<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-38819
PROXY STATEMENT
OF
ZAPPCO, INC.
____________
PROSPECTUS
OF
U.S. BANCORP
COMMON STOCK, $1.25 PAR VALUE
____________
This Proxy Statement/Prospectus (the "Proxy Statement/Prospectus"), is
being furnished to holders of common stock, $1.00 par value ("Zappco Common
Stock"), of Zappco, Inc., a Minnesota corporation ("Zappco"), in connection
with the solicitation of proxies by the Board of Directors of Zappco for use
at a special meeting of such holders (the "Special Meeting") to be held on
December 11, 1997, commencing at 4:30 p.m., local time, and at any
adjournment or postponement thereof. At the Special Meeting, holders of
Zappco Common Stock will be asked to consider and act upon (i) a proposal to
approve the Agreement and Plan of Merger, dated September 12, 1997 (the
"Merger Agreement"), by and among U.S. Bancorp, a Delaware corporation
("USB"), and Zappco, and the transactions contemplated thereby, pursuant to
which, among other things, Zappco would be acquired by USB by means of a
merger of Zappco with and into USB (the "Merger") and (ii) a proposal to
approve payments of any "excess parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "280G
Payments"). A copy of the Merger Agreement is attached hereto as APPENDIX A
and is incorporated herein by reference.
Pursuant to the Merger Agreement, each issued and outstanding share of
Zappco Common Stock will be converted into the right to receive a number of
shares of the common stock, par value $1.25 per share, of USB ("USB Common
Stock") equal to $68 million (the "Purchase Price," as may be adjusted
pursuant to the Merger Agreement and described herein) divided by the average
of the closing prices of USB Common Stock as quoted on the New York Stock
Exchange (the "NYSE") for the ten consecutive trading days ending with the
day preceding the date on which the Merger becomes effective, divided by the
number of shares of Zappco Common Stock outstanding on the date on which the
Merger becomes effective. Any fractional share of USB Common Stock will be
paid in cash. Shares of USB Common Stock issued pursuant to the Merger, plus
cash paid in lieu of fractional shares, constitute the "Merger
Consideration." See "The Merger--Terms of the Merger; Consideration to be
Received by Zappco Shareholders." The outstanding shares of USB Common Stock
are, and it is a condition to the consummation of the Merger that the
shares of USB Common Stock to be issued in the Merger be, listed on the
NYSE under the symbol "USB." The last reported sale price of USB Common Stock
on the NYSE Composite Tape on November 6, 1997 was $104.19 per share, and the
average closing price for the ten consecutive trading days ending on such
date was $102.18 per share.
(CONTINUED ON NEXT PAGE)
____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF USB COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS,
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
BANK INSURANCE FUND, SAVINGS ASSOCIATION INSURANCE
FUND OR ANY OTHER GOVERNMENTAL AGENCY.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS NOVEMBER 7, 1997.
<PAGE>
Based on such average closing price, and assuming no adjustment to the
Purchase Price, the number of shares of USB Common Stock issued in exchange
for each share of Zappco Common Stock would be 42.01. THERE CAN BE NO
ASSURANCE AS TO THE MARKET PRICE OF THE USB COMMON STOCK AT ANY TIME BEFORE
THE EFFECTIVE DATE OR AS TO THE MARKET PRICE OF THE USB COMMON STOCK AT ANY
TIME THEREAFTER.
For additional information regarding the terms of the Merger, see the
Merger Agreement attached as APPENDIX A hereto and "The Merger" herein.
Consummation of the Merger is conditioned upon, among other things,
receipt of all required shareholder and regulatory approvals. If there are
not sufficient votes at the time of the Special Meeting to approve the Merger
Agreement, the Zappco shareholders may be asked to approve adjournment of the
Special Meeting to permit further solicitation of proxies. See "Adjournment
of the Special Meeting" and "The Merger--Regulatory Approvals Required."
HOLDERS OF ZAPPCO COMMON STOCK WHO COMPLY WITH THE REQUIREMENTS OF
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT (THE
"MBCA") ARE ENTITLED TO ASSERT DISSENTERS' RIGHTS WITH RESPECT TO THE
PROPOSED MERGER AND TO OBTAIN PAYMENT OF THE FAIR VALUE OF THEIR SHARES IF
THE PROPOSED MERGER IS CONSUMMATED. IN ORDER TO PERFECT DISSENTERS' RIGHTS,
A SHAREHOLDER MUST SEND A NOTICE TO THE CORPORATION BEFORE THE DATE OF THE
VOTE AND MUST NOT VOTE IN FAVOR OF THE MERGER BY PROXY OR OTHERWISE. A COPY
OF SECTIONS 302A.471 AND 302A.473 OF THE MBCA IS ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS APPENDIX C. SEE "RIGHTS OF DISSENTING SHAREHOLDERS."
THE BOARD OF DIRECTORS OF ZAPPCO UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF ZAPPCO VOTE FOR APPROVAL OF THE MERGER AGREEMENT, FOR
APPROVAL OF THE 280G PAYMENTS AND FOR APPROVAL OF ADJOURNMENT OF THE SPECIAL
MEETING IF NECESSARY TO PERMIT FURTHER SOLICITATION OF PROXIES.
This Proxy Statement/Prospectus also constitutes a prospectus of USB with
respect to the shares of USB Common Stock issuable to shareholders of Zappco
upon consummation of the Merger. USB has supplied all information contained
in this Proxy Statement/Prospectus relating to USB and its subsidiaries, and
Zappco has supplied all information contained in this Proxy
Statement/Prospectus relating to Zappco and its subsidiaries.
This Proxy Statement/Prospectus and the accompanying form of proxy for
the Special Meeting are first being mailed to the shareholders of Zappco on
or about November 7, 1997.
This Proxy Statement/Prospectus is included as part of a registration
statement on Form S-4 filed with the Securities and Exchange Commission by
USB, relating to the registration under the Securities Act of 1933, as
amended, of up to 960,000 shares of USB Common Stock to be issued in
connection with the Merger.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . 1
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Parties to the Merger . . . . . . . . . . . . . . . . . . . . . . 4
The Proposed Merger . . . . . . . . . . . . . . . . . . . . . . . . . 4
Special Meeting of Zappco Shareholders . . . . . . . . . . . . . . . . 5
Vote Required to Approve the Merger, the 280G Payments and the
Adjournment; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 5
Recommendation of the Zappco Board of Directors . . . . . . . . . . . 5
Summary of Reasons for the Merger . . . . . . . . . . . . . . . . . . 6
The Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . 6
Effective Date of the Merger . . . . . . . . . . . . . . . . . . . . . 6
Surrender of Zappco Common Stock Certificates . . . . . . . . . . . . 6
Regulatory Approvals Required . . . . . . . . . . . . . . . . . . . . 7
Conditions, Waiver and Amendment and Termination . . . . . . . . . . . 7
Limitation on Negotiations . . . . . . . . . . . . . . . . . . . . . . 7
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . 8
Certain Federal Income Tax Consequences to Zappco Shareholders . . . . 8
Resale of USB Common Stock . . . . . . . . . . . . . . . . . . . . . . 9
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 9
Dissenters' Rights of Appraisal . . . . . . . . . . . . . . . . . . . 9
Market and Market Prices . . . . . . . . . . . . . . . . . . . . . . . 10
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Differences in Rights of Zappco Shareholders . . . . . . . . . . . . . 10
Excess Parachute Payments . . . . . . . . . . . . . . . . . . . . . . 10
COMPARATIVE UNAUDITED PER SHARE DATA . . . . . . . . . . . . . . . . . . . 12
PRO FORMA FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 14
SELECTED HISTORICAL FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . 14
SELECTED HISTORICAL FINANCIAL DATA OF
U.S. BANCORP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SELECTED HISTORICAL FINANCIAL DATA OF
ZAPPCO, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INFORMATION CONCERNING THE SPECIAL MEETING . . . . . . . . . . . . . . . . 17
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Solicitation, Voting and Revocability of Proxies . . . . . . . . . . . 17
Beneficial Ownership of Zappco Common Stock . . . . . . . . . . . . . 18
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Terms of the Merger; Consideration to be Received by Zappco
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Background of and Reasons for the Merger . . . . . . . . . . . . . . . 22
The Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . 23
Effective Date of the Merger . . . . . . . . . . . . . . . . . . . . . 27
Surrender of Zappco Common Stock Certificates . . . . . . . . . . . . 27
Conditions to Consummation of the Merger . . . . . . . . . . . . . . . 28
Regulatory Approvals Required . . . . . . . . . . . . . . . . . . . . 30
(i)
<PAGE>
Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . 31
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Limitation on Negotiations . . . . . . . . . . . . . . . . . . . . . . 32
Conduct of Zappco Business Pending the Merger . . . . . . . . . . . . 32
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . 35
Certain Federal Income Tax Consequences to Zappco Shareholders . . . . 36
Stock Exchange Listing of USB Common Stock . . . . . . . . . . . . . . 37
Noncompetition Agreements . . . . . . . . . . . . . . . . . . . . . . 37
USB Escrow Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Resale of USB Common Stock Received by Zappco Shareholders . . . . . . 38
USB Dividend Reinvestment and Common Stock Purchase Plan . . . . . . . 39
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . 39
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Certain Differences in Rights of Zappco Shareholders . . . . . . . . . 39
EXCESS PARACHUTE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . 45
RIGHTS OF DISSENTING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . 45
BUSINESS OF USB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . 48
Management and Additional Information . . . . . . . . . . . . . . . . 49
BUSINESS OF ZAPPCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Market Area and Competition . . . . . . . . . . . . . . . . . . . . . 49
Properties and Employees . . . . . . . . . . . . . . . . . . . . . . . 50
Market Prices and Dividends on Zappco Common Stock . . . . . . . . . . 50
Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF ZAPPCO . . . . . . . . . . . . 51
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 51
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . 52
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . 53
Analysis of Interest Income . . . . . . . . . . . . . . . . . . . . . 54
Non-Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . 54
Non-Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . 55
Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Loan Portfolio Review . . . . . . . . . . . . . . . . . . . . . . . . 56
Loan Portfolio Distribution . . . . . . . . . . . . . . . . . . . . . 57
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . 57
Non-Performing Assets . . . . . . . . . . . . . . . . . . . . . . . . 59
Securities Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 60
Deposit Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 61
Other Borrowed Money . . . . . . . . . . . . . . . . . . . . . . . . . 61
Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Capital Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Interest Rate Risk Management . . . . . . . . . . . . . . . . . . . . 63
Interest Rate Risk Management Guidelines . . . . . . . . . . . . . . . 64
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Liquidity Management Guidelines . . . . . . . . . . . . . . . . . . . 66
DESCRIPTION OF USB CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . 67
(ii)
<PAGE>
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Certain Provisions of the USB Certificate and USB Bylaws . . . . . . . 72
DESCRIPTION OF ZAPPCO CAPITAL STOCK . . . . . . . . . . . . . . . . . . . 73
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
ADJOURNMENT OF THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . 73
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
APPENDIX A--AGREEMENT AND PLAN OF MERGER . . . . . . . . . . . . . . . . . A-1
APPENDIX B--OPINION OF DAIN BOSWORTH, INCORPORATED . . . . . . . . . . . . B-1
APPENDIX C--SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTANESS
CORPORATION ACT--DISSENTERS' APPRAISAL RIGHTS . . . . . . . . . . . . C-1
</TABLE>
(iii)
<PAGE>
AVAILABLE INFORMATION
USB is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by USB with the Commission may be
inspected and copied at the public reference facilities of the Commission
located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the public reference facilities in the Commission's
regional offices located at 7 World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained at prescribed rates
by writing to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Certain of such reports, proxy
statements and other information are also available from the Commission over
the Internet at http://www.sec.gov. The USB Common Stock is listed on the
NYSE. The periodic reports, proxy statements and other information filed by
USB also can be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005.
USB has filed a registration statement on Form S-4 (together with all
amendments and exhibits thereto, including documents and information
incorporated by reference, the "Registration Statement") with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the shares of USB Common Stock to be issued in connection with the Merger.
This Proxy Statement/Prospectus does not contain all the information set forth
in the Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Statements
contained in this Proxy Statement/Prospectus as to the contents of any document
are not necessarily complete and, in each instance, reference is made to the
copies of such document filed as an exhibit to the Registration Statement, each
such statement being qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO USB
(EXCLUDING EXHIBITS UNLESS SPECIFICALLY INCORPORATED THEREIN) ARE AVAILABLE TO
EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST
TO JOHN DANIELSON, INVESTOR AND CORPORATE RELATIONS, U.S. BANCORP, 601 SECOND
AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402-4302, TELEPHONE NUMBER (612)
973-2261. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE NO LATER THAN FIVE BUSINESS DAYS BEFORE THE SPECIAL MEETING.
The following documents which have been filed by USB (formerly known as
First Bank System, Inc.) with the Commission are hereby incorporated by
reference in this Proxy Statement/Prospectus: (i) Annual Report on Form 10-K
for the year ended December 31, 1996 (the "1996 Form 10-K"); (ii) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1997, and June 30, 1997;
(iii) two Current Reports on Form 8-K dated March 20, 1997; (iv) Current Report
on Form 8-K dated June 24, 1997; (v) Current Report on Form 8-K dated August 1,
1997; (vi) Current Report on Form 8-K dated September 30, 1997; (vii) Current
Report on Form 8-K dated October 17, 1997; (viii) the portions of USB's Proxy
Statement for the Annual Meeting of Stockholders held on April 24, 1997 that
have been incorporated by reference in the 1996 Form 10-K; and (ix) the
description of the USB Common Stock contained in Item 1 of the Registration
Statement on Form 8-A dated March 19, 1984, as amended in its entirety by that
Form 8 Amendment dated February 26, 1993 and that Form 8-A/A-2 dated October 6,
1994, and any amendment or report filed for the purpose of updating such
description filed subsequent to the date of this Proxy Statement/Prospectus and
prior to the termination of the offering described herein.
1
<PAGE>
All documents filed by USB pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date hereof and before the Special
Meeting shall be deemed to be incorporated herein by reference and to be a part
hereof from the date of filing of such documents. Also incorporated by
reference herein is the Merger Agreement, which is attached to this Proxy
Statement/Prospectus as APPENDIX A. Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in
another subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement/Prospectus.
-----------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES AND
OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY USB OR ZAPPCO.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A
PROXY, OR AN OFFER TO SELL OR A SOLICITATION OR AN OFFER TO PURCHASE ANY
SECURITIES, IN ANY JURISDICTION IN WHICH SUCH SOLICITATION OR OFFER MAY NOT
LAWFULLY BE MADE.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF THE USB
COMMON STOCK OFFERED HEREBY TO BE RECEIVED BY SHAREHOLDERS OF ZAPPCO DEEMED TO
BE "AFFILIATES" OF ZAPPCO OR USB UPON THE CONSUMMATION OF THE MERGER. NO
PERSON IS AUTHORIZED TO MAKE USE OF THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH ANY SUCH RESALES.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF USB OR ZAPPCO
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
2
<PAGE>
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT/PROSPECTUS (INCLUDING INFORMATION INCLUDED OR
INCORPORATED BY REFERENCE HEREIN) CONTAINS OR MAY CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THIS PROXY
STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITH RESPECT
TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, PLANS, OBJECTIVES, FUTURE
PERFORMANCE AND BUSINESS OF EACH OF USB AND ZAPPCO. THESE FORWARD-LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING
POSSIBILITIES; (1) EXPECTED COST SAVINGS FROM THE MERGER OF FIRST BANK
SYSTEM, INC. AND U.S. BANCORP ON AUGUST 1, 1997 (THE "FBS/USB MERGER") CANNOT
BE FULLY REALIZED OR REALIZED WITHIN THE EXPECTED TIME FRAME; (2) REVENUES
FOLLOWING THE FBS/USB MERGER ARE LOWER THAN EXPECTED, OR DEPOSIT ATTRITION,
OPERATING COSTS OR CUSTOMER LOSS AND BUSINESS DISRUPTION FOLLOWING THE
FBS/USB MERGER ARE GREATER THAN EXPECTED; (3) COMPETITIVE PRESSURES AMONG
DEPOSITORY AND OTHER FINANCIAL INSTITUTIONS INCREASE SIGNIFICANTLY; (4) COSTS
OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF FIRST BANK
SYSTEM, INC. AND THE FORMER U.S. BANCORP ARE GREATER THAN EXPECTED; (5)
CHANGES IN THE INTEREST RATE ENVIRONMENT REDUCE MARGINS; (6) GENERAL ECONOMIC
OR BUSINESS CONDITIONS, EITHER NATIONALLY, IN MINNESOTA OR IN THE STATES IN
WHICH USB IS OTHERWISE DOING BUSINESS, ARE LESS FAVORABLE THAN EXPECTED
RESULTING IN, AMONG OTHER THINGS, A DETERIORATION IN CREDIT QUALITY OR A
REDUCED DEMAND FOR CREDIT; (7) LEGISLATIVE OR REGULATORY CHANGES ADVERSELY
AFFECT THE BUSINESSES IN WHICH USB IS ENGAGED; AND (8) CHANGES IN THE
SECURITIES MARKETS.
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ALL RESPECTS BY THE MORE DETAILED
INFORMATION INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS, THE APPENDICES
HERETO AND THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE
URGED TO READ CAREFULLY THE ENTIRE PROXY STATEMENT/PROSPECTUS, INCLUDING THE
APPENDICES. AS USED IN THIS PROXY STATEMENT/PROSPECTUS, THE TERMS "USB" AND
"ZAPPCO" REFER TO U.S. BANCORP AND ZAPPCO, INC., RESPECTIVELY, AND, WHERE THE
CONTEXT SO REQUIRES, TO SUCH CORPORATIONS AND THEIR RESPECTIVE SUBSIDIARIES.
ALL INFORMATION CONCERNING USB INCLUDED HEREIN HAS BEEN FURNISHED BY USB, AND
ALL INFORMATION INCLUDED HEREIN CONCERNING ZAPPCO HAS BEEN FURNISHED BY
ZAPPCO.
THE PARTIES TO THE MERGER
USB. USB is a regional multi-state bank holding company registered under
the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act"), and headquartered in Minneapolis, Minnesota. USB operates five banks and
eleven trust companies with offices in 17 contiguous states from Illinois to
Washington. The banking subsidiaries of USB are engaged in general retail and
commercial banking business, and provide a wide variety of services to
individuals, businesses, industry, institutional organizations, governmental
entities and other financial institutions. USB also has various other
subsidiaries engaged in financial services.
For further information concerning USB, see "Business of USB" and "Selected
Historical Financial Data of U.S. Bancorp" herein and the USB documents
incorporated by reference herein as described under "Incorporation of Certain
Documents by Reference." The principal executive offices of USB are located at
601 Second Avenue South, Minneapolis, Minnesota 55402-4302 (telephone (612)
973-1111).
