Rights Agreement between First Security and First Security
Bank, N.A., dated Aug. 28, 1990, which includes: Exhibit A,
the form of Rights Certificate and the form of Election of
Exercise; Exhibit B, the form of Certificate of Designation
of First Security's Junior Series B Preferred Stock, no par
value per share; and Exhibit C, the Summary of Rights
(Exhibit 4 to First Security's Current Report on Form 8-K,
dated Aug. 28, 1990, filed Sept. 1, 1990, incorporated by
reference) and as amended and extended in 1998. (See,
Exhibit 4 to First Security's Current Report of Form 8-K,
dated November 2, 1998, incorporated by reference.)
4(3) Amendment Agreement between First Security and First
Security Bank, N.A., dated Sept. 26, 1990, amending the
Rights Agreement between the same parties dated Aug. 28,
1990, (Exhibit 1 to First Security's Amendment #1 on Form
8-A, dated Oct. 10, 1990, filed Oct. 16, 1990, amending
First Security's Report on Form 8-K, dated Aug. 28, 1990,
filed Sept. 1, 1990, incorporated by reference).
</TABLE>
II-1
<PAGE> 190
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
4(4) Amendments to Rights Plan, filed in Registrant's Current
Report on Form 8-K dated November 11, 1998 (incorporated by
reference).
5. Opinion of Ray, Quinney & Nebeker as to the legality of the
shares being registered.
8. Opinion of Ray, Quinney & Nebeker re: Tax Matters.
10(1) Amended and Restated First Security Comprehensive Management
Incentive Plan (Exhibit 10.1 to First Security's Annual
Report on Form 10-K for the year ended Dec. 31, 1994,
incorporated by reference).
10(2) Employment Agreement between First Security and Spencer F.
Eccles, dated Oct. 16, 1996 (Exhibit 10.3 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(3) Employment Agreement between First Security and Morgan J.
Evans, dated Oct. 16, 1996 (Exhibit 10.4 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed
Feb. 13, 1997, incorporated by reference).
10(4) Employment Agreement between First Security and Michael P.
Caughlin, dated Oct. 16, 1996 (Exhibit 10.9 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(5) Employment Agreement between First Security and Brad D.
Hardy, dated Oct. 16, 1996 (Exhibit 10.8 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed
Feb. 13, 1997, incorporated by reference).
10(6) Employment Agreement between First Security and Mark D.
Howell, dated Oct. 16, 1996 (Exhibit 10.10 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(7) Employment Agreement between First Security and J. Patrick
McMurray, dated Oct. 16, 1996 (Exhibit 10.6 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(8) Employment Agreement between First Security and L. Scott
Nelson, dated Oct. 16, 1996 (Exhibit 10.5 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(9) Employment Agreement between First Security and Scott C.
Ulbrich, dated Oct. 16, 1996 (Exhibit 10.7 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(10) The form of First Security's Deferred Compensation Plan
Deferral Election -- 01/01/95 -- 12/31/95 (Exhibit 10.10 to
First Security's Annual Report on Form 10-K for the year
ended Dec. 31, 1994, incorporated by reference).
13(1) First Security's Annual Report on Form 10-K for the year
ended December 31, 1997 (as amended and restated to give
effect to the California State Bank acquisition, which was
accounted for as a pooling of interests, as set forth in the
Current Report on Form 8-K, dated October 1, 1998) hereby
incorporated by reference [File No. 1-6906].
21. First Security's Subsidiaries (Exhibit 21 to First
Security's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated by reference).
23(1) Consent of Deloitte & Touche LLP for First Security.
23(2) Consent of Kafoury, Armstrong & Co. for XEON.
</TABLE>
II-2
<PAGE> 191
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
23(3) Consent of Ray, Quinney & Nebeker (filed as part of Exhibit
5 and Exhibit 8(1)).
24. Power of Attorney (included in signature pages of original
filing of Registration Statement).
99(1) Consent of Dain Rauscher Wessels.
99(2) Form of XEON stockholder Proxy Card.
99(3) Form of Letter to XEON Option Holders.
</TABLE>
ITEM 22. UNDERTAKINGS.
First Security hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "1933 Act"), each
filing of First Security's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (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, as amended), that is incorporated
by reference in the registration statement will be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
First Security hereby undertakes 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), 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.
First Security hereby undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the 1933 Act 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 1933 Act, each such post-effective amendment will be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time will be deemed to be the initial bona
fide offering thereof.
