<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 21, 1994
FIRST BANK SYSTEM, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-6880 41-0255900
- -------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS employer
of incorporation) file number) identification No.)
601 Second Avenue South, Minneapolis, Minnesota 55402
-----------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (612) 973-1111
--------------
Not Applicable
---------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. On July 21, 1994, First Bank System, Inc. ("FBS") and Metropolitan
Financial Corporation ("MFC") entered into an Agreement of Merger and
Consolidation (the "Merger Agreement"), pursuant to which MFC will be
merged into FBS. In connection with the merger, each outstanding share
of Common Stock of MFC will be converted into .6803 shares of Common
Stock of FBS. In addition, each outstanding share of Series B Preferred
Stock of MFC will be converted into the right to receive $27.00 (plus
accumulated and unpaid dividends) in cash and the outstanding warrants
to purchase 249,100 shares of MFC Common Stock will be converted to
warrants to purchase 169,462 shares of FBS Common Stock at $6.96 per
share. The conversion ratio for the MFC Common Stock will be
proportionately adjusted if the average closing price of FBS Common
Stock during the 20 trading days ending three business days before the
stockholders' meetings scheduled to consider the merger is less than
$33.00 or more than $40.50. Either party may terminate the merger if the
average closing price of FBS Common Stock during the 20 trading days
ending three business days before the stockholders' meetings scheduled
to consider the merger is less than $29.50. The merger is intended to be
tax free for federal income tax purposes to the holders of MFC Common
Stock receiving shares of FBS Common Stock and to be accounted for as a
"pooling of interests".
In connection with the Merger Agreement, FBS and MFC entered into a
Stock Option Agreement pursuant to which FBS has the right to purchase
up to 19.9% of MFC's outstanding Common Stock at a price of $24.66 per
share if, under certain circumstances, MFC enters into (or the MFC Board
of Directors recommends that the MFC stockholders approve or accept) an
agreement to be merged with or acquired by a third party (including the
acquisition of 20% or more of MFC's outstanding Common Stock) or a third
party acquires 20% or more of the outstanding MFC Common Stock.
The merger is subject to various conditions, including the approval of
the stockholders of MFC and FBS and required regulatory approvals.
The Merger Agreement and the Stock Option Agreement are attached hereto
as Exhibits 2.1 and 2.2 and are incorporated herein by reference.
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<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
(a) Financial Statements of Metropolitan Financial Corporation
----------------------------------------------------------
Consolidated Statements of Condition as of December 31, 1993
and December 31, 1992
Consolidated Statements of Income for the years ended
December 31, 1993, 1992 and 1991
Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements for the years ended
December 31, 1993, 1992 and 1991
Report of Independent Auditors
Condensed Consolidated Statements of Condition--March 31, 1994
and December 31, 1993 (unaudited)
Condensed Consolidated Statements of Income--Three months ended
March 31, 1994 and 1993 (unaudited)
Condensed Consolidated Statement of Shareholders'
Equity--Three months ended March 31, 1994 (unaudited)
Condensed Consolidated Statements of Cash Flows--Three months ended
March 31, 1994 and 1993 (unaudited)
Notes to Condensed Consolidated Financial Statements--March 31, 1994
(b) Pro Forma Financial Information
-------------------------------
As permitted by Item 7 of Form 8-K, because it is impracticable to
file the pro forma financial information required to be filed
reflecting the acquisition of MFC on the date of filing of this Form
8-K, such information will be filed not later than 60 days after the
date of filing of this Form 8-K.
(c) Exhibits
Exhibit No. Description
----------- -----------
2.1 Agreement of Merger and Consolidation, dated July
21, 1994, by and between First Bank System, Inc. and
Metropolitan Financial Corporation. Omitted from this
Exhibit, as filed, are the schedules and exhibits
referenced in such agreement. FBS will furnish
supplementally a copy of any such exhibits to the
Commission upon request.
2.2 Stock Option Agreement, dated July 21, 1994, by and
between First Bank System, Inc. and Metropolitan
Financial Corporation.
23.1 Consent of Ernst & Young LLP.
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<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
(Dollars in thousands, except share and per share data) 1993 1992
<S> <C> <C>
ASSETS
Cash and due from banks $ 85,084 $ 95,370
Short term interest bearing deposits 82,364 157,489
Assets available-for-sale, at market 873,938 162,304
Investment securities (market: $423,774) _ 419,129
Mortgage-backed securities (market: 1993 - $954,908; 1992 - $1,632,794) 943,193 1,612,801
Loans (net of allowance: 1993 - $42,905; 1992 - $35,832) 4,585,410 3,267,131
Federal Home Loan Bank stock, at cost 59,719 64,096
Accrued interest 36,817 36,393
Real estate (net of allowance: 1993 - $9,533; 1992 - $9,874) 56,110 51,915
Office properties and equipment 91,632 71,955
Goodwill 61,517 62,715
Deferred taxes 53,089 51,300
Other assets 77,912 93,913
Total Assets $7,006,785 $6,146,511
LIABILITIES
Transaction and passbook deposits $1,560,667 $1,498,578
Certificates 3,793,968 3,708,447
Total deposits 5,354,635 5,207,025
Federal Home Loan Bank advances 921,801 252,643
Other borrowings 133,159 166,343
Accrued interest 42,485 41,262
Other liabilities 50,322 52,594
Total Liabilities 6,502,402 5,719,867
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 10,000,000 shares;
issued 1993 and 1992 - 488,750 shares 5 5
Common stock, par value $.01 per share; authorized 60,000,000 shares;
issued 1993 - 31,992,275 shares, 1992 - 26,718,855 shares 320 267
Additional paid-in capital 231,881 148,890
Retained earnings 280,813 278,424
Net unrealized gains on securities available-for-sale (net of tax) 4,209 _
Less cost of common stock in treasury: 1993 - 813,522 shares;
1992 - 85,789 shares (12,845) (942)
Total Shareholders' Equity 504,383 426,644
Total Liabilities and Shareholders' Equity $7,006,785 $6,146,511
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands, except per share data) 1993 1992 1991
<S> <C> <C> <C>
INTEREST INCOME
Loans $331,921 $ 268,210 $ 216,985
Mortgage-backed securities 122,649 137,274 145,124
Investments 18,156 19,281 19,001
FSLIC notes and covered assets _ _ 25,910
472,726 424,765 407,020
INTEREST EXPENSE
Transaction and passbook deposits 29,559 37,497 43,541
Certificates 202,260 196,820 212,527
FHLB advances 31,522 32,528 38,078
Other borrowings 11,271 5,363 7,762
274,612 272,208 301,908
Net interest income 198,114 152,557 105,112
Provision for loan losses 7,859 8,316 8,000
Net interest income after provision for loan losses 190,255 144,241 97,112
NONINTEREST INCOME
Gains related to mortgage banking activities 16,271 9,264 225
Other gains on sale of mortgage-backed and other securities _ 44,377 33,366
Mortgage loan servicing fees 3,826 5,107 10,705
Realty commission income 35,350 32,113 26,172
Title closing fees 13,706 11,494 8,001
Service charges on deposit accounts 11,450 6,870 5,414
Financial services income 4,587 852 67
Other income 4,647 4,325 5,491
89,837 114,402 89,441
NONINTEREST EXPENSE
Compensation and related items 77,871 60,250 47,963
Occupancy 24,459 16,729 15,201
Data processing 10,476 7,542 6,585
Advertising 11,856 13,816 9,491
Deposit insurance premium 11,099 9,305 8,012
Amortization of goodwill 4,083 4,000 5,352
Real estate owned 6,684 3,917 6,673
Other general and administrative 47,105 33,022 25,410
193,633 148,581 124,687
Income before income taxes, extraordinary item
and cumulative effect of accounting change 86,459 110,062 61,866
Income tax expense 21,285 42,543 4,427
Income before extraordinary item and cumulative
effect of accounting change 65,174 67,519 57,439
Extraordinary item: Penalty for prepayment of FHLB
advances (net of tax benefit of $4,064) _ (6,329) _
Cumulative effect of accounting change _ 75,941 _
Net Income $ 65,174 $ 137,131 $ 57,439
EARNINGS PER SHARE
Primary:
Income per share before extraordinary item and
cumulative effect of accounting change $ 2.01 $ 2.34 $ 2.42
Extraordinary item _ (0.22) _
Cumulative effect of accounting change _ 2.66 _
Net Primary $ 2.01 $ 4.78 $ 2.42
Fully Diluted:
Income per share before extraordinary item and
cumulative effect of accounting change $ 2.01 $ 2.17 $ 1.96
Extraordinary item _ (0.21) _
Cumulative effect of accounting change _ 2.47 _
Net Fully Diluted $ 2.01 $ 4.43 $ 1.96
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Net
Unrealized
Gains on
Dollars in thousands, Additional Securities Total
(except share and Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders'
per share data) Shares Amount Shares Amount Capital Earnings for-sale Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1990 2,328,750 $23 18,127,453 $181 $133,432 $ 95,025 $ _ (286,302)$ (2,915) $225,746
Stock options
exercised 1,208,454 12 4,143 4,155
Warrants exercised 2,500 13 13
Net treasury stock sold 342 36,315 386 728
Common stock
cancelled (17,540)
Dividends declared:
Preferred (5,085) (5,085)
Common _
$.19 per share (4,233) (4,233)
Net income 57,439 57,439
Balance,
December 31, 1991 2,328,750 23 19,320,867 193 137,930 143,146 _ (249,987) (2,529) 278,763
Issuance of
common stock 1,013,367 10 6,732 7,240 13,982
Stock options
exercised 599,895 6 3,494 3,500
Warrants exercised 31,560 164 164
Net treasury stock sold 1,430 164,198 1,587 3,017
Redemption/Conversion
of series "A" preferred (1,840,000) (18) 5,753,166 58 (860) (820)
Dividends declared:
Preferred (1,405) (1,405)
Common _
$.27 per share (7,688) (7,688)
Net income 137,131 137,131
Balance,
December 31, 1992 488,750 5 26,718,855 267 148,890 278,424 _ (85,789) (942) 426,644
Issuance of
common stock:
Western Financial
Corporation
acquisition 935,772 9 16,991 17,000
Other 619,406 7 8,759 8,766
Stock options
exercised 700,314 7 7,046 7,053
Warrants exercised 194,628 2 921 923
Stock dividends, 10% 2,823,300 28 49,274 (49,302) _
Net treasury
stock acquired (727,733) (11,903) (11,903)
Net unrealized gain 4,209 4,209
Dividends declared:
Preferred (1,405) (1,405)
Common _
$.39 per share (12,078) (12,078)
Net income 65,174 65,174
December 31, 1993 488,750 $ 5 31,992,275 $320 $231,881 $280,813 $4,209 (813,522) $(12,845) $504,383
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Net income $ 65,174 $ 137,131 $ 57,439
Reconciliation to cash provided by operating activities:
Extraordinary item (net of tax) - 6,329 -
Cumulative effect of accounting change _ (75,941) _
Net amortization of loan fees, discounts and premiums 32,751 14,606 7,639
Provision for loan losses 7,859 8,316 8,000
Decrease in deferred tax asset 11,610 24,641 _
Depreciation and amortization 9,291 6,654 4,244
Amortization of goodwill 4,083 4,000 5,352
Decrease in accrued interest receivable 4,405 6,111 11,011
(Decrease) increase in accrued interest payable (3,864) 6,480 2,734
Net Cash Provided by Operating Activities 131,309 138,327 96,419
Acquisitions of subsidiaries, net of cash received (6,719) 321,507 _
Increase in loans (1,475,603) (1,106,401) (733,150)
Purchase of:
Loans (172,494) (104,942) (144,453)
Investment securities held-to-maturity (39,793) (565,148) (112,468)
Mortgage-backed securities available-for-sale (86,236) (29,183) (75,612)
Mortgage-backed securities held-to-maturity (319,604) (460,398) (580,444)
Proceeds from the sale and maturity of:
Investment securities held-to-maturity 284,416 285,924 217,864
Proceeds from the sale of:
Mortgage-backed securities available-for-sale 713,303 1,274,920 702,701
Loans held-for-sale 169,271 108,734 56,655
Covered assets _ _ 19,403
Real estate 35,294 41,433 24,710
Principal repayments of mortgage-backed securities:
Available-for-sale 48,741 69,379 29,915
Held-to-maturity 617,612 222,523 30,197
Settlement of FSLIC assistance agreement _ _ 47,933
Other investing activities 27,184 (31,971) (30,471)
Net Cash (Used) Provided by Investing Activities (204,628) 26,377 (547,220)
Net increase (decrease) in:
Short term borrowings _ (2,394) (224,144)
Deposits (530,503) (19,210) 175,666
Purchase of deposits _ 231,535 254,228
Proceeds from:
Settlement of FSLIC notes receivable _ _ 365,778
FHLB advances 770,000 1,933,000 310,700
Issuance of subordinated notes _ 86,250 _
Issuance of common stock 5,478 716 _
Exercise of common stock options and warrants 7,976 3,664 4,168
Net sale (purchase) of stock (11,903) 3,017 728
Repayment of:
FHLB advances (186,108) (2,197,297) (422,625)
Other borrowings (35,656) (30,823) (19,161)
Redemption of preferred stock _ (820) _
Cash dividends (13,483) (9,093) (9,318)
Other financing activities (17,893) (4,112) (10,989)
Net Cash (Used) Provided by Financing Activities (12,092) (5,567) 425,031
Net (Decrease) Increase in Cash and Cash Equivalents (85,411) 159,137 (25,770)
Cash and cash equivalents at beginning of year 252,859 93,722 119,492
Ending Cash and Cash Equivalents $ 167,448 $ 252,859 $ 93,722
</TABLE>
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
-7-
<PAGE>
Note A
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts and results of
operations of Metropolitan Financial Corporation (the "Company") and its wholly
owned subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
Trading Account Assets
Trading account assets are mortgage-backed securities held for sale in
conjunction with mortgage banking activities. These mortgage-backed securities
are collateralized by 30-year fixed-rate and adjustable-rate mortgage loans and
are stated at fair value. Gains and losses, both realized and unrealized, are
included in net gains related to mortgage banking activities. The Company
carried no trading account assets at December 31, 1993.
Securities Held-To-Maturity and Available-For-Sale
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income with interest and dividends. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
Loans Held-For-Sale
Loans held for sale are valued at the lower of cost or market. Market value is
calculated on the aggregate basis, based on commitments outstanding from
investors and current quoted market prices. Net unrealized losses due to
declines in the market value are included in the determination of net income.
Loan Fees and Discounts
Loan origination fees and certain direct costs are deferred and amortized using
the interest method over the contractual lives of the related loans, adjusted
for prepayments, as a yield adjustment. Discounts and premiums on loans
purchased, net of deferred fees, which are considered yield adjustments, are
amortized using methods which approximate a level yield over the estimated
remaining lives.
Allowance for Loan Losses
Provisions for possible losses on mortgage and other loans are charged to
operations based upon management's review of the loan portfolio. The allowance
is based upon an assessment of the net realizable value of collateral
securing loans, loss experience and management's judgment as the risk
inherent in the loan portfolio.
Loans
Loans are carried at amortized cost, net of allowance for loan losses. Interest
on loans is recorded as it is earned. Allowances are established for uncollected
interest on loans for which payments are more than 90 days past due.
Real Estate
Real estate represents properties acquired through foreclosure, in judgment
(foreclosed real estate for which a redemption period still remains), and in-
substance foreclosure (real estate loans in which the borrower has little or no
equity, repayment can be expected to come only from sale or operation of the
real estate and the borrower has formally or effectively abandoned control)
and is carried at the lower of cost or fair value.
Intangible Assets
Goodwill, the excess of cost over fair value of net assets acquired, is
amortized to expense using the straight line and interest methods over periods
approximating the asset life of related long term assets, to a maximum of 25
years. Premiums paid for loan servicing rights are amortized against servicing
fee income over the estimated average life, adjusted for prepayments, of the
servicing portfolio acquired using the interest method. Accumulated amortization
of goodwill was $42.5 million and $38.4 million at December 31, 1993 and 1992,
respectively. Intangible assets are reviewed periodically for possible
impairment.
-8-
<PAGE>
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
computed using the straight line method based on estimated useful lives.
Interest Rate Exchange Agreements
Interest rate exchange agreements ("swaps") are designated as hedges against
future fluctuation's in the interest rates of specifically identified assets and
liabilities. The net interest differential resulting from floating rate interest
payments exchanged for fixed rate interest payments is recorded as incurred.
Protected Rate Agreements
Protected rate agreements ("caps") are designated as hedges against future
fluctuation's in the interest rates of specially identified liabilities. The
interest received is recorded on a current basis. The cost of the caps is
amortized on a straight line basis over the life of the caps.
Mortgage Options
Mortgage options ("puts") are designated as hedges against future fluctuation's
in the price of specific mortgage loans held for sale. The premium paid for the
put is accounted for as a component of the book value of the mortgage loans and
is realized upon settlement of the loan sales.
Income Taxes
A consolidated federal income tax return is filed for the Company and its
subsidiaries. Deferred taxes are recorded to reflect the tax consequences on
future years' differences between the tax basis of assets and liabilities and
the financial reporting amounts at each year end and the expected future
benefit of net operating loss and alternative minimum tax credit carryforwards.
Cash Flow Information
Cash equivalents include cash and due from banks, short term interest bearing
deposits and federal funds sold. Cash paid for interest expense in 1993, 1992
and 1991 was $278.5 million, $265.7 million and $299.2 million, respectively.
Cash paid during 1993, 1992 and 1991 for income taxes was $8.5 million, $3.5
million and $684,000, respectively. Cash received during 1993, 1992 and 1991
as a recovery of income tax was $343,000, $379,000 and $97,000, respectively.
Earnings Per Share
Earnings per share has been computed using the weighted average number of shares
of common stock outstanding during the period. Per share data reflects the 10
percent stock dividend declared in July 1993, the 100 percent stock dividend
declared in June 1992, and the 20 percent stock dividend declared in
September 1991. Amounts equal to the fair market value of the additional
shares issued in 1993 have been charged to retained earnings and credited to
common stock and paid-in capital. The stock dividends in 1992 and 1991
represent stock splits effected in the form of a dividend, an accounted for
as such.
The weighted average number of common and common equivalent shares outstanding
used to compute primary earnings per share were 31,662,000, 28,384,000 and
21,646,000 for the year ended December 31, 1993, 1992 and 1991, respectively.
The weighted average number of common and common equivalent shares outstanding
used to compute fully diluted earnings per share were 31,692,000, 30,613,000 and
28,494,000 for the year ended December 31, 1993, 1992 and 1991, respectively.
Note B
Business Combinations
On June 11, 1993, the acquisition of Western Financial Corporation ("Western")
and its federally chartered savings and loan association subsidiary Columbia
Savings Association F.A. ("Columbia") was completed. Pursuant to the
agreement and plan of merger, Western was merged into the Company and
Columbia was merged into Metropolitan Federal Bank, fsb, ("the Bank"). Total
merger consideration of approximately $21.9 million was paid in the form of
cash and the Company's stock. The transaction was accounted for as a
purchase and, accordingly, the purchase price was allocated to assets and
liabilities based on the estimated fair value as of the acquisition date.
Based on their election, Western shareholders received .55 shares of the
Company's common stock or $10 in cash for each Western share owned. The
results of operations of Western for the period since June 12, 1993 have
been included in the Company's consolidated results.
On August 6, 1993, the Bank completed its acquisition of Eureka Savings Bank,
fsb, Eureka, Kansas ("Eureka"). The acquisition consideration of approximately
$20.8 million was paid in cash and the transaction was accounted for as a
purchase. The results of operations of Eureka have been included in the
Company's consolidated results of operations for the period since August 7,
1993.
-9-
<PAGE>
During 1992, the Company completed several acquisitions designed to expand into
markets not previously served by the Bank. The acquisitions of Home Owners
Savings Bank of Fergus Falls, Minnesota ("Home Owners") and American Charter
Federal Savings and Loan Association of Lincoln, Nebraska ("American Charter"),
were completed December 1 and December 16, respectively. Home Owners was
acquired from the RTC and American Charter was acquired through a voluntary
supervisory conversion merger. These acquisitions were accounted for as purchase
transactions. The operating results of Home Owners and American Charter have
been included in the Company's consolidated results of operations from the
dates of acquisition.
On September 30, 1992 the Company completed the acquisition of Security
Financial Group, Inc., St. Cloud, Minnesota ("Security Financial"). The
Company issued 963,740 shares of common stock, valued at $12.8 million at the
time of the transaction. The acquisition of Security Financial was accounted for
as a pooling of interests. Security Financial is not material to the financial
condition or operating results of the Company, and therefore, prior years
balances were not restated. However, 1992 amounts were adjusted to reflect the
transaction as if it had occurred January 1, 1992.
The unaudited pro forma consolidated results of operations for the years ended
December 31, 1993 and 1992, assuming the acquisitions of Western, Eureka, Home
Owners and American Charter were consummated as of January 1, 1992 are as
follows:
<TABLE>
<CAPTION> Year Ended December 31
(Dollars in thousands, except per share data) 1993 1992
<S> <C> <C>
Net interest income $212,391 $203,321
Income before extraordinary
item and cumulative effect of
accounting change 79,610 89,538
Net income 79,610 159,150
Per share data:Income before extraordinary
item and cumulative effect of
accounting change $ 2.47 $ 2.79
Net income 2.47 4.99
</TABLE>
This unaudited pro forma information may not be indicative of the results that
would actually have occurred if the combination had been in effect on the dates
indicated or which may be obtained in the future.
In February 1993 the Office of Thrift Supervision notified the Bank that its
application to acquire Rocky Mountain Financial Corporation ("Rocky Mountain"),
Cheyenne, Wyoming, and its bank subsidiary, Rocky Mountain Bank, fsb, had been
approved. Rocky Mountain had assets of $537 million and deposits of $428 million
at December 31, 1993. The banking subsidiary operates 14 branches located
throughout Wyoming. The Bank will pay Rocky Mountain shareholders approximately
$64.2 million in cash as consideration after payment of approximately $3.0
million of transaction expenses. The transaction will be accounted for as a
purchase and is expected to close in March 1994.
Note C
Fair Value of Financial Instruments
The following schedule includes the book value and estimated fair value of all
financial assets and liabilities, as well as specific off-balance sheet items,
as of December 31, 1993. The aggregate fair value amounts presented do not
represent the underlying value of the Company. The fair values indicated for
nonfinancial assets and liabilities, including real estate, office properties
and equipment, goodwill, deferred taxes, other assets (excluding unamortized
premiums on interest rate caps and purchased mortgage servicing rights), and
other liabilities, represent the book value as of December 31, 1993.
<TABLE>
<CAPTION>
(In thousands) Book Value Fair Value
<S> <C> <C>
Assets
Cash and cash equivalents $ 167,448 $ 167,448
Assets available-for-sale 873,938 873,938
Mortgage-backed securities 943,193 954,908
Loans 4,585,410 4,602,925
FHLB stock 59,719 59,719
Nonfinancial assets 363,601 363,601
Other assets 13,476 31,306
Total Assets $7,006,785 $7,053,845
Liabilities
Transaction and passbook deposits $1,560,667 $1,560,667
Certificates 3,793,968 3,829,568
FHLB advances 921,801 928,185
Other borrowings 133,159 134,901
Other liabilities 92,807 92,807
Total Liabilities $6,502,402 $6,546,128
Off-balance Sheet Items:
Rate swaps $ _ $ (1,293)
Commitments _ 658
Total Off-balance Sheet Items $ _ (635)
Total Shareholders' Equity $ 504,383 $ 507,082
</TABLE>
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<PAGE>
The following valuation methods and assumptions were used by the Company in
estimating the fair value of financial instruments:
Cash and Cash Equivalents
The book value of cash and due from banks and short-term interest bearing
deposits approximates fair value.
Assets Available-For-Sale
The book value represents market value of these instruments.
Loans Held-For-Sale
The book value represents the lower of cost or market value of these instruments
determined on an aggregate basis based on commitments outstanding and current
quoted market prices.
Mortgage-backed Securities
Fair values are based on quoted market prices.
Loans
The fair values for fixed rate, one to four family residential mortgage loans,
commercial real estate, commercial business, and consumer loans are calculated
using interest rates currently offered for loans with similar terms to borrowers
of similar credit quality.
FHLB Stock
Fair value for FHLB stock is based on the price at which it may be resold to the
FHLB.
Other Assets
Other assets represent unamortized premiums on interest rate caps and purchased
mortgage servicing rights. The fair value of the interest rate caps is
determined using quoted market prices for instruments with similar rate and
maturity characteristics. The fair value of the loan servicing rights is
based on average loan balances, interest rates, pass-through rates and
estimated servicing cost per loan adjusted for assumptions on prepayments,
delinquencies and foreclosures.
Deposits
The fair values disclosed for demand deposits (i.e., interest and noninterest
bearing checking, passbook savings and money market accounts) are equal to the
amount payable on demand at the reporting date. Fair values for fixed-
maturity certificates of deposit are calculated using a discounted cash flow
analysis that applies interest rates currently being offered on certificates.
Borrowings
The carrying amounts of short-term borrowings approximate their fair value. The
fair value of the Bank's long-term borrowing is calculated using a discounted
cash flow analysis, based on the Bank's current incremental borrowing rate for
similar types of borrowing. The subordinated notes are valued according to the
quoted market price.
Rate Swaps
The fair value of interest rate swaps is derived from a pricing model that
discounts the cash flows of both the paying side and receiving side of the swap
using quoted market rates of similar term instruments.
Commitments
Off-balance sheet commitments include commitments to originate mortgage loans
and sell mortgage-backed securities. Outstanding commitments approximate fair
value.
-11-
<PAGE>
Note D
Assets Available-For-Sale
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." As permitted under the Statement,
the Company has elected to adopt the provisions of the Statement as of the end
of 1993. In accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting principle and there
were no cumulative adjustments to income as a result of adopting the standard.
However, the ending balance of shareholders' equity was increased by $4.2
million (net of $2.8 million in deferred income taxes) to reflect net
unrealized gains on securities classified as available-for-sale previously
carried at amortized cost or LOCOM. Assets available-for-sale consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Book Unrealized Unrealized Market
(In thousands) Value Gains Losses Value
<S> <C> <C> <C> <C>
Mortgage-backed
Securities:
GNMA $190,164 $ 61 $ _ $190,225
FNMA 36,873 452 (365) 36,960
FHLMC 130,890 1,397 (232) 132,055
Collateralized
mortgage
obligations 256,352 3,301 (776) 258,877
________________________________________________________________________
614,279 5,211 (1,373) 618,117
Investments:
U.S. Treasury 12,900 118 (6) 13,012
U.S. government
agencies 118,336 2,981 (36) 121,281
Corporate
debt securities 10,000 44 _ 10,044
Commercial paper 39,793 _ _ 39,793
Other 11,027 19 _ 11,046
________________________________________________________________________
192,056 3,162 (42) 195,176
Loans Held
For Sale 60,645 _ _ 60,645
________________________________________________________________________
$866,980 $8,373 $(1,415) $873,938
</TABLE>
Assets Held-For-Sale
<TABLE>
<CAPTION> 1992
(In thousands) Book Value Market Value
<S> <C> <C>
U.S. Agency $ 97 $ 97
GNMA 3,712 3,712
FNMA _ _
FHLMC _ _
Collateralized
mortgage obligations 7,594 7,594
Loans 150,901 150,901
$162,304 $162,304
</TABLE>
The amortized cost and market value of assets available-for-sale by contractual
maturity at December 31, 1993 are as follows:
<TABLE>
<CAPTION> Book Market
(In thousands) Value Value
<S> <C> <C>
Investments:
One year or less $ 90,721 $ 90,974
Over one year through five years 92,509 95,357
Over five years through ten years 153 153
Over ten years 8,673 8,692
192,056 195,176
Mortgage-backed securities 614,279 618,117
Mortgage loans 60,645 60,645
$866,980 $873,938
</TABLE>
Proceeds from the sale of assets available-for-sale were $835.8 million and
$1.4 billion during 1993 and 1992, respectively. Gross gains on these sales
were $19.3 million and $54.1 million during 1993 and 1992, respectively.
Gross losses were $3.0 million during 1993.
Accrued interest on assets available/held-for-sale at December 31, 1993 and
1992 was $7.0 million and $1.2 million, respectively. Assets available-for-
sale with a book value of $138.1 million were pledged to secure public and
private deposit accounts at December 31, 1993. At December 31, 1993 and 1992,
$59.8 million and $152.4 million, respectively, of loans were committed to be
sold with settlement dates of January through March 1994 and 1993, respectively.