ZAPPCO. Zappco is a multi-bank holding company registered under the Bank
Holding Company Act. Its principal noncash assets consist of three banks,
including Zapp National Bank ("Zapp Bank"), First National Bank of Little Falls
("First National") and Melrose State Bank ("Melrose State") (together, the
"Banks"), which together have six commercial banking offices located in the
Minnesota cities of St. Cloud, Sartell, Little Falls and Melrose, in addition
to Zapp Data, Inc., a data processing center ("Zapp Data"), and Zapp Bank Plaza
Partnership, a real estate partnership ("Zapp Plaza"), both of which are
located in St. Cloud (together with the Banks, the "Subsidiaries"). The Banks
provide general commercial and consumer banking services, including commercial
lending, mortgage origination and ATM locations, in addition to a complete
range of deposit products including checking accounts, savings accounts,
certificates of deposit and money market accounts. Zapp Bank also provides
trust and brokerage services. Zapp Data provides data processing services
primarily to the Banks, and Zapp Plaza owns and manages the building in which
Zapp Bank's main office is located. As of June 30, 1997, Zappco had
consolidated assets of $346.0 million and total deposits of $295.0 million.
For further information concerning Zappco, see "Business of Zappco,"
"Selected Historical Financial Data of Zappco, Inc.," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Zappco" herein. The principal executive offices of Zappco are located at 1015
St. Germain St. West, St. Cloud, Minnesota (telephone (320) 259-8400).
THE PROPOSED MERGER
The Agreement and Plan of Merger, dated September 12, 1997, among USB and
Zappco, provides for the merger of Zappco with and into USB, with USB as the
surviving corporation. Assuming the Merger Agreement is approved by the
shareholders of Zappco, the Merger will become effective upon the filing of an
appropriate certificate of merger and articles of merger with the Secretaries
of State in the States of Delaware and Minnesota, respectively (the "Effective
Date"). Upon consummation of the Merger, each issued and outstanding share of
Zappco Common Stock will be converted into the right to receive the Merger
Consideration. If the Merger is consummated, Zappco shareholders will no
longer
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hold any interest in Zappco other than through their interest in USB
Common Stock received in the Merger. Each outstanding share of USB capital
stock will remain outstanding and unchanged following the Merger. See "The
Merger--Terms of the Merger; Consideration to be Received by Zappco
Shareholders."
The Merger is subject to a number of conditions, including the receipt of
required regulatory and shareholder approvals. See "The Merger--Conditions to
Consummation of the Merger."
Pursuant to the Merger Agreement, the certificate of incorporation and
bylaws of USB as in effect prior to the Effective Date will be the certificate
of incorporation and bylaws of USB, as the surviving corporation in the Merger,
after the Effective Date. In addition, the officers and directors of USB prior
to the Effective Date will be the officers and directors of USB, as the
surviving corporation in the Merger, after the Effective Date until their
successors are duly elected or appointed and qualified.
SPECIAL MEETING OF ZAPPCO SHAREHOLDERS
The Special Meeting to consider and vote upon the Merger Agreement and
the 280G Payments will be held in St. Cloud, Minnesota, at Zappco's principal
executive offices, on Thursday, December 11, 1997 at 4:30 p.m. local time.
Only holders of record of Zappco Common Stock and participants in Zappco's
Employee Stock Ownership Plan at the close of business on October 31, 1997
(the "Record Date"), will be entitled to notice of and to vote at the Special
Meeting. At the close of business on the Record Date, there were outstanding
and entitled to vote 15,842 shares of Zappco Common Stock. Each share of
Zappco Common Stock is entitled to one vote on the Merger Agreement. See
"Information Concerning the Special Meeting."
VOTE REQUIRED TO APPROVE THE MERGER, THE 280G PAYMENTS AND THE ADJOURNMENT;
QUORUM
Pursuant to Minnesota law, approval of the Merger Agreement requires the
affirmative vote of the holders of a majority of all shares of Zappco Common
Stock outstanding at the Record Date. Approval of the 280G Payments requires
the affirmative vote of more than 75% of the voting power of all outstanding
shares of Zappco Common Stock, excluding those shares held or constructively
owned by the individuals (Edward J. Zapp and John E. Leisen) whose
compensation is being considered. A majority of all shares of Zappco Common
Stock outstanding and entitled to vote, represented in person or by proxy,
will constitute a quorum for the Special Meeting. Approval of the
adjournment of the Special Meeting requires the affirmative vote of at least
a majority of the outstanding shares of Zappco Common Stock represented in
person or by proxy at the Special Meeting, even if such number of shares is
less than a quorum. Approval of the Merger Agreement by the shareholders of
USB is not required under applicable law.
It is expected that all of the 4,601 shares of Zappco Common Stock
beneficially owned by directors and executive officers, and their affiliates,
of Zappco at the Record Date (approximately 29.04% of the total number of
outstanding shares of Zappco Common Stock at such date) will be voted for
approval of the Merger Agreement and the 280G Payments (excluding shares owned
or controlled by Edward J. Zapp and John F. Leisen who will receive such
payments) and for adjournment of the Special Meeting under the circumstances
described herein. As of the Record Date, USB beneficially owned no shares of
Zappco Common Stock, and directors and officers of USB and their affiliates
beneficially owned no shares of Zappco Common Stock. See "Information
Concerning the Special Meeting--Solicitation, Voting and Revocability of
Proxies."
RECOMMENDATION OF THE ZAPPCO BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF ZAPPCO RECOMMENDS THAT ZAPPCO SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER AGREEMENT, FOR APPROVAL OF THE 280G PAYMENTS AND FOR
APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING IF NECESSARY TO PERMIT FURTHER
SOLICITATION OF PROXIES.
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The Board of Directors of Zappco recommends that the shareholders of
Zappco approve the Merger Agreement. The Zappco Board believes that the
terms of the Merger Agreement are fair and that the Merger is in the best
interests of Zappco and its shareholders. In making its recommendation, the
Zappco Board considered the opinion of Dain Bosworth Incorporated, financial
advisor to the Zappco Board, dated September 12, 1997, to the effect that the
Merger Consideration is fair to the shareholders of Zappco from a financial
point of view. See "The Merger--The Fairness Opinion." On November 6, 1997,
the last sale price for USB Common Stock on the NYSE was $104.19 per share,
and the average closing price for the ten consecutive trading days ending on
such date was $102.18 per share. Based on such average closing price, and
assuming no adjustment to the Purchase Price, the number of shares of USB
Common Stock issued in exchange for each share of Zappco Common Stock would
be 42.01. See "The Merger--Terms of the Merger; Consideration to be Received
by Zappco Shareholders." The directors and executive officers of Zappco have
unanimously indicated that they intend to vote the Zappco Common Stock that
they hold in favor of the Merger Agreement and in favor of the 280G Payments
(to the extent their shares can be voted for such). See "Information
Concerning the Special Meeting--Beneficial Ownership of Zappco Common Stock."
SUMMARY OF REASONS FOR THE MERGER
The Zappco Board of Directors, after careful study and evaluation of
economic, financial, legal and market factors, believes that the Merger
Agreement is in the best interests of Zappco and Zappco's shareholders. The
Zappco Board believes that the Merger Consideration is fair and that the USB
Common Stock has greater market liquidity than Zappco Common Stock. See "The
Merger - Background of and Reasons for the Merger."
THE FAIRNESS OPINION
Dain Bosworth Incorporated ("Dain"), financial advisor to Zappco, has
rendered to the Zappco Board of Directors a written opinion dated September 12,
1997, to the effect that, as of such date and based upon and subject to certain
matters stated in the opinion, the Merger Consideration is fair to the holders
of Zappco Common Stock from a financial point of view. A copy of the opinion
of Dain is attached hereto as APPENDIX B and should be read carefully in its
entirety. See "The Merger - The Fairness Opinion."
EFFECTIVE DATE OF THE MERGER
The Merger will become effective upon the filing of an appropriate
certificate of merger and articles of merger relating thereto with the
Secretaries of State in the States of Delaware and Minnesota, respectively. The
Merger Agreement provides that the parties to the Merger Agreement will cause
the Merger to be effected as soon as practicable after receipt of all necessary
regulatory approvals, provided that each of the conditions to consummation of
the Merger has been satisfied or waived. The Merger cannot become effective
until Zappco shareholders have approved the Merger Agreement and all required
regulatory approvals and actions have been obtained and taken. The Merger
Agreement may be terminated by either USB or Zappco if the Merger has not
become effective by February 28, 1998 (unless failure to consummate the Merger
by such date shall be due to the action or failure to act of the party seeking
to terminate the Merger Agreement in breach of such party's obligations
thereunder). Accordingly, there can be no assurance as to whether or when the
Merger will become effective. See "The Merger--Effective Date of the Merger,"
"--Conditions to Consummation of the Merger" and "--Regulatory Approvals
Required."
SURRENDER OF ZAPPCO COMMON STOCK CERTIFICATES
In a mailing separate from this Proxy Statement/Prospectus, Zappco (or a
representative of Zappco) will send a notice and transmittal form, with
instructions, to each holder of Zappco Common Stock of record advising such
holder of the procedure for surrendering his, her or its certificates
evidencing
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Zappco Common Stock. Such notice and transmittal form will be sent prior to
the Zappco Special Meeting. Zappco shareholders should not send in their stock
certificates until they receive such separate instructions from Zappco. See
"The Merger--Surrender of Zappco Common Stock Certificates."
REGULATORY APPROVALS REQUIRED
The Merger is subject to the prior approval of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the Bank
Holding Company Act. The acquisition of control of Melrose State by USB as a
result of the Merger is also subject to the prior approval of the Minnesota
Commissioner of Commerce (the "Commissioner") under Section 46.048 of the
Minnesota Statutes (the "Minnesota Change in Control Statute"). USB filed
its notice of its intent to acquire Zappco with the Federal Reserve Board on
October 1, 1997, and received approval of the transaction on November 3, 1997.
USB also filed its notice of its intent to acquire Melrose State as a result
of the Merger with the Commissioner on October 1, 1997, approval of which is
still pending as of the date of this Proxy Statement/Prospectus. See "The
Merger--Regulatory Approvals Required."
CONDITIONS, WAIVER AND AMENDMENT AND TERMINATION
The respective obligations of USB and Zappco to consummate the Merger are
subject to the satisfaction of certain conditions, including, among others, (i)
the receipt of all required regulatory approvals with respect to the Merger,
(ii) the approval of the Merger Agreement and 280G Payments by the requisite
vote of Zappco shareholders and (iii) certain other conditions customary in
transactions of this kind. A failure of any of such conditions to be satisfied
would, if not waived, prevent consummation of the Merger.
At any time before the Effective Date, any party to the Merger Agreement
may (i) extend the time for performance of any obligations or other acts of the
other party under the Merger Agreement or (ii) waive compliance with any of the
agreements of the other parties or with any conditions of its own obligations
contained in the Merger Agreement, to the extent that such obligations,
agreements and conditions are intended for such party's own benefit. In
addition, the Merger Agreement may be amended by written instrument approved by
the parties and signed on behalf of each of the parties. See "The
Merger--Waiver and Amendment."
The Merger Agreement may be terminated at any time before the Effective
Date (i) by mutual consent of USB and Zappco; (ii) by either USB or Zappco, if
any of the conditions to such party's obligation to consummate the transaction
contemplated in the Merger Agreement have become impossible to satisfy; or
(iii) by either USB or Zappco, if the Effective Date is not on or before
February 28, 1998 (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
the Merger Agreement in breach of such party's obligations thereunder). See
"The Merger--Termination."
LIMITATION ON NEGOTIATIONS
The Merger Agreement provides that Zappco will not, and will cause its
Subsidiaries and Zappco's and each Subsidiary's 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 officers or employees
of Zappco or its Subsidiaries) 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,
Zappco or any Subsidiary, or other similar transaction or business combination
involving Zappco or any Subsidiary, or participate in any negotiations in
connection with or in furtherance of any of the foregoing or permit any person
other than USB and its representatives to have any access to the facilities of,
or furnish to any person other than USB and its representatives any non-public
information with respect to, Zappco or any Subsidiary in connection with or in
furtherance of any of the foregoing. The Merger Agreement also requires Zappco
promptly to notify USB if any such proposal or offer, or any inquiry from or
contact with any person
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with respect thereto, is made concerning any such transactions and promptly
to provide USB with such information concerning such matters as USB may
request. See "The Merger--Limitation on Negotiations."
The foregoing provisions may have the effect of discouraging competing
offers to acquire or merge with Zappco.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
SALARY CONTINUATION AGREEMENTS. Zappco is party to salary continuation
agreements with Edward J. Zapp, its President and Chairman of the Board and a
shareholder, and with John E. Leisen, its Vice President, a director and a
shareholder. USB has agreed to assume and be bound by the terms of such salary
continuation agreements. As a result of the Merger and the anticipated
continuation of such agreements, USB and Zappco expect that Messrs. Zapp and
Leisen will each receive an annual amount of $60,000 in salary continuation
payments following the Merger.
NONCOMPETITION AGREEMENTS. Simultaneously with the execution of the
Merger Agreement, each of Messrs. Zapp and Leisen entered into a
Noncompetition Agreement with USB, pursuant to which each of Messrs. Zapp and
Leisen will receive separate consideration to be paid by USB in an annual
amount of $200,000 for approximately eight and seven years, respectively,
subject to adjustment, as well as certain retiree medical benefits. See "The
Merger--Noncompetition Agreements."
OFFER OF CONTINUED EMPLOYMENT. Mr. Leisen and certain other employees of
Zappco have been offered continued employment with USB following the
anticipated closing of the Merger. Mr. Leisen has been offered continued
employment through December 31, 1998, or longer as mutually agreed upon, during
which time Mr. Leisen will receive an annual base salary of $165,000, as well
as benefits normally offered to eligible employees of USB. Mr. Leisen will
also be granted 4,000 shares of USB restricted stock, which will vest over a
three-year period.
SEVERANCE PAYMENTS. Pursuant to the Merger Agreement, certain employees
mutually agreed upon by USB and Zappco will enter into severance agreements
with USB substantially in the form provided by USB to Zappco. With respect to
employees of Zappco or any of its Subsidiaries not subject to any other
severance agreement, the Merger Agreement provides that USB will pay severance
to such employees in accordance with USB's General Severance Pay Program, as
the same may be amended from time to time.
PURCHASE OF CERTAIN ASSETS. Pursuant to the Merger Agreement, Mr. Zapp has
agreed to purchase from Zappco, immediately prior to the Effective Date,
certain assets of a personal and historical interest to the founding families
(listed on a schedule to the Merger Agreement) at the book value of such assets
as of the last day of the month preceding the month in which the Effective Date
occurs.
The foregoing interests of members of management or shareholders of Zappco
and its affiliates in the Merger may mean that such persons have personal
interests in the Merger which may not be identical to the interests of
nonaffiliated shareholders. See "The Merger--Interests of Certain Persons in
the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO ZAPPCO SHAREHOLDERS
Fredrikson & Byron, P.A., special counsel to Zappco, will deliver to
Zappco an opinion of counsel, which will be based upon various
representations and assumptions and subject to various qualifications, to the
effect that for federal income tax purposes the Merger will qualify as a
"reorganization" under Section 368(a) of the Internal Revenue Code of 1986,
as amended (the "Code") and that accordingly (a) no gain or loss will be
recognized for federal income tax purposes by USB or Zappco as a result of
the consummation of the Merger, (b) no gain or loss will be recognized for
federal income tax purposes by any
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Zappco shareholder upon the receipt of USB Common Stock for Zappco Common Stock
in the Merger (except to the extent of any cash received in lieu of fractional
shares), and (c) the tax basis of the USB Common Stock received by a Zappco
shareholder who exchanges Zappco Common Stock for USB Common Stock will be the
same as the basis of the Zappco Common Stock surrendered in exchange therefor.
EACH ZAPPCO SHAREHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISER
CONCERNING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER OR ANY SUBSEQUENT
SALES OF THE USB COMMON STOCK RECEIVED AS PART OF THE MERGER, AS WELL AS ANY
APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES, BASED UPON SUCH
SHAREHOLDER'S OWN PARTICULAR FACTS AND CIRCUMSTANCES. SEE "THE MERGER--CERTAIN
FEDERAL INCOME TAX CONSEQUENCES TO ZAPPCO SHAREHOLDERS."
RESALE OF USB COMMON STOCK
The USB Common Stock issuable to holders of Zappco Common Stock upon
consummation of the Merger has been registered under the Securities Act, and
will be transferable freely and without restriction by those holders of Zappco
Common Stock who receive such shares following consummation of the Merger and
who are not deemed to be "affiliates" (as defined under the Securities Act).
Zappco has agreed in the Merger Agreement to use its best efforts to obtain (i)
signed representation letters (the "Affiliate Letter") (in the form attached as
Exhibit A to the Merger Agreement) from each shareholder of Zappco who may
reasonably be deemed an "affiliate" of Zappco (as such term is used in Rule 145
under the Securities Act) to the effect that such person will not dispose of
shares issued to him pursuant to the Merger except in compliance with Rule 145
under the Securities Act, in a transaction that is otherwise exempt from the
registration requirements under the Securities Act or in an offering registered
under the Securities Act, and (ii) signed representation letters from all of
the shareholders of Zappco (the "Representation Letter") (a copy of which is
enclosed with this Proxy Statement/Prospectus) to the effect that it is each
such person's plan and intent to hold (and not to sell, transfer or otherwise
dispose of) at least 50% of the shares of USB Common Stock issued to him or her
pursuant to the Merger. See "The Merger--Resale of USB Common Stock Received
by Zappco Shareholders."
Until the second anniversary of the Effective Date, upon request, USB has
agreed to purchase from the former shareholders of Zappco up to an aggregate of
30% of the total number of shares of USB Common Stock issued upon exchange of
Zappco Common Stock in the Merger. The purchase price for each such share
purchased by USB shall be equal to the closing price for a share of USB Common
Stock as quoted on the NYSE on the trading day immediately prior to the day on
which such purchase occurs. At any such time as USB has purchased a number of
shares of USB Common Stock representing 30% of the total number of shares
issued pursuant to the Merger, USB's obligation to purchase shares shall cease.
In addition, USB may, in its sole and absolute discretion, suspend its
obligation to purchase shares in the event of restrictions imposed by federal
securities laws or accounting requirements for transactions accounted for as a
pooling-of-interests.
ACCOUNTING TREATMENT
USB intends to account for the Merger using the purchase method of
accounting under generally accepted accounting principles ("GAAP"). See "The
Merger--Accounting Treatment."
DISSENTERS' RIGHTS OF APPRAISAL
Under Section 302A.471 of the MBCA, any holder of Zappco Common Stock who
does not vote in favor of the Merger and who strictly complies with the
procedural requirements of Section 302A.473 of the MBCA, the full text of which
is included in APPENDIX C to this Proxy Statement/Prospectus, will have the
right to dissent to the Merger Agreement and make written demand for the
payment of "fair value" of such holder's shares of Zappco Common Stock. See
"Rights of Dissenting Shareholders."