THE UNDERTAKING AS TO INDEMNIFICATION OF OFFICERS AND DIRECTORS REQUIRED TO
BE DISCLOSED BY ITEM 512(i) OF REGULATION S-K IS FOUND IN "COMPARATIVE RIGHTS OF
STOCKHOLDERS -- DIRECTORS LIABILITY" IN THE PROSPECTUS / PROXY STATEMENT.
First Security hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 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
effectiveness of the registration statement through the date of responding to
the request.
II-3
<PAGE> 192
First Security hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired, that was not the subject of and included in the registration statement
when it became effective.
First Security hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effectiveness of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment will be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time will be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 193
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, First Security
Corporation has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Salt Lake City, Utah,
on the day of April, 1999.
FIRST SECURITY CORPORATION
By: /s/ MORGAN J. EVANS
-----------------------------------
Morgan J. Evans
President and Chief Operating
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
A. Robert Thorup, Esq. and Brad D. Hardy, Esq. and each of them, his true and
lawful attorney-in-fact and agent, with full powers of substitution, for him and
in his name, place and stead, in any and all capacities, to sign and to file any
and all amendments, including pre- and/or post-effective amendments to this
Registration Statement, with the Securities and Exchange Commission, granting to
said attorney-in-fact full power and authority to perform any other act on
behalf of the undersigned required to be done in connection therewith.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the date or dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ SPENCER F. ECCLES Chairman and Chief
- ----------------------------------------------------- Executive Officer,
Spencer F. Eccles Director
/s/ MORGAN J. EVANS President and Chief
- ----------------------------------------------------- Operating Officer,
Morgan J. Evans Director
/s/ BRAD D. HARDY Executive Vice
- ----------------------------------------------------- President, General
Brad D. Hardy Counsel and Chief
Financial Officer
(Principal Financial
and Accounting Officer)
/s/ JAMES C. BEARDALL Director
- -----------------------------------------------------
James C. Beardall
/s/ RODNEY H. BRADY Director
- -----------------------------------------------------
Rodney H. Brady
</TABLE>
<PAGE> 194
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES E. BRUCE Director
- -----------------------------------------------------
James E. Bruce
/s/ THOMAS D. DEE II Director
- -----------------------------------------------------
Thomas D. Dee II
/s/ DR. DAVID P. GARDNER Director
- -----------------------------------------------------
Dr. David P. Gardner
/s/ ROBERT H. GARFF Director
- -----------------------------------------------------
Robert H. Garff
/s/ JAY DEE HARRIS Director
- -----------------------------------------------------
Jay Dee Harris
/s/ ROBERT T. HEINER Director
- -----------------------------------------------------
Robert T. Heiner
/s/ KAREN H. HUNTSMAN Director
- -----------------------------------------------------
Karen H. Huntsman
/s/ G. FRANK JOKLIK Director
- -----------------------------------------------------
G. Frank Joklik
/s/ B. Z. KASTLER Director
- -----------------------------------------------------
B. Z. Kastler
/s/ DR. J. BERNARD MACHEN Director
- -----------------------------------------------------
Dr. J. Bernard Machen
/s/ JOSEPH G. MALOOF Director
- -----------------------------------------------------
Joseph G. Maloof
/s/ MICHELE PAPEN-DANIEL, PH.D. Director
- -----------------------------------------------------
Michele Papen-Daniel, Ph.D.
/s/ SCOTT S. PARKER Director
- -----------------------------------------------------
Scott S. Parker
/s/ JAMES L. SORENSON Director
- -----------------------------------------------------
James L. Sorenson
/s/ HAROLD J. STEELE Director
- -----------------------------------------------------
Harold J. Steele
/s/ JAMES R. WILSON Director
- -----------------------------------------------------
James R. Wilson
</TABLE>
<PAGE> 195
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
2 Agreement and Plan of Reorganization dated as of December
29, 1998, by and among First Security Corporation, First
Security Bank of Nevada, XEON Financial Corp. and Nevada
Banking Company (included as Appendix A to the Prospectus/
Proxy Statement.
3(1) Certificate of Incorporation, as amended (Exhibit 3.1 to
First Security's Registration Statement on Form S-4, Reg
#333-30045, filed July 24, 1990, incorporated by reference).
3(2) Bylaws of First Security, as amended Jan. 26, 1998 (Exhibit
3.2 to First Security's Annual Report on Form 10-K for the
year ended Dec. 31, 1997, incorporated by reference).