-12-
<PAGE>
Note E
Investment Securities
Investment securities held-to-maturity consisted of the following:
<TABLE>
<CAPTION> December 31, 1992
Gross Gross
Book Unrealized Unrealized Market
(In thousands) Value Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 10,654 $ 44 $ _ $ 10,698
U.S. government
agencies 236,392 4,288 (82) 240,598
Corporate
debt securities 10,000 395 _ 10,395
Commercial paper 146,745 _ _ 146,745
Other 15,338 _ _ 15,338
$419,129 $4,727 $ (82) $423,774
</TABLE>
All investment securities are classified as available-for-sale as of December
31, 1993 and are shown in Note D. Accrued interest on investment securities at
December 31, 1992 was $5.2 million. Investment securities with a book value of
$158.7 million at December 31, 1992 were pledged to secure public and private
deposit accounts.
Note F
Mortgage-backed Securities
Mortgage-backed securities held-to-maturity consisted of the following:
<TABLE>
<CAPTION> December 31, 1993 December 31, 1992
Book Market Book Market
(In thousands) Value Value Value Value
<S> <C> <C> <C> <C>
GNMA $ 83,295 $ 86,705 $ 189,516 $ 193,523
FNMA 134,598 134,197 126,639 129,372
FHLMC 86,341 87,630 232,880 237,100
Collateralized
mortgage
obligations 29,913 29,981 438,307 445,262
Participation
certificates 609,046 616,395 625,459 627,537
$943,193 $954,908 $1,612,801 $1,632,794
</TABLE>
The market value of mortgage-backed securities held-to-maturity includes gross
unrealized gains of $14.9 million and $24.4 million and gross unrealized losses
of $3.2 million and $4.4 million for 1993 and 1992, respectively.
Accrued interest on mortgage-backed securities at December 31, 1993 and 1992 was
$5.4 million and $10.5 million, respectively. Mortgage-backed securities with a
book value of $181.7 million and $437.9 million at December 31, 1993 and 1992,
respectively, were pledged to secure public and private deposit accounts.
Mortgage-backed securities at December 31, 1993 include current year loan
production with original principal balances of approximately $39 million. During
1993, 1992 and 1991 the Company securitized $690 million, $234 million and $500
million of mortgage loans, respectively.
Note G
Loans
Loans consisted of the following:
<TABLE>
<CAPTION>
(In thousands) December 31, 1993 December 31, 1992
<S> <C> <C>
Real Estate Mortgage:
Residential $2,700,214 $2,068,300
Commercial 513,870 318,814
Construction 12,185 9,623
Commercial 6,402 9,457
Manufactured home 41,797 53,164
Consumer and other 1,353,847 843,605
4,628,315 3,302,963
Less:
Allowance for losses 42,905 35,832
$4,585,410 $3,267,131
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Balance at beginning of year $35,832 $26,272 $30,386
Provision for loan losses 7,859 8,316 8,000
Acquisitions 11,508 11,845 93
Net transfer of allowance
to covered assets and real estate owned _ _ (4,543)
Net charge-offs (12,294) (10,601) (7,664)
$42,905 $35,832 $26,272
</TABLE>
-13-
<PAGE>
Accrued interest on loans was $24.5 million and $19.9 million at December 31,
1993 and 1992, respectively.
Origination of residential mortgage loans and consumer loans is concentrated in
the states of North Dakota, Minnesota, Nebraska, Iowa, Kansas, South Dakota,
Wisconsin and Arizona. The ability of borrowers to honor these loan obligations
is influenced by the general economic health of the region. The Company's loans
are generally secured by readily marketable collateral. In addition, the Company
requires some form of mortgage insurance, either government sponsored or
private, on residential mortgage loans with a greater than 80 percent loan to
value ratio. The Company's exposure to loss is equal to the net carrying value
of these loans.
At December 31, 1993, approximately $176 million of commitments to make
residential real estate mortgage loans at specific rates were outstanding. These
commitments are subject to the same credit risk, total risk of loss and
collateral policies, as originated loans.
Loans serviced for others totaled $3.3 billion and $3.5 billion at December 31,
1993 and 1992, respectively. Residential mortgage loans sold with recourse
totaled $1.0 billion and $1.1 billion at December 31, 1993 and 1992,
respectively. Recourse provisions for loans sold relate primarily to
defaults. Substantially all loans sold with recourse have either government
sponsored or private mortgage insurance.
Loans at December 31, 1993 include $43.2 million of restructured loans, of which
$16.4 million are performing in accordance with the restructured terms. The
remaining $26.8 million are included in the Company's nonperforming loans.
In May 1993 the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," effective for years
beginning after December 15, 1994. SFAS No. 114 requires that impaired loans
be valued at the present value of expected cash flows. The Company will be
adopting SFAS No. 114 during the first quarter of 1994 and does not expect the
statement to be material to the Company's financial position or results of
operations.
Note H
Real Estate
Real estate consisted of the following:
<TABLE>
<CAPTION> December 31
(In thousands) 1993 1992
<S> <C> <C>
Acquired through foreclosure
and in-substance foreclosures $61,300 $60,781
Held for investment 1,976 _
In judgment and subject to
redemption 2,367 1,008
65,643 61,789
Less allowance for losses 9,533 9,874
$56,110 $51,915
</TABLE>
Changes in the allowance for real estate losses were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Balance at beginning of year $9,874 $3,845 $2,707
Provision for decline in
value of real estate owned 4,540 4,491 2,900
Acquisitions 1,983 3,524 23
Net transfers _ _ 2,282
Net charge-offs (6,864) (1,986) (4,067)
$9,533 $9,874 $3,845
</TABLE>
Note I
Office Properties and Equipment
Office properties and equipment consisted of the following:
<TABLE>
<CAPTION> December 31
(In thousands) 1993 1992
<S> <C> <C>
Land $ 10,579 $ 7,841
Buildings 67,574 51,787
Furniture and equipment 52,972 41,683
131,125 101,311
Less allowance for depreciation 39,493 29,356
$ 91,632 $ 71,955
</TABLE>
-14-
<PAGE>
Note J
Deposits
Deposits consisted of the following:
<TABLE>
<CAPTION> Weighted Average
Interest Rates at
December 31 December 31
(Dollars in thousands) 1993 1992 1993 1992
<S> <C> <C> <C> <C>
Checking:
Noninterest
bearing $ 254,204 $ 232,010
Interest bearing 390,149 334,600 1.65% 2.45%
Money market
demand 185,440 182,953 2.33 2.95
Passbook and
statement 730,874 749,015 3.17 3.23
Certificates:
Nine months
and less 416,415 612,616 3.24 3.71
Over 9 to 30
months 2,187,970 2,230,348 4.28 5.11
Over 30 months 1,189,583 865,483 6.54 7.45
$5,354,635 $5,207,025 4.10% 4.65%
</TABLE>
Accrued interest on deposits was $38.6 million and $36.2 million at December 31,
1993 and 1992, respectively.
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Checking $ 6,601 $ 7,755 $ 7,090
Money market demand 3,933 4,901 11,648
Passbook and statement 19,025 24,841 24,803
Certificates 202,260 196,820 212,527
$231,819 $234,317 $256,068
</TABLE>
The following table sets forth the maturities of certificates in
denominations of $100,000 or more at December 31, 1993.
<TABLE>
<CAPTION>
(In thousands)
Maturity Amount
<S> <C>
Under three months $ 8,590
Three to six months 40,447
Over six to 12 months 54,077
Over 12 months 302,465
$405,579
</TABLE>
Note K
FHLB Advances and Other Borrowings
FHLB advances and other borrowings consisted of the following:
<TABLE>
<CAPTION> Weighted Average
Interest Rates at
December 31, December 31
(Dollars in thousands) 1993 1992 1993 1992
<S> <C> <C> <C> <C>
Federal Home Loan
Bank advances $ 921,801 $ 252,643 5.15% 5.22%
Other Borrowings:
Medium term notes _ 18,998 _ 8.70
Collateralized
mortgage obligation 39,931 54,909 7.37 8.98
Subordinated debt 86,250 86,250 8.25 8.25
Notes payable to
banks and others 6,978 6,186 4.46 4.79
Total other borrowings 133,159 166,343
$ 1,054,960 $ 418,986 5.48% 6.49%
Borrowings due
within one year $ 165,177 $ 120,941 4.45% 4.19%
</TABLE>
At December 31, 1993 and 1992, borrowings due within one year consisted
primarily of FHLB line of credit and FHLB advances of $165.0 million at an
average rate of 4.45 percent and $99.5 million at an average rate of 3.37
percent, respectively.
<PAGE>
Maturities of borrowings at December 31, 1993, were:
<TABLE>
<CAPTION>
(Dollars in thousands)
Year of Maturity Amount
<S> <C>
1994 $ 165,177
1995 100,823
1996 212,182
1997 165,000
1998 215,000
Thereafter 196,778
$1,054,960
</TABLE>
At December 31, 1993, the Company had an existing line of credit with the
FHLB of $100 million. The Company had no balance drawn on this line of credit
as of December 31, 1993. The rate paid on the FHLB line varies daily based on
the federal funds rate.
-15-
<PAGE>
At December 31, 1993, borrowings were secured by the following:
FHLB advances--FHLB stock, real estate loans and mortgage-backed securities
with a carrying value of $1.6 billion.
Collateralized mortgage obligations--mortgage-backed securities with a
carrying value of $41.5 million.
Accrued interest on borrowings was $849,000 and $1.4 million at December 31,
1993 and 1992, respectively.
Note L
Interest Rate Exchange and Protected
Rate Agreements
The Company has entered into interest rate exchange agreements ("swaps") with
primary securities dealers to stabilize its cost of funds. The notional
principal amount of interest rate exchange agreements totaled $200 million
and $250 million for 1993 and 1992, respectively. The Company pays a fixed rate
and receives a variable rate of interest on the stated notional principal
amount for a fixed period of time. The Company's exposure to market risk
results from a declining interest rate environment in which the fixed rate
paid exceeds the variable rate received. These agreements are subject to the
counterparty's ability to perform in accordance with the terms of the
agreements. The Company's risk of loss is equal to the interest payments due
from the counterparty. Net accrued interest payable on swaps was $3.0 million
and $3.8 million on December 31, 1993 and 1992, respectively.
In connection with its asset and liability management program, during 1993 the
Company entered into protected rate agreements ("caps") in the aggregate
notional amount of $450 million with varying maturities. Under the terms of
the caps, the Company will be reimbursed for increases in the three-month
London Inter-Bank Offer Rate ("LIBOR") for any quarter during the agreement
in which such rate exceeds the "strike price", which ranges from 6 percent to
8 percent depending on the maturity of the cap. These agreements are subject to
the counterparty's ability to perform in accordance with the terms of the
agreements. The Company's risk of loss is equal to the original premiums paid
to enter into these agreements.
A summary of the interest rate caps is as follows:
<TABLE>
<CAPTION> Strike Price
(In millions) 6.00 - 6.50% 7.00 - 7.50% 8.00%+ Total
<S> <C> <C> <C> <C>
Mature in 1994 $250 $100 $ 50 $400
Mature in 1995 50 _ _ 50
$300 $100 $ 50 $450
</TABLE>
Note M
Shareholders' Equity
Preferred Stock
The Company has 10,000,000 shares of $.01 par value preferred stock authorized.
At December 31, 1993, the Company had 488,750 units of Series B, $2.875
Cumulative Perpetual Preferred Stock, issued and outstanding.
The Company, at its option, redeemed the outstanding 1,840,000 shares of Series
A, $2.00 cumulative convertible preferred stock on April 20, 1992, for 5,753,166
shares of common stock and $400,000 to holders exercising the options to receive
cash.
Each unit of Series B preferred stock consists of one share of Cumulative
Perpetual Preferred Stock and one warrant to purchase 1.32 shares of Common
Stock. The preferred stock is redeemable at the option of the Company at a rate
of $25 per share. Redemption can occur at any time on or after January 31, 1996.
Each warrant entitles the holder to purchase 1.32 shares of the Company's Common
Stock at a price of $6.25. The warrants became exercisable on February 19, 1991,
and expire November 20, 2000. Warrants outstanding at December 31, 1993 allow
for the purchase of 408,751 shares of Common Stock and would result in total
proceeds to the Company, if exercised, of approximately $1.9 million.
The Company's Series B preferred stock ranks prior to Common Stock as to
dividends and liquidation. The liquidation preference of the preferred stock
is $25 per share plus accumulated unpaid dividends. Dividends on the
preferred stock are cumulative and are to be paid at an annual rate of $2.875.
Shares of the Company's preferred stock have no voting rights except in the
event of certain arrearages in which event holders of the preferred stock will
be entitled to elect two additional directors to the Company's Board of
Directors.
-16-
<PAGE>
Regulatory Capital Requirements
The Bank and its subsidiaries are required to meet capital requirements as
defined by the Office of Thrift Supervision ("OTS") for Tangible, Core and Risk-
based Capital. The requirements call for measures of capital as a percentage of
assets. Required capital levels increase through July 1, 1994, at which time
the fully phased in capital requirements will be effective. At December 31,
1993, the Bank exceeds all fully phased in requirements.
Note N
Income Taxes
Income tax expense consisted of the following:
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Current
Federal $ 6,670 $ 5,015 $4,373
State 3,005 3,058 54
9,675 8,073 4,427
Deferred
Federal $ 9,121 $28,657 _
State 2,489 5,813 _
11,610 34,470 _
$21,285 $42,543 $4,427
</TABLE>
The provision for federal income tax differs from that computed at the statutory
corporate tax rate as follows:
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Tax at 35% statutory $30,261 $37,421 $21,035
rate (34% in 1992
and 1991)
State income taxes, net
of federal tax benefit 4,364 5,474 36
Change in valuation
allowance (10,902) _ _
Tax effect of:
Amortization of goodwill 1,429 1,360 1,839
FSLIC assistance and tax
exempt interest _ _ (8,768)
Bad debt deduction _ _ (5,743)
Effect of operating losses _ _ (810)
Other, net (3,867) (1,712) (3,162)
$21,285 $42,543 $ 4,427
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. In 1992, Metropolitan
established a valuation allowance for a portion of the operating loss
carryforwards as a result of unresolved matters with taxing authorities. During
1993, certain tax issues were resolved which were previously considered in
management's assessment of the valuation allowance. As a result, the Company has
reduced the remaining valuation allowance. The change in the deferred tax asset
valuation allowance of $10.9 million was recorded as a reduction of income tax
expense.
The adjustments to the net deferred tax asset in 1993 identified as the "Effect
of acquisitions and other transactions" result primarily from the acquisitions
of Western Financial Corporation and Eureka Savings Bank, fsb and the exercise
of compensatory stock options.
At December 31, 1993, Metropolitan had the following income tax net operating
loss carryforwards available for income tax purposes:
<TABLE>
<CAPTION>
Expiration
(Dollars in thousands) Date Amount
<S> <C> <C>
Federal regular tax operating loss
carryforwards acquired through
business combinations 2002 $ 3,933
Federal regular tax operating loss
carryforwards from other than
business combinations 2005 43,451
_______________________________________________________________
$47,384
Federal AMT operating loss
carryforwards 2002 $ 4,594
</TABLE>
-17-
<PAGE>
The components of and changes in the net deferred tax asset were as follows:
<TABLE>
<CAPTION> Effect of
Deferred Acquisitions
January 1, (expense) and other December 31,
(In thousands) 1993 benefit transactions 1993
<S> <C> <C> <C> <C>
Loan fees and discounts $ 6,366 $ (840) $ _ $ 5,526
Discounts on loans and mortgage-backed
securities arising from acquisitions 10,998 (8,125) 6,504 9,377
Bad debt deduction 2,160 1,241 3,819 7,220
FHLB stock dividends (6,833) 3,248 (2,781) (6,366)
Other 1,161 2,814 (2,097) 1,878
Net temporary differences 13,852 (1,662) 5,445 17,635
Carryforwards:
Federal regular tax operating loss carryforwards 35,993 (22,933) 2,718 15,778
Federal regular tax operating loss carryforwards
acquired in purchase business combinations 1,948 29 (600) 1,377
State regular tax operating loss carryforwards 7,836 (4,430) 238 3,644
State regular tax operating loss carryforwards
acquired in purchase business combinations 4,844 (135) _ 4,709
Federal AMT credit carryforwards 3,327 6,619 _ 9,946
Total carryforwards 53,948 (20,850) 2,356 35,454
67,800 (22,512) 7,801 53,089
Valuation allowance (16,500) 10,902 5,598 _
Deferred tax asset $51,300 $(11,610) $13,399 $53,089
</TABLE>
During the first quarter of 1992, the Company prospectively adopted SFAS No.
109, "Accounting for Income Taxes." In accordance with this statement, the
Company recognized deferred tax assets reflecting the benefit expected to be
realized from the utilization of net operating loss carryforwards ("NOLs") of
$182.4 million and net deductible temporary differences of approximately $35.8
million.
The Company had taxable income and pre-tax book income for the periods presented
as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Taxable income $68,490 $ 74,707 $15,471
Pre-tax book income 86,459 110,062 61,866
</TABLE>
The primary difference between taxable income and pre-tax book income in 1992
and 1993 relates to the reversal of net deductible temporary differences. In
1991 the primary difference between taxable income and pre-tax book income
related to the federally assisted acquisitions of seven insolvent thrift
institutions in 1988 and the related tax exempt assistance received in the
form of interest on FSLIC notes and covered assets and other assistance
payments. The tax exempt assistance is also the primary cause of NOLs.
The Company generated net taxable income in 1993, 1992 and 1991 resulting in
the utilization of a portion of the NOLs. Except for the effects of the
reversal of net deductible temporary differences, the Company is not
currently aware of any factors which would cause any significant differences
between taxable income and pre-tax book income in future years. However,
there can be no assurances that there will be no significant differences in the
future between taxable income and pre-tax book income if circumstances change
(such as changes in tax laws or the Company's financial condition or
performance).
In adopting SFAS No. 109 the Company recorded income and a deferred tax asset
equal to the cumulative effect of the accounting change of $75.9 million, $53.1
million of which remains at December 31, 1993. To fully realize the deferred tax
asset the Company will need to generate future taxable income of approximately
$133 million prior to expiration of the NOLs which will begin to expire in 2002.
Based on the Company's historical and current pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit of
the NOLs existing at December 31, 1993 before they begin to expire in 2002.
Further, management believes the existing net deductible temporary differences
will reverse during periods in which the Company generates net taxable income.
However, there can be no assurance that the Company will generate any
earnings or specific level of continuing earnings.
-18-
<PAGE>
The bank qualifies as a savings and loan institution as defined by the Internal
Revenue Code. As a qualifying savings and loan, the Bank is able to utilize an
available special tax provision for the bad debt reserve deduction which allows
the use of either the "experience" method or the "percentage of taxable income"
method in determining the annual allowable deduction.
Note O
Employee Benefits
Pension Plan
The Company has a defined benefit plan covering substantially all employees. The
benefits are based on years of service, minimum age requirements, and the
employee's compensation while employed with the Company. The Company's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes. The actuarial cost method used to compute pension
cost is the Projected Unit Credit method.
Net pension cost (income) included the following components:
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Service cost-benefits earned
during the period $1,289 $ 792 $ 218
Interest cost on projected
benefit obligation 580 336 363
Actual return on plan assets (1,453) (2,009) (2,761)
Net amortization and deferral 240 1,167 2,020
Net periodic pension
cost (income) $ 656 $ 286 $ (160)
</TABLE>
The following table sets forth the plan's funded status and amounts
recognized in the Company's statements of financial condition:
<TABLE>
<CAPTION> December 31
(In thousands) 1993 1992
<S> <C> <C>
Actuarial present value of
accumulated benefit obligation
including vested benefits of
$3,623 in 1993 and $5,330 in 1992 $(4,401) $(5,860)
Actuarial present value of
projected benefit obligation (7,401) (7,661)
Plan assets at market value,
primarily certificates of deposit,
U.S. Treasury securities and
listed stock, including $2,615
in 1993 and $2,523 in 1992
of Company stock 12,064 12,236
Plan assets in excess of projected
benefit obligation 4,663 4,575
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions (562) (655)
Prior service cost not yet recognized
in net periodic pension cost (1,119) (1,233)
Unrecognized net assets at end of year (3,980) (3,035)
Pension liability $ (998) $ (348)
</TABLE>
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7 percent at both December 31, 1993 and 1992. The expected long
term rate of return on plan assets in 1993, 1992 and 1991 was 7 percent.
-19-
<PAGE>
Postretirement Benefit Plan
In addition to the Company's defined pension benefit plan, the Company sponsors
a defined benefit health care plan that provides postretirement benefits to
eligible employees. The benefits, based on years of service, is contributory
and contains cost-sharing features such as deductibles and coinsurance. The
Company's policy is to fund the cost of medical benefits in amounts determined
by management.
In 1993, the Company adopted Financial Accounting Standard No. 106 "Employers
Accounting For Postretirement Benefits Other than Pensions." The Company's total
postretirement benefit cost for 1993 was $545,000. Postretirement benefit costs
for 1992 and 1991, which were recorded on a cash basis, have not been restated.
The postretirement benefit liability at December 31, 1993 was $499,000. Upon
adoption, the accumulated postretirement obligation was $2.4 million and
increased to $2.9 million at December 31, 1993.
The weighted average annual assumed rate of increase in the per capita cost of
covered benefits is 13 percent for 1993 and is assumed to decrease gradually
to 6 percent for 2001 and remain at that level thereafter. The health care
cost trend rate assumption has minimal effect on the amounts reported.
Increasing the assumed health care trend rates by one percentage point in
each year would increase the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for 1993 by
$160,000. The weighted average discount rate used in determining
postretirement benefit obligation was 7 percent at December 31, 1993.
The board of directors has approved a directors' retirement plan subject to
shareholder approval.
In November 1992, the Financial Accounting Standards Board issued SFAS No. 112,
"Employers Accounting for Post Employment Benefits." The Company is required to
adopt this Statement in 1994. As of December 31, 1993, the Company had not
adopted Statement No. 112. No material effect on the financial condition of the
Company is anticipated when the statement is adopted.
Savings Plans
The Company has a defined contribution savings plan covering substantially all
employees. Eligibility is based on years of service and minimum age
requirements. Employees elect to contribute a percentage of their compensation.
Contributions are invested, at the direction of the employee, in one or more
funds or can be directed to purchase common stock of the Company at fair market
value. The Company makes matching contributions, invested solely in common stock
of the Company, up to a specified percentage of employee's compensation. Company
contributions vest over a period of five years. Total savings plan expense was
$2.5 million $2.0 million and $1.5 million for the years ended December 31,
1993, 1992 and 1991, respectively.
Stock Purchase Plan
The Company established a shareholder approved Employee Stock Purchase Plan (the
"Plan") in 1992 for which 440,000 shares have been reserved. Under the Plan, the
Company conducts a series of offerings (each an "Offering") of its Common Stock,
each continuing for three months, beginning on January 1, April 1, July 1 and
October 1 of each year (the "Offering Date") and ending on March 31, June 30,
September 30 and December 31 of each year (the "Offering Period"). The per share
purchase price of the shares offered in a given Offering is the lower of 85
percent of the fair market value of one share of the Common Stock of the Company
on the first day of the Offering Period or the last day of the Offering Period.
Employees, subject to restrictions regarding length of service and age, may
designate a payroll deduction limited to a minimum deduction of $25 per pay
period and not exceeding an amount which would result in the purchase of Common
Stock with a fair value of more than $25,000 in any calendar year. During 1993,
a total of 353,450 shares were issued under the plan for an aggregate purchase
price of $4.4 million.
Stock Option and Incentive Plans
The Company has three board of director approved stock option and incentive
plans, initiated in 1984, 1990 and 1993. The 1993 plan is pending shareholder
approval. Two types of options are granted under the plans, incentive and
nonqualified. Incentive options are exercisable on a phased in basis beginning
one year after issuance. Nonqualified options before October 1993 are fully
exercisable on the grant date. Nonqualified options after October 1993 are
exercisable on a phased in basis beginning one year after issuance. All options
expire ten years from the grant date. Under the 1993 plan,restricted stock
awards, performance units, stock bonuses and stock appreciation rights may also
be granted.
The company initiated a non-employee director stock option plan, approved by the
shareholders, in 1993. The options are exercisable one year after issuance. The
grant of incentive and nonqualified stock options is to be made at the
discretion of the committee responsible for administering the plans and is to
be set forth in the option agreement.
-20-
<PAGE>
Shares reserved and options outstanding under all plans are as follows:
<TABLE>
<CAPTION> Options Outstanding
Shares Reserved Total Number and Exercisable Price
For Future Grant Of Shares Total Shares Per Share
<S> <C> <C> <C> <C>
Balance at December 31, 1990 1,371,102 2,805,567 2,805,567 $1.57 _ 4.90
Granted (413,248) 413,248 413,248 4.35 _ 4.35
Exercised _ (1,329,299) (1,329,299) 1.57 _ 4.90
Balance at December 31, 1991 957,854 1,889,516 1,889,516 1.57 _ 4.90
Share allocated 660,000 _ _ _
Granted (767,800) 767,800 767,800 9.72 _ 15.23
Cancelled 79,068 (79,068) (79,068) 4.35 _ 9.72
Exercised _ (574,497) (574,497) 1.84 _ 4.90
Balance at December 31, 1992 929,122 2,003,751 2,003,751 1.57 _ 15.23
Shares allocated 2,275,000 _ _ _
Granted (1,000,900) 1,000,900 553,400 15.13 _ 18.30
Cancelled _ _ _ _
Exercised _ (725,992) (725,992) 1.57 _ 16.02
Balance at December 31, 1993 2,203,222 2,278,659 1,831,159 $2.85 _ 18.30
</TABLE>
Note P
Parent Company Financial Information
The Company's ability to pay cash dividends depends upon the cash dividends it
receives from the Bank, Edina Realty and Equity Title.
The Bank is required to give the OTS thirty day notice prior to declaration of a
cash dividend to the parent company. The Bank's dividends to the parent
company are generally limited to the calendar year's earnings plus 50 percent
of the surplus capital (the percentage by which the ratio of its regulatory
capital to assets ratio exceeds the fully phased in ratio) at the beginning
of the year.
-21-
<PAGE>
The summarized financial information of Metropolitan Financial Corporation, the
parent company, is as follows:
Condensed Statements of Condition
<TABLE>
<CAPTION>
(In thousands) December 31, 1993 December 31, 1992
<S> <C> <C>
Assets
Cash and investments $ 12,254 $ 12,966
Equity in net assets of subsidiaries 578,046 503,107
Other assets 12,504 8,632
Total Assets $602,804 $524,705
Liabilities
Payable to subsidiaries $ 37 $ 1,180
Other borrowings 92,521 93,857
Other liabilities 5,863 3,024
Total Liabilities 98,421 98,061
Shareholders' Equity
Preferred stock 5 5
Common stock 320 267
Additional paid-in capital 231,881 148,890
Retained earnings 280,813 278,424
Net unrealized gains on securities
available-for-sale (net of tax) 4,209 _
Less cost of common stock in treasury (12,845) (942)
Total Shareholders' Equity 504,383 426,644
Total Liabilities and Shareholders' Equity $602,804 $524,705
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Net interest expense $ (7,756) $ (2,070) $ (434)
Cash dividends received from subsidiaries 23,672 17,136 8,930
Management fee income 20,906 15,364 11,979
Noninterest expense (20,731) (15,093) (11,545)
Income before equity in earnings of subsidiaries 16,091 15,337 8,930
Undistributed equity in earnings of subsidiaries 46,137 121,794 48,509
Income before income taxes 62,228 137,131 57,439
Income tax benefit 2,946 _ _
Net Income $65,174 $137,131 $57,439
</TABLE>
-22-
<PAGE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Operating Activities
Net income $ 65,174 $137,131 $57,439
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in earnings of subsidiaries (46,137) (121,794) (48,509)
Net Cash Provided by Operating Activities 19,037 15,337 8,930
Investing Activities
Capital contribution to subsidiary _ (78,000) _
Net Cash Used by Investing Activities _ (78,000) _
Financing Activities
(Decrease) increase in receivables from
or payables to subsidiaries (1,123) 68 (410)
Proceeds from:
Issuance of borrowings _ 86,250 _
Issuance of common stock 16,742 4,380 4,168
Sale of common stock held in Treasury _ 3,131 810
Repayment of borrowings (3,860) (3,048) (4,248)
Purchase of common stock held in Treasury (11,903) (114) (82)
Dividends (13,483) (9,093) (9,318)
Other financing activities (6,122) (9,480) 395
Net Cash (Used) Provided by Financing Activities (19,749) 72,094 (8,685)
(Decrease) Increase in Cash and Cash Equivalents (712) 9,431 245
Cash and cash equivalents at beginning of year 12,966 3,535 3,290
Ending Cash and Cash Equivalents $ 12,254 $ 12,966 $ 3,535
</TABLE>
-23-
<PAGE>
Note Q
Segment Information
The following summarizes financial data for the Company's business segments:
<TABLE>
<CAPTION> Year Ended December 31
(In thousands) 1993 1992 1991
<S> <C> <C> <C>
Revenues:
The Bank $ 507,995 $ 492,907 $ 460,288
Edina Realty 36,267 33,905 28,105
Equity Title 13,714 11,503 8,001
MFS 4,587 852 67
562,563 539,167 496,461
Expenses:
The Bank 430,110 388,980 400,480
Edina Realty 33,093 30,855 27,052
Equity Title 10,693 9,113 7,009
MFS 2,208 157 54
476,104 429,105 434,595
Net income before income tax expense,
extraordinary item and cumulative effect of
accounting change:
The Bank 77,885 103,927 59,808
Edina Realty 3,174 3,050 1,053
Equity Title 3,021 2,390 992
MFS 2,379 695 13
$ 86,459 $ 110,062 $ 61,866
</TABLE>
Nearly all assets are attributable to the financial institutions segment.