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MARKET AND MARKET PRICES
USB Common Stock is listed on the NYSE under the symbol "USB." There is
no public market for shares of Zappco Common Stock. The following table sets
forth the closing price per share of USB Common Stock and the "equivalent per
share price" (as defined below) of Zappco Common Stock as of (i) September
12, 1997, the last trading day before USB announced execution of the Merger
Agreement, and (ii) November 6, 1997. The "equivalent per share price" of
the Zappco Common Stock as of each such date equals the Purchase Price,
assuming no adjustments, divided by the average closing price per share of
USB Common Stock for the ten consecutive trading days ending on such date,
divided by the number of shares of Zappco Common Stock outstanding on such
date, and multiplied by the closing price per share of USB Common Stock on
such date. See "The Merger--Terms of the Merger; Consideration to be Received
by Zappco Shareholders."
Market Price USB Equivalent
Per Share Common Per Share
At: Stock Price
------------------ ----------- -------------
September 12, 1997 $ 90.38 $ 4,367.52
November 6, 1997 $ 104.19 $ 4,376.77
Apart from the publicly disclosed information concerning USB which is
included and incorporated by reference in this Proxy Statement/Prospectus,
USB does not know what factors account for changes in the market price of its
stock. NO ASSURANCE CAN BE GIVEN AS TO THE MARKET PRICES OF USB COMMON STOCK
AT ANY TIME BEFORE THE EFFECTIVE DATE, OR AT ANY TIME THEREAFTER. See "--The
Proposed Merger" above and "The Merger--Terms of the Merger; Consideration to
be Received by Zappco Shareholders."
EXPENSES
The Merger Agreement provides that all costs and expenses incurred in
connection with such agreement and the transactions contemplated thereby shall
be paid by the party incurring such costs and expenses, except for certain
costs and expenses that USB has agreed to reimburse to Zappco. See "The
Merger--Expenses."
DIFFERENCES IN RIGHTS OF ZAPPCO SHAREHOLDERS
Upon consummation of the Merger, holders of Zappco Common Stock will become
holders of USB Common Stock. As a result, their rights as shareholders, which
are now governed by Minnesota corporate law and Zappco's Articles of
Incorporation and Bylaws, will be governed by Delaware corporate law and USB's
Certificate of Incorporation and Bylaws. Because of certain differences
between Minnesota and Delaware corporate law and between the provisions of
Zappco's Articles of Incorporation and Bylaws and USB's Certificate of
Incorporation and Bylaws, the current rights of Zappco shareholders will change
significantly after the Merger. For a discussion of the material differences
between the rights of shareholders of Zappco and the rights of shareholders of
USB, see "The Merger--Certain Differences in Rights of Zappco Shareholders."
EXCESS PARACHUTE PAYMENTS
The Merger Agreement provides that Zappco or its successor, USB, shall make
no payments that separately or in the aggregate could or would result in the
payment of any "excess parachute payments" within the meaning of Section 280G
of the Code, unless and until such payments are approved by Zappco's
shareholders in accordance with the provisions of Sections 280G(b)(5)(A)(ii)
and 280G(b)(5)(B) of the Code. In order to avoid the denial of deductibility
and the imposition of the excise tax which applies to 280G Payments, Zappco's
shareholders are being asked to approve such payments. Approval of the 280G
Payments requires the affirmative vote of more than 75% of the voting power of
all outstanding shares of Zappco Common Stock, excluding those shares held or
constructively owned by
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the individuals (Messrs. Zapp and Leisen) whose compensation is being
considered. See "Excess Parachute Payments."
As described in more detail elsewhere in this Proxy Statement/Prospectus,
Mr. Zapp will receive an annual amount of $60,000 in salary continuation
payments for 15 years following the Merger and annual payments of $200,000 from
USB for eight years under the terms of his Noncompetition Agreement. Mr.
Leisen will receive an annual amount of $60,000 in salary continuation payments
for 15 years following the Merger, annual payments of $200,000 for seven years
under his Noncompetition Agreement, and compensation for continued employment
with USB consisting of an annual base salary of $165,000 and certain contingent
incentive compensation. See "The Merger--Noncompetition Agreements" for a
description of the Noncompetition Agreements.
Shareholder approval of the 280G Payments is a condition to Zappco
consummating the Merger.
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COMPARATIVE UNAUDITED PER SHARE DATA
The following table presents selected comparative unaudited per share data
for USB on a historical and pro forma combined basis, and for Zappco on a
historical and pro forma equivalent basis, giving effect to the Merger using the
purchase method of accounting. The information presented below is derived from
the consolidated historical financial statements of USB and Zappco, including
the related notes thereto, incorporated by reference into, or appearing
elsewhere in, this Proxy Statement/Prospectus. This information should be read
in conjunction with such historical financial statements and the related notes
thereto. See "Incorporation of Certain Documents by Reference" and
"Consolidated Financial Statements of Zappco, Inc."
The per share data included within is not necessarily indicative of the
results of future operations of the combined entity or the actual results that
would have been achieved had the Merger been consummated prior to the periods
indicated.
USB Common Stock Zappco Common Stock
----------------------- -------------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
------------ ---------- ------------ ------------
BOOK VALUE (1):
June 30, 1997 ............... $ 23.36 $ 23.36 $ 1,866.43 $ 1,175.00
December 31, 1996 ........... 22.82 22.82 1,788.85 1,147.85
DIVIDENDS DECLARED (2):
Six months ended:
June 30, 1997 ............ .93 .93 28.10 46.78
Year ended:
December 31, 1996 ........ 1.65 1.65 37.85 83.00
NET INCOME (3):
Six months ended:
June 30, 1997 ............ 2.38 2.38 105.16 119.71
Year ended:
December 31, 1996 ........ 4.74 4.74 276.23 238.42
(NOTES ON FOLLOWING PAGE)
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NOTES TO COMPARATIVE UNAUDITED PER SHARE DATA
(1) The pro forma combined book values per share of USB Common Stock are
based upon the pro forma total common equity for USB and Zappco,
divided by the total pro forma shares of USB Common Stock assuming
conversion of Zappco Common Stock at an exchange ratio of 50.3 shares
of USB Common Stock for each share of Zappco Common Stock (the "Pro
Forma Exchange Ratio"). The pro forma equivalent book values per
share of Zappco Common Stock represent the pro forma combined amounts
multiplied by the Pro Forma Exchange Ratio. See "The Merger--Terms of
the Merger; Consideration to be Received by Zappco Shareholders".
(2) The pro forma combined dividends declared assume no changes in the
historical dividends declared per share of USB Common Stock. The pro
forma equivalent dividends per share of Zappco Common Stock represent
the cash dividends declared on a share of USB Common Stock multiplied
by the Pro Forma Exchange Ratio. See "The Merger--Terms of the
Merger; Consideration to be Received by Zappco Shareholders".
(3) The pro forma combined net income per share has been computed based on
the average number of outstanding shares and common equivalent shares
of USB, and the average number of outstanding shares of Zappco
adjusted for the Pro Forma Exchange Ratio. The pro forma equivalent
net income per share of Zappco Common Stock represents the pro forma
combined net income multiplied by the Pro Forma Exchange Ratio. See
"The Merger--Terms of the Merger; Consideration to be Received by
Zappco Shareholders".
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PRO FORMA FINANCIAL INFORMATION
Pro forma financial information is not presented as the requisitionof
Zappco by USB, to be accounted for as a purchase, does not meet the requirements
of a significant business combination as defined by Reg. 210.1-02 and Reg.
210.11-01 of the Commission.
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth certain selected historical consolidated
financial information for USB and Zappco. The selected historical financial data
for the five years ended December 31, 1996 is derived from audited consolidated
financial statements of USB and Zappco. The selected historical financial data
for the six months ended June 30, 1997 is derived from the unaudited historical
financial statements of USB and Zappco and reflect, in the respective opinions
of management of USB and Zappco, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. On
August 1, 1997, USB (formerly First Bank System, Inc.) completed its acquisition
of U.S. Bancorp. Accordingly, USB's consolidated financial statements and the
related supplemental financial data have been restated to give effect to the
merger using the pooling-of-interests method of accounting, as filed as an
exhibit to USB's Current Report on Form 8-K dated September 30, 1997, and
incorporated by reference herein. This information should be read in
conjunction with the consolidated historical financial statements of USB and
Zappco, and the related notes thereto, incorporated by reference or included
elsewhere in this Proxy Statement/Prospectus. See "Incorporation of Certain
Documents by Reference" and "Consolidated Financial Statements of Zappco, Inc."
14
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF
U.S. BANCORP
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Millions, Except Per Share Data)
CONDENSED INCOME STATEMENT:
Net interest income (taxable-equivalent basis) $ 1,541.5 $ 1,486.6 $ 3,034.7 $ 2,886.6 $ 2,809.6 $ 2,658.2 $ 2,334.0
Provision for credit losses 185.3 122.6 271.2 239.1 243.7 239.3 340.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision
for credit losses 1,356.2 1,364.0 2,763.5 2,647.5 2,565.9 2,418.9 1,993.5
Securities gains (losses) 3.6 19.4 20.8 3.0 (124.2) .8 48.4
Other nonrecurring gains -- 326.4 330.6 44.8 52.6 65.1 12.5
Other noninterest income 781.4 715.4 1,431.7 1,265.5 1,186.5 1,177.9 1,073.9
Merger, integration, and resizing -- 88.1 88.1 98.9 225.3 72.2 110.4
Other nonrecurring charges -- 56.9 118.2 38.2 27.2 -- --
Other noninterest expense 1.165.0 1,163.9 2,331.8 2,338.8 2,479.6 2,442.7 2,215.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before
income taxes and cumulative effect
of changes in accounting principles 976.2 1,116.3 2,008.5 1,484.9 948.7 1,147.8 802.4
Taxable-equivalent adjustment 29.7 32.1 64.1 63.9 69.0 71.1 72.0
Income taxes 349.3 413.3 725.7 523.9 311.5 374.9 245.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations before
cumulative effect of changes in
accounting principles 597.2 670.9 1,218.7 897.1 568.2 701.8 484.5
Income (loss) from discontinued operations -- -- -- -- (8.5) 2.5 2.7
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
changes in accounting principles 597.2 670.9 1,218.7 897.1 559.7 704.3 487.2
Cumulative effect of changes in
accounting principles -- -- -- -- -- -- 173.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 597.2 $ 670.9 $ 1,218.7 $ 897.1 $ 559.7 $ 704.3 $ 660.5
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
FINANCIAL RATIOS
Return on average assets 1.76% 2.02% 1.81% 1.42% .89% 1.17% 1.22%
Return on average common equity 21.2 23.7 21.1 17.2 10.9 14.7 15.9
Efficiency ratio 50.2 51.8 52.9 59.0 67.5 64.5 68.0
Net interest margin 5.07 5.01 5.04 5.10 4.99 4.95 4.81
SELECTED FINANCIAL RATIOS BEFORE MERGER-RELATED
AND NONRECURRING ITEMS AND CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES
Return on average assets 1.75 1.69 1.69 1.51 1.23 1.18 .98
Return on average common equity 21.1 19.7 19.8 18.3 15.3 14.9 12.5
Efficiency ratio 50.2 52.9 52.2 56.3 62.1 63.7 65.0
PER COMMON SHARE:
Primary income from continuing operations
before cumulative effect of changes in
accounting principles $ 2.38 $ 2.60 $ 4.74 $ 3.51 $ 2.16 $ 2.67 $ 1.92
Income (loss) from discontinued operations -- -- -- -- (.03) .01 .01
Cumulative effect of changes in
accounting principles -- -- -- -- -- -- .74
---------- ---------- ---------- ---------- ---------- ---------- ----------
Primary net income $ 2.38 $ 2.60 $ 4.74 $ 3.51 $ 2.13 $ 2.68 $ 2.67
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted income from continuing
operations before cumulative effect
of changes in accounting principles $ 2.37 $ 2.58 $ 4.69 $ 3.46 $ 2.14 $ 2.64 $ 1.89
Income (loss) from discontinued operations -- -- -- -- (.03) .01 .01
Cumulative effect of changes in
accounting principles -- -- -- -- -- -- .71
---------- ---------- ---------- ---------- ---------- ---------- ----------
Fully diluted net income $ 2.37 $ 2.58 $ 4.69 $ 3.46 $ 2.11 $ 2.65 $ 2.61
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Dividends paid* $ .93 $ .825 $ 1.65 $ 1.45 $ 1.16 $ 1.00 $ .88
AVERAGE BALANCE SHEET DATA:
Loans $ 52,975 $ 50,028 $ 50,855 $ 47,703 $ 44,584 $ 41,092 $ 37,209
Earnings assets 61,371 59,648 60,201 56,556 56,233 53,726 48,503
Assets 68,386 66,794 67,402 63,084 62,708 60,187 54,172
Deposits 47,425 46,820 47,252 44,726 46,146 46,616 41,377
Long-term debt 6,262 4,743 4,908 4,162 3,796 2,916 2,800
Common equity 5,616 5,619 5,679 5,090 4,887 4,502 3,924
Total shareholders' equity 5,766 5,865 5,919 5,345 5,180 5,012 4,395
PERIOD-END BALANCE SHEET DATA:
Loans $ 54,158 $ 51,286 $ 52,355 $ 49,345 $ 46,375 $ 43,870 $ 39,520
Assets 71,675 68,973 69,749 65,668 64,737 62,457 60,633
Deposits 50,812 48,487 49,356 45,779 46,115 47,834 47,457
Long-term debt 7,583 4,877 5,369 4,583 4,225 3,231 2,588
Common equity 5,703 5,839 5,613 5,089 4,837 4,758 4,325
Total shareholders' equity 5,853 6,078 5,763 5,342 5,105 5,186 4,866
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
*DIVIDENDS PER SHARE HAVE NOT BEEN RESTATED FOR THE U.S. BANCORP ("USB"),
METROPOLITAN FINANCIAL CORPORATION ("MFC") OR COLORADO NATIONAL BANKSHARES, INC.
("CNB") MERGERS.
USB PAID COMMON DIVIDENDS OF $168.7 MILLION IN 1996 ($1.18 PER SHARE),
$133.1 MILLION IN 1995 ($1.06 PER SHARE), $116.0 MILLION IN 1994 ($.94 PER
SHARE), $100.8 MILLION IN 1993 ($.85 PER SHARE) AND $88.5 MILLION IN 1992
($.76 PER SHARE). MFC PAID COMMON DIVIDENDS OF $25.1 MILLION IN 1994 ($.80
PER SHARE), $12.1 MILLION IN 1993 ($.39 PER SHARE) AND $7.7 MILLION IN 1992
($.27 PER SHARE). CNB PAID COMMON DIVIDENDS OF $3.2 MILLION IN 1992 ($.28
PER SHARE).
15
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF
ZAPPCO, INC.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(unaudited) Years Ended December 31,
---------------------- ----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT DATA:
Interest income $ 13,380 $ 12,030 $ 25,262 $ 22,350 $ 19,208 $ 19,675 $ 21,057
Interest expense 6,151 5,177 10,674 10,008 7,320 7,447 9,534
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income 7,229 6,853 14,588 12,342 11,888 12,228 11,523
Provision for loan losses 58 84 288 152 440 650 910
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses $ 7,171 $ 6,769 $ 14,300 $ 12,190 $ 11,448 $ 11,578 $ 10,613
Non-interest income 2,002 3,277 5,234 4,379 4,009 3,726 3,766
Non-interest expense 6,391 5,944 12,865 12,343 12,039 11,687 11,160
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 2,782 4,102 6,669 4,226 3,418 3,617 3,219
Applicable income taxes 1,116 1,573 2,293 1,707 1,327 1,390 1,227
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principles 1,666 2,529 4,376 2,519 2,091 2,227 1,992
Cumulative effect of change
in accounting principles -- -- -- -- -- 283 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income $ 1,666 $ 2,529 $ 4,376 $ 2,519 $ 2,091 $ 2,510 $ 1,992
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Average common shares 15,842 15,842 15,842 15,842 15,842 15,842 15,843
PER COMMON SHARE DATA:
Net income $ 210.33 $ 319.28 $ 276.23 $ 159.01 $ 131.98 $ 158.43 $ 125.76
Dividends paid 39.15 8.50 21.25 16.00 15.50 15.00 12.00
FINANCIAL RATIOS:
Return on average assets 0.98% 1.66% 1.39% 0.87% 0.76% 0.94% 0.76%
Return on average common
equity 11.37% 19.50% 16.17% 10.59% 9.51% 12.57% 11.08%
Net interest margin 4.70 4.93 5.11 4.82 4.82 5.05 4.97
AVERAGE BALANCE SHEET DATA:
Total gross loans $ 231,345 $ 196,768 $ 207,584 $ 185,234 $ 176,659 $ 168,180 $ 164,745
Total assets 339,909 305,163 315,512 288,728 273,595 268,005 263,576
Deposits 285,344 254,588 263,727 240,528 229,064 225,160 222,695
Shareholders' equity 29,307 25,945 27,058 23,780 21,993 19,967 17,983
BALANCE SHEET DATA AT PERIOD END:
Total gross loans $ 235,282 $ 202,431 $ 224,772 $ 189,071 $ 183,515 $ 171,598 $ 165,770
Total assets 346,241 308,214 339,221 309,287 282,463 275,812 273,726
Deposits 294,600 259,621 283,479 258,116 237,095 232,665 232,564
Shareholders' equity 29,568 26,404 28,339 24,714 22,084 20,555 18,284
</TABLE>
16
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to holders of Zappco
Common Stock as part of the solicitation of proxies by the Zappco Board of
Directors for use at the Special Meeting to be held on December 11, 1997 and
at any adjournment or postponement thereof. This Proxy Statement/Prospectus,
and the accompanying form of proxy, are being first mailed to Zappco
shareholders on or about November 7, 1997.
The principal purpose of the Special Meeting is to consider and vote upon
(i) the proposal to approve the Merger Agreement, dated September 12, 1997,
among USB and Zappco, which sets forth the terms and conditions of the Merger
and (ii) the proposal to approve the 280G Payments. Upon consummation of the
Merger, each outstanding share of Zappco Common Stock will be converted into the
right to receive the Merger Consideration. See "The Merger--Terms of the
Merger; Consideration to be Received by Zappco Shareholders." The Merger is
subject to a number of conditions, including the receipt of required regulatory
and shareholder approvals. See "The Merger--Conditions to Consummation of the
Merger."
In addition to approval of the Merger Agreement and the 280G Payments, the
shareholders of Zappco may be asked to approve a proposal to adjourn the Special
Meeting to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the Special Meeting to approve the Merger
Agreement. See "Adjournment of the Special Meeting."
EACH HOLDER OF ZAPPCO COMMON STOCK IS REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND REPRESENTATION LETTER AND RETURN BOTH PROMPTLY TO ZAPPCO
IN THE ENCLOSED, POSTAGE-PAID ENVELOPE OR BY FACSIMILE. THE MERGER WILL BE
APPROVED IF IT RECEIVES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST AT
THE SPECIAL MEETING, AND THE 280G PAYMENTS PROPOSAL WILL BE APPROVED IF IT
RECEIVES THE AFFIRMATIVE VOTE OF THE HOLDERS OF MORE THAN 75% OF THE
OUTSTANDING SHARES OF ZAPPCO COMMON STOCK EXCLUDING SHARES HELD OR
CONSTRUCTIVELY OWNED BY EDWARD J. ZAPP AND JOHN E. LEISEN, PROVIDED A QUORUM IS
PRESENT OR REPRESENTED BY PROXY.