4(1) No instruments defining the rights of holders of long-term
debt of First Security and its subsidiaries have been
included as exhibits because the total amount of
indebtedness authorized under any such instrument does not
exceed 10% of the total assets of First Security and its
subsidiaries on a consolidated basis.
4(2) Rights Agreement between First Security and First Security
Bank, N.A., dated Aug. 28, 1990, which includes: Exhibit A,
the form of Rights Certificate and the form of Election of
Exercise; Exhibit B, the form of Certificate of Designation
of First Security's Junior Series B Preferred Stock, no par
value per share; and Exhibit C, the Summary of Rights
(Exhibit 4 to First Security's Current Report on Form 8-K,
dated Aug. 28, 1990, filed Sept. 1, 1990, incorporated by
reference) and as amended and extended in 1998. (See,
Exhibit 4 to First Security's Current Report of Form 8-K,
dated November 2, 1998, incorporated by reference.)
4(3) Amendment Agreement between First Security and First
Security Bank, N.A., dated Sept. 26, 1990, amending the
Rights Agreement between the same parties dated Aug. 28,
1990, (Exhibit 1 to First Security's Amendment #1 on Form
8-A, dated Oct. 10, 1990, filed Oct. 16, 1990, amending
First Security's Report on Form 8-K, dated Aug. 28, 1990,
filed Sept. 1, 1990, incorporated by reference).
4(4) Amendments to Rights Plan, filed in Registrant's Current
Report on Form 8-K dated November 11, 1998 (incorporated by
reference).
5. Opinion of Ray, Quinney & Nebeker as to the legality of the
shares being registered.
8. Opinion of Ray, Quinney & Nebeker re: Tax Matters.
10(1) Amended and Restated First Security Comprehensive Management
Incentive Plan (Exhibit 10.1 to First Security's Annual
Report on Form 10-K for the year ended Dec. 31, 1994,
incorporated by reference).
10(2) Employment Agreement between First Security and Spencer F.
Eccles, dated Oct. 16, 1996 (Exhibit 10.3 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(3) Employment Agreement between First Security and Morgan J.
Evans, dated Oct. 16, 1996 (Exhibit 10.4 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed
Feb. 13, 1997, incorporated by reference).
10(4) Employment Agreement between First Security and Michael P.
Caughlin, dated Oct. 16, 1996 (Exhibit 10.9 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
</TABLE>
<PAGE> 196
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10(5) Employment Agreement between First Security and Brad D.
Hardy, dated Oct. 16, 1996 (Exhibit 10.8 to First Security's
Registration Statement on Form S-4, Reg #333-21759, filed
Feb. 13, 1997, incorporated by reference).
10(6) Employment Agreement between First Security and Mark D.
Howell, dated Oct. 16, 1996 (Exhibit 10.10 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(7) Employment Agreement between First Security and J. Patrick
McMurray, dated Oct. 16, 1996 (Exhibit 10.6 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(8) Employment Agreement between First Security and L. Scott
Nelson, dated Oct. 16, 1996 (Exhibit 10.5 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(9) Employment Agreement between First Security and Scott C.
Ulbrich, dated Oct. 16, 1996 (Exhibit 10.7 to First
Security's Registration Statement on Form S-4, Reg
#333-21759, filed Feb. 13, 1997, incorporated by reference).
10(10) The form of First Security's Deferred Compensation Plan
Deferral Election -- 01/01/95 -- 12/31/95 (Exhibit 10.10 to
First Security's Annual Report on Form 10-K for the year
ended Dec. 31, 1994, incorporated by reference).
13(1) First Security's Annual Report on Form 10-K for the year
ended December 31, 1997 (as amended and restated to give
effect to the California State Bank acquisition, which was
accounted for as a pooling of interests, as set forth in the
Current Report on Form 8-K, dated October 1, 1998) hereby
incorporated by reference [File No. 1-6906].
21. First Security's Subsidiaries (Exhibit 21 to First
Security's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated by reference).
23(1) Consent of Deloitte & Touche LLP for First Security.
23(2) Consent of Kafoury, Armstrong & Co. for XEON.
23(3) Consent of Ray, Quinney & Nebeker (filed as part of Exhibit
5 and Exhibit 8(1)).
24. Power of Attorney (included in signature pages of original
filing of Registration Statement).
99(1) Consent of Dain Rauscher Wessels.
99(2) Form of XEON stockholder Proxy Card.
99(3) Form of Letter to XEON Option Holders.
</TABLE>
<PAGE> 1
EXHIBIT 5
April 21, 1999
First Security Corporation XEON Financial Corp.