-24-
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Metropolitan Financial Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of condition of
Metropolitan Financial Corporation and subsidiaries as of December 31, 1993 and
1992 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Metropolitan
Financial Corporation and subsidiaries at December 31, 1993 and 1992 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles.
As discussed in Note D to the financial statements, in 1993 the Company changed
its method of accounting for certain debt and equity securities. Also, as
discussed in Note O to the financial statements, in 1993 the Company changed its
method of accounting for certain postretirement benefits provided to its
employees.
Ernst & Young LLP
Minneapolis, Minnesota
January 19, 1994
-25-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
March 31, December 31,
1994 1993
<S> <C> <C>
Assets
Cash and due from banks $89,251 $85,084
Short term interest bearing deposits 50,644 82,364
Loans held-for-sale 31,659 60,645
Securities available-for-sale 604,406 813,293
Mortgage-backed securities (market: March 31, 1994-$1,092,878;
December 31, 1993-$954,908) 1,102,019 943,193
Loans (net of allowance: March 31, 1994-$42,832;
December 31, 1993-$42,905) 5,479,505 4,585,410
Federal Home Loan Bank stock, at cost 73,062 59,719
Accrued interest 42,260 36,817
Real estate (net of allowance: March 31, 1994-$7,144;
December 31, 1993-$9,533) 59,007 56,110
Office properties and equipment 101,631 91,632
Goodwill 90,874 61,517
Deferred taxes 57,173 53,089
Other assets 73,354 77,912
Total Assets $7,854,845 $7,006,785
Liabilities
Transaction and passbook deposits $1,663,892 $1,560,667
Certificates 4,033,849 3,793,968
Federal Home Loan Bank advances 1,248,141 921,801
Reverse repurchase agreements 175,000 --
Other borrowings 122,428 133,159
Accrued interest 45,593 42,485
Other liabilities 66,705 50,322
Total Liabilities 7,355,608 6,502,402
Shareholders' Equity
Preferred stock, par value
$.01 per share; authorized 10,000,000
shares; issued--488,750 5 5
Common stock, par value $.01 per share; authorized
60,000,000 shares; issued March 31, 1994-32,217,674 shares,
December 31, 1993-31,992,275 shares 322 320
Additional paid-in capital 234,537 231,881
Retained earnings 286,453 280,813
Net unrealized (losses) gains on securities available-for-sale (net of tax) (1,715) 4,209
Less: cost of common stock in treasury; March 31, 1994-1,305,338
shares; December 31, 1993-813,522 shares (20,365) (12,845)
Total Shareholders' Equity 499,237 504,383
Total Liabilities and Shareholders' Equity $7,854,845 $7,006,785
See notes to condensed consolidated financial statements
</TABLE>
-26-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Interest Income
Mortgage-backed securities $ 22,692 $ 32,169
Loans 95,178 74,557
Investments 4,157 5,347
122,027 112,073
Interest Expense
Transaction and passbook deposits 7,050 8,038
Certificates 46,649 51,080
Federal Home Loan Bank advances 12,679 3,628
Reverse repurchase agreements 609 --
Other borrowings 2,475 3,332
69,462 66,078
Net interest income 52,565 45,995
Provision for loan losses 2,575 1,500
Net interest income after provision for loan losses 49,990 44,495
Noninterest Income
Gains related to mortgage banking activities 347 525
Mortgage loan servicing fees 2,126 2,189
Realty commission income 6,306 5,379
Title closing fees 2,202 1,874
Service charges on deposit accounts 3,079 1,885
Financial services income 1,835 702
Other income 1,651 1,193
17,546 13,747
Noninterest Expense
Compensation and related items 19,751 20,163
Occupancy 6,474 5,864
Data processing 2,859 2,748
Advertising 2,942 2,909
Deposit insurance premium 3,102 2,372
Amortization of goodwill 1,035 1,016
Real estate owned expense 914 1,752
Other general and administrative 10,807 12,598
47,884 49,422
Income Before Income Taxes 19,652 8,820
Income tax expense (benefit) 7,467 (6,467)
Net Income $12,185 $15,287
Earnings Per Share:
Primary $0.37 $0.49
Fully diluted $0.37 $0.48
See notes to condensed consolidated financial statements.
</TABLE>
-27-
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Net
Unrealized
Gains (Losses)
Additional on Securities Total
Preferred Stock Common Stock Paid-In Retained Available- Treasury Stock Shareholders'
Shares Amount Shares Amount Capital Earnings For-Sale Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1993 488,750 $5 31,992,275 $320 $231,881 $280,813 $4,209 (813,522) $(12,845) $504,383
Issuance of common stock 105,610 1 1,825 1,826
Stock options exercised 85,337 1 669 670
Warrants exercised 34,452 162 162
Net treasury stock acquired (491,816) (7,520) (7,520)
Net unrealized losses on
securities available-for-sale (5,924) (5,924)
Dividends declared:
Preferred (351) (351)
Common-$.20 per share (6,194) (6,194)
Net income 12,185 12,185
March 31, 1994 488,750 $5 32,217,674 $322 $234,537 $286,453 $(1,715) (1,305,338) $(20,365) $499,237
See notes to condensed consolidated financial statements.
</TABLE>
-28-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Operating Activities
Net income $ 12,185 $ 15,287
Reconciliation to cash provided by operating activities:
Net amortization of loan fees, discounts and premiums 6,801 5,744
Provision for loan losses 2,575 1,500
Decrease (increase) in deferred tax asset 3,479 (7,633)
Depreciation and amortization 2,692 2,091
Amortization of goodwill 1,035 1,016
Increase in accrued interest receivable (2,810) (1,704)
Increase in accrued interest payable 54 1,442
______________________
Net Cash Provided by Operating Activities 26,011 17,743
Investing Activities
Acquisitions of subsidiaries, net of cash received (50,304) --
Increase in loans (267,059) (258,716)
Purchase of:
Loans (466,417) (100,000)
Investment securities available-for-sale (39,475) --
Mortgage-backed securities available-for-sale (9,945) (17,291)
Mortgage-backed securities held-to-maturity (233,446) (290,053)
Proceeds from the maturity of investment securities:
Available-for-sale 105,528 --
Held-to-maturity -- 193,849
Proceeds from the sale of:
Mortgage-backed securities available-for-sale 315,267 143,545
Loans held-for-sale 18,255 15,655
Real estate 10,192 6,450
Principal repayments of mortgage-backed securities:
Available-for-sale 82,082 704
Held-to-maturity 113,404 88,259
Other investing activities 7,336 32,521
______________________
Net Cash Used by Investing Activities (414,582) (185,077)
Financing Activities
Net increase (decrease) in:
Short-term borrowings 175,000 --
Deposits (90,939) (103,901)
Purchase of deposits 11,105 --
Proceeds from:
Federal Home Loan Bank advances 402,000 240,000
Issuance of common stock 1,826 1,914
Exercise of common stock options and warrants 528 1,118
Net purchase of stock (7,520) (21)
Repayment of:
Federal Home Loan Bank advances (120,195) (34,694)
Other borrowings (10,731) (22,653)
Cash dividends (6,545) (3,028)
Other financing activities 6,489 1,399
______________________
Net Cash Provided by Financing Activities 361,018 80,134
______________________
Net Decrease in Cash and Cash Equivalents (27,553) (87,200)
Cash and cash equivalents at beginning of year 167,448 252,859
______________________
Ending Cash and Cash Equivalents $139,895 $165,659
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
-29-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals and periodic changes in estimates) considered
necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 1994, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1994. Amounts have been reclassified to conform to
the current period presentation. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
annual report on Form 10-K for the year ended December 31, 1993.
NOTE B--Income Taxes
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
(In thousands) 1994 1993
<S> <C> <C>
Current
Federal $3,115 $ (53)
State 873 366
_________________
3,988 313
Deferred
Federal 2,930 (7,226)
State 549 446
_________________
3,479 (6,780)
_________________
$7,467 $(6,467)
</TABLE>
The provision for federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
(In thousands) 1994 1993
<S> <C> <C>
Tax statutory rate $6,878 $ 2,999
State income taxes, net of federal benefit 1,057 531
Change in the deferred tax asset valuation allowance -- (10,000)
Tax effect of:
Amortization of goodwill 362 346
Other, net (830) (343)
$7,467 $ (6,467)
</TABLE>
-30-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of and changes in the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
Effect of
Deferred Acquisitions
December 31, (Expense) and Other March 31,
(In thousands) 1993 Benefit Transactions 1994
<S> <C> <C> <C> <C>
Loan fees and discounts $ 5,526 $(1,289) $ 4,237
Discounts on loans and mortgage-backed securities 9,377 130 $ (898) 8,609
Bad debt deduction 7,220 (1,227) 1,159 7,152
Federal Home Loan Bank stock dividends (6,366) 92 (1,138) (7,412)
Other 1,878 1,536 3,967 7,381
_________________________________________________________
Net temporary differences 17,635 (758) 3,090 19,967
Carryforwards:
Federal regular tax operating loss carryforwards 15,778 (5,212) 251 10,817
Federal regular tax operating loss carryforwards
acquired in purchase business combinations 1,377 (158) 3,701 4,920
State regular tax operating loss carryforwards 3,644 (88) 16 3,572
State regular tax operating loss carryforwards
acquired in purchase business combinations 4,709 (440) -- 4,269
Federal AMT credit carryforwards 9,946 3,177 505 13,628
_________________________________________________________
Total carryforwards 35,454 (2,721) 4,473 37,206
_________________________________________________________
Deferred tax asset $53,089 $(3,479) $7,563 $57,173
=========================================================
</TABLE>
The adjustments to the net deferred tax asset in 1994 identified as the
"Effect of acquisitions and other transactions" result primarily from
the acquisition of Rocky Mountain Financial Corporation and the exercise
of compensatory stock options.
A valuation allowance is provided when it is more likely than not, that
some portion of the deferred tax asset will not be realized. The
Company established a valuation allowance for a portion of the operating
loss carryforwards as a result of unresolved matters with taxing
authorities. During 1993, certain tax issues were resolved which were
previously considered in management's assessment of the valuation
allowance. As a result, the Company reduced the valuation allowance by
$10 million during the first quarter of 1993. The remaining $6.5
million valuation allowance was eliminated in the last half of 1993.
Approximately $10.6 million of the change in the deferred tax asset
valuation allowance ($10 million in first quarter 1993) was allocated as
a reduction of income tax expense. At March 31, 1994, the Company had the
following net operating loss carryforwards available for income tax
purposes:
<TABLE>
<CAPTION>
Expiration
(Dollars in thousands) Date Amount
<S> <C> <C>
Federal regular tax
operating loss carryforwards
acquired through business
combinations 1995-2002 $13,366
Federal regular tax operating
loss carryforwards from
other than business
combinations 2005 29,071
42,437
Federal AMT operating loss
carryforwards 1995-2002 $14,718
</TABLE>
-31-
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C--Acquisitions
On March 25, 1994, the Bank completed the acquisition of Rocky Mountain
Financial Corporation ("RMFC"), and its federally chartered thrift
subsidiary Rocky Mountain Bank, FSB ("Rocky Mountain"), Cheyenne,
Wyoming. Pursuant to the stock purchase agreement, the Bank purchased
all of the outstanding stock of RMFC, which was liquidated and dissolved
and Rocky Mountain was merged into the Bank. Total consideration of
$64.2 million was paid in cash to the stockholders of RMFC, after
consideration of approximately $3.0 million of transaction expenses.
The transaction was accounted for as a purchase. Rocky Mountain had
assets of $537 million and deposits of $428 million as of March 25,
1994. The results of operations of RMFC and Rocky Mountain for the
period March 26, 1994 through March 31, 1994 have been included in the
Company's consolidated first quarter results.
In addition, on March 11, 1994, the Bank completed the acquisition of
$12.5 million in deposits of two branches of Pioneer Federal Savings and
Loan Association, a failed thrift in Kansas.
Unaudited pro forma income and income per share information as if RMFC
and Rocky Mountain had been combined with the Company at the beginning
of each of the respective periods is as follows:
<TABLE>
<CAPTION>
Three Months Ended
(Amounts in thousands, except March 31,
per share data) 1994 1993
<S> <C> <C>
Net Interest Income $56,085 $49,998
Net Income 13,170 16,474
Per Share Data:
Primary $0.40 $0.52
Diluted $0.40 $0.52
</TABLE>
-32-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 5, 1994 FIRST BANK SYSTEM, INC.
--------------
/s/ David J. Parrin
------------------------------------
David J. Parrin
Senior Vice President and Controller
-33-
<PAGE>
Exhibit 2.1
AGREEMENT OF MERGER AND CONSOLIDATION
BY AND BETWEEN
FIRST BANK SYSTEM, INC.
AND
METROPOLITAN FINANCIAL CORPORATION
DATED: JULY 21, 1994
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<C> <S> <C>
Page
ARTICLE 1
MERGER.................................................................... 2
1.1. Effect of Merger............................................... 2
1.2. Effect on Outstanding Shares of MFC Capital Stock.............. 2
1.3. FBS Common Stock Adjustments................................... 3
1.4. Rights of Holders of MFC Capital Stock; Capital Stock of FBS... 4
1.5. No Fractional Shares........................................... 4
1.6. Procedure for Exchange of Stock................................ 5
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF FBS..................................... 7
2.1. Organization and Qualification................................. 7
2.2. Authority Relative to this Agreement; Non-Contravention........ 7
2.3. Validity of FBS Common Stock................................... 8
2.4. Capital Stock.................................................. 8
2.5. 1934 Act Reports............................................... 9
2.6. No Material Adverse Changes.................................... 9
2.7. Prospectus/Proxy Statement..................................... 10
2.8. Litigation..................................................... 10
2.9. Reports and Filings............................................ 10
2.10. Compliance with Laws........................................... 10
2.11. Regulatory Approvals........................................... 10
2.12. Disclosure..................................................... 11
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MFC..................................... 11
3.1. Organization and Qualification................................. 11
3.2. Authority Relative to this Agreement; Non-Contravention........ 11
3.3. Capitalization................................................. 12
3.4. 1934 Act Reports............................................... 12
3.5. Financial Statements........................................... 13
3.6. Loans.......................................................... 14
3.7. Reports and Filings............................................ 14
3.8. Subsidiaries................................................... 15
3.9. Absence of Undisclosed Liabilities............................. 15
3.10. No Material Adverse Changes.................................... 15
3.11. Absence of Certain Developments................................ 15
3.12. Properties..................................................... 17
3.13. Tax Matters.................................................... 19
</TABLE>
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<S> <C> <C>
3.14. Contracts and Commitments...................................... 20
3.15. Litigation..................................................... 21
3.16. No Brokers or Finders.......................................... 21
3.17. Employees...................................................... 21
3.18. Employee Benefit Plans......................................... 22
3.19. Insurance...................................................... 25
3.20. Affiliate Transactions......................................... 25
3.21. Compliance with Laws; Permits.................................. 25
3.22. Administration of Fiduciary Accounts........................... 26
3.23. Disclosure..................................................... 26
3.24. Prospectus/Proxy Statement..................................... 26
3.25. Pooling of Interests........................................... 27
3.26. Regulatory Approvals........................................... 27
3.27. Interest Rate Risk Management Instruments...................... 27
ARTICLE 4
CONDUCT OF BUSINESS PENDING THE MERGER..................................... 27
4.1. Conduct of Business............................................. 27
ARTICLE 5
ADDITIONAL COVENANTS AND AGREEMENTS........................................ 30
5.1. Filings and Approvals........................................... 30
5.2. Certain Loans and Related Matters............................... 31
5.3. Monthly Financial Statements.................................... 31
5.4. Expenses........................................................ 31
5.5. No Negotiations, etc. .......................................... 31
5.6. Notification of Certain Matters................................. 32
5.7. Access to Information; Confidentiality.......................... 32
5.8. Filing of Tax Returns and Adjustments........................... 33
5.9. Registration Statement.......................................... 34
5.10. Affiliate Letters............................................... 35
5.11. Establishment of Accruals....................................... 36
5.12. Employee Matters................................................ 36
5.13. Pooling of Interests; Tax Treatment............................. 38
5.14. Stock Options and Warrants...................................... 39
5.15. Indemnification and Insurance................................... 40
5.16. Edina Realty Litigation Matters................................. 41
5.17. FBS SEC Reports................................................. 42
5.18. SEC Reports..................................................... 42
5.19. Stock Exchange Listing.......................................... 42
5.20. Shareholder Approvals........................................... 42
5.21. FBS Board of Directors; Consulting Agreement.................... 42
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE 6
<S> <C> <C>
CONDITIONS................................................................. 43
6.1. Conditions to Obligations of Each Party......................... 43
6.2. Additional Conditions to Obligation of MFC...................... 45
6.3. Additional Conditions to Obligation of FBS...................... 46
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER......................................... 50
7.1. Termination.................................................... 50
7.2. Effect of Termination.......................................... 51
7.3. Amendment...................................................... 52
7.4. Waiver......................................................... 52
ARTICLE 8
GENERAL PROVISIONS........................................................ 52
8.1. Public Statements.............................................. 52
8.2. Notices........................................................ 52
8.3. Interpretation................................................. 53
8.4. Severability................................................... 54
8.5. Miscellaneous.................................................. 54
8.6. Survival of Representations, Warranties and Covenants.......... 54
8.7. Schedules...................................................... 54
SIGNATURES................................................................ 55
</TABLE>
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<PAGE>
AGREEMENT OF MERGER AND CONSOLIDATION
AGREEMENT OF MERGER AND CONSOLIDATION dated July 21, 1994, by and between
FIRST BANK SYSTEM, INC., a Delaware corporation ("FBS"), and METROPOLITAN
FINANCIAL CORPORATION, a Delaware corporation ("MFC").
WHEREAS, the Boards of Directors of FBS and MFC have determined that it is
in the best interests of FBS and MFC and their respective shareholders to
consummate the merger of MFC with and into FBS as described in Article 1 (the
"Merger");
WHEREAS, as a result of the Merger, all of the outstanding common stock,
$0.01 par value, of MFC ("MFC Common Stock") will be converted into common
stock, $1.25 par value, of FBS ("FBS Common Stock") and all of the outstanding
preferred stock, $0.01 par value, of MFC ("MFC Preferred Stock") will be
converted into the right to receive cash, all on the terms and subject to the
conditions set forth in this Agreement;
WHEREAS, (a) MFC (i) owns all of the issued and outstanding capital stock
of Metropolitan Federal Bank, fsb (the "Bank") and (ii) owns all of the issued
and outstanding capital stock of LMN Management Corp. and Edina Realty, Inc.
(collectively, the "Direct Nonbanking Subsidiaries"); (b) the Bank owns,
directly or indirectly, all of the issued and outstanding capital stock of the
entities listed on Schedule A hereto (collectively, the "Indirect Nonbanking
Subsidiaries"); and (c) Edina Realty, Inc. owns all of the issued and
outstanding capital stock of the entities listed on Schedule B hereto
(collectively, the "Edina Realty Subsidiaries" and together with the Bank, the
Direct Nonbanking Subsidiaries and the Indirect Nonbanking Subsidiaries, the
"Subsidiaries");
WHEREAS, as a condition and inducement to FBS's willingness to enter into
this Agreement, FBS and MFC are entering into immediately after the execution
and delivery hereof a Stock Option Agreement dated as of the date hereof (the
"Stock Option Agreement") pursuant to which MFC shall grant to FBS an option to
purchase shares of MFC Common Stock; and
WHEREAS, FBS and MFC desire that the Merger be made on the terms and
subject to the conditions set forth in this Agreement and qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, the parties hereto agree as follows:
<PAGE>
ARTICLE 1
MERGER
Subject to the satisfaction or waiver of the conditions set forth in
Article 6, on a date mutually satisfactory to the parties as soon as practicable
following receipt of all necessary regulatory approvals of the Board of
Governors of the Federal Reserve System ("FRB") and the Office of Thrift
Supervision (the "OTS"), MFC will merge with and into FBS. FBS, in its capacity
as the corporation surviving the Merger, is sometimes referred to herein as the
"Surviving Corporation." The Merger will be effected pursuant to the provisions
of, and with the effect provided in, Section 251 of the Delaware General
Corporation Law (the "DGCL").
1.1. Effect of Merger.
----------------
(a) On the Effective Date (as defined in Section 1.1(d)), MFC shall be
merged with and into FBS, and the separate existence of MFC shall cease. The
Charter (as defined Section 2.2) and Bylaws of FBS, as in effect immediately
prior to the Effective Date, shall be the Charter and the Bylaws of the
Surviving Corporation until further amended as provided therein and in
accordance with law. The directors of FBS immediately prior to the Effective
Date will be the directors of the Surviving Corporation until their successors
are elected and qualify.
(b) The Surviving Corporation shall thereupon and thereafter be responsible
and liable for all the liabilities, debts, obligations and penalties of each of
FBS and MFC.
(c) The Surviving Corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises, of a public as well as of a
private nature, of each of FBS and MFC; all property, real, personal and mixed,
and all debts due on whatever account, and all and every other interest, of or
belonging to or due to each of FBS and MFC, shall be taken and deemed to be
transferred to and vested in the Surviving Corporation without further act or
deed; and the title to any real estate or any interest therein, vested in FBS
and MFC, shall not revert or be in any way impaired by reason of the Merger.
(d) To effect the Merger, the parties hereto will cause a certificate of
merger relating to the Merger to be filed with the Secretary of State of
Delaware. The Merger shall be effective upon the filing of such certificate of
merger. As used herein, the term "Effective Date" shall mean the date on which
the certificate of merger is filed with the Secretary of State of Delaware.
1.2. Effect on Outstanding Shares of MFC Capital Stock.
-------------------------------------------------
To effectuate the Merger and subject to the terms and conditions of this
Agreement:
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(a) each issued and outstanding share of MFC Common Stock (other than
shares held as treasury stock of MFC or shares held directly or indirectly by
FBS, other than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted) shall be converted into .6803 shares of FBS Common Stock,
and FBS shall issue to holders of MFC Common Stock .6803 shares of FBS Common
Stock (the "Exchange Ratio"), subject to adjustment as provided in Section 1.3,
in exchange for each such share of MFC Common Stock;
(b) all outstanding options and warrants to purchase shares of MFC Common
Stock shall be exchanged for options and warrants to purchase FBS Common Stock,
or shares of FBS Common Stock, as provided in Section 5.14;
(c) each issued and outstanding share of MFC Preferred Stock (other than
shares as to which the holders thereof have asserted and not effectively
withdrawn or otherwise lost their appraisal rights pursuant to Section 262 of
the DGCL ("Dissenters' Shares")) shall be converted into the right to receive
$27.00 in cash, plus any accumulated and unpaid dividends on such shares of MFC
Preferred Stock to, but excluding, the Effective Date calculated as set forth in
the terms of such MFC Preferred Stock, without interest, from FBS (the
"Preferred Consideration"), and FBS shall pay to holders of such MFC Preferred
Stock the Preferred Consideration in exchange for each such share of MFC
Preferred Stock;
(d) Dissenters' Shares shall be purchased and paid for in accordance with
Section 262 of the DGCL; and
(e) each share of MFC Common Stock held as treasury stock of MFC or held
directly or indirectly by FBS, other than shares held in a fiduciary capacity or
in satisfaction of a debt previously contracted, shall be canceled, retired and
cease to exist, and no exchange or payment shall be made with respect thereof.
1.3. FBS Common Stock Adjustments.
----------------------------
(a) If the average of the closing prices of FBS Common Stock as quoted on
the New York Stock Exchange (the "NYSE") for the 20 trading days ending three
business days prior to the last date of the meetings of shareholders scheduled
to obtain the shareholder approvals referred to in Section 5.20 (the "Average
Price") is less than $33.00, then, subject to Section 7.1(e), the Exchange Ratio
will be adjusted by multiplying the Exchange Ratio by the quotient of (i) $33.00
divided by (ii) the Average Price.
(b) If the Average Price is greater than $40.50, then the Exchange Ratio
will be adjusted by multiplying the Exchange Ratio by the quotient of (i) $40.50
divided by (ii) the Average Price.
(c) If, between the date hereof and the Effective Date, shares of FBS
Common Stock shall be changed into a different number of shares or a different
class of shares by reason of any reclassification, recapitalization, split-up,
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combination, exchange of shares or readjustment, or if a stock dividend thereon
shall be declared with a record date within such period, then the number of
shares of FBS Common Stock issued to holders of MFC Common Stock pursuant to
this Agreement will be appropriately and proportionately adjusted so that the
number of such shares of FBS Common Stock (or such class of shares into which
shares of FBS Common Stock have been changed) that will be issued to holders of
MFC Common Stock will equal the number of such shares that holders of MFC Common
Stock would have received pursuant to such classification, recapitalization,
split-up, combination, exchange of shares or readjustment had the record date
therefor been immediately following the Effective Date.
1.4. Rights of Holders of MFC Capital Stock; Capital Stock of FBS.
------------------------------------------------------------
(a) On and after the Effective Date and until surrendered for exchange,
each outstanding stock certificate which immediately prior to the Effective Date
represented shares of MFC Common Stock shall be deemed for all purposes, except
as provided in Section 1.6(c), to evidence ownership of and to represent the
number of whole shares of FBS Common Stock into which such shares of MFC Common
Stock shall have been converted, and the record holder of such outstanding
certificate shall, after the Effective Date, be entitled to vote the shares of
FBS Common Stock into which such shares of MFC Common Stock shall have been
converted on any matters on which the holders of record of FBS Common Stock, as
of any date subsequent to the Effective Date, shall be entitled to vote. In any
matters relating to such certificates, FBS may rely conclusively upon the record
of shareholders maintained by MFC containing the names and addresses of the
holders of record of MFC Common Stock on the Effective Date.
(b) On and after the Effective Date and until surrendered for exchange,
each outstanding stock certificate which immediately prior to the Effective Date
represented shares of MFC Preferred Stock (other than Dissenters' Shares) shall
be deemed for all purposes to represent the right to receive the Preferred
Consideration from FBS. In any matters relating to such certificates, FBS may
rely conclusively upon the record of shareholders maintained by MFC containing
the names and address of the holders of record of MFC Preferred Stock on the
Effective Date.
(c) On and after the Effective Date, each share of FBS Common Stock issued
and outstanding immediately prior to the Effective Date shall remain an issued
and existing share of common stock of the Surviving Corporation and shall not be
affected by the Merger.
(d) On and after the Effective Date, FBS shall reserve a sufficient number
of authorized but unissued shares of FBS Common Stock for issuance in connection
with the conversion of MFC Common Stock into FBS Common Stock as provided
herein.
1.5. No Fractional Shares. No fractional shares of FBS Common Stock, and no
certificates representing such fractional shares, shall be issued upon the
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surrender for exchange of certificates representing MFC Common Stock. In lieu of
any fractional share, FBS shall pay to each holder of MFC Common Stock who
otherwise would be entitled to receive a fractional share of FBS Common Stock an
amount of cash (without interest) determined by multiplying (a) the closing
price per share of FBS Common Stock on the Effective Date times (b) the
fractional share interest to which such holder would otherwise be entitled.
1.6. Procedure for Exchange of Stock.
-------------------------------
(a) After the Effective Date, holders of certificates theretofore
evidencing outstanding shares of MFC Common Stock or MFC Preferred Stock, upon
surrender of such certificates to an exchange agent appointed by FBS (the
"Exchange Agent"), shall be entitled to receive, (i) in the case of MFC Common
Stock, (A) certificates representing the number of whole shares of FBS Common
Stock into which shares of MFC Common Stock theretofore represented by the
certificates so surrendered shall have been converted as provided in
Section 1.2(a) and (B) cash payments in lieu of fractional shares, if any, as
provided in Section 1.5, and (ii) in the case of MFC Preferred Stock, the
Preferred Consideration. As soon as practicable after the Effective Date, FBS
shall cause the Exchange Agent to mail appropriate and customary transmittal
materials (which shall specify that delivery shall be effected, and risk of loss
and title to the certificates theretofore representing shares of MFC Common
Stock or MFC Preferred Stock shall pass, only upon proper delivery of such
certificates to the Exchange Agent) to each holder of MFC Common Stock and MFC
Preferred Stock of record as of the Effective Date advising such holder of the
effectiveness of the Merger and the procedure for surrendering to the Exchange
Agent outstanding certificates formerly evidencing MFC Common Stock in exchange
for new certificates for FBS Common Stock and outstanding certificates formerly
evidencing MFC Preferred Stock in exchange for the Preferred Consideration. FBS
shall not be obligated to deliver the consideration to which any former holder
of shares of MFC Common Stock or MFC Preferred Stock is entitled as a result of
the Merger until such holder surrenders the certificate or certificates
representing such shares for exchange as provided in such transmittal materials
and this Section 1.6(a). In addition, certificates surrendered for exchange by
any person deemed an "affiliate" of MFC (as defined in Section 5.10), shall not
be exchanged for such consideration until FBS has received a written agreement
from such person as provided in Section 5.10. Upon surrender, each certificate
evidencing MFC Common Stock or MFC Preferred Stock shall be canceled.