SOLICITATION, VOTING AND REVOCABILITY OF PROXIES
The Board of Directors of Zappco has fixed the close of business on October
31, 1997 as the Record Date for the determination of the shareholders of
Zappco entitled to notice of and to vote at the Special Meeting.
Accordingly, only holders of record of shares of Zappco Common Stock and
participants in Zappco's Employee Stock Ownership Plan at the close of
business on such date will be entitled to vote at the Special Meeting, with
each share entitling its owner to one vote on all matters properly presented
at the Special Meeting. On the Record Date, there were 113 holders of
record, including the Zappco Employee Stock Ownership Plan, of the 15,482
shares of Zappco Common Stock then outstanding. The presence, in person or
by proxy, of at least a majority of the total number of outstanding shares of
Zappco Common Stock entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. Under Minnesota law, the
affirmative vote of the holders of a majority of the voting power of all
shares entitled to vote is required to approve the Merger Agreement. Approval
of the 280G Payments requires the affirmative vote of 75% of the voting power
of all outstanding shares of Zappco Common Stock, excluding those shares held
or constructively owned by the individuals (Edward J. Zapp and John E.
Leisen) whose compensation is being considered. Approval of the adjournment
of the Special Meeting requires the affirmative vote of at least a majority
of the outstanding shares of Zappco Common Stock represented in person or by
proxy at the Special Meeting, even if such number of shares is less than a
quorum. If an executed form of proxy is returned and the shareholder has
affirmatively abstained from voting on any matter, the shares represented by
such proxy will be considered present at the Special Meeting for purposes of
determining a quorum and for purposes of calculating the vote, but will not
be considered to have voted in favor as to such matter.
17
<PAGE>
It is expected that all of the 4,601 shares of Zappco Common Stock
beneficially owned by directors and executive officers of Zappco and their
affiliates at the Record Date (29.04% of the total number of outstanding shares
of Zappco Common Stock at such date) will be voted for approval of the Merger
Agreement, the 280G Payments (excluding shares held or constructively owned by
Messrs. Zapp and Leisen) and for adjournment of the Special Meeting under the
circumstances described herein. As of the Record Date, USB beneficially owned
no shares of Zappco Common Stock and directors and executive officers of USB
beneficially owned no shares of Zappco Common Stock.
If the accompanying form of proxy is properly executed and returned to
Zappco in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
EXECUTED BUT UNMARKED PROXIES WILL BE VOTED "FOR" APPROVAL OF THE MERGER
AGREEMENT, "FOR" APPROVAL OF THE 280G PAYMENTS AND "FOR" THE PROPOSAL TO ADJOURN
THE SPECIAL MEETING IF NECESSARY TO PERMIT FURTHER SOLICITATION OF PROXIES. The
Board of Directors of Zappco does not know of any matters other than those
described in the notice of the Special Meeting that are to come before the
Special Meeting. If any other matters are properly brought before the Special
Meeting, one or more of the persons named in the form of proxy will vote the
shares represented by such proxy upon such matters as determined in their best
judgment.
THE BOARD OF DIRECTORS OF ZAPPCO UNANIMOUSLY RECOMMENDS THAT THE
SHAREHOLDERS OF ZAPPCO VOTE FOR APPROVAL OF THE MERGER AGREEMENT, FOR APPROVAL
OF THE 280G PAYMENTS AND FOR APPROVAL OF ADJOURNMENT OF THE SPECIAL MEETING IF
NECESSARY TO PERMIT FURTHER SOLICITATION OF PROXIES.
The presence of a shareholder at the Special Meeting will not automatically
revoke such shareholder's proxy. A shareholder may, however, revoke a proxy
at any time prior to its exercise by filing a written notice of revocation
with, or by delivering a duly executed proxy bearing a later date to, Edward
J. Zapp, President, Zappco, Inc., 1015 St. Germain St. West, P.O. Box 531,
St. Cloud, Minnesota 56302-0531, or by attending the Special Meeting and
voting in person. A shareholder may vote via facsimile by sending the
executed proxy to the attention of Edward J. Zapp at (320) 259-8440.
The cost of printing and mailing this Proxy Statement/Prospectus to Zappco
Shareholders will be borne by USB, and any additional cost of soliciting proxies
for the Special Meeting will be borne by Zappco. In addition to use of the
mails, proxies may be solicited personally or by telephone, telegraph or
facsimile by directors, officers and employees of Zappco, who will not be
specially compensated for such activities. Zappco will also request persons,
firms and companies holding shares in their names or in the name of their
nominees, which are beneficially owned by others, to send proxy materials to and
obtain proxies from such beneficial owners. Zappco will reimburse such persons
for their reasonable expenses incurred in that connection.
SHAREHOLDERS OF ZAPPCO ARE INSTRUCTED NOT TO SEND IN THE STOCK CERTIFICATES
REPRESENTING THEIR SHARES OF ZAPPCO COMMON STOCK WITH THEIR PROXY. SHAREHOLDERS
OF ZAPPCO WILL RECEIVE INSTRUCTIONS REGARDING THE SURRENDER OF THEIR STOCK
CERTIFICATES IN A SEPARATE MAILING. SEE "THE MERGER--SURRENDER OF ZAPPCO COMMON
STOCK CERTIFICATES."
BENEFICIAL OWNERSHIP OF ZAPPCO COMMON STOCK
The following table sets forth, as of October 31, 1997, the Record Date for
the Special Meeting, certain information with respect to the beneficial
ownership of Zappco Common Stock by (i) each person who is a beneficial owner
of more than 5% of the outstanding shares of Zappco Common Stock, (ii) each
executive officer of Zappco and each director of Zappco, and (iii) all
directors and executive officers as a group.
18
<PAGE>
<TABLE>
<CAPTION>
Common Stock
-------------------------------------
Name, Title and Amount and Nature Percent of
Address of Beneficial Ownership Class
- ---------------------- ----------------------- ----------
<S> <C> <C>
Edward J. Zapp(1)
President, Director 1,131 7.14%
1015 St. Germain St. West
St. Cloud, MN 56302
Mary Anne Geving(2)
Director 889 5.61
S. Edward Maehren(3)
Director 755 4.77
L. Michael Hall(4)
Director 630 3.98
Joseph H. Wenner(5)
Director 422 2.66
John E. Leisen(6)
Director 422 2.66
Gretchen L. Leisen(7)
Director 235 1.48
Vincent J. Leisen(8)
Director 223 1.41
Gerald J. Plachecki(9)
Director 113 *
Robert C. Bogard
Director 35 *
Clarence N. Kremer
Director 31 *
James A. Hall(10)
Director 20 *
All directors and executive officers 4,601 29.04
as a group(12 persons)
Thomasine Baston Revocable Trust 1,430 9.03
P.O. Box 887
St. Cloud, MN 56302
Herbert J. Hall Revocable Trust 907 5.73
P.O. Box 887
St. Cloud, MN 56302
</TABLE>
- --------------------
* Less than 1%
19
<PAGE>
(1) Mr. Zapp is a brother to Ms. Gering, a director. Includes 171 shares
held in the Marion F. Zapp Revocable Trust, for which Mr. Zapp and Ms.
Geving are co-trustees, and 134 shares held by the Zappco Employee Stock
Ownership Plan Trust, for which Mr. Zapp is a co-trustee.
(2) Ms. Geving is a sister of Mr. Edward J. Zapp. Includes 171 shares held
in the Marion F. Zapp Revocable Trust, for which Ms. Geving and Mr. Zapp
are co-trustees.
(3) Includes 40 shares held by Mr. Maehren's wife.
(4) Includes (i) 524 shares held by Cloud & Company, a trust over which Mr.
Hall has sole voting and investment power; (ii) three shares held in Mr.
Hall's IRA; (iii) 17 shares held by Zapp Bank as custodian for Mary D.
Hall, Mr. Hall's wife; and (iv) one share held by the T.H.E. Partnership,
pursuant to which Mr. Hall has shared voting and investment power.
(5) Includes 140 shares held by Mr. Wenner's wife.
(6) Mr. Leisen is a brother to each of Gretchen Leisen and Vincent Leisen.
Includes 134 shares held by the Zappco Employee Stock Ownership Plan Trust,
for which Mr. Leisen is a co-trustee.
(7) Ms. Leisen is a sister to each of Mr. John Leisen and Mr. Vincent Leisen.
Represents 235 shares held in the Gretchen Leisen Revocable Trust, for
which Ms. Leisen has sole voting and investment power.
(8) Mr. Leisen is a brother to Mr. John Leisen and Ms. Gretchen Leisen.
(9) Includes 70 shares held in the Gerald J. Plachecki Revocable Trust, over
which Mr. Plachecki has sole voting and investment power, and 43 shares
held in the Doris S. Plachecki Revocable Trust. Ms. Placheki is Mr.
Placheki's wife.
(10) Does not include 907 shares held by the Herbert J. Hall Estate as Mr.
Hall has no voting or investment power.
20
<PAGE>
THE MERGER
(PROPOSAL NO. 1)
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED MERGER. TO THE EXTENT THAT IT RELATES TO THE MERGER AGREEMENT, THE
FOLLOWING DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF WHICH IS ATTACHED
HERETO AS APPENDIX A AND IS INCORPORATED HEREIN BY REFERENCE. ALL SHAREHOLDERS
ARE URGED TO READ THE MERGER AGREEMENT, THE EXHIBITS THERETO AND THE OTHER
APPENDICES HERETO IN THEIR ENTIRETY.
TERMS OF THE MERGER; CONSIDERATION TO BE RECEIVED BY ZAPPCO SHAREHOLDERS
On the Effective Date, Zappco will merge with and into USB, with USB as the
surviving corporation. The officers and directors of USB immediately prior to
the Effective Date will be the officers and directors of USB, as the surviving
corporation, after the Effective Date until their successors are duly elected or
appointed and qualified. The Certificate of Incorporation and Bylaws of USB as
in effect immediately prior to the Merger will be the Certificate of
Incorporation and Bylaws of the surviving corporation until further amended as
provided therein and in accordance with law. On the Effective Date, each issued
and outstanding share of Zappco Common Stock (other than shares to be canceled
as set forth below and Dissenting Shares) will be converted into the right to
receive a number of shares of USB Common Stock equal to $68 million (the
"Purchase Price," as may be adjusted as set forth below) divided by the average
of the closing prices of USB Common Stock as quoted on the NYSE for the ten
consecutive trading days ending with the day preceding the Effective Date
divided by the number of shares of Zappco Common Stock outstanding on the
Effective Date, with cash paid in lieu of fractional shares (the "Merger
Consideration"). Each share of Zappco Common Stock held directly or indirectly
by USB, other than shares of Zappco Common Stock held in a fiduciary capacity or
in satisfaction of a debt previously contracted, will be canceled, retired and
cease to exist when the Merger becomes effective, and no payment or exchange
will be made with respect to such shares.
At least five business days prior to the Effective Date, Zappco will deliver
to USB a balance sheet of Zappco dated as of the last day of the month
immediately preceding the Effective Date (the "Final Balance Sheet"). The
Purchase Price will be (i) increased by the amount, if any, by which the Final
Retained Earnings (as defined below) exceeds $22,596,472 and (ii) decreased by
the amount, if any, by which the Final Retained Earnings is less than
$22,596,472. Zappco reported Retained Earnings as of June 30, 1997 to be
$23,818,963, which represents an increase from December 31, 1996 of $1,222,491.
USB and Zappco have agreed to cooperate and promptly commence good faith
negotiations to resolve any disputes regarding the Final Balance Sheet. The
"Final Retained Earnings" shall be equal to the amount of Zappco's retained
earnings (referred to therein as "undivided profits") as reflected on the Final
Balance Sheet (which Final Balance Sheet will be as mutually agreed to by Zappco
and USB) plus an amount equal to the product of (i) the Average Daily Retained
Earnings (as defined below) times (ii) the number of days from, but excluding
the date of, the Final Balance Sheet to and including the Effective Date. The
"Average Daily Retained Earnings" shall be equal to the quotient derived by
calculating the difference between retained earnings as reflected on the Final
Balance Sheet and $22,596,472 and dividing that difference (if positive) by the
number of calendar days in the period from but excluding December 31, 1996 to
and including the date of Final Balance Sheet.
In determining the Final Retained Earnings and the Average Daily Retained
Earnings, Zappco will prepare the Final Balance Sheet in accordance with the
accounting methods and practices used by Zappco in preparing the financial
statements previously provided to USB, except that in no event will any gains on
sale of assets not in the ordinary course of business or other extraordinary or
unusual items be included in determining the Final Retained Earnings. Without
limiting the generality of the foregoing, Zappco will continue to make provision
for loan losses and other reserves on the balance sheets of its Subsidiaries in
a manner consistent with past practices, and Zappco will not alter or vary its
practices and policies relating to classified loans and loan write-offs.
21
<PAGE>
The Merger Agreement provides that if, between September 12, 1997 (the date
of the Merger Agreement) and the Effective Date, shares of USB Common Stock are
changed into a different number or class of shares by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment, or if a stock dividend thereon is declared with a record date
within such period, then the number of shares issued as a result of the Merger
will be appropriately and proportionately adjusted so that holders of Zappco
Common Stock will receive that number of shares of USB Common Stock that they
would have received if the record date for such reclassification,
recapitalization, split-up, combination, exchange of shares, readjustment or
stock dividend had been immediately following the Effective Date.
No fractional shares of USB Common Stock will be issued in the Merger.
Instead, the Merger Agreement provides that in lieu of any fractional share, USB
will pay to each holder of Zappco Common Stock who otherwise would be entitled
to receive a fractional share of USB Common Stock a cash amount (without
interest) determined by multiplying (i) the average closing price used in the
computation of Merger Consideration by (ii) the fractional share interest to
which such holder would otherwise be entitled.
Shares of USB capital stock issued and outstanding immediately prior to the
Effective Date will remain issued and outstanding thereafter and will not be
affected by the Merger.
The market price of USB Common Stock as of a recent date is set forth herein
under "Summary--Market and Market Prices." NO ASSURANCE CAN BE GIVEN AS TO THE
MARKET PRICE OF USB COMMON STOCK AT ANY TIME BEFORE THE EFFECTIVE DATE OR AS TO
THE MARKET PRICE OF USB COMMON STOCK AT ANY TIME THEREAFTER.
BACKGROUND OF AND REASONS FOR THE MERGER
BACKGROUND OF THE MERGER. In November 1996, USB (formerly First Bank
System, Inc.) provided an unsolicited written proposal to acquire Zappco. The
Zappco Board of Directors discussed such proposal at its regular meeting on
November 14, 1996, at which meeting the Zappco Board of Directors adopted a
resolution affirming that Zappco was not for sale and preferred to remain
independent, although its Board of Directors would review substantive proposals
submitted by highly qualified buyers which offered the prospect of an
extraordinary premium price to Zappco shareholders. The Zappco Board of
Directors at such meeting further appointed a Long Range Planning Committee to
further review the USB proposal.
An exchange of correspondence, various meetings and discussions ensued.
Representatives of USB and the Zappco Board of Directors Long Range Planning
Committee and their respective counsel met on May 21, 1997 to refine the terms
of a possible merger. USB and Zappco executed a Confidentiality Agreement on
June 13, 1997 and representatives of USB commenced an off-site due diligence
review of Zappco.
USB and Zappco executed a Letter Agreement and Summary Term Sheet, including
funding of an Option Deposit, on July 24, 1997. Representatives of USB and
Zappco and their respective counsel thereafter negotiated the form of the
Agreement and Plan of Merger, and on September 11, 1997, the Zappco Board of
Directors met to consider the Merger Agreement. Based on a variety of factors,
including receipt of a Fairness Opinion orally from Dain, the Zappco Board of
Directors approved the Merger Agreement at such meeting. The Merger Agreement
was executed and delivered by the parties on September 12, 1997. Following the
execution and delivery of the Merger Agreement, USB and Zappco formally
announced the execution of the Merger Agreement on September 15, 1997.
REASONS OF ZAPPCO FOR THE MERGER. The Board of Directors of Zappco, after
careful study and evaluation of economic, financial, legal and market factors,
believes that the Merger Agreement is in the best interests of Zappco and
Zappco's shareholders. The Board believes that the Merger
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Consideration is fair and that the receipt of the Merger Consideration
represents an opportunity for the holders of Zappco Common Stock to exchange
their shares of Zappco Common Stock for USB Common Stock as an equity
security with a greater market liquidity. Among the factors considered by
the Board of Directors of Zappco in deciding to approve and recommend the
execution of the Merger Agreement were the terms and conditions of the Merger
Agreement; recent market prices for USB Common Stock; the lack of a public
trading market for Zappco Common Stock; the nature of the banking business of
Zappco and USB; the competitive position and outlook in a changing banking
and financial services industry that is facing the development of interstate
banking, a trend toward bank consolidation and increasing pressure to realize
economies of scale; the various needs of Zappco shareholders; and the
consideration to be received by the shareholders of Zappco in the Merger.
While the Board of Directors did not give greater weight to any one of the
factors listed above, the Board of Directors of Zappco considered the
proposed exchange of Zappco Common Stock for USB Common Stock to be
advantageous to its shareholders, both because the aggregate Purchase Price
to be received per share of Zappco Common Stock has a value substantially in
excess of the book value of such Zappco Common Stock and because the Zappco
shareholders will receive securities which have a greater market liquidity
than the Zappco Common Stock and which have historically paid dividends at a
rate higher than the rate of dividends paid on the Zappco Common Stock which
will be exchanged therefor in the Merger.
RECOMMENDATION OF ZAPPCO BOARD OF DIRECTORS. The Board of Directors of
Zappco recommends that the shareholders of Zappco approve the Merger
Agreement. The Zappco Board believes that the terms of the Merger Agreement
are fair and that the Merger is in the best interests of Zappco and its
shareholders. In making its recommendation, the Zappco Board considered the
opinion of Dain, financial advisor to the Zappco Board, dated September 12,
1997 to the effect that the Merger Consideration is fair to the shareholders
of Zappco from a financial point of view. See "--The Fairness Opinion." On
November 6, 1997, the last sale price for USB Common Stock on the NYSE was
$104.19 per share and the average closing price for the ten consecutive
trading days ending on such date was $102.18 per share. Based on such
average closing price, and assuming no adjustment to the Purchase Price, the
number of shares of USB Common Stock issued in exchange for each share of
Zappco Common Stock would be 42.01. The directors and executive officers of
Zappco have unanimously indicated that they intend to vote the Zappco Common
Stock that they hold in favor of the Merger Agreement. See "Information
Concerning the Special Meeting--Beneficial Ownership of Zappco Common
Stock."