Attn: Morgan J. Evans, President Attn: John A. Schopf, Jr., CEO
79 South Main Street 229 Kingsbury Grade
Salt Lake City, Utah 84111 Stateline, Nevada 89449
Re: REGISTRATION AND ISSUANCE OF FIRST SECURITY CORPORATION COMMON
STOCK TO STOCKHOLDERS OF XEON FINANCIAL CORP.
Dear Messrs. Evans and Schopf:
This Firm has acted as counsel to First Security Corporation, a Delaware
corporation ("the Company), in connection with its registration of 1,976,471
shares of its common stock, par value $1.25 ("the Shares") for use in the merger
(as defined in the Prospectus/Proxy Statement included in the Company's
Registration Statement on Form S-4 as filed with the Securities and Exchange
Commission on April 21, 1999.)
In connection with this representation, we have examined the originals,
or copies identified to our satisfaction, of such minutes, agreements, corporate
records and filings and other documents necessary to our opinion contained in
this letter. We have also relied as to certain matters of fact upon
representations made to us by officers and agents of the Company and of XEON.
Based upon and in reliance on the foregoing, it is our opinion that:
1. The Company has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of the State of Delaware;
and has full corporate power and authority to own its properties and
conduct its business as described in the Prospectus/Proxy Statement
referred to above.
2. When issued and distributed to the Stockholders of XEON Financial
Corp. under the terms of the merger agreement, the Shares will be duly
and validly issued and will be fully paid and nonassessable.
3. The stockholders of the Company have no pre-emptive rights to acquire
additional shares of First Security common stock in respect of the
Shares.
We hereby consent to the use of our name in the Prospectus/Proxy
Statement and therein being disclosed as counsel to the Company in this matter.
Very truly yours,
RAY, QUINNEY & NEBEKER
By: /s/ A. ROBERT THORUP
-----------------------------------
A. Robert Thorup,
a Stockholder and Director of
the Firm
<PAGE> 1
EXHIBIT 8
April 21, 1999
First Security Corporation XEON Financial Corp.
Attn: Morgan J. Evans, President Attn: John A. Schopf, Jr., Chief
Executive Officer
79 South Main Street 229 Kingsbury Grade
Salt Lake City, Utah 84111 Stateline, Nevada 89449
Ladies and Gentlemen:
We have acted as counsel to First Security Corporation, a Delaware
corporation ("First Security"), in connection with the merger (the "Merger") of
XEON Financial Corp. ("XEON") with and into First Security Corporation, all as
fully described in that certain Merger Agreement, dated as of December 29, 1998
(the "Agreement"), by and among First Security, First Security Bank of Nevada,
XEON and Nevada Banking Company and in that certain S-4 Registration Statement
dated as of April 21, 1999 (the "Registration Statement"), to be filed with
the Securities and Exchange Commission. This opinion is delivered to you
pursuant to the Agreement. Unless otherwise defined herein, capitalized terms
will have the meanings given them in the Agreement. Further, all references to
the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended.
In connection with this opinion, we have reviewed a signed copy of the
Agreement, the Registration Statement and all other documents we have deemed
necessary or appropriate for purposes of this opinion. In addition, we expressly
rely upon the representations and facts set forth in the Agreement, the
Registration Statement, and in certificates of responsible officers of First
Security and of XEON concerning matters within the areas of responsibility of
such officers, dated April 21, 1999 and April 21, 1999, respectively (the
"Certificates"). If any of the representations and facts set forth in the
Agreement, the Registration Statement and the Certificates upon which this
opinion is based are not true and accurate, both on the date of this letter and
at the effective date of the merger, then we express no opinion. Further, our
opinion assumes that the merger will occur fully in accordance with the terms
and provisions of the Agreement insofar as they are pertinent to this opinion.
If it does not, then we express no opinion.
Based on the foregoing, and subject to the qualifications and exceptions
heretofore and hereafter set forth, it is our opinion that for Federal income
tax purposes:
1. The merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code.
2. No gain or loss will be recognized by the holders of XEON common
stock who exchange such stock for First Security common stock pursuant
to the merger (with the exception of gain recognized upon the receipt of
cash in lieu of fractional shares (see below)).
3. The basis of the First Security common stock received by the holders
of XEON common stock in the merger will be the same as the basis of XEON
common stock exchanged therefor, after appropriate reduction for the
basis of fractional shares for which cash is received.