(b) On the Effective Date, FBS shall deposit, or shall cause to be
deposited, with the Exchange Agent, for exchange in accordance with this
Section 1.6, certificates representing the shares of FBS Common Stock and the
cash in lieu of fractional shares and cash for payment of the Preferred
Consideration (such certificates and cash, hereinafter referred to as the
"Exchange Fund") to be issued or paid by FBS pursuant to this Article 1 in
connection with the Merger.
(c) Until outstanding certificates formerly representing MFC Common Stock
are surrendered as provided in Section 1.6(a), no dividend or distribution
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payable to holders of record of FBS Common Stock shall be paid to any holder of
such outstanding certificates, but upon surrender of such outstanding
certificates by such holder there shall be paid to such holder the amount of any
dividends or distributions (without interest) theretofore paid with respect to
such whole shares of FBS Common Stock, but not paid to such holder, and which
dividends or distributions had a record date occurring on or subsequent to the
Effective Date.
(d) After the Effective Date, there shall be no further registration of
transfers on the records of MFC of outstanding certificates formerly
representing shares of MFC Common Stock or MFC Preferred Stock and, if a
certificate formerly representing such shares is presented to MFC or FBS, it
shall be forwarded to the Exchange Agent for cancellation and exchange for
certificates representing shares of FBS Common Stock or the Preferred
Consideration, as applicable, as herein provided.
(e) All shares of FBS Common Stock and cash for any fractional shares
issued and paid upon the surrender for exchange of MFC Common Stock and all
Preferred Consideration paid upon the surrender for exchange of MFC Preferred
Stock in accordance with the above terms and conditions shall be deemed to have
been issued and paid in full satisfaction of all rights pertaining to such
shares of MFC Common Stock and MFC Preferred Stock, respectively.
(f) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any FBS Common Stock or any dividends or distributions
thereon) that remains unclaimed by the holders of MFC Common Stock or MFC
Preferred Stock for six months after the Effective Date shall be repaid to FBS.
Any holders of MFC Common Stock or MFC Preferred Stock who have not theretofore
complied with this Section 1.6 shall thereafter look only to FBS for payment of
their shares of FBS Common Stock, cash in lieu of fractional shares and any
unpaid dividends and distributions on the FBS Common Stock deliverable in
respect of each share of MFC Common Stock or cash in an amount equal to the
Preferred Consideration payable in respect of each share of MFC Preferred Stock,
as the case may be, that such holder holds as determined pursuant to this
Agreement, in each case, without any interest thereon. If outstanding
certificates for shares of MFC Common Stock or MFC Preferred Stock are not
surrendered or the payment for them not claimed prior to the date on which such
payments would otherwise escheat to or become the property of any governmental
unit or agency, the unclaimed items shall, to the extent permitted by abandoned
property and any other applicable law, become the property of FBS (and to the
extent not in its possession shall be paid over to it), free and clear of all
claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, none of FBS, the Exchange Agent or any other
person shall be liable to any former holder of MFC Common Stock or MFC Preferred
Stock for any amount delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(g) In the event any certificate for MFC Common Stock or MFC Preferred
Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue
and
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<PAGE>
pay in exchange for such lost, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, (i) in the case of
MFC Common Stock, such shares of FBS Common Stock and cash for fractional
shares, if any, and (ii) in the case of MFC Preferred Stock, such Preferred
Consideration, each as may be required pursuant to this Agreement; provided,
however, that FBS may, in its discretion and as a condition precedent to the
issuance and payment thereof, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such sum as it may direct as
indemnity against any claim that may be made against FBS, MFC, the Exchange
Agent or any other party with respect to the certificate alleged to have been
lost, stolen or destroyed.
(h) Any Dissenters' Shares shall not be converted into the Preferred
Consideration or the right to receive the Preferred Consideration unless and
until the holder of such Dissenters' Shares shall have effectively withdrawn or
otherwise lost the right to appraisal of and payment for such shares under the
DGCL, at which time such shares shall be converted into the Preferred
Consideration, and the right to receive the Preferred Consideration, as provided
in Section 1.2(c). MFC shall give prompt notice to FBS of any demands received
from holders of MFC Preferred Stock for appraisal of and payment for their
shares. MFC shall not, except with the prior written consent of FBS,
voluntarily make any payment with respect to, or settle or offer to settle, any
such demands for appraisal.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF FBS
FBS hereby represents and warrants to MFC as follows:
2.1. Organization and Qualification. FBS is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the requisite corporate power to carry on its business as now conducted.
FBS is registered as a bank holding company under Section 1841 et seq. of Title
12, United States Code (the "Bank Holding Company Act"). FBS is licensed or
qualified to do business in every jurisdiction in which the nature of its
business or its ownership of property requires it to be licensed or qualified,
except where the failure to be so licensed or qualified would not have or would
not reasonably be expected to have a material adverse effect on the business,
operations or financial condition of FBS and its subsidiaries, taken as a whole.
2.2. Authority Relative to this Agreement; Non-Contravention. FBS has the
requisite corporate power and authority to enter into this Agreement and to
carry out its obligations hereunder. The execution and delivery of this
Agreement by FBS and the consummation by FBS of the transactions contemplated
hereby have been duly authorized by the Board of Directors of FBS, and, except
for approval of this Agreement and the Merger by the shareholders of FBS, no
other corporate proceedings on the part of FBS are necessary to authorize this
Agreement and such
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<PAGE>
transactions. This Agreement has been duly executed and delivered by FBS and
constitutes a valid and binding obligation of FBS, enforceable in accordance
with its terms. FBS is not subject to, or obligated under, any provision of (a)
its Charter (as hereinafter defined) or Bylaws, (b) any agreement, arrangement
or understanding, (c) any license, franchise or permit or (d) subject to
obtaining the approvals referred to in the next sentence, any law, regulation,
order, judgment or decree, which would be breached or violated, or in respect of
which a right of termination or acceleration or any encumbrance on any of its or
any of its subsidiaries' assets would be created, by its execution, delivery and
performance of this Agreement and the consummation by it of the transactions
contemplated hereby, other than any such breaches or violations which will not,
individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of FBS and its subsidiaries, taken
as a whole, or the consummation of the transactions contemplated hereby. Other
than in connection with obtaining any approvals required by the Bank Holding
Company Act, Section 1730a of Title 12, United States Code (the "Savings and
Loan Holding Company Act"), the Home Owners Loan Act (the "HOLA"), the Federal
Deposit Insurance Act (the "FDIA"), the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended,
and the rules and regulations thereunder (the "1933 Act"), the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (the
"1934 Act"), rules of the NYSE, state securities or blue sky laws, and the rules
and regulations thereunder ("Blue Sky Laws"), rules and regulations of any
applicable state insurance regulatory authority ("Applicable Insurance
Regulations") and the filing of a certificate of merger with the Secretary of
State of Delaware, no authorization, consent or approval of, or filing with, any
public body, court or authority is necessary on the part of FBS for the
consummation by it of the transactions contemplated by this Agreement, except
for such authorizations, consents, approvals and filings as to which the failure
to obtain or make would not, individually or in the aggregate, have a material
adverse effect on the business, operations or financial condition of FBS and its
subsidiaries, taken as a whole, or the consummation of the transactions
contemplated hereby. As used in this Agreement, the term "Charter" with respect
to any corporation or banking association shall mean those instruments that at
that time constitute its charter as filed or recorded under the general
corporation or other applicable law of the jurisdiction of incorporation or
association, including the articles or certificate of incorporation or
association, any amendments thereto and any articles or certificate of merger or
consolidation.
2.3. Validity of FBS Common Stock. The shares of FBS Common Stock to be
issued pursuant to this Agreement will be, when issued, duly authorized, validly
issued, fully paid and nonassessable.
2.4. Capital Stock. The authorized capital stock of FBS consists of
200,000,000 shares of FBS Common Stock and 10,000,000 shares of preferred stock,
par value $1.00 per share (the "FBS Preferred Stock"). As of June 30, 1994,
(a) 116,300,311 shares of FBS Common Stock were issued and outstanding
(including 2,144,277 shares of FBS Common Stock, par value $1.25 per share, held
in treasury),
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<PAGE>
10,982,385 shares of FBS Common Stock were reserved for issuance pursuant to
FBS's 1987 Stock Option Plan, 1991 Stock Incentive Plan, 1994 Stock Incentive
Plan, Restated Employee Stock Purchase Plan and Dividend Reinvestment Plan, the
Western Capital Investment Corp. 1984 Stock Option and Incentive Plan and the
1988 Equity Participation Plan and 3,655,684 shares of FBS Common Stock were
reserved for issuance upon conversion of FBS's $3.5625 Cumulative Preferred
Stock, Series 1991A (the "Series 1991A Preferred"); (b) 2,118,500 shares of
Series 1991A Preferred were outstanding; (c) 12,750 shares of Adjustable Rate
Cumulative Preferred Stock, Series 1990A were reserved for issuance pursuant to
certain periodic stock purchase rights and risk event warrants issued by FBS;
and (d) 1,400,000 shares of Series A Junior Participating Preferred Stock were
reserved for issuance upon exercise of rights to purchase shares of Junior
Participating Preferred Stock of FBS pursuant to the Rights Agreement dated as
of December 21, 1988, between FBS and First Chicago Trust Company of New York,
as Rights Agent.
2.5. 1934 Act Reports.
----------------
(a) Prior to the execution of this Agreement, FBS has delivered to MFC
complete and accurate copies of (a) FBS's Annual Reports on Form 10-K for the
years ended December 31, 1991, 1992 and 1993, as amended (the "FBS 10-K
Reports"), as filed under the 1934 Act with the Securities and Exchange
Commission (the "SEC"), (b) all FBS proxy statements and annual reports to
shareholders used in connection with meetings of FBS shareholders held since
January 1, 1992, and (c) FBS's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994 (the "FBS 10-Q Report"), as filed under the 1934 Act with
the SEC. As of their respective dates, such documents (i) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (ii) complied as to
form in all material respects with the applicable laws and rules and regulations
of the SEC. Since January 1, 1991, FBS has filed in a timely manner all reports
that it was required to file with the SEC pursuant to the 1934 Act.
(b) The FBS financial statements (including any footnotes thereto)
contained in the FBS 10-K Reports and the FBS 10-Q Report were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved and fairly present the consolidated financial
position of FBS and its subsidiaries as of the dates thereof and the
consolidated results of operations, changes in shareholders' equity and cash
flows for the periods then ended.
2.6. No Material Adverse Changes. Since March 31, 1994, there has been no
material adverse change in, and no event, occurrence or development in the
business of FBS or its subsidiaries that, taken together with other events,
occurrences and developments with respect to such business, has had or would
reasonably be expected to have a material adverse effect on, the business
operations or financial condition of FBS and its subsidiaries, taken as a whole,
or the ability of FBS to consummate the transactions contemplated hereby.
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2.7. Prospectus/Proxy Statement. At the time the Registration Statement
(as defined in Section 5.9(a)) becomes effective and at the time the
Prospectus/Proxy Statement (as defined in Section 5.9(a)) is mailed to the
shareholders of FBS and MFC for purposes of obtaining the approvals referred to
in Section 5.9(a) and at all times subsequent to such mailing up to and
including the times of such approvals, the Registration Statement and the
Prospectus/Proxy Statement (including any amendments or supplements thereto),
with respect to all information set forth therein relating to FBS, the FBS
Common Stock, this Agreement, the Merger and all other transactions contemplated
hereby, will (a) comply in all material respects with applicable provisions of
the 1933 Act and the 1934 Act and (b) not contain any 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, in light of the
circumstances under which they were made, not misleading.
2.8. Litigation. There are no actions, suits, proceedings, orders or
investigations pending or, to the best knowledge of FBS threatened, against FBS
or any of its subsidiaries which if determined adversely to FBS or its
subsidiaries could reasonably be expected to have a material adverse effect on
the financial condition, business or operations of FBS and its subsidiaries,
taken as a whole, or would have a material adverse effect on the ability of FBS
to consummate the transactions contemplated hereby.
2.9. Reports and Filings. Since January 1, 1991, each of FBS and its
subsidiaries has filed each report or other filing it was required to file with
any federal or state banking or bank holding company or other regulatory
authority having jurisdiction over it (together with all exhibits thereto, the
"FBS Regulatory Reports"), except for such reports and filings which the failure
to so file would not have a material adverse effect on the business, operations
or financial condition of FBS and its subsidiaries, taken as a whole, or the
ability of FBS to consummate the transactions contemplated hereby. As of their
respective dates or as subsequently amended prior to the date hereof, each of
the FBS Regulatory Reports was true and correct in all material respects and
complied in all material respects with applicable laws, rules and regulations.
2.10. Compliance with Laws. Each of FBS and its subsidiaries has
complied in all material respects with applicable laws and regulations of
foreign, federal, state and local governments and all agencies thereof which
affect the business or any owned or leased properties of FBS or any of its
subsidiaries and to which FBS or any of its subsidiaries may be subject, except
where the failure to so comply would not, individually or in the aggregate, have
a material adverse effect on the business, operations or financial condition of
FBS and its subsidiaries, taken as a whole, or the ability of FBS to consummate
the transactions contemplated hereby.
2.11. Regulatory Approvals. As of the date hereof, FBS is not aware of
any reason that the regulatory approvals specified in Section 5.1 and required
to be obtained by FBS would not be obtained.
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2.12. Disclosure. The representations and warranties contained in this
Agreement are true and correct in all material respects, and such
representations and warranties do not omit any material fact necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading. There is no fact known to FBS which has not been
disclosed to MFC pursuant to this Agreement, the FBS 10-K Reports and the FBS
10-Q Report, all taken together as a whole, which would have or would reasonably
be expected to have a material adverse effect on the business, operations or
financial condition of FBS and its subsidiaries, taken as a whole, or the
ability of FBS to consummate the transactions contemplated hereby.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF MFC
MFC hereby represents and warrants to FBS as follows:
3.1. Organization and Qualification. MFC is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
MFC is registered as a savings and loan holding company under the Savings and
Loan Holding Company Act. The Bank is a federally chartered savings bank duly
organized, validly existing and in good standing under the laws of the United
States and has the requisite corporate power to carry on its business as now
conducted. Each of the Subsidiaries (other than the Bank) is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. The copies of the Charter and Bylaws of each of MFC and the
Subsidiaries which have been made available to FBS prior to the date of this
Agreement are correct and complete and reflect all amendments made thereto
through such date. Each of MFC and the Subsidiaries is licensed or qualified to
do business in every jurisdiction in which the nature of its respective business
or its ownership of property requires it to be licensed or qualified, except
where the failure to be so licensed or qualified would not have or would not
reasonably be expected to have a material adverse effect on the business,
operations or financial condition of MFC and the Subsidiaries, taken as a whole.
3.2. Authority Relative to this Agreement; Non-Contravention. MFC has the
requisite corporate power and authority to enter into this Agreement and to
carry out its obligations hereunder. The execution and delivery of this
Agreement by MFC and the consummation by MFC of the transactions contemplated
hereby have been duly authorized by the Board of Directors of MFC and, except
for approval of this Agreement and the Merger by the affirmative vote of the
holders of a majority of the outstanding MFC Common Stock, no other corporate
proceedings on the part of MFC are necessary to authorize this Agreement and
such transactions. This Agreement has been duly executed and delivered by MFC
and constitutes a valid and binding obligation of MFC, enforceable in accordance
with its terms.
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None of MFC or the Subsidiaries is subject to, or obligated
under, any provision of (a) its Charter or Bylaws, (b) any agreement,
arrangement or understanding, (c) any license, franchise or permit or
(d) subject to obtaining the approvals referred to in the next sentence, any
law, regulation, order, judgment or decree, which would be breached or violated,
or in respect of which a right of termination or acceleration or any encumbrance
on any of its assets would be created, by the execution, delivery or performance
of this Agreement, the Stock Option Agreement or the consummation of the
transactions contemplated hereby or thereby, other than any such breaches or
violations which will not, individually or in the aggregate, have a material
adverse effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole, or the consummation of the transactions
contemplated hereby or thereby. Other than in connection with obtaining any
approvals required by the Bank Holding Company Act, the Savings and Loan Holding
Company Act, the HOLA, the FDIA, the HSR Act, the 1933 Act, the 1934 Act, the
rules of the NYSE, Blue Sky Laws, Applicable Insurance Regulations and the
filing of a certificate of merger with the Secretary of State of Delaware, no
authorization, consent or approval of, or filing with, any public body, court or
authority is necessary on the part of MFC or any of the Subsidiaries for the
consummation by MFC of the transactions contemplated by this Agreement, except
for such authorizations, consents, approvals and filings as to which the failure
to obtain or make would not, individually or in the aggregate, have a material
adverse effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole, or the consummation of the transactions
contemplated hereby.
3.3. Capitalization. The authorized and issued and outstanding capital
stock of each of MFC and the Subsidiaries as of the date hereof is correctly set
forth on Schedule 3.3. The issued and outstanding shares of capital stock of
each of MFC and the Subsidiaries are duly authorized, validly issued, fully paid
and nonassessable and have not been issued in violation of any preemptive
rights. Except as disclosed on Schedule 3.3 and as permitted in Section 4.1,
there are no options, warrants, conversion privileges or other rights,
agreements, arrangements or commitments obligating MFC or any Subsidiary to
issue, sell, purchase or redeem any shares of its capital stock or securities or
obligations of any kind convertible into or exchangeable for any shares of its
capital stock or of any of its subsidiaries or affiliates, nor are there any
stock appreciation, phantom or similar rights outstanding based upon the book
value or any other attribute of any of the capital stock of MFC or any of the
Subsidiaries, or the earnings or other attributes of MFC or any of the
Subsidiaries. MFC has heretofore delivered to FBS true and correct copies of
all such agreements, arrangements (including all stock option plans) or
commitments identified on Schedule 3.3.
3.4. 1934 Act Reports. Prior to the execution of this Agreement, MFC has
delivered or made available to FBS complete and accurate copies of (a) MFC's
Annual Reports on Form 10-K for the years ended December 31, 1991, 1992 and 1993
(the "MFC 10-K Reports") as filed under the 1934 Act with the SEC, (b) all MFC
proxy statements and annual reports to shareholders used in connection with
meetings of
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<PAGE>
MFC shareholders held since January 1, 1992 and (c) MFC's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (the "MFC 10-Q Report") as filed
under the 1934 Act with the SEC. As of their respective dates, such documents
(i) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and (ii) complied as to form in all material respects with the
applicable laws and rules and regulations of the SEC. Since January 1, 1991, MFC
has filed in a timely manner all reports that it was required to file with the
SEC pursuant to the 1934 Act.
3.5. Financial Statements.
--------------------
(a) The MFC financial statements (including any footnotes thereto)
contained in the MFC 10-K Reports and the MFC 10-Q Report have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis during the periods involved and fairly present the consolidated financial
position of MFC and the Subsidiaries as of the dates thereof and the results of
operations, changes in shareholders' equity and cash flows for the periods then
ended. MFC has furnished FBS with copies of the consolidated balance sheet of
MFC as of June 30, 1994 (the "Latest MFC Balance Sheet") and the related
statements of income and changes in shareholders' equity for the six months
ended June 30, 1994 (the "Related MFC Statements"). The Latest MFC Balance Sheet
and the Related MFC Statements have been prepared in accordance with generally
accepted accounting principles and fairly present the consolidated financial
position of MFC and the Subsidiaries, subject to normal recurring year-end
adjustments, as of the date thereof and the results of operations and changes in
shareholders' equity for the six-month period then ended.
(b) MFC has furnished FBS with copies of the balance sheets of the Bank as
of December 31, 1991, 1992 and 1993 and as of June 30, 1993 and 1994 and the
related statements of income, changes in shareholder's equity and cash flows for
the years and six-month periods then ended (except that no statement of cash
flows for the six months ended June 30, 1994 have been so furnished),
respectively (collectively, together with any footnotes thereto, the "Bank
Financial Statements"). The balance sheet of the Bank as of June 30, 1994 are
referred to herein as the "Latest Bank Balance Sheet," and the related
statements of income and changes in shareholder's equity for the six-month
period then ended are referred to herein as the "Related Bank Financial
Statements." The Bank Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved and fairly present the financial position of the Bank,
subject in the case of the Latest Bank Balance Sheet and the Related Bank
Financial Statements to normal recurring year-end adjustments, as of the dates
thereof and the results of operations, changes in shareholder's equity and cash
flows for the periods then ended.
(c) MFC has furnished FBS with copies of the balance sheets of each of
Edina Realty, Inc., MFC Insurance Corporation and Equity Title Services, Inc.
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(collectively, the "Principal Nonbanking Subsidiaries") as of December 31, 1991,
1992 and 1993 and as of June 30, 1993 and 1994 and the related statements of
income for the years and six-month periods then ended (except that no statement
of cash flows for the six months ended June 30, 1994 have been so furnished),
respectively (collectively, together with any footnotes thereto, the "Principal
Nonbanking Subsidiaries Financial Statements"). The balance sheets of each of
the Principal Nonbanking Subsidiaries as of June 30, 1994 are herein referred to
as the "Latest Principal Nonbanking Subsidiaries Balance Sheets," and the
related statement of income and changes in shareholder's equity for the six-
month period then ended are herein referred to as the "Related Principal
Nonbanking Subsidiaries Financial Statements." The Principal Nonbanking
Subsidiaries Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved and fairly present the financial position of each of the
Principal Nonbanking Subsidiaries covered thereby, subject in the case of the
Latest Principal Nonbanking Subsidiaries Balance Sheet and the Related Principal
Nonbanking Subsidiaries Financial Statements to normal recurring year-end
adjustments, as of the dates thereof and the results of operations, changes in
shareholder's equity and cash flows for the periods then ended. The Latest MFC
Balance Sheet, the Latest Bank Balance Sheet and the Latest Principal Nonbanking
Subsidiaries Balance Sheets are collectively referred to herein as the "Latest
Balance Sheets," and the Related MFC Financial Statements, the Related Bank
Financial Statements and the Related Principal Nonbanking Subsidiaries Financial
Statements are collectively referred to herein as the "Related Statements."
3.6. Loans.
-----
(a) The documentation relating to each loan made by the Bank and relating
to all security interests, mortgages and other liens with respect to all
collateral for each such loan, taken as a whole, are adequate for the
enforcement of the material terms of each such loan and of the related security
interests, mortgages and other liens. The terms of each such loan and of the
related security interests, mortgages and other liens comply in all material
respects with all applicable laws, rules and regulations (including, without
limitation, laws, rules and regulations relating to the extension of credit).
(b) Except as set forth in Schedule 3.6, (i) as of June 30, 1994, there are
no loans, leases, other extensions of credit or commitments to extend credit of
the Bank that have been or, to MFC's knowledge, should have been classified by
the Bank as non-accrual, as restructured, as 90 days past due, as still accruing
and doubtful of collection or any comparable classification, (ii) MFC has
provided to FBS true, correct and complete in all material respects written
information concerning the loan portfolios of the Bank, and (iii) no material
information with respect to the loan portfolios of the Bank has been withheld
from FBS.
3.7. Reports and Filings. Since January 1, 1991, each of MFC and the
Subsidiaries has filed each report or other filing that it was required to file
with any federal or state savings and loan, banking, savings and loan holding
company, bank
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<PAGE>
holding company or other applicable regulatory authorities having
jurisdiction over it (together with all exhibits thereto, the "MFC Regulatory
Reports"). As of their respective dates or as subsequently amended prior to the
date hereof, each of the MFC Regulatory Reports was true and correct in all
material respects and complied in all material respects with applicable laws,
rules and regulations.
3.8. Subsidiaries. Schedule 3.8 correctly sets forth the jurisdiction of
incorporation of each Subsidiary. All of the issued and outstanding shares of
capital stock of each Subsidiary are owned by MFC free and clear of any lien,
pledge, security interest, encumbrance or charge of any kind, other than
encumbrances arising as a result of requisite regulatory approvals for transfer.
Except for the stock of the Subsidiaries owned by MFC and as otherwise disclosed
on Schedule 3.8, neither MFC nor any of the Subsidiaries owns any stock,
partnership interest, joint venture interest or any other security issued by any
other corporation, organization or entity, except securities owned by the Bank
in the ordinary course of its business.
3.9. Absence of Undisclosed Liabilities. All of the obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether due or to become due, and regardless of when asserted) arising out of
transactions or events heretofore entered into, or any action or inaction,
including Taxes (as defined in Section 3.13) with respect to or based upon
transactions or events heretofore occurring ("Liabilities"), required to be
reflected on the Latest Balance Sheets in accordance with generally accepted
accounting principles have been so reflected. MFC and the Subsidiaries have no
Liabilities except (a) as reflected on the Latest Balance Sheets,
(b) Liabilities which have arisen after the date of the Latest Balance Sheets in
the ordinary course of business and (c) as otherwise disclosed on Schedule 3.9.
As of June 30, 1994, there are no agreements or commitments binding the Bank to
extend credit, in the amount per "one borrower" (as defined in 12 C.F.R.
(S) 563.93), of $1,000,000 or more, except as set forth on Schedule 3.9.
3.10. No Material Adverse Changes. Since the date of the Latest Balance
Sheets, there has been no material adverse change in, and no event, occurrence
or development in the business of MFC or the Subsidiaries that, taken together
with other events, occurrences and developments with respect to such business,
has had or would reasonably be expected to have a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries, taken
as a whole, or the ability of MFC to consummate the transactions contemplated
hereby.
3.11. Absence of Certain Developments. Except as set forth in the Latest
Balance Sheets and the Related Statements or on Schedule 3.11, unless otherwise
expressly contemplated or permitted by this Agreement, since May 31, 1994,
neither MFC nor any of the Subsidiaries has:
(a) issued or sold any of its equity securities, securities convertible
into or exchangeable for its equity securities, warrants, options or other
rights to acquire its equity securities, or any bonds or other securities,
except (i) deposit and other bank obligations in the ordinary course of business
and (ii) pursuant to the exercise of
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stock options and warrants issued under, or otherwise pursuant to, the
agreements, arrangements or commitments identified on Schedule 3.3;
(b) redeemed, purchased, acquired or offered to acquire, directly or
indirectly, any shares of capital stock of MFC or any of the Subsidiaries or
other securities of MFC or any of the Subsidiaries, except pursuant to the
exercise of stock options and warrants issued under, or otherwise pursuant to,
the agreements, arrangements or commitments identified on Schedule 3.3;
(c) split, combined or reclassified any outstanding shares of capital stock
of MFC or any of the Subsidiaries, or declared, set aside or paid any dividends
or other distribution payable in cash, property or otherwise with respect to any
shares of capital stock of MFC or any of the Subsidiaries or other securities,
except (i) dividends paid in cash by the Subsidiaries which are wholly owned by
MFC to MFC, or to another wholly owned Subsidiary of MFC, (ii) the regular
quarterly cash dividends paid on the MFC Common Stock in an amount not to exceed
$.20 per share and (iii) the regular dividends paid in accordance with the terms
of the MFC Preferred Stock;
(d) borrowed any amount or incurred or become subject to any material
liability, except liabilities incurred in the ordinary course of business, but
in no event has MFC or any of the Subsidiaries entered into any long-term
borrowings with terms of greater than one year, other than (i) as set forth in
Schedule 3.27 and (ii) borrowings for the purpose of interest rate risk
management with maturities of less than three years in an aggregate amount not
exceeding $150,000,000 and any related derivative transactions, without prior
consultation with FBS;
(e) discharged or satisfied any material lien or encumbrance on the
properties or assets of MFC or any of the Subsidiaries or paid any material
liability other than in the ordinary course of business, other than reverse
repurchase agreements or Federal Home Loan Bank borrowings;
(f) sold, assigned, transferred, mortgaged, pledged or subjected to any
lien or other encumbrance any of its assets with an aggregate market value in
excess of $50,000 except (A) in the ordinary course of business, including real
estate acquired through foreclosure or deed in lieu of foreclosure ("REO"), (B)
liens and encumbrances for current property taxes not yet due and payable and
(C) liens and encumbrances which do not materially affect the value of, or
interfere with the past or future use or ability to convey, the property subject
thereto or affected thereby;
(g) canceled any material debts or claims or waived any rights of material
value, except in the ordinary course of business or upon payment in full;
(h) suffered any theft, damage, destruction or loss of or to any property
or properties owned or used by it, whether or not covered by insurance, which
would, individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries, taken
as a whole;
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<PAGE>
(i) made or granted any bonus or any wage, salary or compensation increase
or severance or termination payment to, or promoted, any director, officer,
employee, group of employees or consultant, entered into any employment contract
or hired any employee with an employee classification above grade "G" (as such
classifications have been described by MFC to FBS) other than (A) bonuses,
compensation increases, promotions or new hires in the ordinary course and in a
manner consistent with past practices as previously disclosed to FBS and (B)
bonuses payable on the Effective Date as a result of the Merger under the Change
in Control Plans (as defined in Section 5.12(d));
(j) made or granted any increase in the benefits payable under any employee
benefit plan or arrangement, amended or terminated any existing employee benefit
plan or arrangement or adopted any new employee benefit plan or arrangement
(except as required by law and, with respect to any such action taken prior to
the date hereof, disclosed on Schedule 3.11);
(k) made any single or group of related capital expenditures or commitment
therefor in excess of $50,000 or entered into any lease or group of related
leases with the same party which involves aggregate lease payments payable of
more than $100,000 for any individual lease or involves more than $100,000 for
any group of related leases in the aggregate;
(l) acquired (by merger, exchange, consolidation, acquisition of stock or
assets or otherwise) any corporation, partnership, joint venture or other
business organization or division or material assets thereof, or assets or
deposits that are material to MFC, except in exchange for debt previously
contracted, including REO;
(m) taken any other action or entered into any other transaction other than
in the ordinary course of business; or
(n) agreed to do any of the foregoing.