THE BOARD OF DIRECTORS OF ZAPPCO RECOMMENDS THAT ZAPPCO SHAREHOLDERS
VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
REASONS OF USB FOR THE MERGER. The acquisition of Zappco by USB will expand
USB's retail banking operations in Minnesota. The acquisition will allow USB to
leverage its existing presence in Minnesota, providing the opportunity to
realize economies from consolidation.
THE FAIRNESS OPINION
Dain has acted as financial advisor to Zappco in connection with the Merger.
Dain was selected by Zappco based on a recommendation of Zappco legal counsel.
Further, the Zappco Board expressly desired to obtain such a written opinion
from a nationally recognized investment banking firm with experience in the
valuation of financial institutions and securities and which had never been
previously engaged by Zappco. Dain is a nationally recognized investment
banking firm and is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes.
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In connection with Dain's engagement, Zappco requested that Dain evaluate
the fairness of the consideration to be received by the Zappco shareholders from
a financial point of view. Dain rendered to the Zappco Board a written opinion
dated September 12, 1997 to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the consideration was fair to
the holders of Zappco Common Stock from a financial point of view.
THE FULL TEXT OF DAIN'S WRITTEN OPINION TO THE ZAPPCO BOARD DATED SEPTEMBER
12, 1997, WHICH SETS FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX B
TO THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
SHAREHOLDERS OF ZAPPCO ARE URGED TO READ THIS OPINION CAREFULLY IN IT ENTIRETY.
DAIN'S OPINION RELATED ONLY TO THE FAIRNESS OF THE CONSIDERATION FROM A
FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED
MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE ZAPPCO SPECIAL
MEETING. THE SUMMARY OF THE OPINION OF DAIN SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In arriving at its opinion, Dain reviewed the Merger Agreement and certain
publicly available business and financial information relating to Zappco and
USB. Dain also reviewed certain other information relating to Zappco and USB,
including financial forecasts provided to Dain by Zappco, and met with the
management of Zappco to discuss the business and prospects of Zappco. Dain also
discussed with the management of USB expected savings that might be realized as
a result of the Merger. Dain also considered certain financial data of Zappco
and certain financial and stock market data of USB and compared that data with
similar data for other publicly held companies in businesses similar to those of
Zappco and USB and considered, to the extent publicly available, the financial
terms of certain other business combinations and other transactions recently
effected. Dain also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which
Dain deemed relevant.
In connection with its review, Dain did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by Dain and relied on such information being complete and accurate in
all material respects. With respect to the financial forecasts, Dain assumed
that such forecasts were reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Zappco as to
the future financial performance of Zappco. Dain was not requested to conduct,
and did not conduct, a review of individual credit files or make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Zappco nor was Dain furnished with any such evaluations or appraisals,
including loan or lease portfolios or the allowances for losses with respect
thereto, and Dain assumed that such allowances of Zappco are in the aggregate
adequate to cover such losses. Dain further assumed that in the course of
obtaining the necessary regulatory and third-party consents for the proposed
Merger and transactions contemplated thereby, no restriction will be imposed
that will have a material adverse effect on the contemplated benefits of the
Merger or the transactions contemplated thereby. Dain's opinion was
necessarily based upon information available to Dain, and financial, economic,
market and other conditions as they existed and could be evaluated on the date
of its opinion. Dain did not express any opinion as to the actual value of the
USB Common Stock when issued pursuant to the Merger or the prices at which the
USB Common Stock will trade subsequent to the Merger. In connection with its
engagement, Dain was not requested to, and did not, solicit third-party
indications of interest in acquiring all or any part of Zappco. Although Dain
evaluated the consideration from a financial point of view, Dain was not
requested to, and did not, recommend the specific consideration payable in the
Merger, which consideration was determined through negotiation between Zappco
and USB. No other limitations were imposed by Zappco on Dain with respect to
the investigations made or procedures followed by Dain in rendering its opinion.
In preparing its opinion to the Zappco Board, Dain performed a variety of
financial and comparative analyses, including those described below. The
summary of Dain's analyses set forth
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below does not purport to be a complete description of the analyses
underlying Dain's opinion, but rather, sets forth a description of the
material analyses performed by Dain for purposes of such opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. In arriving at its opinion, Dain made qualitative
judgments as to the significance and relevance of each analysis and factor
considered by it. Accordingly, Dain believes that its analyses must be
considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a
misleading or incomplete view of the processes underlying such analyses and
its opinion. In its analyses, Dain made numerous assumptions with respect to
Zappco, USB, industry performance, regulatory, general business, economic,
market and financial conditions and other matters, many of which are beyond
the control of Zappco and USB. No company, transaction or business used in
such analyses as a comparison is identical to Zappco, USB or the proposed
Merger, nor is an evaluation of the results of such analyses entirely
mathematical; rather, such analyses involve complex considerations and
judgments concerning financial and operating characteristics and other
factors that could affect the acquisition, public trading or other values of
the companies, business segments or transactions being analyzed. The
estimates contained in such analyses and the ranges of valuations resulting
from any particular analysis are not necessarily indicative of actual values
or predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities
actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Dain's opinion and financial
analyses constituted only one of many factors considered by the Zappco Board
in its evaluation of the proposed Merger and should not be viewed as
determinative of the views of Zappco's Board or management with respect to
the consideration or the proposed Merger.
The following is a summary of each of the material financial analyses
performed by Dain in connection with its opinion dated September 12, 1997:
CALCULATION OF IMPLIED VALUE OF CONSIDERATION. Dain calculated the implied
value of the consideration based on the closing price of USB Common Stock on
September 9, 1997, which indicated an implied equity value for Zappco of
approximately $4,490 per share. Dain also calculated the implied value of the
consideration based on the closing price of USB Common Stock on September 9,
1997 and assumed a 15% discount to reflect expected transferability restrictions
on 50% of USB Common Stock to be issued in the Merger. Such process indicated
an implied equity value of $3,817 per share. The implied equity value of $4,490
per share equated to implied multiples for Zappco of latest twelve months'
earnings per share ("EPS"), estimated calendar 1997 EPS, estimated calendar 1998
EPS, and most recent book value and tangible book value of 20.4x, 17.8x, 16.7x,
2.34x and 2.39x, respectively. The implied equity value of $3,817 per share
equated to implied multiples for Zappco of latest twelve months' EPS, estimated
calendar 1997 EPS, estimated calendar 1998 EPS and most recent book value and
tangible book value of 17.3x, 15.1x, 14.2x, 1.99x and 2.03x, respectively. Dain
then compared these results with those derived from the analyses described
below.
SELECTED TRANSACTIONS ANALYSIS. Using publicly available information, Dain
analyzed the purchase prices and implied transaction multiples paid in 25
selected transactions in the banking industry that occurred between January 1,
1996 and September 5, 1997, where the sellers' assets were in the range of $100
million to $650 million, and where the sellers' headquarters was located in one
of the following states: Minnesota, Illinois, Iowa, Kansas, North Dakota, South
Dakota, Wisconsin, or Nebraska (the "Selected Transactions"). All multiples
were based on information available at the time of the transaction. This
analysis indicated median multiples for the Selected Transactions of latest 12
months' EPS, most recent book value and tangible book value and core deposit
premium of 14.8x, 1.83x, 1.87x, and 11.8%, respectively. These multiples
compare to implied multiples for Zappco based on consideration equal to $4,490
per share of 20.4x, 2.34x, 2.39x, and 14.8%, respectively. The
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Selected Transactions multiples compared to implied multiples for Zappco
based on consideration received equal to $3,817 per share of 17.3x, 1.99x,
2.03x and 11.0%, respectively.
STAND ALONE VALUATION ANALYSIS. Dain estimated the present value of Zappco
Common Stock on a stand-alone basis based upon a forecast provided by Zappco
management assuming that the Merger did not occur. The value of the stock was
calculated by applying multiples ranging from 10.5x to 12.5x to earnings per
share for each year through 2001. The projected stock values and dividends
expected to be paid by Zappco were then discounted to present values using
discount rates ranging from 12% to 18%. This analysis indicated an implied
equity reference range for Zappco of approximately $2,095 to $3,041 per share.
Dain also estimated the present value of Zappco Common Stock on a
stand-alone basis by applying multiples ranging from 0.9x to 1.3x to the
projected year-end book value each year through 2001. The projected stock
values and dividends expected to be paid by Zappco were then discounted to
present values using discount rates ranging from 12% to 18%. This analysis
indicated an implied equity reference range for Zappco of approximately $1,516
to $2,805 per share.
DISCOUNTED DIVIDEND ANALYSIS. Dain estimated the present value of the
future dividends that Zappco could pay on a stand-alone basis through fiscal
year 2001 based a forecast provided by Zappco management assuming that the
Merger did not occur. The range of estimated terminal values was calculated by
applying multiples ranging from 0.9x to 1.3x to the projected 2001 year-end book
value of Zappco. The dividends and estimated terminal values were then
discounted to present values using discount rates ranging from 12% to 18%. This
analysis indicated an implied equity reference range for Zappco of approximately
$1,530 to $2,616 per share.
SELECTED COMPANIES ANALYSIS. Dain analyzed certain financial, operating and
stock market data of selected publicly traded companies in the banking industry
deemed to be similar to Zappco. Such companies included: BNCCORP; Gold Banc
Corporation; Mahaska Investment Company; MNB Bancshares; National City
Bancorp; and State Financial Services Corporation ("Selected Companies"). EPS
estimates for the Selected Companies were based on estimates of selected
investment banking firms as compiled by First Call. All multiples were based on
closing stock prices of September 9, 1997. This analysis indicated a median of
multiples for the Selected Companies for latest twelve months' EPS, estimated
calendar 1997 EPS, estimated calendar 1998 EPS and most recent book value and
tangible book values of 17.5x, 16.0x, 13.4x, 1.67x, and 1.84x, respectively.
These multiples compare to implied multiples for Zappco based on consideration
received equal to $4,490 per share of 20.4x, 17.8x, 16.7x, 2.34x, and 2.39x
respectively. The Selected Companies' multiples compare to implied multiples
for Zappco based on consideration received equal to $3,817 per share of 17.3x,
15.1x, 14.2x, 1.99x, and 2.03x, respectively.
CONTRIBUTION ANALYSIS. Dain analyzed the relative contributions of Zappco
and USB to, among other things, the estimated net income of the pro forma
combined company for the 1997 and 1998 fiscal years, before giving effect to
certain cost savings which the management of USB estimated could be achieved in
the Merger, with particular emphasis on the combined net income of Zappco and
USB before taking into account such cost savings. This analysis indicated that,
without giving effect to such cost savings, Zappco would contribute
approximately 0.32% and 0.31% of the net income of the combined company in
fiscal 1997 and 1998, respectively. Under the terms of the Merger, Zappco
shareholders would own approximately 0.32%, of the combined company upon
consummation of the Merger.
PRO FORMA MERGER ANALYSIS. Dain analyzed the potential pro forma effect of
the Merger on USB's EPS for calendar year 1998 relative to USB on a stand-alone
basis. This analysis indicated that the Merger could be accretive to USB's EPS
in calendar year 1998, assuming certain cost savings anticipated by the
management of USB to result from the Merger are achieved. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
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MISCELLANEOUS. Pursuant to the terms of Dain's engagement, Zappco has
agreed to pay Dain for its services in connection with providing the Fairness
Opinion a fee of $100,000 which was payable upon delivery of the Fairness
Opinion to the Zappco Board. Zappco also has agreed to indemnify Dain and
certain related persons and entities against certain liabilities, including
liabilities under the federal securities laws, arising out of Dain's
engagement. Dain has in the past provided financial services to USB unrelated
to the proposed Merger, for which services Dain has received compensation.
In the ordinary course of its business, Dain may actively trade the debt and
equity securities of USB for its own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
EFFECTIVE DATE OF THE MERGER
The Merger will become effective upon the filing of an appropriate
certificate of merger and articles of merger relating thereto with the
Secretaries of State of the States of Delaware and Minnesota, respectively.
The Merger Agreement provides that the parties thereto will cause the Merger
to be effected as soon as practicable after receipt of all necessary
regulatory approvals, provided that each of the conditions to consummation of
the Merger has been satisfied or waived. See "--Conditions to Consummation
of the Merger." The Merger cannot become effective until Zappco shareholders
have approved the Merger Agreement and all required regulatory approvals and
actions have been obtained and taken. See "--Regulatory Approvals Required."
The Merger Agreement may be terminated by either USB or Zappco if the Merger
has not become effective by February 28, 1998 (unless failure to consummate
the Merger by such date shall be due to the action or failure to act of the
party seeking to terminate the Merger Agreement in breach of such party's
obligations thereunder). See "--Termination."
SURRENDER OF ZAPPCO COMMON STOCK CERTIFICATES
In a separate mailing, Zappco (or a representative of Zappco) will send a
notice and transmittal form to each holder of Zappco Common Stock of record
advising such holder of the procedure for surrendering his, her or its
certificates evidencing Zappco Common Stock to Zappco. Zappco or such
representative will hold such shares in trust until the Effective Date. Such
notice and transmittal form will be sent as soon as practicable after the
mailing of this Proxy Statement/Prospectus. ZAPPCO SHAREHOLDERS SHOULD NOT
SEND IN THEIR STOCK CERTIFICATES UNTIL THEY RECEIVE SUCH SEPARATE
INSTRUCTIONS FROM ZAPPCO.
Each holder of a certificate or certificates representing shares of Zappco
Common Stock may surrender such certificate or certificates to Zappco,
together with a properly completed and signed letter of transmittal, to
effect the exchange of such certificate or certificates on his, her or its
behalf. Following shareholder approval of the Merger, and on or about the
Effective Date, Zappco will present such certificates to USB and USB will
distribute to the person in whose name such certificate is registered (or
such other name as may be authorized by the holder) (1) a certificate or
certificates representing the number of whole shares of USB Common Stock that
such holder is entitled to receive in the Merger and (2) a cash payment in
lieu of any fractional shares of USB Common Stock.
THE SURRENDER OF CERTIFICATES TO ZAPPCO IS INTENDED TO EXPEDITE THE
CERTIFICATE EXCHANGE PROCESS, AND IS SEPARATE AND APART FROM THE SOLICITATION
OF PROXIES. EVEN IF A SHAREHOLDER SUBMITS HIS, HER OR ITS CERTIFICATES TO
ZAPPCO TO HOLD UNTIL THE EFFECTIVE DATE, SUCH SHAREHOLDER MAY CONTINUE TO
REVOKE HIS OR HER PROXY AT ANY TIME PRIOR TO ITS EXERCISE. NO PROXY WILL BE
USED IF SUCH SHAREHOLDER ATTENDS AND VOTES AT THE SPECIAL MEETING IN PERSON.
SEE "INFORMATION CONCERNING THE SPECIAL MEETING--SOLICITATION, VOTING AND
REVOCABILITY OF PROXIES." SHAREHOLDERS WHO HAVE SURRENDERED CERTIFICATES TO
ZAPPCO IN ADVANCE OF THE SPECIAL MEETING MAY ALSO BE ELIGIBLE TO ASSERT HIS,
HER OR ITS RIGHTS AS A DISSENTING SHAREHOLDER IF SUCH SHAREHOLDER SATISFIES
THE PROCEDURAL REQUIREMENTS SPECIFIED IN THE MBCA. SEE "RIGHTS OF DISSENTING
SHAREHOLDERS."
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At and after the Effective Date and until surrendered and exchanged as
described above, certificates which, immediately prior to the Effective Date,
represented shares of Zappco Common Stock shall be deemed for all purposes to
represent and evidence only the right to receive the Merger Consideration to be
paid therefor. After the Effective Date, the record holder of an outstanding
certificate formerly evidencing Zappco Common Stock will be entitled to vote the
shares of USB Common Stock into which such shares of Zappco Common Stock shall
have been converted on any matters on which the holders of record of USB Common
Stock, as of any date subsequent to the Effective Date, shall be entitled to
vote. However, until such certificates are surrendered by Zappco to USB, no
dividend or distribution payable to holders of record of USB Common Stock will
be paid to the holders of record of such unsurrendered certificates. Upon the
surrender of such a certificate, there will be paid to the holder thereof,
without interest, the amount of any dividends or distributions not previously
paid to such holder which had a record date on or after the Effective Date with
respect to such number of whole shares of USB Common Stock. In any matters
relating to such certificates, USB may rely conclusively upon the record of
shareholders maintained by Zappco containing the names and addresses of the
holders of record of Zappco Common Stock at the Effective Date.
If any certificate formerly evidencing Zappco Common Stock has been lost,
stolen or destroyed, Zappco will, upon the making of an affidavit of that fact
by the holder thereof, issue a replacement certificate and present such
certificate to USB. USB will pay in exchange for such lost, stolen or destroyed
certificate Merger Consideration as may be required pursuant to the Merger
Agreement; provided, however, that USB may, in its sole discretion and as a
condition to the issuance and payment of the Merger Consideration to which the
holder of such certificate is entitled as a result of the Merger, require the
owner thereof to deliver a bond in such sum as USB may direct as indemnity
against any claim that may be made against USB, Zappco or any other party with
respect to the certificate alleged to have been lost, stolen or destroyed.
After the Effective Date, there shall be no further registration of transfers on
the records of USB of certificates formerly evidencing Zappco Common Stock, and
if a certificate is presented, it shall be canceled and exchanged for the Merger
Consideration as described above. Certificates formerly evidencing shares of
Zappco Common Stock surrendered by any former shareholder of Zappco who is
deemed an "affiliate" of Zappco will not be exchanged for the Merger
Consideration until such shareholder has executed and delivered to USB an
Affiliate Letter (in the form attached as Exhibit A to the Merger Agreement)
with respect to the resale of shares of USB Common Stock received by such
shareholders in the Merger. See "--Resale of USB Common Stock Received by
Zappco Shareholders."
All Merger Consideration issued and paid upon the surrender of Zappco Common
Stock shall be deemed to have been paid in full satisfaction of all rights
pertaining to such shares of Zappco Common Stock.
CONDITIONS TO CONSUMMATION OF THE MERGER
The Merger will occur only if the Merger Agreement is approved by the
requisite vote of Zappco shareholders. In addition, consummation of the Merger
is subject to the satisfaction of certain other conditions, unless waived (to
the extent such waiver is permitted by law). A failure of any such conditions
to be satisfied, if not waived, would prevent consummation of the Merger.