4. The holding period of the First Security common stock received by the
holders of XEON common stock pursuant to the merger will include the
holding period of the XEON common stock surrendered in exchange
therefor, provided that the XEON common stock so surrendered was held as
a capital asset at the time of the exchange.
5. Any cash received by the holders of XEON common stock in lieu of a
fractional share of First Security common stock will be treated as
having been received in redemption of the fractional share so cashed
out, and will result in taxable gain or loss. The amount of such gain or
loss will be the difference between the cash received and the basis of
the fractional share interest surrendered in exchange therefor. Provided
the fractional share interest was held as a capital asset at the time of
redemption, such gain or loss will constitute capital gain or loss.
6. Neither XEON nor First Security will recognize gain or loss as a
result of the merger.
The opinions set forth above are predicated upon and are limited by the
assumptions set forth herein and are further subject to the qualifications,
assumptions, exceptions, and limitations set forth below:
<PAGE> 2
(a) The opinions and conclusions set forth herein are based upon the
Federal income tax laws of the United States, including the Internal Revenue
Code, Treasury Regulations and judicial and administrative interpretations
thereof, as they exist on the date of this letter. There can be no assurance
that the legal authorities upon which our opinion is based will not be modified,
revoked, supplemented or otherwise changed, with possible retroactive effect. If
there is a material change in the legal authorities or the facts, information,
covenants, statements, representations or assumptions upon which our opinion is
based, we express no opinion. However, we undertake no obligation to reexamine
or revise our opinion in the light of any such changes.
(b) The opinions set forth herein are limited to those Federal income
tax consequences of the merger which are specifically addressed in the six
numbered paragraphs above. In particular, no opinion is expressed with respect
to the tax consequences of the merger under Internal Revenue Code Sections 55
through 59 and the Regulations thereunder (providing for alternative minimum
tax). We also express no opinion or conclusion with regard to foreign, state or
local income tax consequences.
(c) The opinions set forth herein are given only as of the date hereof.
We undertake no obligation to advise you of changes of law or fact that occur
after the date of this opinion letter.
(d) The opinions set forth herein are given solely to First Security and
to XEON for their benefit and are given solely in connection with the merger and
shall not be deemed binding for any other purpose, and you shall not have the
right to rely thereon for any other purpose.
Very truly yours,
RAY, QUINNEY & NEBEKER
/s/
---------------------------------------
Gerald T. Snow,
A Stockholder and Director of the Firm
<PAGE> 1
EXHIBIT 23(1)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
First Security Corporation on Form S-4 of our report dated February 24, 1999,
appearing in the Annual Report on Form 10-K of First Security Corporation for
the year ended December 31, 1998, and to the reference to us under the heading
"Experts" in the Prospectus/Proxy Statement, which is part of this Registration
Statement.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 20, 1999
<PAGE> 1
EXHIBIT 23(2)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of our report, dated January 22, 1999 relating to the
consolidated statements of financial condition of XEON Financial Corp. and
Subsidiary. We also consent to the reference of our Firm under the caption
"Experts" in the Prospectus/Proxy Statement.
/s/ Kafoury, Armstrong & Co.
Kafoury, Armstrong & Co.
Reno, Nevada
April 21, 1999
<PAGE> 1
EXHIBIT 99(1)
First Security Corporation
79 South Main Street
Salt Lake City, Utah 84111
Gentlemen:
We hereby consent to the inclusion of our Fairness Opinion addressed to
the Board of Directors of XEON Financial Corp. in the Form S-4 Registration
Statement of First Security Corporation to be filed in connection with the
pending acquisition of XEON Financial Corp. by First Security Corporation. We
also consent to the inclusion in the such Form S-4 Registration Statement of
references to our firm.
Sincerely,
April 21, 1999 DAIN RAUSCHER WESSELS
/s/ David Welch
-----------------------------------------
Managing Director
<PAGE> 1
EXHIBIT 99(2)
XEON FINANCIAL CORP.
229 KINGSBURY GRADE
STATELINE, NEVADA 89449
May ___ , 1999
Dear XEON Financial Corp. stockholders:
You are cordially invited to attend the 1999 Annual Meeting of
stockholders to be held on Tuesday, June 8, 1999, at 8:00 a.m. Pacific Time at
the main office of XEON Financial Corp., 229 Kingsbury Grade, Stateline, Nevada
89449. At the 1999 Annual Meeting of stockholders, holders of common stock of
XEON Financial Corp. will be asked to adopt the Agreement and Plan of
Reorganization dated as of December 29, 1998 by and among First Security
Corporation, its subsidiary First Security Bank of Nevada, XEON Financial Corp.
and its subsidiary, Nevada Banking Company.