3.12. Properties.
----------
(a) Each of MFC and the Subsidiaries owns good and marketable title to all
of the real property and all of the personal property, fixtures, furniture and
equipment reflected on the Latest Balance Sheets or acquired since the date
thereof (other than real property reflected on the Latest Balance Sheets as
REO), free and clear of all liens and encumbrances, except for (i) mortgages on
real property set forth on Schedule 3.12(a), (ii) encumbrances which do not
materially affect the value of, or interfere with the past or future use or
ability to convey, the property subject thereto or affected thereby, (iii) liens
for current taxes and special assessments not yet due and payable, (iv)
leasehold estates with respect to multi-tenant buildings owned by MFC or any of
the Subsidiaries, which leases are identified on Schedule 3.12(a), and (v)
property disposed of since the date of the Latest Balance Sheets in the ordinary
course of business.
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<PAGE>
(b) Schedule 3.12(b) correctly sets forth a brief description, including
the term, of each lease for real or personal property to which MFC or any of the
Subsidiaries is a party as lessee with respect to (i) each individual lease
which involves a remaining aggregate balance of lease payments payable of more
than $100,000 or any group of related leases which involves a remaining
aggregate balance of lease payments payable of more than $100,000, (ii) each
lease which is a "material contract" within the meaning of Item 601(b)(10) of
Regulation S-K promulgated by the SEC or (iii) each lease which was not entered
into in the ordinary course of business. MFC has delivered or made available to
FBS complete and accurate copies of each of the leases described on
Schedules 3.12(a) and 3.12(b), and none of such leases has been modified in any
material respect, except to the extent that such modifications are disclosed by
the copies delivered to FBS. The leases described on Schedules 3.12(a) and
3.12(b) are in full force and effect. MFC or one of the Subsidiaries (if lessee
under such lease) has a valid and existing leasehold interest under each lease
described on Schedule 3.12(b) for the term set forth therein. With respect to
the leases described on Schedule 3.12(b), neither MFC nor any of the
Subsidiaries is in default, nor, to the best knowledge of MFC and the
Subsidiaries, are any of the other parties to any of such leases in default,
and, to the best knowledge of MFC and the Subsidiaries, no circumstances (not in
the control of MFC and the Subsidiaries) exist which could result in such a
default under any of such leases. To the best knowledge of MFC and the
Subsidiaries, there has been no cancellation, breach or anticipated breach by
any other party to any lease described on Schedule 3.12(a) or 3.12(b). The rent
rolls set forth on Schedules 3.12(a) and 3.12(b) are true and complete in all
material respects and describe all occupancies and the material terms of each
occupancy.
(c) Except as set forth in Schedule 3.12(c), all of the buildings,
fixtures, furniture and equipment necessary for the conduct of the business of
MFC and each of the Subsidiaries are in good condition and repair, ordinary wear
and tear excepted, and are usable in the ordinary course of business. Each of
MFC and the Subsidiaries owns, or leases under valid leases, all buildings,
fixtures, furniture, personal property, land improvements and equipment
necessary for the conduct of its business as it is presently being conducted.
(d) Except as set forth in Schedules 3.12(d) and 3.12(e), neither MFC nor
any of the Subsidiaries nor any of the buildings owned or leased by MFC or any
of the Subsidiaries is in violation of any applicable zoning ordinance or other
law, regulation or requirement relating to the operation of any properties used
in the operation of its business, including, without limitation, applicable
environmental protection laws and regulations, which violations would,
individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries taken as
a whole; and neither MFC nor any of the Subsidiaries has received any notice of
any such violation, or of the existence of any condemnation proceeding with
respect to any properties owned or leased by MFC or any of the Subsidiaries.
Except as set forth in Schedule 3.12(d), no hazardous substances, hazardous
wastes, pollutants or contaminants have been deposited or
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disposed of in, on or under MFC's or any of the Subsidiaries' owned or leased
properties (including properties owned, managed or controlled by the Bank in
connection with its lending or fiduciary operations) during the period in which
MFC or any of the Subsidiaries has owned, occupied, managed, controlled or
operated such properties, except to the extent not material to the business,
operations or financial conditions of MFC and the Subsidiaries, taken as a
whole. To the best knowledge of MFC and the Subsidiaries, no prior owners,
occupants or operators of all or any part of MFC's or any of the Subsidiaries'
owned or leased properties (including properties owned, managed or controlled by
the Bank in connection with its lending or fiduciary operations) ever used such
properties as a dump or gasoline service station, or deposited, disposed of or
allowed to be deposited or disposed of in, on or under such properties any
hazardous substances, hazardous wastes, pollutants or contaminants, except to
the extent not material to the business, operations or financial conditions of
MFC and the Subsidiaries, taken as a whole. No asbestos or any material amount
of ureaformaldehyde materials exists in or on any of MFC's or the Subsidiaries'
owned or leased properties (including properties owned, managed or controlled by
the Bank in connection with its lending or fiduciary operations), and no
electrical transformers or capacitors, other than those owned by public utility
companies, on such properties contain any PCBs. The representations contained in
this Section 3.12(d) are not applicable to properties securing loans made by the
Bank where the loans were made in the ordinary course of business and are fully
performing in accordance with their terms.
(e) Except as set forth in Schedule 3.12(e), there are no aboveground or
underground tanks (excluding hot water storage or propane tanks) located under,
in or about, nor, to the best knowledge of MFC and the Subsidiaries, have there
ever been any such tanks located under, in or about, any of MFC's or any of the
Subsidiaries' owned or leased properties (including properties owned, managed or
controlled by the Bank in connection with its lending or fiduciary operations).
3.13. Tax Matters. Each of MFC, the Subsidiaries and all members of any
consolidated, affiliated, combined or unitary group of which MFC or any of the
Subsidiaries is a member have filed or will file all Tax (as hereinafter
defined) and Tax information returns or reports required to be filed (taking
into account permissible extensions) by them on or prior to the Effective Date,
and have paid (or have accrued or will accrue, prior to the Effective Date,
amounts for the payment of) all Taxes relating to the time periods covered by
such returns and reports. The accrued taxes payable accounts for Taxes and
provision for deferred income taxes, specifically identified as such, on the
Latest Balance Sheets are sufficient for the payment of all unpaid Taxes of MFC
and the Subsidiaries accrued for or applicable to all periods ended on or prior
to the date of the Latest Balance Sheet or which may subsequently be determined
to be owing with respect to any such period. Except as disclosed on Schedule
3.13, neither MFC nor any of the Subsidiaries has waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to an assessment or deficiency for Taxes. Each of MFC and the
Subsidiaries has paid or will pay in a timely manner and as required by law all
Taxes due and payable by it or which it is obligated to withhold from amounts
owing to any
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employee or third party. All Taxes which will be due and payable, whether now or
hereafter, for any period ending on, prior to or including the Effective Date
shall have been paid by or on behalf of MFC and the Subsidiaries or shall be
reflected on the books of MFC and the Subsidiaries as an accrued Tax liability
determined in a manner which is consistent with past practices and the Latest
Balance Sheets. No Tax returns of MFC or the Subsidiaries have been audited by
any governmental authority other than as disclosed on Schedule 3.13; and, except
as set forth on Schedule 3.13, there are no unresolved questions, claims or
disputes asserted by any relevant taxing authority concerning the liability for
Taxes of MFC or any of the Subsidiaries. Neither MFC nor any of the Subsidiaries
has made an election under Section 341(f) of the Code for any taxable years not
yet closed for statute of limitations purposes. No demand or claim has been made
against MFC or any of the Subsidiaries with respect to any Taxes arising out of
membership or participation in any consolidated, affiliated, combined or unitary
group of which MFC or any of its Subsidiaries was at any time a member. For
purposes of this Agreement, the term "Tax" shall mean any federal, state, local
or foreign income, gross receipts, license, payroll, employment, excise,
severance, stamp, occupation, premium, property or windfall profits tax,
environmental tax, customs duty, capital stock, franchise, employees' income
withholding, foreign or domestic withholding, social security, unemployment,
disability, workers' compensation, employment-related insurance, real property,
personal property, sales, use, transfer, value added, alternative or add-on
minimum or other tax, fee, assessment or charge of any kind whatsoever,
including any interest, penalties or additions to, or additional amounts in
respect of the foregoing, for each of MFC, the Subsidiaries and all members of
any consolidated, affiliated, combined or unitary group of which MFC or any of
the Subsidiaries is a member.
3.14. Contracts and Commitments.
-------------------------
(a) Except as set forth on Schedule 3.14, neither MFC nor any of the
Subsidiaries (i) is a party to any collective bargaining agreement or contract
with any labor union, (ii) is a party to any written or oral contract for the
employment of any officer, individual employee or other person on a full-time or
consulting basis, or relating to severance pay for any such person, (iii) is a
party to any written or oral agreement or understanding to repurchase assets
previously sold (or to indemnify or otherwise compensate the purchaser in
respect of such assets), except for securities sold under a repurchase agreement
providing for a repurchase date 30 days or less after the purchase date, (iv) is
a party to any (A) contract or group of related contracts with the same party
for the purchase or sale of products or services, under which the undelivered
balance of such products and services has a purchase price in excess of $100,000
for any individual contract or $100,000 for any group of related contracts in
the aggregate, (B) other contract which is a "material contract" within the
meaning of Item 601(b)(10) of Regulation S-K promulgated by the SEC, or (C)
other agreement which is not entered into in the ordinary course of business and
which is not disclosed on Schedules 3.12(a) or 3.12(b), or (v) has any
commitments for capital expenditures in excess of $50,000.
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(b) Except as disclosed on Schedule 3.14, (i) to the best knowledge of MFC
and the Subsidiaries, since the date of the Latest Balance Sheets, no customer
has indicated that it will stop or decrease the rate of business done with MFC
or any of the Subsidiaries (except for changes in the ordinary course of such
business) that would, individually or in the aggregate, have a material adverse
effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole; (ii) each of MFC and the Subsidiaries have
performed all obligations required to be performed by it prior to the date
hereof in connection with the contracts or commitments set forth on
Schedule 3.14, and none of MFC or any of the Subsidiaries is in receipt of any
claim of default under any contract or commitment set forth on Schedule 3.14,
except for any failures to perform, breaches or defaults which would not,
individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries taken as
a whole; (iii) none of MFC or any of the Subsidiaries has any present
expectation or intention of not fully performing any material obligation
pursuant to any contract or commitment set forth on Schedule 3.14; and (iv) to
the best knowledge of MFC and the Subsidiaries, there has been no cancellation,
breach or anticipated breach by any other party to any contract or commitment
set forth on Schedule 3.14, except for any cancellation, breach or anticipated
breach which would not, individually or in the aggregate, have a material
adverse effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole.
3.15. Litigation. Except as set forth on Schedule 3.15, there are no
actions, suits, proceedings, orders or investigations pending or, to the best
knowledge of MFC and the Subsidiaries, threatened against MFC or any of the
Subsidiaries, at law or in equity, or before or by any federal, state or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, except for such actions, suits, proceedings, orders or
investigations which are not reasonably likely to result in losses or expenses
in excess of $50,000. Except as set forth on Schedule 3.15, none of the matters
set forth on such Schedule, individually or in the aggregate, will have or could
reasonably be expected to have a material adverse effect on the business,
operations or financial condition of MFC and the Subsidiaries, taken as a whole.
3.16. No Brokers or Finders. Except as disclosed on Schedule 3.16, there
are no claims for brokerage commissions, finders' fees, investment advisory fees
or similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement, understanding, commitment or agreement made
by or on behalf of MFC or any of the Subsidiaries.
3.17. Employees. Except as set forth on Schedule 3.17, none of MFC's
Chairman, Chief Administrative Officer, Chief Financial Officer or Senior Vice
President, Human Resources, has any knowledge (without inquiry) of the announced
or anticipated resignation of (i) any officer of MFC or any of the Subsidiaries
or (ii) other employees at a rate substantially higher than the historical
resignation rate for such employees of MFC or the Subsidiaries. Except as set
forth on Schedule 3.17, MFC and each of the Subsidiaries has complied with all
laws
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relating to the employment of labor, including provisions thereof relating
to wages, hours, equal opportunity, collective bargaining, non-discrimination
and the payment of social security and other taxes, except where failure to so
comply would not, individually or in the aggregate, have a material adverse
effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole.
3.18. Employee Benefit Plans.
----------------------
(a) Definitions. For the purposes of this Section 3.18, unless the context
clearly requires otherwise, the term "Plan" or "Plans" includes all employee
benefit plans as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and all other benefit arrangements
(including, without limitation, any employment agreement or any program,
agreement, policy or commitment providing for insurance coverage of employees,
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits, life, health, disability or accidental
benefits) applicable to the employees of MFC or any of the Subsidiaries, to
which MFC or any of the Subsidiaries contribute, or which MFC or any of the
Subsidiaries have committed to implement for their employees prior to the date
of this Agreement. Unless the context clearly requires otherwise, "Plan" or
"Plans" shall also include any similar program or arrangement maintained by any
organization affiliated by ownership with MFC or any of the Subsidiaries for
which MFC or any of the Subsidiaries are or could be completely or partially
liable for the funding or the administration either as a matter of law or by
agreement but excluding customers of the trust departments of affiliates of MFC
where there is no ownership affiliation between such customers and MFC.
(b) Except as disclosed on Schedule 3.18:
(i) Full Disclosure of All Plans. With respect to all employees and
former employees of MFC and the Subsidiaries (and all dependents and
beneficiaries of such employees and former employees):
(A) Neither MFC nor any of the Subsidiaries maintain or contribute
to any nonqualified deferred compensation or retirement plans,
contracts or arrangements;
(B) Neither MFC nor any of the Subsidiaries maintain or contribute
to any qualified defined contribution plans (as defined in
Section 3(34) of ERISA or Section 414(i) of the Code);
(C) Neither MFC nor any of the Subsidiaries maintain or contribute
to any qualified defined benefit plans (as defined in Section 3(35) of
ERISA or Section 414(j) of the Code) ("Defined Benefit Plans"); and
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(D) Neither MFC nor any of the Subsidiaries maintain or
contribute to any employee welfare benefit plans (as defined in
Section 3(1) of ERISA).
(ii) Funding. With respect to the Plans, (A) all required
contributions which are due have either been made or properly accrued and
(B) neither MFC nor any of the Subsidiaries is liable for any "accumulated
funding deficiency" as that term is defined in Section 412 of the Code or
any penalty or excise tax in connection therewith.
(iii) Plan Documents. With respect to all Plans sponsored or
administered by MFC or any Subsidiary and with respect to any other Plan if
available to MFC or any Subsidiary, MFC has furnished FBS with true and
complete copies of (A) the most recent determination letter, if any,
received by MFC or any of the Subsidiaries from the Internal Revenue
Service regarding each qualified Plan, (B) the Form 5500 and all Schedules
and accompanying financial statements, if any, for each Plan for which such
form is required to be filed for the three most recent fiscal Plan years,
(C) the most recently prepared actuarial valuation report, if any, for each
Plan, and (D) copies of the current Plan documents, trust agreements,
insurance contracts and all related contracts and documents (including any
material employee communications) with respect to each Plan.
(iv) Defined Benefit Plans. Neither MFC nor any of the Subsidiaries
nor any affiliate of MFC or any of the Subsidiaries maintains or has
maintained any Defined Benefit Plans for which MFC, any of the Subsidiaries
or FBS have or will have any liability or, which if terminated, could
result in any liability to MFC, the Subsidiaries or FBS under Title IV of
ERISA. There are no unfunded vested liabilities (determined using the
assumptions used by the Plan for funding and without regard to future
salary increases) with respect to Defined Benefit Plans sponsored by MFC or
any Subsidiary. There have been no reportable events under Section 4043 of
ERISA (with respect to which the 30-day notice requirement has not been
waived by regulation) with respect to any Defined Benefit Plan maintained
by MFC or any of the Subsidiaries. No Defined Benefit Plan has been
terminated that will result in a material liability by MFC or any of the
Subsidiaries to the Pension Benefit Guaranty Corporation.
(v) Multiemployer Plans. Neither MFC nor any of the Subsidiaries has
any actual or potential liabilities under Sections 4201 or 4205 of ERISA
for any complete or partial withdrawal from any multiemployer plan.
(vi) Fiduciary Breach; Claims. Neither MFC nor any of the
Subsidiaries nor any of its directors, officers, employees or other
"fiduciaries" (as such term is defined in Section 3(21) of ERISA) has
committed any breach of fiduciary duty imposed by ERISA or any other
applicable law with respect to the Plans which would subject MFC or any of
the Subsidiaries, directly or
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indirectly, to any liability under ERISA or any applicable law. There are
no actions, suits or claims pending against MFC or any Subsidiary relating
to benefits other than routine, uncontested claims for benefits.
(vii) Prohibited Transaction. Neither MFC nor any of the Subsidiaries
nor any officer, director, employee, agent or fiduciary of any Plan has
incurred any liability for any civil penalty imposed by Section 4975 of the
Code or Section 502(i) of ERISA.
(viii) Material Compliance With Law. All Plans have been consistently
administered in accordance with their terms in all material respects. To
the extent required either as a matter of law or to obtain the intended tax
treatment and tax benefits, all Plans comply in all material respects with
the requirements of ERISA and the Code. All Tax information returns or
reports and all other required filings, disclosures and contributions have
been made with respect to all Plans. No condition exists that limits the
right of MFC or any of the Subsidiaries to amend or terminate any such Plan
(except as provided in such Plans or limited under ERISA or the Code).
(ix) VEBA Funding. No Plan is funded in whole or in part through a
voluntary employees' beneficiary association exempt from tax under
Section 501(c)(9) of the Code. The limitations under Sections 419 and 419A
of the Code have been computed, all unrelated business income tax returns
have been filed and appropriate adjustments have been made on all other Tax
returns.
(x) Retirement and COBRA Benefits. Neither MFC nor any of the
Subsidiaries have actual or potential liability under current law for
benefits after separation from employment other than (i) benefits under
Plans described in clauses (A), (B) or (C) of Section 3.18(b)(i)(ii) health
care continuation benefits described in Section 4980B of the Code or Part G
of Subtitle B of Title I of ERISA or any comparable provisions under the
laws of any state.
(xi) Collective Bargaining. No Plan is maintained in whole or in part
pursuant to collective bargaining.
(xii) Employee Status. No employee of MFC or any of the Subsidiaries
is absent due to (A) a disability that currently entitles the employee to
benefits under any long-term disability plan sponsored by MFC or any of the
Subsidiaries or (B) military service leave of absence. All employees of MFC
or any of the Subsidiaries are "at will" employees.
(xiii) Parachute Payments. No Plan requires or would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code, and the
consummation of the transactions contemplated by this Agreement will not
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<PAGE>
be a factor in causing payments to be made by FBS, MFC or any of the
Subsidiaries that are not deductible (in whole or in part) under
Section 280G of the Code.
3.19. Insurance. Schedule 3.19 hereto lists each insurance policy
maintained by MFC or any of the Subsidiaries with respect to its properties and
assets. Prior to the date hereof, MFC has delivered to FBS complete and accurate
copies of each of the insurance policies described on Schedule 3.19. All such
insurance policies are in full force and effect, and neither MFC nor any of the
Subsidiaries is in default with respect to its obligations under any of such
insurance policies.
3.20. Affiliate Transactions. Except as set forth on Schedule 3.20, neither
MFC nor any of the Subsidiaries, nor any executive officer or director of MFC or
any of the Subsidiaries, nor any member of the immediate family of any such
officer or director (which for the purposes hereof shall mean a spouse, minor
child or adult child living at the home of any such officer or director), nor
any entity which any of such persons "controls" (within the meaning of
Regulation O of the FRB), has any loan agreement, note or borrowing arrangement
or any other agreement with MFC or any of the Subsidiaries (other than normal
employment arrangements) or any interest in any property, real, personal or
mixed, tangible or intangible, used in or pertaining to the business of MFC or
any of the Subsidiaries.
3.21. Compliance with Laws; Permits. Each of MFC and the Subsidiaries has
complied in all respects with all applicable laws and regulations of foreign,
federal, state and local governments and all agencies thereof which affect the
business or any owned or leased properties of MFC or any of the Subsidiaries and
to which MFC or any of the Subsidiaries may be subject (including, without
limitation, the Occupational Safety and Health Act of 1970, the HOLA, the FDIA,
the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act of
1975, the Fair Housing Act, the Equal Credit Opportunity Act and the Federal
Reserve Act, each as amended, and any other state or federal acts (including
rules and regulations thereunder) regulating or otherwise affecting employee
health and safety or the environment), except where failure to so comply would
not, individually or in the aggregate, have a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries, taken
as a whole, or MFC's ability to consummate the transactions contemplated hereby;
and no claims have been filed by any such governments or agencies against MFC or
any of the Subsidiaries alleging such a violation of any such law or regulation
which have not been resolved to the satisfaction of such governments or
agencies. Each of MFC and the Subsidiaries holds all of the permits, licenses,
certificates and other authorizations of foreign, federal, state and local
governmental agencies required for the conduct of its business, except where
failure to obtain such authorizations would not, individually or in the
aggregate, have a material adverse effect on the business, operations or
financial condition of MFC and the Subsidiaries, taken as whole, or the ability
of MFC to consummate the transactions contemplated hereby. Except as disclosed
in Schedule 3.21, neither MFC nor any of the Subsidiaries is subject to any
cease and desist order, written agreement or memorandum of understanding with,
or is a
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<PAGE>
party to any commitment letter or similar undertaking to, or is subject
to any order or directive by, or is a recipient of any extraordinary supervisory
agreement letter from, or has adopted any board resolutions at the request of,
federal or state governmental authorities charged with the supervision or
regulation of savings banks, banks, savings and loan holding companies or bank
holding companies or engaged in the insurance of bank deposits (collectively,
the "Bank Regulators"), nor have any of MFC or any of the Subsidiaries been
advised by any Bank Regulator that it is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar undertaking.
Neither MFC nor any Subsidiary is subject to Section 32 of the Federal Deposit
Insurance Act.
3.22. Administration of Fiduciary Accounts. Each Subsidiary has
properly administered, in all respects material and which could reasonably be
expected to be material to the business, operations or financial condition of
MFC and the Subsidiaries, taken as a whole, all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator or
investment advisor, in accordance with the terms of the governing documents and
applicable state and federal law and regulation and common law. Neither MFC, any
Subsidiary, nor any director, officer or employee of MFC or any Subsidiary has
committed any breach of trust with respect to any such fiduciary account which
is material to or could reasonably be expected to be material to the business,
operations or financial condition of MFC and the Subsidiaries, taken as a whole,
and the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account in
all material respects.
3.23. Disclosure. The representations and warranties of MFC contained
in this Agreement are true and correct in all material respects, and such
representations and warranties do not omit any material fact necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading. There is no fact known to MFC and the Subsidiaries
which has not been disclosed to FBS pursuant to this Agreement, the Schedules
hereto and the MFC 10-K Reports and the MFC 10-Q Report, all taken together as a
whole, which would have or would reasonably be expected to have a material
adverse effect on the business, operations or financial condition of MFC and the
Subsidiaries, taken as a whole, or the ability of MFC to consummate the
transactions contemplated hereby.
3.24. Prospectus/Proxy Statement. At the time the Prospectus/Proxy
Statement is mailed to the shareholders of FBS and MFC in order to obtain
approvals referred to in Section 5.9(a) and at all times subsequent to such
mailing up to and including the times of such approvals, such Prospectus/Proxy
Statement (including any supplements thereto), with respect to all information
set forth therein relating to MFC (including the Subsidiaries) and its
shareholders, MFC Common Stock, this Agreement, the Merger and all other
transactions
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<PAGE>
contemplated hereby, will (a) comply in all material respects with
applicable provisions of the 1933 Act and the 1934 Act, and (b) not contain any
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein, in
light of the circumstances under which they are made, not misleading.
3.25. Pooling of Interests. Neither MFC nor any of the Subsidiaries
has taken or agreed to take any action which would disqualify the Merger as a
"pooling of interests" for accounting purposes.
3.26. Regulatory Approvals. As of the date hereof, MFC is not aware of
any reason that the regulatory approvals specified in Section 5.1 would not be
obtained.
3.27. Interest Rate Risk Management Instruments.
-----------------------------------------
(a) Schedule 3.27 sets forth a true, correct and complete list of all
interest rate swaps, caps, floors and option agreements and other interest rate
risk management arrangements to which MFC or any of the Subsidiaries is a party
or by which any of their properties or assets may be bound. MFC has delivered
or made available to FBS true, correct and complete copies of all such interest
rate risk management agreements and arrangements.
(b) All interest rate swaps, caps, floors and option agreements and
other interest rate risk management arrangements to which MFC or any of the
Subsidiaries is a party or by which any of their properties or assets may be
bound were entered into in the ordinary course of business and, to MFC's
knowledge, in accordance with prudent banking practice and applicable rules,
regulations and policies of the Bank Regulators and with counterparties believed
to be financially responsible at the time and are legal, valid and binding
obligations enforceable in accordance with their terms (except as may be limited
by bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
the rights of creditors generally and the availability of equitable remedies),
and are in full force and effect. MFC and each of the Subsidiaries has duly
performed in all material respects all of its obligations thereunder to the
extent that such obligations to perform have accrued; and to MFC's knowledge,
there are no breaches, violations or defaults or allegations or assertions of
such by any party thereunder.