The obligations of both USB and Zappco to consummate the Merger are subject
to satisfaction of the following conditions, among others: (i) regulatory
approval for the consummation of the transactions contemplated by the Merger
Agreement shall have been obtained from the Federal Reserve Board and any other
governmental authority from whom approval is required, and all applicable
regulatory waiting periods shall have lapsed; (ii) no injunction or other court
order shall have been issued and remain in effect which would impair
consummation of the transactions contemplated by the Merger Agreement; (iii) no
law, statute, rule or regulation shall have been enacted or promulgated which
would materially impair consummation of the transactions contemplated by the
Merger Agreement; (iv) no action shall have been taken, nor any statute, rule,
regulation, judgment,
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order or injunction shall have been proposed, enacted, enforced, promulgated,
issued or deemed applicable to the transactions contemplated by the Merger
Agreement by any court, government or governmental authority or agency, which
would reasonably be expected to result in (a) restraining or prohibiting the
consummation of the transactions contemplated by the Merger Agreement or
obtaining material damages from Zappco, any of its Subsidiaries, USB or any
of its subsidiaries, (b) prohibiting ownership or operation by USB of all or
a material portion of the business or assets of Zappco, Zappco's Subsidiaries
or USB or any of its subsidiaries, or compelling the disposal of or the
holding separately of all or a material portion of the business or assets of
USB, Zappco or their subsidiaries, or (c) requiring divestiture by USB of any
of its, Zappco, or any Zappco Subsidiary's business or assets, (v) no party
to the Merger Agreement shall have terminated such agreement as permitted
therein and (vi) approval by Zappco shareholders of the 280G Payments. The
Merger Agreement provides that no regulatory approval referred to in (i)
above shall contain any conditions or restrictions that USB reasonably
believes will materially restrict or limit the business or activities of USB,
Zappco or Zappco's 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 USB and its subsidiaries taken
as a whole, on the one hand, or Zappco or Zappco's Subsidiaries, taken as a
whole, on the other hand.
In addition to the foregoing conditions, the obligation of Zappco to
consummate the Merger is subject to satisfaction of the following conditions,
among others: (i) the representations and warranties of USB set forth in the
Merger Agreement shall be true and correct as of the date of such agreement 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 USB and its subsidiaries,
taken as a whole; and USB shall in all material respects have performed each
obligation and agreement and complied with each covenant to be performed and
complied with by it under the Merger Agreement at or prior to the Effective
Date; (ii) Zappco shall have received an officer's certificate of the Chief
Financial Officer of USB to the effect that she has no reason to believe that
the conditions set forth in (i) above have not been fulfilled; (iii) Zappco
shall have received a certificate of the corporate Secretary or an assistant
corporate Secretary of USB as to the text of resolutions authorizing the
corporate actions necessary to approve the Merger Agreement and the transactions
contemplated thereby and as to the incumbency of certain officers of USB; (iv)
since the date of the Merger Agreement, there shall have been no material
adverse change in, and no event, occurrence or development in the business of
USB or its subsidiaries that, taken together with other events, occurrences and
development 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 USB and its subsidiaries, taken as whole; (v) USB shall
not have merged, or announced an agreement to merge, into another corporation,
or sold all or substantially all of its assets, or had one person or group
acquire, or had one person or group announce its intent to acquire, directly or
indirectly, beneficial ownership of more than 50% of the outstanding USB Common
Stock; (vi) the Registration Statement shall have been declared effective, and
the shares of USB Common Stock to be issued pursuant to the Merger shall have
been listed on the NYSE subject to notice of issuance; and (vii) Zappco shall
have received an opinion of Fredrikson & Byron, P.A. to the effect that, on the
basis of the facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing on the Effective Date, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that accordingly: (a) no
gain or loss will be recognized for federal income tax purposes by USB or Zappco
as a result of the consummation of the Merger; (b) no gain or loss will be
recognized for federal income tax purposes by shareholders of Zappco who
exchange their Zappco Common Stock solely for USB Common Stock pursuant to the
Merger (except to the extent of any cash received in lieu of fractional shares);
and (c) the tax basis of the USB Common Stock received by shareholders of Zappco
who exchange all of their Zappco Common Stock solely for USB Common Stock in the
Merger will be the same as the tax basis of the Zappco Common Stock surrendered
in exchange therefor.
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In addition to the foregoing conditions, the obligation of USB to
consummate the Merger is subject to satisfaction of the following conditions,
among others: (i) the representations and warranties of Zappco in the Merger
Agreement shall have been true and correct as of the date of such agreement
and as of the Effective Date, except (a) 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
Zappco and its Subsidiaries, taken as a whole, (b) for certain
representations and warranties regarding loans, which shall be true and
correct in all materials respects as of the date of the Merger Agreement, and
certain lists regarding loans, which shall be true and correct in all
material respects as of the respective dates of each such list, and (c) for
certain representations and warranties regarding employees, which may be
updated for facts arising after the date of the Merger Agreement and which
shall be true and correct as of the date of such update; and Zappco shall in
all material respects have performed each obligation and agreement and
complied with each covenant to be performed and complied with by it under the
Merger Agreement at or prior to the Effective Date; (ii) USB shall have
received an officer's certificate of the Chief Executive Officer and the
Chief Financial Officer of Zappco to the effect that they have no reason to
believe that the conditions set forth in (i) above have not been fulfilled;
(iii) USB shall have received a certificate of the corporate Secretary or an
Assistant Secretary of Zappco as to resolutions authorizing the corporate
actions necessary to approve the Merger Agreement and transactions
contemplated thereby and as to the incumbency of certain officers of Zappco;
(iv) since the date of the Merger Agreement, there shall have been no
material adverse change in, and no event, occurrence or development in the
business of Zappco 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 Zappco and its
Subsidiaries, taken as a whole; provided, however, that a material adverse
change or a material adverse effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities and (b) changes
in GAAP or regulatory accounting requirements applicable to banks and their
holding companies generally; (v) on the Effective Date all issued and
outstanding shares of Zappco Common Stock shall be free and clear of any
lien, pledge, security interest, encumbrance or charge of any kind; (vi)
Zappco shall have delivered to USB the Affiliate Letters and Representation
Letters acquired after Zappco has used its best efforts to acquire the same
as described under "--Resale of USB Common Stock Received by Zappco
Shareholders;" (vii) Zappco shall have delivered to USB the Final Balance
Sheet described under "--Terms of Merger; Consideration to be Received by
Zappco Shareholders," and (viii) USB shall have received an opinion of
Dorsey & Whitney LLP to USB to the effect that, on the basis of the facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing on the Effective Date, the Merger
will be treated for federal income tax purposes as a reorganization within
the meaning of Section 368(a) of the Code and that accordingly: (a) no gain
or loss will be recognized for federal income tax purposes by USB or Zappco
as a result of the consummation of the Merger; (b) no gain or loss will be
recognized for federal income tax purposes by shareholders of Zappco who
exchange their Zappco Common Stock solely for USB Common Stock pursuant to
the Merger (except to the extent of any cash received in lieu of fractional
shares); and (c) the tax basis of the USB Common Stock received by shareholders
of Zappco who exchange all of their Zappco Common Stock solely for USB Common
Stock in the Merger will be the same as the tax basis of the Zappco Common Stock
surrendered in exchange therefor.
REGULATORY APPROVALS REQUIRED
Under the Merger Agreement, the obligations of both USB and Zappco to
consummate the Merger are conditioned upon the receipt of all required
regulatory approvals (without certain restrictions or limitations) and the lapse
of all required regulatory waiting periods. See "--Conditions to Consummation
of the Merger." There can be no assurance that any applicable regulatory
authority will approve or take other required action with respect to the Merger
or as to the date of such regulatory approval or other action. USB and Zappco
are not aware of any governmental approvals or actions that are required in
order to consummate the Merger except as described below. Should such other
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approval or action be required, it is contemplated that USB and Zappco would
seek such approval or action. There can be no assurance as to whether or when
any such other approval or action, if required, could be obtained.
FEDERAL RESERVE BOARD. The Merger is subject to the prior approval of the
Federal Reserve Board under Sections 3(a)(5) and 4(c)(8) of the Bank Holding
Company Act. Under the Bank Holding Company Act, the Federal Reserve Board
is required, in approving a transaction such as the Merger, to take into
consideration the financial and managerial resources and future prospects of
the existing and proposed institutions and the convenience and needs of the
communities to be served. The Bank Holding Company Act prohibits the Federal
Reserve Board from approving the Merger if it would result in a monopoly or
be in furtherance of any combination or conspiracy to monopolize or to
attempt to monopolize the business of banking in any part of the United
States. The Bank Holding Company Act also prohibits the Federal Reserve
Board from approving the Merger if its effect in any section of the United
States may be substantially to lessen competition or tend to create a
monopoly, or if it would in any other manner result in a restraint of trade,
unless the Federal Reserve Board finds that the anti-competitive effects of
the Merger are clearly outweighed in the public interest by the probable
effect of the transaction in meeting the convenience and needs of the
communities to be served. In addition, under the Community Reinvestment Act
of 1977, as amended, the Federal Reserve Board must take into account the
record of performance of the existing institutions in meeting the credit
needs of the entire community, including low- and moderate-income
neighborhoods, served by such institutions.
COMMISSIONER OF COMMERCE. The acquisition of control of Melrose State by
USB as a result of the Merger is subject to the prior approval of the
Commissioner under the Minnesota Change in Control Statute. Under the Minnesota
Change in Control Statute, the Commissioner may disapprove an acquisition if (i)
the proposed acquisition of control would result in a monopoly or would be in
furtherance of any combination or conspiracy to monopolize or to attempt to
monopolize the business of banking in any part of the United States, (ii) the
effect of the proposed acquisition of control in any section of the United
States may be substantially to lessen competition or to create a monopoly or the
proposed acquisition of control would in any other manner be in restraint of
trade, and the anticompetitive effects of the proposed acquisition are not
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be served,
(iii) the financial condition of any acquiring person is such as might
jeopardize the financial stability of the bank or prejudice the interests of
depositors of the bank, (iv) the competence, experience, or integrity of any
acquiring person or of any of the proposed management personnel indicates that
it would not be in the public interest of the depositors of the bank or in the
interest of the public to permit such person to control the bank, (v) any
acquiring person neglects, fails, or refuses to furnish all of the information
required by the Commissioner, or (vi) the Commissioner determines that the
acquisition of control would result in an adverse effect on the Bank Insurance
Fund or the Savings Association Insurance Fund.
CURRENT STATUS OF REGULATORY APPROVALS. USB filed its notice of its intent
to acquire Zappco with the Federal Reserve Board on October 1, 1997, and
received approval of the transaction on November 3, 1997. USB also filed its
notice of its intent to acquire Melrose State as a result of the Merger with
the Commissioner on October 1, 1997, approval of which is still pending as of
the date of this Proxy Statement/Prospectus.
WAIVER AND AMENDMENT
At any time prior to the Effective Date, any party to the Merger Agreement
may (i) extend the time for performance of any obligations or other acts of any
other party under the Merger Agreement or (ii) waive compliance with any of the
agreements of the other parties or with any conditions of its own obligations
contained in the Merger Agreement, to the extent that such obligations,
agreements and conditions are intended for such party's own benefit.
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The Merger Agreement may not be amended except by written instrument
approved by the parties to such agreement and signed on behalf of each of the
parties thereto.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Date (i) by mutual consent of USB and Zappco; (ii) by either USB or Zappco,
if any of the conditions to such party's obligation to consummate the
transaction contemplated in the Merger Agreement have become impossible to
satisfy; or (iii) by either USB or Zappco, if the Effective Date is not on or
before February 28, 1998 (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 the Merger Agreement in breach of such party's obligations
thereunder). Any party desiring to terminate the Merger Agreement is
required to give written notice of such termination and the reasons therefor
to the other party. If the Merger Agreement is terminated pursuant to the
foregoing provisions, such termination will be without liability or
obligation of any party (or any shareholder, officer, employee, agent,
consultant or representative of such party) to any other party except (i) as
may be otherwise provided in law or equity, (ii) for the obligations of the
parties with respect to the USB Deposit (as defined under "USB Escrow
Deposit" below) and (iii) for the survival of certain covenants relating to
payment of expenses, confidentiality of information and non-disclosure.
LIMITATION ON NEGOTIATIONS
The Merger Agreement provides that Zappco will not, and will cause its
Subsidiaries and Zappco's and each Subsidiary's 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 officers or employees of
Zappco or its Subsidiaries) 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, Zappco
or any Subsidiary, or other similar transaction or business combination
involving Zappco or any Subsidiary, or participate in any negotiations in
connection with or in furtherance of any of the foregoing or permit any person
other than USB and its representatives to have any access to the facilities of,
or furnish to any person other than USB and its representatives any non-public
information with respect to, Zappco or any Subsidiary in connection with or in
furtherance of any of the foregoing. The Merger Agreement also requires Zappco
promptly to notify USB if any such proposal or offer, or any inquiry from or
contact with any person with respect thereto, is made concerning any such
transactions and promptly to provide USB with such information concerning such
matters as USB may request. The foregoing provisions of the Merger Agreement
may have the effect of discouraging competing offers to acquire or merge with
Zappco.
The Merger Agreement also provides that USB will not, and will cause its
subsidiaries and USB's and its subsidiaries' respective officers, directors,
employees, agents and affiliates not to, directly or indirectly negotiate with
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, any bank with its principal
offices located in, or within a 50-mile radius of, St. Cloud, Minnesota.
CONDUCT OF ZAPPCO BUSINESS PENDING THE MERGER
The Merger Agreement provides that from the date of the Merger Agreement to
the Effective Date, unless USB shall otherwise agree in writing or as
otherwise contemplated or permitted by the Merger Agreement, the business of
Zappco and its Subsidiaries will be conducted only in the ordinary course, on
an arms-length basis and in accordance in all material respects with past
practices and all applicable laws, rules and regulations. In addition, the
Merger Agreement specifically provides that
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during such period, except as otherwise permitted by the Merger Agreement or
agreed to in writing by USB:
(a) neither Zappco nor any Subsidiary shall, directly or indirectly, (i)
amend or propose to amend its articles 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
a schedule to the Merger Agreement; (iii) redeem, purchase, acquire or
offer to acquire, directly or indirectly, any shares of capital stock
of or any other ownership interest in Zappco or any Subsidiary; (iv)
split, combine or reclassify any outstanding shares of capital stock
of Zappco or any Subsidiary, 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 Zappco, except that the Banks
shall be permitted to pay dividends on the shares of common stock of
the Banks owned by Zappco; (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 Zappco or any Bank
enter into any long-term borrowings with a term of greater than one
year; (vi) discharge or satisfy any material lien or encumbrance on
the properties or assets of Zappco or any Subsidiary or pay any
material liability, except otherwise in the ordinary course of
business; (vii) sell, assign, transfer, mortgage, pledge or subject to
any lien or other encumbrance any of its assets, except (A) in the
ordinary course of business; provided, that any such sale, assignment
or transfer of any real property shall not be considered in the
ordinary course of business, (B) liens and encumbrances for current
property taxes not yet due and payable, (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; (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
Zappco, except in exchange for debt previously contracted, including
OREO; (x) other than as set forth on a schedule to the Merger
Agreement, make any single or group of related capital expenditures or
commitments therefor in excess of $25,000 or enter into any lease or
group of related leases with the same party which involves aggregate
lease payments payable of more than $50,000 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 above;
(b) neither Zappco nor any Subsidiary 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, except in the ordinary course of business consistent
with past practice;
(c) neither Zappco nor any Subsidiary 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 and
to the extent required by law or as disclosed on a schedule to the
Merger Agreement;
(d) each of Zappco and its Subsidiaries shall use commercially 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,
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replacement policies providing coverage substantially equal to the
coverage under the canceled, terminated or lapsed policies are in full
force and effect;
(e) neither Zappco nor any Subsidiary 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 a schedule to the Merger
Agreement or to which Zappco or any Subsidiary becomes a party after
the date of the Merger Agreement, without prior consultation with USB;
(f) each of Zappco and its Subsidiaries shall use commercially reasonable
efforts to preserve intact in all material respects the business
organization and the goodwill of each of Zappco and its Subsidiaries
and to keep available the services of its officers and employees as a
group and preserve intact material agreements and credit facilities,
and Zappco shall confer on a regular and frequent basis with
representatives of USB, as reasonably requested by USB, to report on
operational matters and the general status of ongoing operations;
(g) neither Zappco nor any Subsidiary 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 USB, take any action that would have or could reasonably be
expected to have a material effect on the Banks' asset/liability
position;
(h) the Banks shall not make any agreements or commitments binding them to
extend credit except in a manner consistent with past practice and in
accordance with each Bank's lending policies as disclosed to USB, and
shall not make any agreements or commitments binding it to extend
credit in an amount in excess of $500,000, or sell, assign or
otherwise transfer any participation in any loan, in each case without
prior or prompt subsequent notification to USB;
(i) with respect to properties leased by Zappco or any Subsidiary, neither
Zappco nor any Subsidiary shall renew, exercise an option to extend,
cancel or surrender any lease of real property nor allow any such
lease to lapse, without the consent of USB, which consent shall not be
unreasonably withheld;
(j) neither Zappco nor any Subsidiary shall make any change in its
accounting methods or practices, other than changes required by law or
regulation made in accordance with GAAP or regulatory accounting
principles generally applicable to depository institutions such as the
Banks, as the case may be;
(k) neither Zappco nor any Subsidiary shall renew for any period in excess
of one month its agreement with Deluxe Corporation (or its
affiliates); and
(l) neither Zappco nor any Subsidiary shall agree to do any of the
foregoing.
The Merger Agreement also prevents Zappco from negotiating for an
acquisition of Zappco by any other party, subject to specified exceptions, see
"--Limitations on Negotiations," and from taking any action which would
disqualify the Merger as a "reorganization" that would be tax-free to
shareholders of Zappco pursuant to Section 368(a) of the Code, see "--Certain
Federal Income Tax Consequences to Zappco Shareholders." Zappco has also agreed
not to sell any loan participation or renew any loan participation without first
offering to sell such loan participation to USB on the same terms.
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In addition, the Merger Agreement provides that at the request of USB, on
the business day before the Merger takes effect, the Banks will establish,
consistent with GAAP, such additional accruals and reserves as may be necessary
to conform the Banks' accounting and credit loss reserve practices and methods
to those of USB and to reflect the plans of USB with respect to the conduct of
the business of the Banks following the Merger and to provide for the costs and
expenses related to the consummation by the Banks of the transactions
contemplated by the Merger Agreement. The establishment of such accruals and
reserves will not be an adjustment to the Final Balance Sheet or the Final
Retained Earnings described in "--Terms of the Merger; Consideration to be
Received by Zappco Shareholders," and will not constitute a breach of any
representation or warranty of Zappco contained in the Merger Agreement or
constitute a material adverse change in the business, operations or financial
condition of Zappco and its Banks, taken as a whole.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
SALARY CONTINUATION AGREEMENTS. Zappco is party to salary continuation
agreements with Edward J. Zapp, its Chairman of the Board, President and a
shareholder, and with John E. Leisen, its Vice President, a director and a
shareholder. USB has agreed to assume and be bound by the terms of such salary
continuation agreements. As a result of the Merger and the anticipated
continuation of such agreements, USB and Zappco expect that Messrs. Zapp and
Leisen will each receive an annual amount of $60,000 for 15 years in salary
continuation payments following the Merger.
NONCOMPETITION AGREEMENTS. Simultaneously with the execution of the Merger
Agreement, each of Messrs. Zapp and Leisen entered into a Noncompetition
Agreement with USB, pursuant to which each of Messrs. Zapp and Leisen will
receive separate consideration to be paid by USB in an annual amount of
$200,000 for approximately eight and seven years, respectively, subject to
adjustment, as well as certain retiree medical benefits. See
"--Noncompetition Agreements."