When the merger of XEON Financial Corp. with and into First Security
Corporation becomes effective, each outstanding share of XEON Financial Corp.
common stock (other than shares held by stockholders who properly perfect
dissenters' rights) will be exchanged for First Security Corporation common
stock. We have received an opinion from Dain Rauscher Wessels, XEON Financial
Corp.'s financial advisor, that the merger consideration is fair from a
financial point of view to the holders of XEON Financial Corp. common stock.
Your Board of Directors believes that the merger of XEON Financial Corp.
with and into First Security Corporation is in the best interests of XEON
Financial Corp.'s stockholders. The Board of Directors unanimously recommends
that stockholders vote FOR adoption of the merger proposal. The terms of the
proposed merger and important information relating to XEON Financial Corp. and
First Security Corporation are explained in the accompanying Prospectus/Proxy
Statement. Please give this document your prompt attention.
TO APPROVE THE PROPOSED MERGER, IT IS NECESSARY THAT THE HOLDERS OF A
MAJORITY OF THE OUTSTANDING SHARES OF XEON FINANCIAL CORP. COMMON STOCK
VOTE IN FAVOR OF THE MERGER. AN ABSTENTION OR FAILURE TO VOTE HAS THE
SAME EFFECT AS A VOTE AGAINST THE PROPOSED MERGER.
At the Annual Meeting, XEON Financial Corp. stockholders will also be
asked to consider and vote upon (i) election of ten nominees to serve as
directors of XEON Financial Corp. until the 2000 Annual Meeting of Stockholders
or until completion of the merger and (ii) ratification of the Board of
Directors' appointment of Kafoury, Armstrong & Company to serve as independent
auditors of XEON Financial Corp. for the year ending December 31, 1999.
We enclose a proxy card for your use. The proxy card relates to the
proposal to adopt the Agreement and Plan of Reorganization and approve the
merger contemplated thereby, as well as the proposals to elect directors and
ratify the appointment of independent auditors. Please indicate your voting
instructions and sign, date and return the proxy card promptly in the
postage-paid envelope provided. Regardless of whether you plan to attend the
1999 Annual Meeting in person, it is important that you return the enclosed
proxy card so that your shares of XEON Financial Corp. common stock will be
voted.
Thank you for your attention to this important matter.
Sincerely,
-------------------------------------
John A. Schopf, Jr.
President and Chief Executive Officer
<PAGE> 2
XEON FINANCIAL CORP.
229 KINGSBURY GRADE
STATELINE, NEVADA 89449
(775) 588-5124
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 8, 1999
- --------------------------------------------------------------------------------
Notice is hereby given that the 1999 Annual Meeting of Stockholders of
XEON Financial Corp. will be held at the main office of XEON Financial Corp.,
229 Kingsbury Grade, Stateline, Nevada on Tuesday, June 8, 1999, at 8:00 a.m.
Pacific Time.
A proxy card and a Prospectus/Proxy Statement for the 1999 Annual
Meeting of Stockholders are enclosed. At the meeting, stockholders of XEON
Financial Corp. will be asked to consider and vote upon:
1. Approval and adoption of the Agreement and Plan of Reorganization
dated as of December 29, 1998 by and among First Security
Corporation, its subsidiary First Security Bank of Nevada, XEON
Financial Corp. and its subsidiary Nevada Banking Company;
2. Election of 10 persons to serve as directors until the 2000
Annual Meeting of Stockholders or until their successors are
elected and qualified;
3. Ratification of the Board of Directors' appointment of Kafoury,
Armstrong & Co. as independent auditors of XEON Financial Corp.
for the fiscal year ending December 31, 1999; and
4. Such other business as may properly come before the 1999 Annual
Meeting of Stockholders or any adjournments or postponements
thereof.
Any action may be taken on the foregoing proposals at the 1999 Annual
Meeting of Stockholders on the date specified or on any date or dates to which
the meeting may be adjourned or postponed. Stockholders of XEON Financial Corp.
at the close of business on April 30, 1999 are entitled to receive notice of and
to vote at the 1999 Annual Meeting of Stockholders.