ARTICLE 4
CONDUCT OF BUSINESS PENDING THE MERGER
4.1. Conduct of Business. From the date of this Agreement to the
Effective Date, unless FBS shall otherwise agree in writing or as otherwise
expressly contemplated or permitted by other provisions of this Agreement,
including this Section 4.1:
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(a) the business of MFC and each of the Subsidiaries shall be conducted
only in, and neither MFC nor any of the Subsidiaries shall take any action
except in, the ordinary course, on an arms-length basis and in accordance, in
all material respects, with all applicable laws, rules and regulations and past
practices;
(b) neither MFC nor any of the Subsidiaries shall, directly or
indirectly, (i) amend or propose to amend its Charter or Bylaws; (ii) issue or
sell any of its equity securities, securities convertible into or exchangeable
for its equity securities, warrants, options or other rights to acquire its
equity securities, or any bonds or other securities, except (A) deposit and
other bank obligations in the ordinary course of business and (B) pursuant to
the exercise of the options, warrants, conversion privileges and other rights
set forth on Schedule 3.3 on the date of this Agreement; (iii) redeem, purchase,
acquire or offer to acquire, directly or indirectly, any shares of capital stock
of MFC or any of the Subsidiaries or other securities of MFC or of any of the
Subsidiaries, except pursuant to the agreements, arrangements or commitments
identified on Schedule 3.3; (iv) split, combine or reclassify any outstanding
shares of capital stock of MFC or any of the Subsidiaries, or declare, set aside
or pay any dividend or other distribution payable in cash, property or otherwise
with respect to shares of capital stock of MFC or any of the Subsidiaries except
(A) dividends paid in cash by the Subsidiaries which are wholly owned by MFC to
MFC, or another wholly owned Subsidiary of MFC, (B) the regular quarterly cash
dividends paid on the MFC Common Stock in an amount not to exceed $.20 per
share, and (C) the regular dividends paid in accordance with the terms of the
MFC Preferred Stock; (v) borrow any amount or incur or become subject to any
material liability, except liabilities incurred in the ordinary course of
business, but in no event will MFC or any of the Subsidiaries enter into any
long-term borrowings with a term of greater than one year, other than (i) as set
forth on Schedule 3.27 and (ii) borrowings for the purpose of interest rate risk
management with maturities of less than three years in an aggregate amount not
exceeding $150,000,000 and any related derivative transactions, without prior
consultation with FBS; (vi) discharge or satisfy any material lien or
encumbrance on the properties or assets of MFC or any of the Subsidiaries or pay
any material liability, except in the ordinary course of business, other than
reverse repurchase agreements or Federal Home Loan Bank borrowings; (vii) sell,
assign, transfer, mortgage, pledge or subject to any lien or other encumberance
any of its assets with an aggregate market value in excess of $50,000, except
(x) in the ordinary course of business, including REO, (y) liens and
encumbrances for current property taxes not yet due and payable and (z) liens
and encumbrances which do not materially affect the value of, or interfere with
the past or future use or ability to convey, the property subject thereto or
affected thereby; (viii) cancel any material debt or claims or waive any rights
of material value, except in the ordinary course of business; (ix) acquire (by
merger, exchange, consolidation, acquisition of stock or assets or otherwise)
any corporation, partnership, joint venture or other business organization or
division or material assets thereof, or assets or deposits that are material to
MFC, except in exchange for debt previously contracted, including REO; (x) other
than as set forth on Schedule 3.11 on the date of this Agreement, make any
single or group of related capital expenditures or commitments therefor in
excess of $50,000 or enter into any lease or group of related
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leases with the same party which involves aggregate lease payments payable of
more than $100,000 for any individual lease or involves more than $100,000 for
any group of related leases in the aggregate; or (xi) enter into or propose to
enter into, or modify or propose to modify, any agreement, arrangement or
understanding with respect to any of the matters set forth in this
Section 4.l(b);
(c) neither MFC nor any of the Subsidiaries shall, directly or indirectly,
enter into or modify any employment, severance or similar agreements or
arrangements with, or grant any bonuses, wage, salary or compensation increases,
or severance or termination pay to, or promote, any director, officer, employee,
group of employees or consultant or hire any employee with an employee
classification above grade "G" (as such classifications have been described by
MFC to FBS), other than (i) bonuses, increases, promotions or new hires in the
ordinary course and in a manner consistent with past practices as previously
disclosed to FBS, (ii) bonuses payable on the Effective Date as a result of the
Merger under the Change in Control Plans and (iii) retention bonuses in an
aggregate amount not to exceed $300,000 and as to which the identity of the
recipient and amount of each such bonus will be previously agreed upon by FBS
and MFC;
(d) neither MFC nor any of the Subsidiaries shall adopt or amend any bonus,
profit sharing, stock option, pension, retirement, deferred compensation, or
other employee benefit plan, trust, fund, contract or arrangement for the
benefit or welfare of any employees, except as required by law;
(e) each of MFC and the Subsidiaries shall use reasonable efforts to cause
its current insurance policies not to be canceled or terminated or any of the
coverage thereunder to lapse, unless simultaneously with such termination,
cancellation or lapse, replacement policies providing coverage substantially
equal to the coverage under the canceled, terminated or lapsed policies are in
full force and effect;
(f) neither MFC nor any of the Subsidiaries shall enter into any settlement
or similar agreement with respect to, or take any other significant action with
respect to the conduct of, any action, suit, proceeding, order or investigation
which is set forth on Schedule 3.15 or to which MFC or any of the Subsidiaries
becomes a party after the date of this Agreement, without prior consultation
with FBS, provided that neither MFC nor any of the Subsidiaries shall take any
such action with respect to the litigation matters identified as "Edina Realty
Litigation Matters" on Schedule 3.15 (the "Edina Realty Litigation Matters"),
without the prior written consent of FBS;
(g) each of MFC and the Subsidiaries shall use commercially reasonable
efforts to preserve intact in all material respects the business organization
and the goodwill of each of MFC and the Subsidiaries and to keep available the
services of its officers and employees as a group and preserve intact material
agreements, and MFC shall confer on a regular and frequent basis with
representatives of FBS, as reasonably requested by FBS, to report on operational
matters and the general status of ongoing operations;
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<PAGE>
(h) neither MFC nor any of the Subsidiaries shall take any action with
respect to investment securities held or controlled by any of them inconsistent
with past practices, alter its investment portfolio duration policy as
heretofore in effect or, without prior consultation with FBS, take any action
that would have or could reasonably be expected to have a material effect on the
Bank's asset/liability position;
(i) the Bank shall not make any agreements or commitments binding it to
extend credit in the amount per "one borrower" (as previously defined) in excess
of $1,000,000 nor will it purchase any portfolio of loans with an aggregate
principal balance in excess of $100,000,000 without prior consultation with FBS;
(j) with respect to properties leased by MFC or any of the Subsidiaries,
neither MFC nor any of the Subsidiaries shall renew, exercise an option to
extend, cancel or surrender any lease of real property nor allow any such lease
to lapse, without prior consultation with FBS (other than leases with remaining
terms of six months or less); and
(k) neither MFC nor any of the Subsidiaries shall agree to do any of the
foregoing;
provided, however, that in the event MFC and the Subsidiaries would be
prohibited from taking any action by reason of this Section 4.1 without the
prior written consent of FBS, such action may nevertheless be taken if MFC or
any of the Subsidiaries is expressly required to do so by law or by the OTS and
MFC informs FBS of such prohibition or restriction. For purposes of this
Agreement, the words "prior consultation" with respect to any action means
advance notice of such proposed action and a reasonable opportunity to discuss
such action in good faith prior to taking such action.
ARTICLE 5
ADDITIONAL COVENANTS AND AGREEMENTS
5.1. Filings and Approvals. Each party will use all reasonable efforts and
will cooperate with the other party in the preparation and filing, as soon as
practicable, of all applications or other documents required to obtain
regulatory approvals and consents from the FRB and the OTS, filings under the
HSR Act and any other applicable regulatory authorities (including any
applications with the OTS or the Office of the Comptroller of the Currency
deemed by FBS to be necessary to allow it to consolidate the operations of the
Bank with the operations of FBS) and provide copies of such applications,
filings and related correspondence to the other party. Prior to filing each
application, registration statement or other document with the applicable
regulatory authority, each party will provide the other party with an
opportunity to review and comment on the nonconfidential portions of each such
application, registration statement or other document. Each party will use all
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reasonable efforts and will cooperate with the other parties in taking any other
actions necessary to obtain such regulatory or other approvals and consents,
including participating in any required hearings or proceedings. Subject to the
terms and conditions herein provided, each party will use all reasonable efforts
to take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
5.2. Certain Loans and Related Matters. MFC will furnish to FBS a complete
and accurate list as of the end of each calendar month after May 1994, within 15
business days after the end of each such calendar month, of (a) all of the
Bank's periodic internal credit quality reports prepared during such calendar
month (which reports will be prepared in a manner consistent with past
practices), (b) all loans of the Bank classified as non-accrual, as
restructured, as 90 days past due, as still accruing and doubtful of collection
or any comparable classification, (c) all REO, including in-substance
foreclosures and real estate in judgment, (d) any current repurchase obligations
of the Bank with respect to any loans, loan participations or state or municipal
obligations or revenue bonds and (e) any standby letters of credit issued by the
Bank.
5.3. Monthly Financial Statements. MFC shall furnish FBS with MFC's and
each of the Subsidiaries' balance sheets as of the end of each calendar month
after June 1994 and the related statements of income, within 15 business days
after the end of each such calendar month. Such financial statements shall be
prepared on a basis consistent with the Latest Balance Sheets and the Related
Statements and on a consistent basis during the periods involved and shall
fairly present the financial positions of MFC and each of the Subsidiaries as of
the dates thereof and the results of operations of MFC and each of the
Subsidiaries for the periods then ended.
5.4. Expenses. All costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs and expenses.
5.5. No Negotiations, etc. MFC will not, and will cause the Subsidiaries
and MFC's and the Subsidiaries' respective officers, directors, employees,
agents and affiliates, not to, directly or indirectly, solicit, authorize,
initiate or encourage submission of, any proposal, offer, tender offer or
exchange offer from any person or entity (including any of its or their officers
or employees) relating to any liquidation, dissolution, recapitalization,
merger, consolidation or acquisition or purchase of all or a material portion of
the assets or deposits of, or any equity interest in, MFC or any of the
Subsidiaries or other similar transaction or business combination involving MFC
or any of the Subsidiaries, or, unless MFC shall have determined, after receipt
of a written opinion of counsel to MFC (a copy of which opinion shall be
delivered to FBS), that the Board of Directors of MFC has a fiduciary duty to do
so, (a) participate in any negotiations in connection with or in furtherance of
any of the foregoing or (b) permit any person other than FBS and its
representatives to have any access to the facilities of, or furnish to any
person other than FBS and its
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representatives any non-public information with respect to, MFC or any of the
Subsidiaries in connection with or in furtherance of any of the foregoing. MFC
shall promptly notify FBS if any such proposal or offer, or any inquiry from or
contact with any person with respect thereto, is made, and shall promptly
provide FBS with such information regarding such proposal, offer, inquiry or
contact as FBS may request.
5.6. Notification of Certain Matters. Each party shall give prompt notice
to the other party of (a) the occurrence or failure to occur of any event or the
discovery of any information, which occurrence, failure or discovery would be
likely to cause any representation or warranty on its part contained in this
Agreement to be materially untrue or inaccurate when made at the Effective Date
or at any time prior to the Effective Date and (b) any material failure of such
party to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder.
5.7. Access to Information; Confidentiality.
--------------------------------------
(a) MFC shall permit and shall cause each of the Subsidiaries to permit FBS
full access on reasonable notice and at reasonable hours to its properties and
shall disclose and make available (together with the right to copy) to FBS and
to the internal auditors, loan review officers, employees, attorneys,
accountants and other representatives of FBS all books, papers and records
relating to the assets, stock, properties, operations, obligations and
liabilities of MFC and the Subsidiaries, including, without limitation, all
books of account (including, without limitation, the general ledger), tax
records, minute books of directors' and shareholders' meetings, organizational
documents, bylaws, contracts and agreements, filings with any regulatory
authority, accountants' work papers, litigation files (including, without
limitation, legal research memoranda), documents relating to assets and title
thereto (including, without limitation, abstracts, title insurance policies,
surveys, environmental reports, opinions of title and other information relating
to the real and personal property), plans affecting employees, securities
transfer records and shareholder lists, and any books, papers and records
relating to other assets, business activities or prospects in which FBS may have
a reasonable interest, including, without limitation, its interest in planning
for integration and transition with respect to the business of MFC and the
Subsidiaries; provided, however, that the foregoing rights granted to FBS shall,
whether or not and regardless of the extent to which the same are exercised, in
no way affect the nature or scope of the representations, warranties and
covenants of MFC set forth herein. In addition, MFC shall cause each of the
Subsidiaries to instruct its officers, employees, counsel and accountants to be
available for, and respond to any questions of, such FBS representatives at
reasonable hours and with reasonable notice by FBS to such individuals, and to
cooperate fully with FBS in planning for the integration of the business of MFC
and the Subsidiaries with the business of FBS and its subsidiaries.
(b) FBS shall permit reasonable access to its properties and shall disclose
and make available (together with the right to copy) to MFC and to its
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representatives FBS's financial books and records, minute books of directors'
and shareholders' meetings, organizational documents, bylaws, and filings with
any regulatory authority; provided, however, that the foregoing rights granted
to MFC shall, whether or not and regardless of the extent to which the same are
exercised, in no way affect the nature or scope of the representations,
warranties and covenants of FBS set forth herein. In addition, FBS shall
instruct its officers, employees, counsel and accountants to be available for,
and respond to reasonable questions of, representatives of MFC at reasonable
hours and with reasonable notice by MFC to such individuals.
(c) All information furnished by MFC or FBS pursuant hereto shall be
treated as the sole property of the party furnishing the information until the
Effective Date, and, if the Effective Date shall not occur, the receiving party
shall return to the party which furnished such information, or destroy, all
documents or other materials (including copies thereof) containing, reflecting
or referring to such information. In addition, the receiving party shall keep
confidential all such information and shall not directly or indirectly use such
information for any competitive or other commercial purpose. In the event that
this Agreement shall terminate, neither party shall disclose, except as required
by law or pursuant to the request of an administrative agency or other
regulatory body, the basis or reason for such termination, without the consent
of the other party. The obligation to keep such information confidential shall
not apply to (i) any information which (A) was already in the receiving party's
possession prior to the disclosure thereof to the receiving party by the party
furnishing the information, (B) was then generally known to the public,
(C) became known to the public through no fault of the receiving party or its
representatives or (D) was disclosed to the receiving party by a third party not
bound by an obligation of confidentiality or (ii) disclosures required by law,
governmental or regulatory authority.
5.8. Filing of Tax Returns and Adjustments.
-------------------------------------
(a) MFC, on behalf of MFC and each of the Subsidiaries, shall file (or
cause to be filed) at their own expense, on or prior to the due date, all Tax
returns, including all Plan returns and reports, for all Tax periods ending on
or before the Effective Date where the due date for such returns or reports
(taking into account valid extensions of the respective due dates) falls on or
before the Effective Date; provided, however, that neither MFC nor any of the
Subsidiaries shall file any such Tax returns, or other returns, elections or
information statements with respect to any liabilities for Taxes (other than
federal, state or local sales, use, withholding or employment tax returns or
statements), or consent to any adjustment or otherwise compromise or settle any
matters with respect to Taxes, without prior consultation with FBS; provided,
further, that neither MFC nor any of the Subsidiaries shall make any election or
take any other discretionary position with respect to Taxes, in a manner
inconsistent with past practices, without the prior written approval of FBS,
which approval shall not be unreasonably withheld. In the event the granting or
withholding of such approval by FBS results in additional Taxes owing for any
Tax period ending on or before the Effective Date, liability for such additional
Taxes shall
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not cause any representation of MFC relating to Taxes to be untrue. MFC shall
provide FBS with a copy of appropriate workpapers, schedules, drafts and final
copies of each federal and state income Tax return or election of MFC and each
of the Subsidiaries (including returns of all Plans) at least seven days before
filing such return or election and shall reasonably cooperate with any request
by FBS in connection therewith.
(b) FBS, in its sole and absolute discretion, will file (or cause to be
filed) all Tax returns of MFC and each of the Subsidiaries due after the
Effective Date. After the Effective Date, FBS, in its sole and absolute
discretion and to the extent permitted by law, shall have the right to amend,
modify or otherwise change all Tax returns of MFC and each of the Subsidiaries
for all Tax periods.
5.9. Registration Statement.
----------------------
(a) For the purposes (i) of holding meetings of the shareholders of FBS and
MFC to approve this Agreement and the Merger and (ii) of registering the FBS
Common Stock to be issued to holders of MFC Common Stock and of options under
the MFC Stock Option Plans (as defined in Section 5.14(a)) in connection with
the Merger with the SEC and with applicable state securities authorities, the
parties hereto shall cooperate in the preparation of an appropriate registration
statement (such registration statement, together with all and any amendments and
supplements thereto, being herein referred to as the "Registration Statement"),
which shall include a prospectus/joint proxy statement satisfying all applicable
requirements of the 1933 Act, the 1934 Act, applicable state securities laws and
the rules and regulations thereunder (such prospectus/joint proxy statement,
together with any and all amendments or supplements thereto, being herein
referred to as the "Prospectus/Proxy Statement").
(b) FBS shall furnish such information concerning FBS as is necessary in
order to cause the Prospectus/Proxy Statement, insofar as it relates to FBS, to
be prepared in accordance with Section 5.9(a). FBS agrees promptly to advise
MFC if at any time prior to the FBS or MFC shareholders' meetings any
information provided by FBS in the Prospectus/Proxy Statement becomes incorrect
or incomplete in any material respect, and to provide the information needed to
correct such inaccuracy or omission.
(c) MFC shall furnish FBS with such information concerning MFC and the
Subsidiaries as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to MFC and the Subsidiaries, to be prepared in accordance
with Section 5.9(a). MFC agrees promptly to advise FBS if at any time prior to
the FBS or MFC shareholders' meetings any information provided by MFC in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect, and to provide FBS with the information needed to correct such
inaccuracy or omission.
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(d) FBS shall promptly file the Registration Statement with the SEC and
applicable state securities agencies. FBS shall use reasonable efforts to cause
the Registration Statement to become effective under the 1933 Act and applicable
state securities laws at the earliest practicable date. MFC authorizes FBS to
utilize in the Registration Statement the information concerning MFC and the
Subsidiaries provided to FBS for the purpose of inclusion in the
Prospectus/Proxy Statement. MFC shall have the right to review and comment on
the form of proxy statement included in the Registration Statement. FBS shall
advise MFC promptly when the Registration Statement has become effective and of
any supplements or amendments thereto, and FBS shall furnish MFC with copies of
all such documents. Prior to the Effective Date or the termination of this
Agreement, each party shall consult with the other with respect to any material
(other than the Prospectus/Proxy Statement) that might constitute a "prospectus"
relating to the Merger within the meaning of the 1933 Act.
(e) FBS shall use reasonable efforts to cause to be delivered to MFC a
letter relating to the Registration Statement from Ernst & Young, FBS's
independent auditors, dated a date within two business days before the date on
which the Registration Statement shall become effective and addressed to MFC, in
form and substance reasonably satisfactory to MFC and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement.
(f) MFC shall use reasonable efforts to cause to be delivered to FBS a
letter relating to the Registration Statement from Ernst & Young, MFC's
independent auditors, dated a date within two business days before the date on
which the Registration Statement shall become effective and addressed to FBS, in
form and substance reasonably satisfactory to FBS and customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement.
(g) FBS shall bear (i) the costs of all SEC filing fees with respect to the
Registration Statement and the costs of qualifying the shares of FBS Common
Stock under state blue sky laws to the extent necessary and (ii) all printing
and mailing costs in connection with the preparation and mailing of the
Prospectus/Proxy Statement to FBS shareholders. MFC shall bear all printing and
mailing costs in connection with the preparation and mailing of the
Prospectus/Proxy Statement to MFC shareholders. FBS and MFC shall each bear
their own legal and accounting expenses in connection with the Registration
Statement.
5.10. Affiliate Letters. MFC shall use its best efforts to obtain and
deliver to FBS at least 31 days prior to the Effective Date a signed
representation letter substantially in the form of Exhibit A hereto from each
shareholder of MFC who may reasonably be deemed an "affiliate" of MFC within the
meaning of such term as used in Rule 145 under the 1933 Act and for purposes of
qualifying for pooling of interests accounting treatment for the Merger. FBS
may place appropriate legends on the stock certificates of affiliates of MFC.
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5.11. Establishment of Accruals. If requested by FBS prior to March 1,
1995, prior to the public release of financial results for MFC's 1994 fiscal
year (or, if earlier, the business day immediately prior to the Effective Date),
MFC shall, consistent with generally accepted accounting principles, establish
for such fiscal year such additional accruals and reserves as may be necessary
to conform MFC's accounting and credit loss reserve practices and methods to
those of FBS (as such practices and methods are to be applied to MFC from and
after the Effective Date) and reflect FBS's plans with respect to the conduct of
MFC's business following the Merger and to provide for the costs and expenses
relating to the consummation by MFC of the transactions contemplated by this
Agreement; provided, however, that MFC shall not be required to take such action
unless (A) FBS certifies in writing that it has no reason to believe that all
conditions to FBS's obligation to consummate the transactions contemplated by
this Agreement set forth in Article 6 hereof will not be satisfied or waived;
and (B) MFC shall have no reasonable basis for believing that all the conditions
to MFC's obligation to consummate the transactions contemplated by this
Agreement will not be satisfied. In the event that MFC shall not be obligated to
establish the additional accruals and reserves referred to in the preceding
sentence prior to March 1, 1995, and thereafter FBS shall request that MFC
establish such accruals and reserves and the conditions set forth in clauses (A)
and (B) of the preceding sentence are satisfied, MFC shall establish such
accruals and reserves for a period subsequent to the 1994 fiscal year.
Notwithstanding anything to the contrary contained in this Agreement, no accrual
or reserve made by MFC or the Bank pursuant to this Section 5.11, or any
litigation or regulatory proceeding arising out of any such accrual or reserve,
or any other effect on MFC or the Bank resulting from MFC's compliance with this
Section 5.11, shall constitute or be deemed to be a breach, violation of or
failure to satisfy any representation, warranty, covenant, condition or other
provisions of this Agreement or otherwise be considered in determining whether
any such breach, violation or failure to satisfy shall have occurred.
5.12. Employee Matters.
----------------
(a) General. Subject to the following agreements, FBS shall have the right
to continue, amend or terminate any of the Plans (as defined in Section 3.18) in
accordance with the terms thereof and subject to any limitation arising under
applicable law. Until FBS shall take such action, however, such Plans shall
continue in force for the benefit of present and former employees of MFC or the
Subsidiaries who have any present or future entitlement to benefits under any of
the Plans ("MFC Employees").
(b) MFC Plans.
---------
(i) MFC 401(k) Plan. After the Effective Date, FBS will terminate the
accrual of benefits under the MFC 401(k) plans listed on
Schedule 3.18(b)(i)(B) and sponsored by MFC or any Subsidiary not more than
two years after the Effective Date and will take such actions as may be
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necessary to cause the assets and liabilities of the MFC 401(k) plans to be
merged with and into the FBS 401(k) plan. As of the Effective Date, FBS
shall take such action as may be necessary to amend the MFC 401(k) plans to
provide that with respect to MFC Employees who are participants in the MFC
401(k) plans and who are employees of MFC as of the Effective Date, their
accounts under such plans as of the Effective Date shall be fully vested as
of the Effective Date. Benefits accruing between the Effective Date and
the date on which the accrual of benefits is terminated shall be fully and
immediately vested as of that time. Distributions shall not be permitted
from the MFC 401(k) plans merely because of the discontinuance of accruals
or the transfer of assets and liabilities.
(ii) MFC Directors' Retirement Plan. MFC shall calculate and pay in
cash on the Effective Date all amounts reasonably estimated to be owing to
any MFC director pursuant to the MFC Directors' Retirement Plan, including
any estimated "gross up" payment payable as provided therein. To the
extent that any such gross up payment remains payable after the Effective
Date, FBS hereby acknowledges that it will promptly pay such amounts in
full in accordance with the terms of such plan.
(iii) Change in Control Plans. Prior to the Effective Date, MFC shall
amend the Change in Control Plans as set forth in Exhibit B hereto, and FBS
hereby agrees to such amendments. FBS acknowledges that any employment
agreement with an executive officer previously disclosed to it does not
constitute a "severance plan" for purposes of such plans.
(iv) MFC Bonus Plans. On or prior to December 31, 1994, MFC shall pay
all bonuses accrued in 1994 by MFC Employees under the MFC bonus plans
disclosed to FBS.
(v) MFC Defined Benefit Plan. Not more than two (2) years after the
Effective Date, FBS will terminate the accrual of benefits under the MFC
qualified defined benefit pension plan and will take such actions as may be
necessary to cause the assets and liabilities of the MFC qualified defined
benefit pension plan to be merged with and into the FBS Personal Retirement
Account. As of the Effective Date, FBS shall take such action as may be
necessary to amend the MFC qualified defined benefit pension plan to
provide that with respect to MFC Employees who are participants in the MFC
qualified defined benefit pension plan and who are employees of MFC as of
the Effective Date, their accrued benefits under such plan as of the
Effective Date shall be fully vested as of the Effective Date.
(c) FBS Plans.
---------
(i) FBS CAP (401(k)) Plan. After the Effective Date, FBS shall take
such actions as may be necessary to cause eligible MFC Employees to become
qualified to participate in the FBS Capital Accumulation Plan ("CAP")
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concurrent with the date that FBS causes accruals to cease under the MFC
401(k) plan. All service with MFC and any of the Subsidiaries (whether
before or after the Effective Date) shall be recognized under the CAP for
eligibility and vesting purposes but shall not be recognized for
contribution and allocation purposes. FBS shall take such actions as may be
necessary to cause the CAP to accept transfers of assets and liabilities
from the MFC 401(k) plan.
(ii) FBS Defined Benefit Plan. Upon the cessation of accruals under
any MFC Defined Benefit Plan, FBS shall take such actions as may be
necessary to cause eligible MFC Employees to be qualified to participate in
any qualified defined benefit plan generally available at the time to
similarly situated employees of FBS or an affiliate of FBS. All service
with MFC or any of the Subsidiaries and their predecessors, to such extent
taken into account for purposes of the MFC Defined Benefit Plan (whether
before or after the Effective Date) shall be recognized under the FBS plan
for eligibility and vesting purposes but shall not be required to be
recognized for any other purpose.
(iii) Welfare and Other Benefits. FBS shall use its best efforts to
cause any transition by MFC Employees from the welfare and other generally
applicable benefit plans and practices of MFC or its affiliates not
otherwise expressly dealt with in this Section 5.12 to FBS plans and
practices to be effected in a manner that does not result in a significant
financial detriment to the MFC Employees other than any such financial
detriment as a result of higher premium costs in the FBS plan which are
generally applicable to other similarly situated employees of FBS and its
affiliates or to the absence of any FBS counterpart for a particular MFC
plan or practice.
(d) Successor Status; Further Assurances. FBS hereby expressly assumes and
agrees to perform or cause to be performed all of the obligations of
"successors" under the terms of the MFC Broad-Based Change in Control Severance
Pay Plan, as amended, the MFC Senior Management Change in Control Severance Pay
Plan, as amended, and the MFC Executive Management Change in Control Severance
Pay Plan, as amended (the "Change in Control Plans"), and the MFC Directors'
Retirement Plan.
(e) Limitation on Enforcement. This Section 5.12 is an agreement solely
between MFC and the Subsidiaries and FBS. Nothing in this Section 5.12, whether
express or implied, confers upon any employee of MFC, any of the Subsidiaries or
FBS or any other person, any rights or remedies, including, but not limited to:
(i) any right to employment or recall, (ii) any right to continued employment
for any specified period, or (iii) any right to claim any particular
compensation, benefit or aggregate of benefits, of any kind or nature
whatsoever, as a result of this Section 5.12.
5.13. Pooling of Interests; Tax Treatment. Neither MFC nor any of the
Subsidiaries nor FBS shall take any action which would disqualify the Merger as
a
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"pooling of interests" for accounting purposes or as a "reorganization" that
would be tax free to the shareholders of MFC pursuant to Section 368(a) of the
Code.
5.14. Stock Options and Warrants.
--------------------------
(a) Stock Option Plans. In the event that each option outstanding or to
be outstanding on the Effective Date under the MFC 1982 Stock Option and
Incentive Plan, the MFC 1990 Stock Option Plan, the MFC 1993 Non-Employee
Director Stock Option Plan and the MFC 1993 Stock Incentive Plan (collectively,
the "MFC Stock Option Plans") is converted into a right to receive in lieu of
all other rights under such option (and each such option thereafter is
terminated and canceled), shares of FBS Common Stock with a value as of the
Effective Date equal to the "fair value" of such option as determined by an
independent third party expert to be mutually selected by FBS and MFC, FBS will,
as of the Effective Date, issue in respect of such option shares of FBS Common
Stock having an Average Price equal to such "fair value." In the event that
each such option is not so converted, then, at the Effective Date, such option
shall be assumed by FBS and shall thereafter be deemed to constitute an option
to acquire, on the same terms and conditions as were applicable under such
option, the same number of shares of FBS Common Stock as the holder of such
option would have been entitled to receive pursuant to the Merger had such
holder exercised such option in full immediately prior to the Effective Date, at
a price per share equal to (x) the aggregate exercise price for the shares of
MFC Common Stock otherwise purchasable pursuant to such option divided by (y)
the number of full shares of FBS Common Stock deemed purchasable pursuant to
such option; provided, however, that in the case of any option to which Section
421 of the Code applies by reason of its qualification under Section 422 of the
Code ("incentive stock options"), the option price, the number of shares
purchasable pursuant to such option and the terms and conditions of exercise of
such options shall be determined in order to comply with Section 424(a) of the
Code. In addition, MFC will use its best efforts to cause all of the options
outstanding and vested under the MFC Stock Option Plans as of December 31, 1994
to be exercised in full on or prior to such date.
(b) Employee Stock Purchase Plans. At the Effective Date, each outstanding
option issued pursuant to the MFC Employee Stock Purchase Plan or the Edina
Realty Sales Associate Stock Purchase Plan shall be deemed to constitute an
option to acquire FBS Common Stock on the same terms and conditions as
theretofore applicable, except that the exercise price per share and the number
of shares of stock for which such option is exercisable shall be adjusted as
appropriate in light of the Merger and the Exchange Ratio in order to prevent
any diminution of the value of such options or the rights of the participants.