OFFER OF CONTINUED EMPLOYMENT. Mr. Leisen and certain other employees of
Zappco have been offered continued employment with USB following the anticipated
closing of the Merger. Mr. Leisen has been offered continued employment through
December 31, 1998, or longer as mutually agreed upon, during which time Mr.
Leisen will receive an annual base salary of $165,000, as well as benefits
normally offered to eligible employees of USB. Mr. Leisen will also be granted
4,000 shares of USB restricted stock, which will vest over a three-year period.
SEVERANCE PAYMENTS. Pursuant to the Merger Agreement, eight employees
mutually agreed upon by USB and Zappco will enter into severance agreements with
USB substantially in the form provided by USB to Zappco. With respect to
employees of Zappco or any of its Subsidiaries not subject to any other
severance agreement, the Merger Agreement provides that USB will pay severance
to such employees in accordance with USB's General Severance Pay Program, as the
same may be amended from time to time. Nothing in the Merger Agreement,
however, whether express or implied, confers upon any employee of Zappco, any
Subsidiary or USB 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. The
severance payments described above may be paid to officers of Zappco and its
Subsidiaries who are also shareholders of Zappco.
PURCHASE OF CERTAIN ASSETS. Pursuant to the Merger Agreement, Mr. Zapp has
agreed to purchase from Zappco, immediately prior to the Effective Date, certain
assets of a personal and historical interest to the founding families (listed on
a schedule to the Merger Agreement) at the book value of such assets as of the
last day of the month preceding the month in which the Effective Date occurs.
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The foregoing interests of members of management or shareholders of Zappco
in the Merger may mean that such persons have personal interests in the Merger
which may not be identical to the interests of nonaffiliated shareholders.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO ZAPPCO SHAREHOLDERS
Zappco expects that the Merger will be treated as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) of the Code and that for federal
income tax purposes no gain or loss will be recognized by any shareholder of
Zappco upon the receipt of USB Common Stock for Zappco Common Stock pursuant to
the Merger. Gain will be recognized as described below upon the receipt of cash
in lieu of fractional shares of USB Common Stock. The Internal Revenue Service
(the "Service") has not been and will not be asked to rule upon the tax
consequences of the Merger. Instead, Zappco will rely upon the opinion of
Fredrikson & Byron, P.A., its special outside legal counsel, as to certain
federal income tax consequences of the Merger. The opinion of Fredrikson &
Byron, P.A. will be based upon facts described herein, upon certain
representations made by Zappco and USB in the Merger Agreement, certain
representations made by management of Zappco and USB, certain representations
made by Zappco shareholders, and certain assumptions regarding the Merger and
the parties thereto. The opinion of Fredrikson & Byron, P.A. will also be based
upon the Code, regulations now in effect thereunder, current administrative
rulings and practice, and judicial authority, all of which are subject to
change. An opinion of counsel is not binding on the Service and there can be no
assurance, and none is hereby given, that the Service will not take a position
contrary to one or more positions reflected herein or that the opinion will be
upheld by the courts if challenged by the Service. EACH HOLDER OF ZAPPCO COMMON
STOCK IS URGED TO CONSULT HIS, HER OR ITS OWN TAX AND FINANCIAL ADVISERS AS TO
THE EFFECT OF SUCH FEDERAL INCOME TAX CONSEQUENCES ON HIS, HER OR ITS OWN
PARTICULAR FACTS AND CIRCUMSTANCES AND ALSO AS TO ANY STATE, LOCAL, FOREIGN OR
OTHER TAX CONSEQUENCES ARISING OUT OF THE MERGER OR FROM SUBSEQUENT SALES OF USB
COMMON STOCK, WHETHER OR NOT PURSUANT TO USB'S AGREEMENT TO REPURCHASE UP TO 30
PERCENT OF THE SHARES OF USB COMMON STOCK RECEIVED PURSUANT TO THE MERGER DURING
THE FIRST TWO YEARS FOLLOWING THE EFFECTIVE DATE. SEE "--RESALE OF USB COMMON
STOCK RECEIVED BY ZAPPCO SHAREHOLDERS."
Based upon various representations and assumptions and subject to various
qualifications, Fredrikson & Byron, P.A. will opine that the Merger will
qualify as a "reorganization" under Section 368(a) of the Code and,
accordingly, the following federal income tax consequences will result from
the Merger:
(a) No gain or loss will be recognized for federal income tax purposes by
USB or Zappco as a result of the consummation of the Merger;
(b) No gain or loss will be recognized by any Zappco shareholder (except in
connection with the receipt of cash in lieu of fractional shares) upon the
receipt of USB Common Stock for Zappco Common Stock in the Merger; and
(c) The tax basis of the USB Common Stock received by a Zappco shareholder
who exchanges Zappco Common Stock for USB Common Stock will be the same as the
basis of the Zappco Common Stock surrendered in exchange therefor.
The opinions described above will be based upon certain assumptions,
including the assumption that the shareholders of Zappco do not have any plan or
intention to dispose, sell, exchange or otherwise dispose of a number of shares
of USB Common Stock received pursuant to the Merger that would reduce the
ownership of USB Common Stock by such shareholders to a number of shares having
a value, as of the date of the Merger, which is less than 50 percent of the
value of all of the formerly outstanding Zappco Common Stock held by such Zappco
shareholders as of the same date. EACH ZAPPCO SHAREHOLDER IS ASKED TO SIGN THE
ENCLOSED REPRESENTATION LETTER WHICH CONTAINS A REPRESENTATION REGARDING SUCH
INTENT. EACH ZAPPCO SHAREHOLDER IS ASKED TO RETURN SUCH REPRESENTATION LETTER
WITH HIS, HER OR ITS PROXY.
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Dissenters, if any, will receive solely cash for their Zappco Common Stock
as described in "Rights of Dissenting Shareholders" below. The cash received
will either be subject to treatment as a dividend, or will be subject to capital
gain treatment as proceeds of the sale of the dissenting shareholder stock,
depending upon whether the transaction as to such shareholder would qualify as
a redemption under Code Section 302. If redemption treatment is not available,
the payment will be treated as a dividend.
Generally, any shareholder who dissents and has his, her or its shares
purchased will be able to qualify for redemption capital gain treatment
unless he, she or it is also deemed to own shares of another person under
Code Section 318. In that case, redemption capital gain treatment would be
available nonetheless if (i) the distribution is found to be not essentially
equivalent to a dividend under the subjective test of Code Section 302(b)(1);
(ii) the selling shareholder is not an officer, director, or employee of USB
and he or she waives the family attribution rules of Code Section 318,
thereby causing the transaction to be a complete termination of his or her
interest; or (iii) the shareholder's proportionate interest in the
corporation (counting directly owned and constructively owned shares) after
the transaction is less than 50% of the total combined voting power of all
classes of stock entitled to vote and the shareholder's proportionate voting
interest before the transaction is less than 80% of such shareholder's
proportionate voting interest after the transaction. The tax authorities are
not fully settled on the issue, but it is probable that this test would be
applied at the USB level, AS IF the dissenting shareholder received the USB
shares to which he or she would have been entitled in the merger, and then
the shares were redeemed by USB. Shareholders considering the exercise of
their dissenter's rights should seek advice from their personal tax advisor
on thisissue.
The foregoing is only a general description of certain anticipated federal
income tax consequences of the Merger, without regard to the particular facts
and circumstances of the tax situation of each shareholder of Zappco. It
does not discuss all of the consequences that may be relevant to shareholders
of Zappco entitled to special treatment under the Code (such as insurance
companies, dealers in securities, exempt organizations or foreign persons) or
to shareholders of Zappco who acquired their Zappco Common Stock pursuant to
the exercise of employee stock options or otherwise as compensation. The
summary set forth above does not purport to be a complete analysis of all
potential tax effects of the transactions contemplated by the Merger
Agreement or the Merger itself. No information is provided herein with
respect to the tax consequences, if any, of the Merger under state, local,
foreign or other tax laws.
STOCK EXCHANGE LISTING OF USB COMMON STOCK
It is a condition to the obligation of Zappco to consummate the Merger
pursuant to the Merger Agreement that the shares of USB Common Stock which are
issuable upon consummation of the Merger shall have been approved for listing on
the NYSE subject to notice of issuance. USB anticipates that such application
will be approved subject to notice of issuance at or before the Effective Date.
NONCOMPETITION AGREEMENTS
Simultaneously with the execution of the Merger Agreement, each of Edward J.
Zapp and John Leisen entered into a Noncompetition Agreement with USB providing
that such individuals shall not, for a period of five years after the Effective
Date, (i) engage in the banking or financial services business as an advisor,
employee, consultant, agent, partner, principal, director, owner or stockholder
of any corporation or other business entity within a 50-mile radius of the main
office and each of the branch offices of the Banks (subject to certain
exceptions); (ii) directly or indirectly solicit the banking or financial
services business of any past or present customer of any Bank or encourage any
such customer to terminate or alter such customer's relationship with any Bank
(or its successor by merger); or (iii) directly or indirectly, hire for
employment any individual who, as of the date of the Merger Agreement, was an
employee or agent of Zappco or any Bank or who subsequent to the date of the
Merger Agreement became an employee of Zappco or any Bank (or any successors by
merger) (subject to certain exceptions). Messrs. Zapp and Leisen each received
separate consideration for entering into these agreements to be paid by USB in
an annual amount of $200,000 for approximately eight and seven
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years, respectively, subject to annual adjustment and subject to each such
individual's compliance therewith, and certain retiree medical benefits as
provided therein.
USB ESCROW DEPOSIT
Prior to the execution of the Merger Agreement, and in consideration for
certain covenants and agreements set forth in a letter agreement previously
entered into by and among USB and Zappco setting forth the general provisions of
the Merger Agreement, USB deposited $500,000 (the "Option Deposit") in an escrow
account. Upon execution of the Merger Agreement, USB deposited $1,000,000 (the
"Escrow Deposit") in an escrow account for the benefit of Zappco pursuant to the
deposit escrow agreement attached as Exhibit B to the Merger Agreement, plus the
Option Deposit (the Escrow Deposit together with the Option Deposit being
hereinafter referred to as the "USB Deposit"). If the Effective Date is delayed
beyond February 28, 1998 or if the Merger shall not have been consummated for
any reason on or prior to such date (unless the failure to consummate the Merger
by such date shall be due to the action or failure to act of Zappco in breach of
Zappco's obligations under the Merger Agreement), other than the termination of
the Merger Agreement due to a failure to satisfy certain conditions therein, the
USB Deposit, together with interest thereon, shall be paid to Zappco on the
earlier of such termination or such date. If the Effective Date is on or before
February 28, 1998, the USB Deposit shall be refunded to USB. If the Merger
Agreement is terminated at any time due to a failure to satisfy certain
conditions therein, or if the Merger shall not have been consummated due to the
action or failure to act of Zappco, the USB Deposit shall be refunded to USB.
Interest on the USB Deposit shall be paid to the party to be paid the USB
Deposit as detailed above. Any fees of the escrow deposit agent shall be paid
by the party receiving the interest on the USB Deposit.
RESALE OF USB COMMON STOCK RECEIVED BY ZAPPCO SHAREHOLDERS
The USB Common Stock issuable to holders of Zappco Common Stock upon
consummation of the Merger has been registered under the Securities Act, and
will be transferable freely and without restriction by those holders of
Zappco Common Stock who receive such shares following consummation of the
Merger and who are not deemed to be "affiliates" (as defined under the
Securities Act). Zappco has agreed in the Merger Agreement to use its best
efforts to obtain signed Representation Letters from all of the shareholders
of Zappco to the effect that it is each such holder's plan and intent to hold
(and not to sell, transfer or otherwise dispose of) at least 50% of the
shares of USB Common Stock issued to him pursuant to the Merger; provided,
however, in the event that the proposed U.S. Treasury regulation regarding
the "continuity of interest" test applicable to transactions intending to
qualify as reorganizations within the meaning of Section 368(a) of the Code
are adopted as final regulations in substantially the form in which they were
proposed December 20, 1996 with an effective date of such regulations prior
to the Effective Date, Zappco's obligation to use its best efforts to obtain
such Representation Letters will terminate.
Shares of USB Common Stock received by those shareholders of Zappco who are
deemed to be "affiliates" of Zappco at the time of the Special Meeting may be
resold without registration under the Securities Act only as permitted by
Rule 145 under the Securities Act or as otherwise permitted under the
Securities Act. Zappco has agreed in the Merger Agreement to use its best
efforts to obtain and deliver to USB prior to the Effective Date signed
Affiliate Letters (in the form attached as Exhibit A to the Merger Agreement)
from each shareholder of Zappco who may reasonably be deemed to be an
"affiliate" of Zappco to the effect that such persons will not offer to sell,
transfer or otherwise dispose of any of the shares of USB Common Stock
distributed to them pursuant to the Merger except in compliance with Rule
145, or in a transaction that is otherwise exempt from the registration
requirements of the Securities Act, or in an offering which is registered
under the Securities Act. This Proxy Statement/Prospectus does not cover any
resales of USB Common Stock received by persons who are deemed to be
"affiliates" of Zappco. No person is authorized to make use of this Proxy
Statement/Prospectus in connection with any such resales. Former
shareholders of Zappco who are deemed to be "affiliates" of Zappco and who
surrender certificates formerly evidencing shares of
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Zappco Common Stock must execute and deliver to USB a letter containing the
representations described above before any exchange of such certificates for
Merger Consideration will be effected. See "--Surrender of Zappco Common
Stock Certificates."
Until the second anniversary of the Effective Date, upon request, USB has
agreed to purchase from the former shareholders of Zappco up to an aggregate of
30% of the total number of shares of USB Common Stock issued upon conversion of
Zappco Common Stock in the Merger. The purchase price for each such share
purchase by USB shall be equal to the closing price of a share of USB Common
Stock as quoted on the NYSE on the trading day immediately prior to the day on
which such purchase occurs. At any such time as USB has purchased from former
Zappco shareholders a number of shares of USB Common Stock representing 30% of
the total number of shares issued pursuant to the Merger, USB's obligation to
purchase shares shall cease. In addition, USB may, it is sole and absolute
discretion, suspend its obligation to purchase shares in the event of
restrictions imposed by federal securities laws or accounting requirements for
transactions accounted for as a pooling-of-interests.
USB DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN
USB provides eligible shareholders with a simple and convenient method of
investing cash dividends and optional cash payments at 100% of the average price
(as defined) in additional shares of USB Common Stock without payment of any
brokerage commission or service charge pursuant to its Automatic Dividend
Reinvestment and Common Stock Purchase Plan. The plan includes certain dollar
limitations on participation and provides for eligible shareholders to elect
dividend reinvestment on only a part of the shares registered in the name of a
participant (while continuing to receive cash dividends on remaining shares).
It is anticipated that the plan will continue after the Effective Date and that
shareholders of Zappco who receive USB Common Stock in the Merger will have the
right to participate therein.
ACCOUNTING TREATMENT
The Merger will be accounted for by USB under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended. Under this method of accounting, the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated values. Income of the combined company will not
include income or loss of Zappco prior to the Effective Date.
EXPENSES
The Merger Agreement provides that all costs and expenses incurred in
connection with such agreement and the transactions contemplated thereby shall
be paid by the party incurring such costs and expenses; provided, however, USB
has agreed to reimburse Zappco in an amount not to exceed $200,000 (excluding
the cost of obtaining the Fairness Opinion) for costs and expenses incurred in
connection with such agreement and the transactions contemplated thereby, and
for the cost of obtaining the Fairness Opinion. Additionally, USB has agreed to
bear the costs of all filing fees associated with the Registration Statement and
the costs of qualifying the shares of USB Common Stock under state securities
laws, to the extent necessary, as well as all printing and mailing costs in
connection with the preparation and mailing of this Proxy Statement/Prospectus
to Zappco shareholders.
CERTAIN DIFFERENCES IN RIGHTS OF ZAPPCO SHAREHOLDERS
The rights of holders of Zappco Common Stock are governed by the Articles of
Incorporation of Zappco, as amended (the "Zappco Articles"), the bylaws of
Zappco (the "Zappco Bylaws") and the laws of the State of Minnesota. The rights
of USB shareholders are governed by the Restated Certificate of Incorporation of
USB, as amended (the "USB Certificate"), the bylaws of USB (the "USB Bylaws")
and the laws of the State of Delaware. After the Effective Date, the rights of
holders
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of Zappco Common Stock will be governed by the USB Certificate, the USB
Bylaws and the laws of the State of Delaware. Because of certain differences
between Minnesota and Delaware corporate law and between the Zappco Articles
and Zappco Bylaws, on the one hand, and the USB Certificate and the USB
Bylaws, on the other hand, the current rights of Zappco shareholders will
change significantly as a result of the Merger. While it is not practical to
describe all changes in the rights of Zappco shareholders that will result
from the Merger, the following is a summary of the material differences.
BUSINESS COMBINATIONS AND SUPERMAJORITY VOTING. Under Delaware law, a
corporation is prohibited from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance of
stock, with an interested shareholder, or an interested shareholder's affiliates
and associates, for a three-year period beginning on the date the interested
shareholder acquires 15% or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if the
board of directors gives prior approval to the transaction in which the 15%
ownership level is exceeded, the interested shareholder acquires at one time 85%
of the corporation's stock (excluding shares held by management or employee
stock plans in which employees do not have the effective power to tender stock)
or the business combination is approved by the board of directors and authorized
at a meeting of shareholders by the holders of at least 66 2/3% of the
outstanding voting stock, excluding shares owned by the interested shareholder.
The USB Certificate requires the affirmative vote of the holders of not less
than 80% of the outstanding shares of USB entitled to vote in connection with
certain "Business Transactions" (as defined in the USB Certificate) involving a
"Related Person" (as defined in the USB Certificate). The 80% shareholder vote
is not required if the Business Transaction meets certain "fair price" criteria
or in the event the "Continuing Directors" (as defined in the USB Certificate)
approve the transaction. The USB Certificate also requires the vote of the
holders of at least 80% of the outstanding shares of USB entitled to vote
generally in the election of directors to add to, alter, change or repeal the
supermajority provisions.
Minnesota law requires approval by the disinterested shareholders of any
"control share acquisition" of stock of an "issuing public corporation" if an
acquiror exceeds specified levels of ownership (20%, 33 1/3% and 50%) of the
stock of the target corporation. This provision essentially requires a proxy
contest to approve such share acquisitions and delays the acquiror's purchase up
to 55 days while a special shareholders' meeting is held to vote on the
acquisition. The definition of "control share acquisition" excludes cash tender
offers for all outstanding shares if the offer has been approved in advance by
the board of directors of the target corporation and acquisitions by employee
benefit plans.
Minnesota law restricts transactions with a shareholder (an "interested
shareholder") acquiring ten percent or more of the shares of a publicly held
(i.e., required to file Exchange Act reports) "issuing public corporation"
unless the share acquisition or the transaction has been approved by the
corporation's board of directors prior to the acquisition of the ten percent
interest. An "issuing public corporation" is a corporation which has at least
50 shareholders. For four years after the ten percent threshold is exceeded
(absent prior board approval), the corporation cannot have a merger, sale of
substantial assets, loan, substantial issuance of stock, plan of liquidation or
reincorporation involving the interested shareholder or its affiliates.