Under Nevada law, stockholders of XEON Financial Corp. on the record
date have the right to dissent from the merger contemplated by the Agreement and
Plan of Reorganization and, if the merger is consummated, to receive payment in
an amount equal to the fair value of their shares of XEON Financial Corp. common
stock. Stockholders of XEON Financial Corp. who desire to exercise dissenters'
rights must follow the procedures set forth in Section 92A.300 through
Section 92A.500 of the Nevada Revised Statutes, a copy of which is attached
hereto as Appendix C. Failure by a stockholder to comply with the procedures set
forth in Section 92A.300 through Section 92A.500 of the Nevada Revised Statutes
could result in the loss of his or her dissenters' rights.
AT ANY TIME PRIOR TO THE PROXIES BEING VOTED, PROXIES ARE REVOCABLE BY
WRITTEN NOTICE TO THE SECRETARY OF XEON FINANCIAL CORP. OR BY GIVING A DULY
EXECUTED PROXY BEARING A LATER DATE.
You are requested to complete and sign the enclosed proxy, which is
solicited by the Board of Directors, and to return the proxy promptly in the
postage-paid return envelope provided. Please sign your name on the proxy
exactly as indicated thereon.
<PAGE> 3
THE BOARD OF DIRECTORS OF XEON FINANCIAL CORP. RECOMMENDS THAT YOU VOTE
- FOR APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF
REORGANIZATION;
- FOR ELECTION OF THE TEN NOMINEES IDENTIFIED HEREIN AS DIRECTORS
OF XEON FINANCIAL CORP.; AND
- FOR RATIFICATION OF THE BOARD OF DIRECTORS' APPOINTMENT OF
INDEPENDENT AUDITORS.
By Order of the Board of Directors
Julie L. Kidd
Vice President, Chief Financial Officer
and Secretary
Stateline, Nevada
May , 1999
================================================================================
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE XEON FINANCIAL CORP. THE
EXPENSE OF FURTHER REQUESTS FOR PROXIES. A SELF-ADDRESSED, PREPAID ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE.
================================================================================
<PAGE> 4
XEON FINANCIAL CORP.
- --------------------------------------------------------------------------------
1999 ANNUAL MEETING OF STOCKHOLDERS
JUNE 8, 1999
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints each of John A. Schopf, Jr. and Wayne Snyder
(together, the "Proxies"), each with the power to appoint his or her substitute,
as proxies of the undersigned, and hereby authorizes them to represent and to
vote all the shares of common stock, without par value, of XEON Financial Corp.,
held by the undersigned on April 30, 1999, at the Annual Meeting of Stockholders
of XEON Financial Corp. to be held at the main office of XEON Financial Corp.,
229 Kingsbury Grade, Stateline, Nevada at 8:00 a.m. on June 8, 1999 and any
adjournment thereof, as follows:
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------- --- ------- -------
1. A proposal to adopt and approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization dated as of December 29, 1998 by and among First [ ] [ ] [ ]
Security Corporation, First Security Bank of Nevada, XEON
Financial Corp. and Nevada Banking Company, pursuant to which
XEON Financial Corp. will be merged with and into First Security
Corporation.
WITHHOLD
2. A proposal to elect the nominees named herein to serve as FOR AUTHORITY
directors until the 2000 Annual Meeting of Stockholders, or [ ] [ ]
until their successors are elected and qualified.
NOMINEES:
David E. Barnett Milos S. Begovich
Troy Bowser Edward C. Coppin
D. Leonard Detrick John A. Schopf, Jr.
Carol I. Sesser Wayne Snyder
Ronald W. (Bud) Vogel Philip W. Weidinger
To withhold authority to vote for any individual nominee, print the
name(s) here:
3. Ratification of the Board of Directors' appointment of Kafoury, FOR AGAINST ABSTAIN
Armstrong & Co. to serve as independent auditors of XEON [ ] [ ] [ ]
Financial Corp. for the year ending December 31, 1999.
4. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the meeting and any adjournment
thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2 AND 3.
YOUR VOTE IS IMPORTANT. FAILURE TO VOTE IN PERSON OR BY PROXY IS
EQUIVALENT TO A VOTE AGAINST THE PROPOSALS BEING SUBMITTED TO STOCKHOLDERS FOR
THEIR CONSIDERATION AT THE MEETING.
The undersigned acknowledges receipt prior to the execution of this
proxy of a Notice of 1999 Annual Meeting of Stockholders and Prospectus/Proxy
Statement dated May ___, 1999.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2 AND 3.
(Continued and to be signed on reverse side)
</TABLE>
<PAGE> 5
(Continued from other side)
Should the undersigned be present and elect to vote at the 1999 Annual Meeting
of Stockholders or at any adjournment thereof and after notification to the
Secretary of XEON Financial Corp. at the meeting of the stockholder's decision
to terminate this proxy, then the power of said attorneys and proxies shall be
deemed terminated and of no further force and effect.