(c) MFC Warrants. On the Effective Date, FBS shall execute a supplemental
warrant agreement to the Warrant Agreement dated as of November 20, 1990 (the
"MFC Warrant Agreement") between MFC and American Stock Transfer and Trust
Company, as Warrant Agent, as provided in Section 10(I) of the Warrant
Agreement, and all outstanding warrants of MFC (the "MFC Warrants") issued
pursuant to such Warrant Agreement shall be assumed by FBS. Each MFC
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Warrant shall be deemed to constitute an option to acquire, on the same terms
and conditions as were applicable under such MFC Warrant, the same number of
shares of FBS Common Stock as the holder of such MFC Warrant would have been
entitled to receive pursuant to the Merger had such holder exercised such option
in full immediately prior to the Effective Date, at a price per share equal to
(x) the aggregate exercise price for the shares of MFC Common Stock otherwise
purchasable pursuant to such MFC Warrant divided by (y) the number of full
shares of FBS Common Stock deemed purchasable pursuant to such MFC Warrant. FBS
shall take all corporate action necessary to reserve for issuance a sufficient
number of shares of FBS Common Stock for delivery upon exercise of MFC Warrants
assumed by it in accordance with this Section 5.14. FBS shall use its best
efforts to register the MFC Warrants and the underlying FBS Common Stock under
the 1933 Act as of the Effective Date and to maintain the effectiveness of such
registration statement or registration statements (and maintain the current
status of the prospectus or prospectuses contained therein) for so long as such
MFC Warrants remain outstanding.
5.15. Indemnification and Insurance.
-----------------------------
(a) From and after the Effective Date, FBS shall indemnify, defend and hold
harmless each person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Date, an officer, director or
employee of MFC or any of the Subsidiaries (the "Indemnified Parties") against
all losses, claims, damages, costs, expenses (including attorney's fees),
liabilities or judgments or amounts that are paid in settlement (which
settlement shall require the prior written consent of FBS, which consent shall
not be unreasonably withheld) of or in connection with any claim, action, suit,
proceeding or investigation (a "Claim") in which an Indemnified Party is, or is
threatened to be made, a party or a witness based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director, officer or employee of MFC or any of the Subsidiaries if such Claim
pertains to any matter or fact arising, existing or occurring prior to the
Effective Date (including, without limitation, the Merger and other transactions
contemplated by this Agreement), regardless of whether such Claim is asserted or
claimed prior to, at or after the Effective Date (the "Indemnified Liabilities")
to the full extent permitted under applicable Delaware or federal law as of the
date hereof or as amended prior to the Effective Date and under MFC's Charter
and Bylaws as in effect on the date hereof (and FBS shall pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by law and under such Charter or
Bylaws, upon receipt of any undertaking required by such Charter, Bylaws or
applicable law). Any Indemnified Party wishing to claim indemnification under
this Section 5.15(a), upon learning of any Claim, shall notify FBS (but the
failure so to notify FBS shall not relieve it from any liability which FBS may
have under this Section 5.15(a) except to the extent such failure prejudices
FBS) and shall deliver to FBS any undertaking required by such Charter, Bylaws
or applicable law. FBS shall use its best efforts to assure, to the extent
permitted under applicable law, that all limitations of liability existing in
favor of the Indemnified Parties as provided in the MFC Charter and Bylaws, as
in
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effect as of the date hereof, with respect to claims or liabilities arising
from facts or events existing or occurring prior to the Effective Date
(including, without limitation, the transactions contemplated by this
Agreement), shall survive the Merger. The obligations of FBS described in this
Section 5.15(a) shall continue in full force and effect, without any amendment
thereto, for a period of not less than five years from the Effective Date;
provided, however, that all rights to indemnification in respect of any Claim
asserted or made within such period shall continue until the final disposition
of such Claim; and provided further that nothing in this Section 5.15(a) shall
be deemed to modify applicable Delaware law regarding indemnification of former
officers and directors. Nothing in this Section 5.15(a) shall affect the
obligations to be assumed in the Merger by FBS to indemnify former directors and
officers of MFC or the Bank pursuant to the terms of the indemnification
agreements in effect as of the date hereof and as disclosed to FBS in Schedule
3.14.
(b) From and after the Effective Date, the directors, officers and
employees of MFC and the Subsidiaries who become directors, officers or
employees of FBS or any of its subsidiaries, except for the indemnification
rights set forth in Section 5.15(a), shall have indemnification rights with
prospective application only. The prospective indemnification rights shall
consist of such rights to which directors, officers and employees of FBS are
entitled under the provisions of the Charter or similar governing documents of
FBS and its subsidiaries, as in effect from time to time after the Effective
Date, as applicable, and provisions of applicable law as in effect from time to
time after the Effective Date.
(c) The obligations of FBS provided under Sections 5.15(a) and 5.15(b) are
intended to benefit, and be enforceable against FBS directly by, the Indemnified
Parties, and shall be binding on all respective successors of FBS.
(d) For a period of three years after the Effective Date, FBS shall use its
best efforts to provide that portion of directors' and officers' liability
insurance that serves to reimburse officers and directors of MFC or any of the
Subsidiaries (as opposed to FBS or MFC) with respect to claims against such
officers and directors arising from facts or events which occurred before the
Effective Date of at least the same coverage and amounts, and containing terms
and conditions no less advantageous, as that coverage currently provided by MFC;
provided, however, that the annual premiums for such coverage will not exceed
200% of the annual premiums currently paid by MFC for such coverage; provided,
further, that officers and directors of MFC or any Subsidiary may be required to
make application and provide customary representations and warranties to FBS's
insurance carrier for the purpose of obtaining such insurance; and provided,
further, that such coverage will have a single aggregate for such three-year
period in an amount not less than the annual aggregate of such coverage
currently provided by MFC.
5.16. Edina Realty Litigation Matters. MFC shall provide FBS regular
updates on the status of the Edina Realty Litigation Matters, shall notify FBS
of any developments with respect to such matters, and shall allow FBS to attend
all
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settlement negotiations or other meetings relating to the settlement or
other disposition of such matters.
5.17. FBS SEC Reports. FBS shall continue to file all reports with the
SEC necessary to permit the shareholders of MFC who are "affiliates" of MFC
(within the meaning of such term as used in Rule 145 under the 1933 Act) to sell
the FBS Common Stock received by them in connection with the Merger pursuant to
Rules 144 and 145(d) under the 1933 Act if they would otherwise be so permitted.
After the Effective Date, FBS will file with the SEC reports and other materials
required by the federal securities laws on a timely basis.
5.18. SEC Reports. Each of FBS and MFC agree to provide to the other
party copies of all reports and other documents filed with the SEC by it between
the date hereof and the Effective Date within five days after the date such
reports or other documents are filed with the SEC.
5.19. Stock Exchange Listing. FBS shall use its best efforts to list
on the New York Stock Exchange, subject to official notice of issuance, the
shares of FBS Common Stock to be issued to the holders of MFC Common Stock in
the Merger.
5.20. Shareholder Approvals. Each of FBS and MFC shall call a meeting
of its shareholders for the purpose of voting upon this Agreement and the
Merger, and shall schedule such meeting based on consultation with the other
party. The Board of Directors of each of FBS and MFC shall recommend approval of
this Agreement and the Merger, and use its best efforts (including, without
limitation, soliciting proxies for such approvals) to obtain such shareholder
approvals, unless the Board of Directors of either party determines, after
receipt of a written opinion of counsel to such party (a copy of which shall be
delivered to the other party), that recommending such approvals or using its
best efforts to obtain such shareholder approvals would be a breach of its
fiduciary duties.
5.21. FBS Board of Directors; Consulting Agreement.
--------------------------------------------
(a) Following the Effective Date, FBS shall use its best efforts to
(i) secure the election of Norman M. Jones to the FBS Board of Directors for a
term of at least three years and (ii) appoint Mr. Jones as Chairman of the Board
of Directors of the Bank, or its successor following the Merger, for at least
three years, subject to any applicable regulatory requirements.
(b) Prior to the Effective Date, FBS shall enter into a consulting
agreement with Mr. Jones, containing customary terms and conditions, engaging
Mr. Jones for a three-year period following the Effective Date as an independent
consultant to assist FBS in identifying and contacting, on behalf of FBS,
potential financial institution acquisition candidates as requested from time to
time by FBS.
(c) FBS shall pay Mr. Jones, for all of the services rendered by Mr. Jones
pursuant to this Section 5.21, total compensation equal to $200,000 annually.
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(d) FBS acknowledges that, on the Effective Date, there shall exist a
"termination" of Mr. Jones employment with MFC under the terms of the MFC
Executive Management Change in Control Severance Pay Plan and FBS shall pay all
benefits payable to Mr. Jones pursuant to the terms of such plan upon such
termination.
ARTICLE 6
CONDITIONS
6.1. Conditions to Obligations of Each Party. The respective obligations
of each party to effect the transactions contemplated hereby shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:
(a) Regulatory Approval. Regulatory approval for the consummation of
the transactions contemplated hereby shall have been obtained from the FRB,
the OTS and any other governmental authority from whom approval is
required, the applicable waiting periods, if any, under the HSR Act shall
have expired or been terminated, and all other statutory or regulatory
waiting periods shall have lapsed. None of such approvals shall contain
any conditions or restrictions that FBS reasonably believes will materially
restrict or limit the business or activities of FBS, MFC or the
Subsidiaries or have a material adverse effect on, or would be reasonably
likely to have a material adverse effect on, the business, operations or
financial condition of FBS and its subsidiaries, taken as a whole, on the
one hand, or MFC and the Subsidiaries, taken as a whole, on the other hand.
FBS acknowledges that a requirement to divest control of Edina Realty, Inc.
following the Merger would not, in and of itself, constitute a failure of
the condition in this Section 6.1(a).
(b) No Injunction. No injunction or other order entered by a state or
federal court of competent jurisdiction shall have been issued and remain
in effect which would impair the consummation of the transactions
contemplated hereby.
(c) No Prohibitive Change of Law. There shall have been no law,
statute, rule or regulation, domestic or foreign, enacted or promulgated
which would materially impair the consummation of the transactions
contemplated hereby.
(d) No Termination. No party hereto shall have terminated this
Agreement as permitted herein.
(e) Registration Statement. The Registration Statement shall have
been declared effective and shall not be subject to a stop order of the
SEC, and,
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if the offer and sale of FBS Common Stock in the Merger pursuant
to this Agreement is required to be registered under the securities laws of
any state, the Registration Statement shall not be subject to a stop order
of securities commission in such state.
(f) Federal Tax Opinion. An opinion of Oppenheimer Wolff & Donnelly
shall have been obtained with respect to the Merger, based on customary
reliance and subject to customary qualifications, to the effect that for
federal income tax purposes:
(i) The Merger will qualify as a "reorganization" under
Section 368(a) of the Code;
(ii) No gain or loss will be recognized by any MFC shareholder
(except in connection with the receipt of cash) upon the exchange of
MFC Common Stock for FBS Common Stock in the Merger;
(iii) The basis of the FBS Common Stock received
by a MFC shareholder who exchanges MFC Common Stock for FBS Common
Stock will be the same as the basis of the MFC Common Stock
surrendered in exchange therefor (subject to any adjustments required
as the result of receipt of cash in lieu of a fractional share of FBS
Common Stock);
(iv) The holding period of the FBS Common Stock received by a MFC
shareholder receiving FBS Common Stock will include the period during
which the MFC Common Stock surrendered in exchange therefor was held
(provided that the MFC Common Stock of such MFC shareholder was held
as a capital asset at the Effective Date); and
(v) Cash received by a MFC shareholder in lieu of a fractional
share interest of FBS Common Stock will be treated as having been
received as a distribution in full payment in exchange for the
fractional share interest of FBS Common Stock which he would otherwise
be entitled to receive, and will qualify as capital gain or loss
(assuming the MFC Common Stock was a capital asset in his hands at the
Effective Date).
Such opinion shall be delivered on and dated as of the Effective Date
and on and as of such earlier date as may be required by the SEC in
connection with the Registration Statement.
(g) The FBS Common Stock to be issued to holders of MFC Common Stock
in the Merger shall have been approved for listing on the NYSE on official
notice of issuance.
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6.2. Additional Conditions to Obligation of MFC. The obligation of MFC to
consummate the transactions contemplated hereby in accordance with the terms of
this Agreement is also subject to the following conditions:
(a) Representations and Compliance. The representations and
warranties of FBS set forth in Article 2 shall have been true and correct
as of the date hereof, and shall be true and correct as of the Effective
Date as if made at and as of the Effective Date, except where the failure
to be true and correct would not have, or would not reasonably be expected
to have, a material adverse effect on the business, operations or financial
condition of FBS and its subsidiaries, taken as a whole; and FBS shall in
all material respects have performed each obligation and agreement and
complied with each covenant to be performed and complied with by it
hereunder at or prior to the Effective Date.
(b) Officer's Certificate. FBS shall have furnished to MFC a
certificate of the Vice Chairman and Chief Financial Officer of FBS, dated
as of the Effective Date, in which such officer shall certify that he has
no reason to believe that the conditions set forth in Section 6.2(a) have
not been fulfilled.
(c) FBS Secretary's Certificate. FBS shall have furnished to MFC
(i) copies of the text of the resolutions by which the corporate action on
the part of FBS necessary to approve this Agreement and the transactions
contemplated hereby were taken, (ii) a certificate dated as of the
Effective Date executed on behalf of FBS by its corporate secretary or one
of its assistant corporate secretaries certifying to MFC that such copies
are true, correct and complete copies of such resolutions and that such
resolutions were duly adopted and have not been amended or rescinded and
(iii) an incumbency certificate dated as of the Effective Date executed on
behalf of FBS by its corporate secretary or one of its assistant corporate
secretaries certifying the signature and office of each officer of FBS
executing this Agreement or any other agreement, certificate or other
instrument executed pursuant hereto.
(d) Opinion of Counsel to FBS. MFC shall have received an opinion
letter dated as of the Effective Date addressed to MFC from Michael J.
O'Rourke, Esq., Executive Vice President and General Counsel of FBS, based
on customary reliance and subject to customary qualifications, to the
effect that:
(i) FBS is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. FBS is registered as a
bank holding company under the Bank Holding Company Act.
(ii) FBS has the corporate power to consummate the transactions on its
part contemplated by this Agreement. FBS has taken all requisite corporate
action to authorize this Agreement, and
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this Agreement has been duly executed and delivered by FBS and constitutes the
valid and binding obligation of FBS enforceable in accordance with its terms,
subject as to the enforcement of remedies to applicable bankruptcy, insolvency,
moratorium and other laws affecting the rights of creditors generally and to
judicial limitations on the enforcement of the remedy of specific performance.
(iii) The execution and delivery of this Agreement
by FBS and the consummation of the transactions contemplated hereby will not
constitute a breach, default or violation under its Charter or Bylaws or, to his
knowledge, (A) any agreement, arrangement or understanding to which FBS is a
party, (B) any license, franchise or permit or (C) any law, regulation, order,
judgment or decree.
(iv) No authorization, consent or approval of, or filing with, any
public body, court or authority is necessary for the consummation by FBS of the
transactions contemplated hereby which has not been obtained or made.
(v) The shares of FBS Common Stock to be issued pursuant to this
Agreement will be, when issued, duly authorized, validly issued, fully paid and
nonassessable.
(e) Shareholder Approval. This Agreement and the Merger shall have
been approved by the affirmative vote of the holders of the percentage of
MFC capital stock required for such approval under the provisions of MFC's
Charter and Bylaws, the DGCL and the rules of the NYSE.
(f) Material Adverse Change. Since the date of this Agreement, there
has been no material adverse change in, and no event, occurrence or
development in the business of FBS or its subsidiaries that, taken together
with other events, occurrences and developments with respect to such
business, would have or would reasonably be expected to have a material
adverse effect on, the business, operations or financial condition of FBS
and its subsidiaries, taken as a whole.
(g) Fairness Opinion. Prior to mailing the Prospectus/Proxy Statement
and immediately prior to the Effective Date, MFC shall have received a
written opinion in a form reasonably acceptable to MFC from Dain Bosworth
Incorporated (or another investment banking firm reasonably acceptable to
MFC) to the effect that the consideration to be delivered in the Merger is
fair from a financial point of view to the holders of MFC Common Stock.
6.3. Additional Conditions to Obligation of FBS. The obligation of FBS to
consummate the transactions contemplated hereby in accordance with the terms of
this Agreement is also subject to the following conditions:
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(a) Representations and Compliance. The representations and
warranties of MFC in this Agreement shall have been true and correct as of
the date hereof, and such representations and warranties shall be true and
correct as of the Effective Date as if made at and as of the Effective
Date, except where the failure to be true and correct would not have, or
would not reasonably be expected to have, a material adverse effect on the
business, operations or financial condition of MFC and the Subsidiaries
taken as a whole; and MFC shall in all material respects have performed
each obligation and agreement and complied with each covenant to be
performed and complied with by it hereunder at or prior to the Effective
Date.
(b) Officers' Certificate of MFC. MFC shall have furnished to FBS a
certificate of the Chief Executive Officer and Chief Financial Officer of
MFC, dated as of the Effective Date, in which such officers shall certify
that they have no reason to believe that the conditions set forth in
Section 6.3(a) have not been fulfilled.
(c) Secretary's Certificates. MFC shall have furnished to FBS
(i) copies of the text of the resolutions by which the corporate action on
the part of MFC necessary to approve this Agreement and the transactions
contemplated hereby were taken, (ii) certificates dated as of the Effective
Date executed on behalf of MFC by its corporate secretary or one of its
assistant corporate secretaries certifying to FBS that such copies are
true, correct and complete copies of such resolutions and that such
resolutions were duly adopted and have not been amended or rescinded and
(iii) an incumbency certificate dated as of the Effective Date executed on
behalf of MFC by its corporate secretary or one of its assistant corporate
secretaries certifying the signature and office of each officer executing
this Agreement or any other agreement, certificate or other instrument
executed pursuant hereto.
(d) Opinion of Counsel to MFC. FBS shall have received an opinion
letter dated as of the Effective Date addressed to FBS from Oppenheimer
Wolff & Donnelly, counsel to MFC (provided that the opinions contained in
subparagraphs (iv), (vi) and (viii) of this Section 6.3(d) may be provided
by J. Michael Nilles, Esq., Executive Vice President and General Counsel of
MFC), based on customary reliance and subject to customary qualifications,
to the effect that:
(i) MFC is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware. MFC is registered
as a savings and loan holding company under the Savings and Loan Holding
Company Act.
(ii) The Bank is a federally chartered savings bank duly organized,
validly existing and in good standing under the laws of the United States.
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(iii) Each of the Principal Nonbanking Subsidiaries (other than the
Bank) is a corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation.
(iv) Each of MFC, the Bank and the Principal Nonbanking Subsidiaries
has the requisite corporate and other power and authority (including all
licenses, permits and authorizations) to own and operate its properties and to
carry on its business as now conducted. Each of MFC, the Bank and the Principal
Nonbanking Subsidiaries is licensed or qualified to do business in every
jurisdiction in which the nature of its business or its ownership of property
requires it to be licensed or qualified, except where the failure to be so
licensed or qualified would not have or would not be reasonably expected to have
a material adverse effect on the business, operations, financial condition or
operating results of MFC, the Bank or any of the Principal Nonbanking
Subsidiaries.
(v) The execution and delivery of this Agreement by MFC and the
consummation of the transactions contemplated hereby and thereby will not
constitute a breach, default or violation under the respective Charter or Bylaws
of MFC, the Bank or any of the Principal Nonbanking Subsidiaries or, to such
counsel's knowledge, (A) any material agreement, arrangement or understanding to
which MFC, the Bank or any of the Principal Nonbanking Subsidiaries is a party,
(B) any material license, franchise or permit or (C) any material law,
regulation, order, judgment or decree.
(vi) The authorized capital of MFC consists of 60,000,000 shares of
MFC Common Stock and 10,000,000 shares of preferred stock; all of the issued and
outstanding shares of the capital stock of MFC are duly authorized, validly
issued, fully paid and nonassessable. No holder of the capital stock of MFC is
entitled to any preemptive or other similar rights with respect to the capital
stock of MFC.
(vii) All of the issued and outstanding shares of each of the Bank and
the Principal Nonbanking Subsidiaries are duly authorized, validly issued, fully
paid and nonassessable.
(viii) Except as set forth in Schedule 3.15, to the knowledge of such
counsel, there are no actions, suits, proceedings, orders or investigations
pending or threatened against MFC, the Bank or any of the Principal Nonbanking
Subsidiaries, at law or in equity, or before or by any federal, state or other
governmental department, commission, board, bureau, agency or instrumentality.
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(ix) MFC has the corporate power to consummate the transactions on its
part contemplated by this Agreement. MFC has duly taken all requisite corporate
action to authorize this Agreement and this Agreement has been duly executed and
delivered by MFC and constitutes the valid and binding obligation of MFC
enforceable in accordance with its terms, subject as to the enforcement of
remedies to applicable bankruptcy, insolvency, moratorium and other laws
affecting the rights of creditors generally and to judicial limitations on the
enforcement of the remedy of specific performance.
(x) No authorization, consent or approval of, or filing with any
public body, court or public authority, is necessary for the consummation by MFC
of the transactions contemplated hereby which has not been obtained or made.
(e) Shareholder Approval. This Agreement and the Merger shall have
been approved by the affirmative vote of holders of the percentage of FBS
capital stock required for such approval under the Charter and Bylaws of
FBS, the DGCL and the rules of the NYSE.
(f) Affiliate Letters. MFC shall have delivered to FBS the letters
required to be delivered pursuant to Section 5.10.
(g) Pooling of Interests Accounting. No event shall have occurred
which, in the reasonable opinion of FBS and concurred in by Ernst & Young,
would prevent the Merger from being accounted for as a pooling of
interests, and FBS shall have received from Ernst & Young an opinion that
the Merger shall qualify as a pooling of interests for accounting purposes.
(h) Adverse Proceedings. There shall not be threatened, instituted or
pending any action or proceeding before any court or governmental authority
or agency, domestic or foreign, (i) challenging or seeking to make illegal,
or to delay or otherwise directly or indirectly to restrain or prohibit,
the consummation of the transactions contemplated hereby or seeking to
obtain material damages in connection with the transactions contemplated
hereby, (ii) seeking to prohibit direct or indirect ownership or operation
by FBS of all or a material portion of the business or assets of MFC or any
of the Subsidiaries or of FBS or any of its subsidiaries, or to compel FBS
or any of its subsidiaries or MFC or any of the Subsidiaries to dispose of
or to hold separately all or a material portion of the business or assets
of FBS or any of its subsidiaries or of MFC or any of the Subsidiaries, as
a result of the transactions contemplated hereby, or (iii) seeking to
require direct or indirect divestiture by FBS of any material portion of
its business or assets or of MFC's or the Subsidiaries' business or assets.
FBS acknowledges that an action or proceeding seeking to divest control of
Edina Realty, Inc. following the Merger would not, in and of itself,
constitute a failure of the condition in this Section 6.3(h).
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(i) Governmental Action. There shall not be any action taken, or any
statute, rule, regulation, judgment, order or injunction proposed, enacted,
entered, enforced, promulgated, issued or deemed applicable to the
transactions contemplated hereby by any federal, state or other court,
government or governmental authority or agency, which would reasonably be
expected to result, directly or indirectly, in any of the consequences
referred to in Section 6.3(h).
(j) Failure to Disclose. FBS shall not have discovered any fact or
circumstance existing as of the date of this Agreement which has not been
disclosed to FBS, as of the date of this Agreement, in this Agreement, any
Schedule hereto, or any document specifically required to be furnished to
FBS hereunder, regarding MFC or any of the Subsidiaries which would,
individually or in the aggregate with other such facts and circumstances,
(i) materially impair the consummation of the transactions contemplated by
this Agreement, or (ii) have a material adverse effect on the business,
operations or financial condition of MFC and the Subsidiaries, taken as a
whole.
(k) Material Adverse Change. Since the date of this Agreement, there
has been no material adverse change in, and no event, occurrence or
development in the business of MFC or the Subsidiaries that, taken together
with other events, occurrences and developments with respect to such
business, would have or would reasonably be expected to have a material
adverse effect on, the business, operations or financial condition of MFC
and the Subsidiaries, taken as a whole.
(l) Stock Option Agreement. Immediately following the execution and
delivery of this Agreement, FBS and MFC shall have executed and delivered
the Stock Option Agreement.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1. Termination. This Agreement may be terminated prior to the Effective
Date:
(a) by mutual consent of FBS and MFC;
(b) by either FBS or MFC, if any of the conditions to such party's
obligation to consummate the transactions contemplated in this Agreement shall
have become impossible to satisfy;
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(c) by either FBS or MFC, if this Agreement and the Merger are not duly
approved by the shareholders of each of MFC and FBS, in each case at a meeting
of shareholders (or any adjournment thereof) duly called and held for such
purpose;
(d) by FBS or MFC if the Effective Date is not on or before September 30,
1995 (unless the failure to consummate the Merger by such date shall be due to
the action or failure to act of the party seeking to terminate this Agreement in
breach of such party's obligations under this Agreement);
(e) by FBS or MFC if the Average Price is less than $29.50;
(f) by MFC if (1) any corporation, partnership, person, other entity or
group, as defined in the 1934 Act (other than FBS or any affiliate of FBS) (a
"Person"), shall have commenced (as such term is used in Rule 14d-2(b) under the
1934 Act) a bona fide tender offer for all outstanding shares of MFC Common
Stock or any Person shall have made a bona fide written offer involving a merger
or consolidation of MFC or the acquisition of all or substantially all of its
assets, and (2) MFC's Board of Directors shall determine, based on advice of
MFC's independent financial advisors that such offer is a material economic
improvement to the Company's shareholders when compared to the Merger, and
(3) MFC's Board of Directors determines upon the advice of its legal counsel
that if they failed to recommend such offer or accept such proposal then such
failure would be likely to result in a breach of the directors' fiduciary
duties; provided, however, that MFC may not terminate the Agreement pursuant to
this Section 7.1(f) until the expiration of five business days after written
notice of any such offer or proposal referenced in this Section 7.1(f) has been
delivered to FBS, together with a summary of the terms of any such offer or
proposal;
(g) by FBS if, after the date hereof, any Person shall have commenced (as
such term is used in Rule 14d-2(b) under the 1934 Act) a bona fide tender offer
or exchange offer to acquire at least 20% of the then outstanding shares of MFC
Common Stock, or if the Board of Directors of MFC shall have withdrawn, modified
or changed its recommendation of this Agreement or the Merger; or
(h) by FBS if after the date hereof, there shall have occurred a
"Subsequent Triggering Event" as defined in the Stock Option Agreement.
Any party desiring to terminate this Agreement shall give written notice of
such termination and the reasons therefor to the other party.
7.2. Effect of Termination. If this Agreement is terminated as permitted
by Section 7.1, such termination shall be without liability or obligation of any
party (or any shareholder, officer, employee, agent, consultant or
representative of such party) to any other party to this Agreement, except (a)
that if such termination is (i) by MFC pursuant to (A) Section 7.1(b) as a
result of a failure of the condition contained in Section 6.2(g), or (B)
Section 7.1(f) or (ii) by FBS pursuant to (A) Section 7.1(g), (B) Section
7.1(h), or (C) Section 7.1(b) as a result of the failure of the condition
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contained in Section 6.3(a) because of the willful and material breach by MFC of
any obligation, agreement or covenant referred to therein (a "willful and
material" breach for the purposes of this Section 7.2 shall be deemed to have
occurred if MFC has intentionally and knowingly taken, or intentionally and
knowingly failed to take, any action which causes such breach), then MFC shall
pay to FBS within three business days of such termination, a termination fee of
$35,000,000 by wire transfer in immediately available funds to an account
designated by FBS, (b) as may be otherwise provided in law or in equity, and (c)
except as provided in Section 8.6.
7.3. Amendment. This Agreement may not be amended except by an instrument
in writing approved by the parties to this Agreement and signed on behalf of
each of the parties hereto.
7.4. Waiver. At any time prior to the Effective Date, any party hereto may
(a) extend the time for the performance of any of the obligations or other acts
of any other party hereto or (b) waive compliance with any of the agreements of
any other party or with any conditions to its own obligations, in each case only
to the extent such obligations, agreements and conditions are intended for its
benefit.
ARTICLE 8
GENERAL PROVISIONS
8.1. Public Statements. Neither MFC nor FBS shall make any public
announcement or statement with respect to the Merger, this Agreement or any
related transactions without the approval of the other party; provided, however,
that either FBS or MFC may, upon reasonable notice to the other party, make any
public announcement or statement that it believes is required by federal
securities law. To the extent practicable, each of FBS and MFC will consult
with the other with respect to any such public announcement or statement.
8.2. Notices. All notices and other communications hereunder shall be in
writing and shall be sufficiently given if made by hand delivery, by fax, by
telecopier, by overnight delivery service, or by registered or certified mail
(postage prepaid and return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by it by
like notice):
if to FBS:
First Bank System, Inc.
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Richard A. Zona, Vice Chairman
and Chief Financial Officer
Fax: (612) 973-0410
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with a copy to:
Dorsey & Whitney
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Lee R. Mitau, Esq.
Fax: (612) 340-8738
if to MFC:
Metropolitan Financial Corporation
1000 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Norman M. Jones, Chairman
Fax: (612) 339-6011
with a copy to:
Oppenheimer Wolff & Donnelly
3400 Plaza VII Building
45 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Bruce A. Machmeier, Esq.