Dated:_______________, 1999 Please sign exactly as name appears below. When
shares are held by joint tenants, both must
sign. When signing as attorney, executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please
sign in full corporate name by the president or
other authorized officer. If a partnership,
please sign in partnership name by any
authorized person.
Signature
Signature, if held jointly
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
<PAGE> 1
EXHIBIT 99(3)
May __, 1999
Dear Option Holder of XEON Financial Corp.
As you may be aware, XEON Financial Corp. ("XEON") and First Security
Corporation ("First Security") have agreed to merge XEON with and into First
Security, subject to certain conditions, including the approval of XEON's
stockholders. You are currently a holder of an outstanding option or options to
purchase ________ shares of XEON stock issued under the stock option plan of
XEON (the "Plan"). With this letter you have also received a copy of the
combined First Security prospectus and XEON Proxy Statement related to the
merger. XEON and First Security are sending you this Prospectus/Proxy Statement
to provide you with important information about this proposed transaction.
First Security and XEON have agreed in the merger agreement to provide a
method for the "cashless exercise" of your option, such that you will not have
to pay the exercise price in cash. If you agree to this procedure, immediately
prior to closing you will be deemed to have received a number of XEON shares of
common stock with a value equal to (a) the difference between the per share
value of the XEON common stock as calculated pursuant to the merger agreement
and the option exercise price, (b) multiplied by the number of shares obtainable
upon the exercise of the option. This number of XEON shares deemed to have been
obtained will then be converted into shares of First Security common stock at
the conversion ratio provided in the merger agreement. Because the value of the
XEON stock and the exchange ratio to be used in the conversion of your stock
depend upon stock prices for periods immediately prior to the closing, we are
unable to provide you with that information. Immediately following the closing
of the merger, First Security will send you a transmittal letter, outlining the
steps you should follow to obtain First Security stock. That letter will provide
you with all of the financial information related to the conversion of your
option.
We believe that there are three alternatives you could elect in regards
to your option(s):
FIRST: The first alternative is to do nothing and let the option(s)
expire. If you select this alternative, you will receive nothing
for your option(s) and your unexercised, in-the-money option(s)
will become worthless from and after the merger closing date.
SECOND: The second alternative is to exercise your option and pay XEON
the exercise price, receive your shares of XEON stock and either
have the XEON stock converted into First Security stock or
exercise your statutory dissenters' rights. This alternative
will require you to come up with the exercise price in cash now.
THIRD: The third alternative is to elect the cashless exercise
procedure proposed above.
We advise you that this cashless exercise program will have tax
consequences to you. XEON and First Security urge you to consult your tax
advisor as to particular facts and circumstances which may be unique to you and
also any tax consequences as a result of the exercise of your options.
Because the option is a personal right to you, you must affirmatively
agree to elect the cashless exercise procedure set forth above. Please indicate
below if you are willing to elect the cashless exercise program and return a
copy of this letter to XEON Financial Corp., 229 Kingsbury Grade, Stateline,
Nevada 89449, Attention: John A. Schopf, Jr. If you have any questions about
your option or the "cashless exercise" procedure set forth above, please feel
free to contact me.
Sincerely,
XEON FINANCIAL CORP.
-------------------------------------------
JOHN A. SCHOPF, JR.
<PAGE> 2
I am the holder of option(s) to purchase _______ shares of the common
stock of XEON Financial Corp. issued to me pursuant to the Plan. I hereby agree
to accept the terms of the cashless exercise procedure discussed above, pursuant
to which my option(s) will be deemed to be converted into shares of XEON
Financial Corp. common stock as provided above and then converted into shares of
First Security common stock. I understand these conversions will only occur at
the closing of the merger between XEON and First Security and, if for some
reason the merger does not close, my option(s) will be unaffected. If the merger
does close, all of my rights under the option(s) will terminate and I shall only
be entitled to receive the shares of First Security common stock as provided
herein.
DATED: ___________, 1999 ____________________________________________
Signature of Option Holder
____________________________________________
____________________________________________
____________________________________________
____________________________________________
Printed name and address of Option Holder
FIRST SECURITY CORPORATION
hereby acknowledges that it has received
an executed copy of this letter from XEON
FINANCIAL CORP. to the above-
referenced Option Holder as of _____ day
of ____________, 1999.
FIRST SECURITY CORPORATION
By:_________________________________
Its:___________________________