Fax: (612) 344-9376
All such notices and other communications shall be deemed to have been duly
given as follows: when delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if delivered by mail;
when receipt acknowledged, if faxed or telecopied; and the next day after being
delivered to an overnight delivery service.
8.3. Interpretation. When a reference is made in this Agreement to
subsidiaries of FBS, the word "subsidiary" means any "majority-owned subsidiary"
(as defined in Rule 12b-2 under the 1934 Act) of FBS, as the context requires;
provided, however, that neither MFC nor any of the Subsidiaries shall at any
time be considered a subsidiary of FBS for purposes of this Agreement. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
References to Sections and Articles refer to Sections and Articles of this
Agreement unless otherwise stated. Words such as "herein," "hereinafter,"
"hereof," "hereto," "hereby" and "hereunder," and words of like import, unless
the context requires otherwise, refer to this Agreement (including the Exhibits
and Schedules hereto). As used in this Agreement, the masculine, feminine and
neuter genders shall be deemed to include the others if the context requires.
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8.4. Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated, and the parties shall negotiate
in good faith to modify this Agreement and to preserve each party's anticipated
benefits under this Agreement.
8.5. Miscellaneous. This Agreement (together with all other documents and
instruments referred to herein): (a) constitutes the entire agreement, and
supersedes all other prior agreements and undertakings, both written and oral,
among the parties, with respect to the subject matter hereof; (b) is not
intended to confer upon any person other than each party hereto any rights or
remedies hereunder, except as provided in Section 5.15; (c) shall be governed in
all respects, including validity, interpretation and effect, by the internal
laws of the State of Minnesota, without giving effect to the principles of
conflict of laws thereof; (d) shall not be assigned by operation of law or
otherwise. This Agreement may be executed in two or more counterparts which
together shall constitute a single agreement.
8.6. Survival of Representations, Warranties and Covenants. The
representations and warranties of the parties set forth herein shall not survive
the consummation of the Merger, but covenants that specifically relate to
periods, activities or obligations subsequent to the Merger shall survive the
Merger. In addition, if this Agreement is terminated pursuant to Section 7.1,
the covenants contained in Sections 5.4, 5.7(c) and 7.2 shall survive such
termination.
8.7. Schedules. The Schedules referred to in this Agreement shall be
delivered as of the date hereof under cover of a letter from the Chief Executive
Officer of MFC.
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<PAGE>
IN WITNESS WHEREOF, FBS and MFC have caused this Agreement to be executed
on the date first written above by their respective officers.
FIRST BANK SYSTEM, INC.
By John F. Grundhofer
--------------------------------------
Its Chairman, President and Chief
---------------------------------
Executive Officer
--------------------------------
METROPOLITAN FINANCIAL
CORPORATION
By Norman M. Jones
--------------------------------------
Its Chairman of the Board and Chief
---------------------------------
Executive Officer
---------------------------------
-55-
<PAGE>
[Not a part of agreement]
EXHIBITS AND SCHEDULES TO
AGREEMENT OF MERGER AND CONSOLIDATION,
DATED JULY 21, 1994, BY AND BETWEEN
FIRST BANK SYSTEM, INC. AND
METROPOLITAN FINANCIAL CORPORATION
<TABLE>
<CAPTION>
EXHIBIT OR REFERENCE IN
SCHEDULE SUBJECT AGREEMENT
- ----------- ------- ------------
<C> <S> <C>
Exhibit A Affiliate Letter Section 5.10
Exhibit B Amendment to Change Section
in Control Severance 5.12(b) (iii)
Pay Plan
Schedules A & B Subsidiaries Recitals
Schedules 3.1, Disclosure Schedules Article 3
3.2, 3.3, 3.4,
3.5, 3.6, 3.8,
3.9, 3.11, 3.12,
3.13, 3.14, 3.15,
3.16, 3.17,, 3.18,
3.19, 3.20, 3.21
and 3.27
</TABLE>
<PAGE>
Exhibit 2.2
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated July 21, 1994 between FIRST BANK SYSTEM,
INC., a Delaware corporation ("Grantee"), and METROPOLITAN FINANCIAL
CORPORATION, a Delaware corporation ("Issuer").
W I T N E S S E T H:
-------------------
WHEREAS, Grantee and Issuer have entered into an Agreement of Merger
and Consolidation of even date herewith (the "Merger Agreement"), which
agreement has been executed by the parties hereto immediately prior to this
Agreement; and
WHEREAS, as a condition and inducement to Grantee's entering into the
Merger Agreement and in consideration therefor, Issuer has agreed to grant
Grantee the Option (as hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to 6,209,304 fully paid and nonassessable shares of the common stock, $.01 par
value, of Issuer ("Common Stock") at a price of $24.66 per share; provided,
however, that in the event Issuer issues or agrees to issue any shares of Common
Stock at a price less than $24.66 per share (as adjusted pursuant to subsection
(b) of Section 5) other than in connection with the options, rights or plans
disclosed on Schedule 3.3 to the Merger Agreement, such price shall be equal to
such lesser price (such price, as adjusted if applicable, the "Option Price");
provided further that in no event shall the number of shares for which this
Option is exercisable exceed 19.9% of the issued and outstanding shares of
Common Stock. The number of shares of Common Stock that may be received upon the
exercise of the Option and the Option Price are subject to adjustment as herein
set forth.
(b) In the event that any additional shares of Common Stock are
issued or otherwise become outstanding after the date of this Agreement (other
than pursuant to this Agreement), the number of shares of Common Stock subject
to the Option shall be increased so that, after such issuance, it equals 19.9%
of the number of shares of Common Stock then issued and outstanding without
giving effect to any shares subject or issued pursuant to the Option. Nothing
contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to
authorize Issuer or Grantee to breach any provision of the Merger Agreement.
<PAGE>
2. (a) The Holder (as hereinafter defined) may exercise the Option,
in whole or part, if, but only if, both an Initial Triggering Event (as
hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined)
shall have occurred prior to the occurrence of an Exercise Termination Event (as
hereinafter defined), provided that the Holder shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 2) within
12 months following such Subsequent Triggering Event (or such later period as
provided in Section 10). Each of the following shall be an Exercise Termination
Event: (i) the Effective Date of the Merger; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event; (iii) termination of
the Merger Agreement either (a) pursuant to Section 7.1(e) thereof, or (b) by
Grantee solely as a result of failure of one or more of the conditions set forth
in Sections 6.1(a), 6.1(b), 6.1(c), 6.1(g), 6.3(e), 6.3(h), 6.3(i) or 6.3(k) or
pursuant to Section 7.1(c) (as a result of failure of Grantee's shareholders to
approve the Merger) or Section 7.1(d) (as a result of failure to consummate the
Merger on or before the date specified therein) if neither Issuer nor any of its
affiliates, officers, directors, employees or agents shall have taken any
actions that have contributed in any way, either directly or indirectly, to any
such failure; or (iv) the passage of 12 months (or such longer period as
provided in Section 10) after termination of the Merger Agreement (other than
any termination of the Merger Agreement covered by the immediately preceding
clause (iii)) if such termination follows the occurrence of an Initial
Triggering Event (provided that if an Initial Triggering Event continues or
occurs beyond such termination, the Exercise Termination Event shall be 12
months (or such longer period as provided in Section 10) from the expiration of
the Last Triggering Event but in no event more than 18 months (or such longer
period as provided in Section 10) after such termination). The "Last Triggering
Event" shall mean the last Initial Triggering Event to occur. The term "Holder"
shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (as hereinafter
defined) (each an "Issuer Subsidiary"), without having received
Grantee's prior written consent, shall have entered into an agreement
to engage in an Acquisition Transaction (as hereinafter defined) with
any person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the
Securities Exchange Act of 1934 (the "1934 Act"), and the rules and
regulations thereunder) other than Grantee or any of its Subsidiaries
(each a "Grantee Subsidiary") or the Board of Directors of Issuer
shall have recommended that the shareholders of Issuer approve or
accept any Acquisition Transaction other than as contemplated by the
Merger Agreement or this Agreement. For purposes of this Agreement,
(a) "Acquisition Transaction" shall mean (x) a merger or
consolidation,
-2-
<PAGE>
or any similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated by
the Securities and Exchange Commission (the "SEC")) of Issuer, (y) a
purchase, lease or other acquisition of all or substantially all of
the assets or deposits of Issuer or any Significant Subsidiary of
Issuer, or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of securities
representing 10% or more of the voting power of Issuer or any
Significant Subsidiary of Issuer, and (b) "Subsidiary" shall have the
meaning set forth in Rule 12b-2 under the 1934 Act;
(ii) Any person other than Grantee or any Grantee Subsidiary
shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of
Common Stock (the term "beneficial ownership" for purposes of this
Agreement having the meaning assigned thereto in Section 13(d) of the
1934 Act, and the rules and regulations thereunder);
(iii) The shareholders of the Issuer shall not have approved
the transactions contemplated by the Merger Agreement at the meeting
held for that purpose or any adjournment thereof, or such meeting
shall not have been held or shall have been cancelled prior to
termination of the Merger Agreement, or Issuer's Board of Directors
shall have withdrawn or modified (or publicly announced its intention
to withdraw or modify or interest in withdrawing or modifying) its
recommendation that the shareholders of Issuer approve the
transactions contemplated by the Merger Agreement, or Issuer or any
Issuer Subsidiary, without having received Grantee's prior written
consent, shall have authorized, recommended, proposed (or publicly
announced its intention to authorize, recommend or propose or interest
in authorizing, recommending or proposing) an agreement to engage in
an Acquisition Transaction with any person other than Grantee or a
Grantee Subsidiary ;
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
shareholders by public announcement or written communication that is
or becomes the subject of public disclosure to engage in an
Acquisition Transaction;
(v) Issuer shall have breached any covenant or obligation
contained in the Merger Agreement and such breach would entitle
Grantee to terminate the Merger Agreement;
-3-
<PAGE>
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, the Office of
Thrift Supervision ("OTS") or other federal or state bank regulatory
authority, which application or notice has been accepted for
processing, for approval to engage in an Acquisition Transaction; or
(vii) Issuer shall have terminated the Merger
Agreement pursuant to Section 7.1(b) by reason of the failure of
Issuer's condition set forth in Section 6.2(g) or pursuant to Section
7.1(f).
(c) The term "Subsequent Triggering Event" shall mean any of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership
of 20% or more of the then outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in clause (i) of subsection (b) of this Section 2, except
that the percentage referred to in clause (z) shall be 20%.
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering Event
(together, a "Triggering Event"), it being understood that the giving of such
notice by Issuer shall not be a condition to the right of the Holder to exercise
the Option.
(e) In the event the Holder is entitled to and wishes to exercise
the Option, it shall send to Issuer a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 60 business days from the Notice
Date for the closing of such purchase (the "Closing Date"); provided that if
prior notification to or approval of the Federal Reserve Board, the OTS or any
other regulatory agency is required in connection with such purchase, the Holder
shall promptly file the required notice or application for approval, shall
promptly notify the Issuer of such filing, and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
-4-
<PAGE>
(f) At the closing referred to in subsection (e) of this Section
2, the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this Section 2,
Issuer shall deliver to the Holder a certificate or certificates representing
the number of shares of Common Stock purchased by the Holder and, if the Option
should be exercised in part only, a new Option evidencing the rights of the
Holder thereof to purchase the balance of the shares purchasable hereunder.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate is subject
to certain provisions of an agreement between the registered holder
hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on
file at the principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a written
request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933 (the "1933 Act") in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
Holder shall have delivered to Issuer a copy of a letter from the staff of the
SEC, or an opinion of counsel, in form and substance satisfactory to Issuer, to
the effect that such legend is not required for purposes of the 1933 Act; (ii)
the reference to the provisions of this Agreement in the above legend shall be
removed by delivery of substitute certificate(s) without such reference if the
shares have been sold or transferred in compliance with the provisions of this
Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(i) Upon the giving by the Holder to Issuer of the written notice
of exercise of the Option provided for under subsection (e) of this Section 2
and the tender of the applicable purchase price in immediately available funds,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any
-5-
<PAGE>
and all United States federal, state and local taxes and other charges that may
be payable in connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its assignee,
transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock;
(ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S)18a and regulations promulgated
thereunder and (y) in the event, under the Bank Holding Company Act of 1956, as
amended, or the Home Owners Loan Act, as amended, or any state or other federal
banking law, prior approval of or notice to the Federal Reserve Board, the OTS
or to any state or other federal regulatory authority is necessary before the
Option may be exercised, cooperating fully with the Holder in preparing such
applications or notices and providing such information to the Federal Reserve
Board, the OTS or such state or other federal regulatory authority as they may
require) in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and (iv)
promptly to take all action provided herein to protect the rights of the Holder
against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of the Issuer, for other Agreements
providing for Options of different denominations entitling the holder thereof to
purchase, on the same terms and subject to the same conditions as are set forth
herein, in the aggregate the same number of shares of Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include any
Agreements and related Options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
-6-
<PAGE>
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, the number of shares of Common Stock purchasable upon the
exercise of the Option shall be subject to adjustment from time to time as
provided in this Section 5.
(a) In the event of any change in Common Stock by reason of
stock dividends, split-ups, mergers, recapitalizations, combinations,
subdivisions, conversions, exchanges of shares or the like, the type and
number of shares of Common Stock purchasable upon exercise hereof shall be
appropriately adjusted and proper provision shall be made so that, in the
event that any additional shares of Common Stock are to be issued or
otherwise become outstanding as a result of any such change (other than
pursuant to an exercise of the Option), the number of shares of Common
Stock that remain subject to the Option shall be increased so that, after
such issuance and together with shares of Common Stock previously issued
pursuant to the exercise of the Option (as adjusted on account of any of
the foregoing changes in the Common Stock), it equals 19.9% of the number
of shares of Common Stock then issued and outstanding.
(b) Whenever the number of shares of Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option
Price shall be adjusted by multiplying the Option Price by a fraction, the
numerator of which shall be equal to the number of shares of Common Stock
purchasable prior to the adjustment and the denominator of which shall be
equal to the number of shares of Common Stock purchasable after the
adjustment.
6. Upon the occurrence of a Subsequent Triggering Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 12 months (or such later period as provided in Section 10) of
such Subsequent Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares of
Common Stock issued pursuant hereto), promptly prepare, file and keep current a
registration statement under the 1933 Act covering any shares issued and
issuable pursuant to this Option and shall use its best efforts to cause such
registration statement to become effective and remain current in order to permit
the sale or other disposition of any shares of Common Stock issued upon total or
partial exercise of this Option ("Option Shares") in accordance with any plan of
disposition requested by Grantee. Issuer will use its best efforts to cause
such registration statement first to become effective and then to remain
effective for such period not in excess of 180 days from the day such
registration statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Grantee shall
have the right to demand two such registrations. The Issuer shall bear the
costs of such registrations (including, but not limited to, attorneys' fees,
printing costs and filing fees). The foregoing notwithstanding, if, at the time
of any request by Grantee
-7-
<PAGE>
for registration of Option Shares as provided above, Issuer is in registration
with respect to an underwritten public offering of shares of Common Stock, and
if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of Option
Shares otherwise to be covered in the registration statement contemplated hereby
may be reduced; provided, however, that after any such required reduction the
number of Option Shares to be included in such offering for the account of the
Holder shall constitute at least 25% of the total number of shares to be sold by
the Holder and Issuer in the aggregate; and provided further, however, that if
such reduction occurs, then the Issuer shall file a registration statement for
the balance as promptly as practicable thereafter as to which no reduction
pursuant to this Section 6 shall be permitted or occur and the Holder shall
thereafter be entitled to one additional registration. Each such Holder shall
provide all information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such Holder in
connection with such registration, Issuer shall become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting
agreements for Issuer. Upon receiving any request under this Section 6 from any
Holder, Issuer agrees to send a copy thereof to any other person known to Issuer
to be entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies.
7. (a) Upon the occurrence of a Subsequent Triggering Event that
occurs prior to an Exercise Termination Event, (i) at the request of the Holder,
delivered within 12 months of such occurrence (or such later period as provided
in Section 10), Issuer shall repurchase the Option from the Holder at a price
(the "Option Repurchase Price") equal to (x) the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised plus (y)
Grantee's Out-of-Pocket Expenses (as defined below) (to the extent not
previously reimbursed), and (ii) at the request of the owner of Option Shares
from time to time (the "Owner"), delivered within 12 months of such occurrence
(or such later period as provided in Section 10), Issuer shall repurchase such
number of the Option Shares from the Owner as the Owner shall designate at a
price (the "Option Share Repurchase Price") equal to (x) the market/offer price
multiplied by the number of Option Shares so designated plus (y) Grantee's Out-
of-Pocket Expenses (to the extent not previously reimbursed). The term "Out-of-
Pocket Expenses" shall mean Grantee's reasonable out-of-pocket expenses incurred
in connection with the transactions contemplated by the Merger Agreement,
including without limitation legal, accounting and consulting fees. The term
"market/offer price" shall mean the highest of (i) the price per share of Common
Stock at which a tender or exchange offer therefor has been made, (ii) the price
per share of Common Stock to be paid by any third party pursuant to an agreement
with Issuer, (iii) the highest closing price for shares of
-8-
<PAGE>
Common Stock within the six-month period immediately preceding the date the
Holder gives notice of the required repurchase of this Option or the Owner gives
notice of the required repurchase of Option Shares, as the case may be, or (iv)
in the event of a sale of all or substantially all of Issuer's assets or
deposits, the sum of the price paid in such sale for such assets or deposits and
the current market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, divided by the number of shares of Common Stock of
Issuer outstanding at the time of such sale. In determining the market/offer
price, the value of consideration other than cash shall be determined by a
nationally recognized investment banking firm selected by the Holder or Owner,
as the case may be.
(b) The Holder and the Owner, as the case may be, may
exercise its right to require Issuer to repurchase the Option and any Option
Shares pursuant to this Section 7 by surrendering for such purpose to Issuer, at
its principal office, a copy of this Agreement or certificates for Option
Shares, as applicable, accompanied by a written notice or notices stating that
the Holder or the Owner, as the case may be, elects to require Issuer to
repurchase this Option and/or the Option Shares in accordance with the
provisions of this Section 7. As promptly as practicable, and in any event
within five business days after the surrender of the Option and/or certificates
representing Option Shares and the receipt of such notice or notices relating
thereto, Issuer shall deliver or cause to be delivered to the Holder the Option
Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor
or the portion thereof that Issuer is not then prohibited under applicable law
and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable
law or regulation, or as a consequence of administrative policy, from
repurchasing the Option and/or the Option Shares in full, Issuer shall
immediately so notify the Holder and/or the Owner and thereafter deliver or
cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from delivering to the Holder and/or the Owner, as appropriate, the
Option Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required notices as
promptly as practicable in order to accomplish such repurchase), the Holder or
Owner may revoke its notice of repurchase of the Option or the Option Shares
whether in whole or to the extent of the prohibition, whereupon, in the latter
case, Issuer shall promptly (i) deliver to the Holder and/or the Owner, as
appropriate, that portion of the Option Purchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new
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<PAGE>
Agreement evidencing the right of the Holder to purchase that number of shares
of Common Stock obtained by multiplying the number of shares of Common Stock for
which the surrendered Agreement was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Option
Repurchase Price less the portion thereof theretofore delivered to the Holder
and the denominator of which is the Option Repurchase Price, or (B) to the
Owner, a certificate for the Option Shares it is then so prohibited from
repurchasing. If an Exercise Termination Event shall have occurred prior to the
date of the notice by Issuer described in the first sentence of this subsection
(c), or shall be scheduled to occur at any time before the expiration of a
period ending on the thirtieth day after such date, the Holder shall nonetheless
have the right to exercise the Option until the expiration of such 30-day
period.
8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or a Grantee Subsidiary, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or a Grantee Subsidiary, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Common Stock shall
be changed into or exchanged for stock or other securities of any other person
or cash or any other property or the then outstanding shares of Common Stock
shall after such merger represent less than 50% of the outstanding shares and
share equivalents of the merged company, or (iii) to sell or otherwise transfer
all or substantially all of its or any Significant Subsidiary's assets or
deposits to any person, other than Grantee or a Grantee Subsidiary, then, and in
each such case, the agreement governing such transaction shall make proper
provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option (the "Substitute Option"), at the election of
the Holder, of either (x) the Acquiring Corporation (as hereinafter defined) or
(y) any person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving person, and (iii) the transferee of all or
substantially all of Issuer's assets or deposits (or the assets or
deposits of a Significant Subsidiary of Issuer).
(ii) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
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<PAGE>
(iii) "Assigned Value" shall mean the market/offer price, as
defined in Section 7.
(iv) "Average Price" shall mean the average closing price of
a share of the Substitute Common Stock for one year immediately
preceding the consolidation, merger or sale in question, but in no
event higher than the closing price of the shares of Substitute Common
Stock on the day preceding such consolidation, merger or sale;
provided that if Issuer is the issuer of the Substitute Option, the
Average Price shall be computed with respect to a share of common
stock issued by the person merging into Issuer or by any company which
controls or is controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to the Holder. The issuer of the Substitute
Option shall also enter into an agreement with the then Holder or Holders of the
Substitute Option in substantially the same form as this Agreement (after giving
effect for such purpose to the provisions of Section 9), which agreement shall
be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number
of shares of Substitute Common Stock as is equal to the Assigned Value
multiplied by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing
paragraphs, shall the Substitute Option be exercisable for more than 19.9% of
the shares of Substitute Common Stock outstanding prior to exercise of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the shares of Substitute Common Stock outstanding prior
to exercise but for this clause (e), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall make a cash payment to Holder equal to the
excess of (i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute Option after
giving effect to the limitation in this clause (e). This difference in value
shall be determined by a nationally recognized investment banking firm selected
by the Holder.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
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that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "Substitute Option Repurchase Price")
equal to (x) the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised plus (y) Grantee's Out-of-Pocket Expenses (to the extent
not previously reimbursed), and at the request of the owner (the "Substitute
Share Owner") of shares of Substitute Common Stock (the "Substitute Shares"),
the Substitute Option Issuer shall repurchase the Substitute Shares at a price
(the "Substitute Share Repurchase Price") equal to (x) the Highest Closing Price
multiplied by the number of Substitute Shares so designated plus (y) Grantee's
Out-of-Pocket Expenses (to the extent not previously reimbursed). The term
"Highest Closing Price" shall mean the highest closing price for shares of
Substitute Common Stock within the six-month period immediately preceding the
date the Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share Owner,
as the case may be, may exercise its respective right to require the Substitute
Option Issuer to repurchase the Substitute Option and the Substitute Shares
pursuant to this Section 9 by surrendering for such purpose to the Substitute
Option Issuer, at its principal office, the agreement for such Substitute Option
(or, in the absence of such an agreement, a copy of this Agreement) and
certificates for Substitute Shares accompanied by a written notice or notices
stating that the Substitute Option Holder or the Substitute Share Owner, as the
case may be, elects to require the Substitute Option Issuer to repurchase the
Substitute Option and/or the Substitute Shares in accordance with the provisions
of this Section 9. As promptly as practicable and in any event within five
business days after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to be
delivered to the Substitute Option Holder the Substitute Option Repurchase Price
and/or to the Substitute Share Owner the Substitute Share Repurchase Price
therefor or the portion thereof which the Substitute Option Issuer is not then
prohibited under applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from repurchasing the Substitute Option and/or the Substitute Shares in
part or in full, the Substitute Option Issuer shall immediately so notify the
Substitute Option Holder and/or the Substitute Share Owner and thereafter
deliver or cause to be delivered, from time to time, to the Substitute Option
Holder and/or the Substitute
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Share Owner, as appropriate, the portion of the Substitute Share Repurchase
Price, respectively, which it is no longer prohibited from delivering, within
five business days after the date on which the Substitute Option Issuer is no
longer so prohibited; provided, however, that if the Substitute Option Issuer is
at any time after delivery of a notice of repurchase pursuant to subsection (b)
of this Section 9 prohibited under applicable law or regulation, or as a
consequence of administrative policy, from delivering to the Substitute Option
Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option
Repurchase Price and the Substitute Share Repurchase Price, respectively, in
full (and the Substitute Option Issuer shall use its best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder or Substitute Share
Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of prohibition, whereupon, in
the latter case, the Substitute Option Issuer shall promptly (i) deliver to the
Substitute Option Holder or Substitute Share Owner, as appropriate, that portion
of the Substitute Option Repurchase Price or the Substitute Share Repurchase
Price that the Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Option Shares it is then so prohibited from repurchasing. If an
Exercise Termination Event shall have occurred prior to the date of the notice
by the Substitute Option Issuer described in the first sentence of this
subsection (c), or shall be scheduled to occur at any time before the expiration
of a period ending on the thirtieth day after such date, the Substitute Option
Holder shall nevertheless have the right to exercise the Substitute Option until
the expiration of such 30-day period.
10. The 30-day, 12-month or 18-month periods for exercise of certain
rights under Sections 2, 6, 7, 9 and 12 shall be extended: (i) to the extent
necessary to obtain all regulatory approvals for the exercise of such rights
(for so long as the Holder is using commercially reasonable efforts to obtain
such regulatory approvals), and for the expiration of all statutory waiting
periods; and (ii) to the extent necessary to avoid liability under Section 16(b)
of the 1934 Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
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transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer. This Agreement is the valid and legally binding
obligation of Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant thereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder within 12 months
following such Subsequent Triggering Event (or such later period as provided in
Section 10); provided, however, that until the date 30 days following the date
on which the Federal Reserve Board and OTS have approved applications by Grantee
to acquire the shares of Common Stock subject to the Option, Grantee may not
assign its rights under the Option except in (i) a widely dispersed public
distribution, (ii) a private placement in which no one party acquires the right
to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment
to a single party (e.g., a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on Grantee's behalf, or (iv)
any other manner approved by the Federal Reserve Board and OTS.
13. If the Grantee has been paid the termination fee provided for in
the Merger Agreement (the "Termination Fee") and at any time receives any Net
Realized Cash (as defined below) under this Agreement, then Grantee shall be
obligated, as provided in this Section 13, to reimburse such Termination Fee,
but only up to the amount of Net Realized Cash received by the Grantee. The
term "Net Realized Cash" shall mean: (i) any cash proceeds received on sale or
other disposition of Option Shares (or on sale or other disposition of other
consideration received in exchange for such Option Shares), net of all related
commissions, fees, underwriting discounts, costs and expenses; (ii) any Option
Repurchase Price paid pursuant to Section 7 hereof; and (iii) any cash proceeds
received in exchange for sale or other disposition of the Option (or upon sale
or other disposition of other consideration received in exchange for such
Option), net of all related commissions, fees, underwriting discounts, costs and
expenses. If the Grantee becomes obligated to
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reimburse all or any part of the Termination Fee under this Section 13, Grantee
shall do so as soon as practicable upon receipt of the Net Realized Cash, by
wire transfer of immediately available funds to a bank account designated by
Issuer. In no event shall the aggregate amount payable by Grantee under this
Section 13 exceed the lesser of (x) the amount of Termination Fee previously
received by Grantee and (y) the amount of Net Realized Cash received by Grantee
under this Agreement.
14. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation applying to the Federal Reserve
Board under the Bank Holding Company Act and the OTS under the Home Owners Loan
Act for approval to acquire the shares issuable hereunder, but Grantee shall not
be obligated to apply to state banking authorities for approval to acquire the
shares of Common Stock issuable hereunder until such time, if ever, as it deems
appropriate to do so.
15. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.
16. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
17. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
fax, telecopy, or by registered or certified mail (postage prepaid, return
receipt requested) at the respective addresses of the parties set forth in the
Merger Agreement.
18. This Agreement shall be governed by and construed in accordance
with the laws of the State of Minnesota, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
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19. This Agreement may be executed in two or more counterparts, each
of which shall be deemed to be an original, but all of which shall constitute
one and the same agreement.
20. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
21. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contain the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assignees.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assignees, any rights, remedies, obligations or liabilities under or by reason
of this Agreement, except as expressly provided herein.
22. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunto duly authorized, all of the
date first above written.
METROPOLITAN FINANCIAL
CORPORATION
By Norman M. Jones
-----------------------------------
Its Chairman of the Board and Chief
---------------------------------
Executive Officer
--------------------------------
FIRST BANK SYSTEM, INC.
By John F. Grundhofer
-----------------------------------
Its Chairman, President and Chief
----------------------------------
Executive Officer
----------------------------------
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Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of First Bank System, Inc. of our report dated January 19, 1994,
with respect to the consolidated financial statements of Metropolitan Financial
Corporation included in First Bank System, Inc.'s Current Report on Form 8-K
dated July 21, 1994, filed with the Securities and Exchange Commission.
Form S-8, Registration Statement Numbers: 2-89224, 33-16242, 33-42333,
33-55932, 33-42334, 33-52959, 33-52835, 33-53395
Form S-3, Registration Statement Numbers: 33-38268, 33-33508, 33-39303,
33-47785, 33-51407, 33-53373, 33-52495
ERNST & YOUNG LLP
Minneapolis, Minnesota
August 5, 1994