DISSENTERS' RIGHTS. Under Delaware law, appraisal rights are available
only in connection with certain statutory mergers or consolidations, unless
the certificate of incorporation grants such rights with respect to
amendments to its certificate of incorporation, any merger or consolidation
in which the corporation is a constituent corporation, or sales of all or
substantially all of the assets of a corporation. The USB Certificate does
not grant such rights. Appraisal rights under Delaware law, however, are not
available if the corporation's stock is (prior to the relevant transaction)
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than 2,000
shareholders; provided that, if the merger or consolidation requires
shareholders to exchange their stock for anything other than shares of the
surviving or resulting corporation, for shares of another
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corporation which will be listed on a national securities exchange or held by
more than 2,000 shareholders, for cash in lieu of fractional shares of any
such corporation, or for a combination of such shares and cash, then
appraisal rights will be available.
Minnesota law also makes appraisal rights available to dissenting
shareholders in the event of any of the following actions: (i) an amendment
of the articles of incorporation that materially and adversely affects the
rights and preferences of the shares of the dissenting shareholder in certain
respects; (ii) a sale or transfer of all or substantially all of the assets
of the corporation; (iii) a plan of merger to which the corporation is a
party; (iv) a plan of exchange of shares to which the corporation is a party;
and (v) any other corporation action with respect to which the corporation's
articles of incorporation or bylaws give dissenting shareholders the right to
obtain payment for their shares. The Zappco Articles do not grant any other
dissenters' rights. For a description of appraisal rights provided by
Minnesota law in the event of a merger, see "Rights of Dissenting
Shareholders."
ADVANCE NOTICE OF SHAREHOLDER NOMINATIONS FOR DIRECTORS AND PROPOSALS. The
USB Bylaws require that any shareholder nominating a person for election as a
director must give written notice to the secretary of USB not less than
ninety days prior to an annual meeting of shareholders or not less than seven
days after the date on which notice of a special meeting of shareholders for
the election of directors is given. The USB Bylaws contain no advance notice
requirements relating to shareholder proposals for business to be conducted
at a shareholders meeting. Neither the Zappco Articles nor Bylaws require
notice for nomination by a shareholder of a director or notice for
shareholder proposals for business to be conducted at a shareholders' meeting.
AMENDMENTS TO CHARTER AND BYLAWS. Under Delaware law, a corporation's
certificate of incorporation may be amended by resolution of the board of
directors and the affirmative vote of the holders of a majority of the
outstanding shares entitled to vote. Delaware law reserves the power to
amend or repeal the bylaws exclusively to the shareholders unless the
certificate of incorporation confers such power upon the directors.
Under Minnesota law, the articles of incorporation may be amended by the
greater of (i) a majority of the voting power present and entitled to vote on
an item, or (ii) a majority of the voting power of the minimum number of
shares entitled to vote that would constitute a quorum for the transaction of
business at the meeting. Minnesota law also entitles holders of shares of a
class or series to vote as a class or series on any amendment which would (a)
change the number of authorized shares of such class or series, (b) change or
adversely affect the rights and preferences of such class or series, (c)
create a new class or series of shares with rights and preferences prior and
superior to such class or series, or (d) increase the rights and preferences
of any class or series with prior and superior rights and preferences to such
class or series.
Minnesota law grants the power to adopt and amend bylaws to the board of
directors unless the power is reserved exclusively for shareholders in the
charter; provided, however, that Minnesota law has a limitation on the power
of the board of directors to adopt or amend bylaws which is not contained in
the Delaware statute. After the adoption of initial bylaws, the board of a
Minnesota corporation may not adopt, amend or repeal a bylaw fixing a quorum
for meetings of shareholders, prescribing procedures for removing directors
or filling vacancies in the board, or fixing the number of directors or their
classifications, qualifications or terms of office except that the board may
adopt or amend a bylaw to increase the number of directors. This limitation
occasionally prevents the board from changing certain governance provisions
(or even adopting an updated set of bylaws that happens to change the wording
of such provisions) without the expense of shareholder approval. The
shareholder approval requirement does not turn on the materiality or adverse
nature to shareholders of a change. Any change triggers the requirement.
Minnesota law also requires that a resolution proposed by the holders of 3%
or more of the voting power of shares calling for adoption, amendment or repeal
of a bylaw must be presented to shareholders
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as in the case of amendments to the articles of incorporation. Delaware law
does not specify the requirements for shareholder initiation of amendments to
the bylaws.
The USB Certificate provides that the USB Bylaws may be amended or repealed
by the Board of Directors of USB, subject to the power of the shareholders to
amend or repeal any such change to the USB Bylaws. The Zappco Bylaws provide
that the Zappco Bylaws may be amended or altered by majority vote of the
whole Board of Directors at any meeting, provided that notice of a proposed
amendment have been given to the directors of such a meeting. The authority
of the Zappco Board of Directors is subject to the power of the shareholders
to change or repeal such Zappco Bylaws by a majority vote of the shareholders
present and represented at any annual meeting or at any special meeting
called for such purpose, and the Board of Directors may not make or alter any
Zappco Bylaws fixing their number, qualifications or terms of office.
PREEMPTIVE RIGHTS. A preemptive right allows a shareholder to maintain its
proportionate share of ownership of a company by permitting such shareholder
the right to purchase a proportionate share of any new stock issuance and
thereby protecting the shareholder from dilution of value and control upon
new stock issuances.
Unless the certificate of incorporation provides otherwise, under Delaware
law, shareholders of a corporation have no preemptive rights. The USB
Certificate contains no such provision for preemptive rights. Minnesota law
provides that all security holders are entitled to preemptive rights unless
the articles of incorporation specifically deny or limit preemptive rights.
Under the Zappco Articles, no holder of stock of Zappco has any preemptive
rights.
ACTION BY WRITTEN CONSENT. Delaware law provides that, unless otherwise
provided in the certificate of incorporation, shareholders may act by the
written consent of the holders of not less than the minimum number of shares
that would be necessary to approve such action at a meeting where all shares
entitled to vote were present and voted. The USB Certificate provides that
USB shareholders may not act by written consent.
Under Minnesota law, any action required or permitted to be taken in a
meeting of the shareholders may be taken without a meeting by a written
action signed by all of the shareholders. The Zappco Articles do not
restrict shareholder action by written consent.
VOTING RIGHTS IN THE ELECTION OF DIRECTORS. In an election of directors
for corporations for which cumulative voting is provided, each share of stock
normally having one vote is entitled to a number of votes equal to the number
of directors to be elected. A shareholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
shareholder may choose. Without cumulative voting, the holders of a majority
of shares voting in the election of directors would have the power to elect
all the directors to be elected, and no person could be elected without the
support of holders of a majority of the shares.
Under Delaware law, a corporation's certificate of incorporation may
provide for cumulative voting in the election of directors. The USB
Certificate does not provide for cumulative voting.
Under Minnesota law, cumulative voting for the election of directors is
required unless specifically limited or denied in the articles of
incorporation. The Zappco Articles prohibit cumulative voting in the election
of directors.
NUMBER OF DIRECTORS, VACANCIES AND NEWLY-CREATED DIRECTORSHIPS. Under
Delaware law, the number of directors shall be fixed by or in the manner
provided in the bylaws, unless the certificate of incorporation fixes the number
of directors, in which case a change in the number of directors shall be made
only by amendment to the certificate. Unless otherwise provided in the
certificate of incorporation or bylaws, vacancies and newly created
directorships resulting from any increase in the
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authorized number of directors elected by all of the stockholders having the
right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
The USB Certificate provides that the number of directors shall be fixed by
the USB Bylaws, and shall not be less than 12 nor more than 30.
The USB Certificate provides that vacancies and newly-created directorships
resulting from an increase in the number of USB directors shall be filled only
by a majority of the directors then in office, although less than a quorum, or
by the sole remaining director. The USB Certificate also provides that this
provision may not be amended or repealed unless approved by the affirmative vote
of holders of not less than 80% of the outstanding voting stock of USB.
However, the USB Certificate exempts from its 80% shareholder voting requirement
any future amendment to the USB Certificate to reduce the maximum number of USB
directors to not less than the greater of (i) the number of directors then in
office and (ii) 24.
Under Minnesota law, the minimum number of directors is one. Minnesota law
permits the number of directors to be fixed by the articles of incorporation
or bylaws, and the number of directors may be increased or decreased by the
shareholders of the board in the manner permitted by the articles of
incorporation or bylaws. Under the Zappco Bylaws, the number of directors
shall not be less than one nor more than seven; provided, however, that in
the event all of the shares of the corporation are owned beneficially and of
record by more than one shareholder, the number of directors shall be no less
than three.
Under Minnesota law, unless different rules for filling vacancies are
provided for in the articles of incorporation or bylaws, vacancies resulting
from the death, resignation, removal or disqualification of a director may be
filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum, and vacancies resulting from a newly-created
directorship may be filled by the affirmative vote of a majority of the
directors serving at the time of the increase. The shareholders may also elect
a new director to fill a vacancy that is created by the removal of a director by
the shareholders. The Zappco Bylaws provide that if any vacancies exist by
reason of death, resignation, or otherwise, a majority of the remaining
directors shall constitute a quorum for the filling of such vacancies.
CLASSIFICATION OF BOARD. A classified board of directors is one in which a
certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition
of the board of directors, and thus a potential change in control of a
corporation, a lengthier and more difficult process.
As permitted by Delaware law, the USB Certificate provides for
classification of the USB Board into three classes of directors with each class
as nearly equal in number as possible and elected for a three-year term and only
one class standing for election each year. The affirmative vote of the holders
of at least 80% of the outstanding voting stock of USB is required to amend or
repeal this provision.
Minnesota law permits, but does not require, a classified board of
directors, with the terms of any such classes to be provided for in the articles
of incorporation and bylaws. Neither the Zappco Articles nor Bylaws provide for
a classified board of directors.
REMOVAL OF DIRECTORS. Delaware law provides that a director or the entire
board of directors may be removed, with or without cause, by the holders of a
majority of the shares then entitled to vote at an election of directors, unless
the certificate of incorporation provides, in the case of a corporation whose
board is classified, that directors may be removed only for cause. If the
corporation has cumulative voting, in which event if less than the entire board
is to be removed, no director may be removed without cause if the votes cast
against the director's removal would be sufficient to elect that director if
voted cumulatively either at an election of the entire board of directors or for
classes of the board.
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Under the USB Certificate, USB shareholders may remove a director only for
cause upon a majority vote of the shareholders.
Under Minnesota law, a director of a corporation that does not have
cumulative voting may be removed with or without cause with the approval of
the holders of a majority of the outstanding shares entitled to vote at an
election of directors. In the case of a corporation having cumulative
noting, if less than the entire board of directors is to be removed, a
director may not be removed without cause unless the number of shares voted
against such removal would not be sufficient to elect the director under
cumulative voting. The Zappco Articles do not contain provisions with
respect to removal of directors.
SPECIAL MEETINGS OF SHAREHOLDERS. The USB Bylaws provide that special
meetings may be called only by the Board of Directors or the Chief Executive
Officer. The Zappco Bylaws provide that special meetings of Zappco
shareholders may be called by the Chairman of the Board of Directors, and
shall be called by the President at the request of the holders of not less
than 10% of the outstanding shares of Zappco entitled to vote at such
meeting.
QUORUM AT SHAREHOLDERS' MEETINGS. The USB Bylaws require that the holders
of not less than one-third of the shares entitled to vote at any
shareholder's meeting be present, in person or by proxy, to constitute a
quorum. The Zappco Bylaws provide that the holders of a majority of the
outstanding shares entitled to vote at a meeting, represented in person or by
proxy, shall constitute a quorum for purposes of such a meeting.
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS. The USB Certificate
provides that directors of USB shall not be liable to USB or its shareholders
for monetary damages for breaches of fiduciary duty; provided, however, that
such liability of a director shall not be eliminated or limited to the extent
provided by applicable law under certain circumstances. The Zappco Articles
do not contain such a provision.
DIVIDENDS. Under Delaware law, dividends may be paid out of surplus or out
of net profits for the fiscal year in which the dividend is paid or the
preceding fiscal year, except that no dividends may be paid if the capital of
the corporation has been diminished to an amount less than the liquidation
preference of outstanding preferred stock. Under the USB Certificate,
holders of USB 8 1/8% Cumulative Preferred Stock are entitled to receive,
when, as and if declared by the USB Board of Directors, cumulative cash
dividends, payable quarterly in arrears, at the rate of 8 1/8% per share per
annum. See "Description of USB Capital Stock--Preferred Stock."
Under Minnesota law, a corporation may make a distribution only if the board
of directors has determined that the corporation is able, and the corporation is
in fact able, to pay its debts in the ordinary course of business after making
the distribution. A distribution may be made to holders of a class or series of
shares only if all amounts payable to holders of shares having a preference are
paid (except for those having waived rights to payment) and if payment of such
distribution does not reduce the net assets of the corporation below the
aggregate preferential amount payable upon liquidation (unless the distribution
is made to shareholders in the order of and to the extent of their respective
priorities).
GENERAL. The foregoing discussion of certain similarities and material
differences between the rights of holders of Zappco Common Stock and the rights
of holders of USB Common Stock under the Articles and Certificate of
Incorporation, respectively, and Bylaws pursuant to Delaware and Minnesota law
is only a summary of certain provisions and does not purport to be a complete
description of such similarities and differences. The foregoing discussion also
does not reflect any rules of the NYSE that may apply to USB. The foregoing
discussion is qualified in its entirety by reference to the MBCA, the Delaware
Law, the common law thereunder, and the full texts of the Articles and
Certificate of Incorporation, respectively, and Bylaws of Zappco and USB. Such
Articles, Certificate of
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Incorporation and Bylaws are filed or incorporated by reference as exhibits
to the Registration Statement of which this Proxy Statement/Prospectus is a
part.
EXCESS PARACHUTE PAYMENTS
(PROPOSAL NO. 2)
The Merger Agreement provides that Zappco shall make no payments that
separately or in the aggregate could or would result in the payment of any
"excess parachute payments" within the meaning of Section 280G of the Code,
unless and until such payments are approved by Zappco's shareholders in
accordance with the provisions of Sections 280G(b)(5)(A)(ii) and
280G(b)(5)(B) of the Code. Generally speaking, 280G Payments result when
there is a change in control of an employer, such as contemplated by the
Merger, and as a result, certain employee/officers receive compensation equal
to or in excess of three times their average annual compensation for the five
years preceding the taxable year in which the change in control occurs (the
"base amount"). The excess of such "parachute payments" (i) will not be
deductible by the payor and (ii) will be subject to an excise tax payable by
the individual. It is probable that (i) noncompete payments to be made by
USB to Messrs. Zapp and Leisen, (ii) deferred compensation/salary
continuation payments to be paid to Messrs. Zapp and Leisen under existing
agreements between them and Zappco, and (iii) compensation payments to be
made by USB to Mr. Leisen for continued employment would constitute 280G
Payments. Section 280G of the Code contains an exemption for payments by a
corporation whose stock is not publicly traded on an established securities
market if disinterested shareholders owning more than 75% of the voting power
of such corporation's stock approve the payment. In order to avoid the
denial of deductibility and the imposition of the excise tax which applies to
280G Payments, Zappco's shareholders are being asked to approve such
payments. Approval of the 280G Payments by Zappco's shareholders is a
condition to consummation of the Merger, but will not affect the amount of
the Merger consideration to be received. For a discussion of the
compensation to be received by Messrs. Zapp and Leisen, see "--Interests of
Certain Persons in the Merger."
APPROVAL OF THE 280G PAYMENTS REQUIRES THE AFFIRMATIVE VOTE OF MORE THAN 75% OF
THE VOTING POWER OF ALL OUTSTANDING SHARES OF ZAPPCO COMMON STOCK, EXCLUDING
THOSE SHARES HELD OR CONSTRUCTIVELY OWNED BY MESSRS. ZAPP AND LEISEN. THE
BOARD OF DIRECTORS OF ZAPPCO RECOMMENDS THAT ZAPPCO SHAREHOLDERS VOTE FOR
APPROVAL OF THE 280G PAYMENTS.
RIGHTS OF DISSENTING SHAREHOLDERS
Sections 302A.471 and 302A.473 of the MBCA provide to each shareholder the
right to dissent from the Merger and obtain payment for the "fair value" of such
shareholder's shares following the consummation of the Merger.
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety by reference to such sections,
the full texts of which are attached as APPENDIX C to this Proxy
Statement/Prospectus. These sections should be reviewed carefully by any
shareholder who wishes to exercise dissenters' rights or who wishes to
preserve the right to do so, since failure to comply with the procedures set
forth herein or therein will result in the loss of dissenters' rights.
Under the MBCA, holders of Zappco Common Stock will have the right, by
fully complying with the applicable provisions of Sections 302A.471 and
302A.473, to dissent with respect to the Merger and to receive from the
surviving corporation payment in cash of the "fair value" of their shares of
Zappco Common Stock after the Merger is completed. The term "fair value"
means the value of the shares of Zappco Common Stock immediately before the
Effective Date.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to a record holder of the shares of Zappco Common Stock as to
which dissenters' rights are asserted. A person having beneficial ownership of
shares of Zappco Common Stock that are held of record in the name of another
person, such as a broker, nominee, trustee or custodian, must act promptly to
cause the
45
<PAGE>
record holder to follow the steps summarized below properly and in a timely
manner in order to perfect whatever dissenters' rights such beneficial owner
may have.
If a date is fixed by the Zappco Board for the determination of
shareholders entitled to receive notice of and to vote on the Merger
Agreement, only shareholders and beneficial owners as of the Record Date may
exercise dissenters' rights.
Shareholders of record who desire to exercise their dissenters' rights must
satisfy all of the following conditions. A written notice of intent to
demand fair value for shares must be delivered to the executive offices of
Zappco before the taking of the shareholder vote on the Merger. This written
demand must be in addition to and separate from any proxy or vote against the
Merger. Voting against, abstaining from voting or failing to vote on the
Merger does not constitute a demand for appraisal within the meaning of the
MBCA.
Shareholders electing to exercise their dissenters' rights under the MBCA
must not vote for adoption of the Merger. A shareholder's failure to vote
against the Merger will not constitute a waiver of dissenters' rights.
However, if a shareholder returns a signed proxy but does not specify a vote
against adoption of the Merger or direction to abstain, the proxy will be
voted for adoption of the Merger, which will have the effect of waiving that
shareholder's dissenters' rights.
A Zappco shareholder may not assert dissenters' rights as to less than all
of the shares registered in such holder's name except where certain shares
are beneficially owned by another person but registered in such holder's
name. If a record owner, such as a broker, nominee, trustee or custodian,
wishes to dissent with respect to shares beneficially owned by another
person, such shareholder must dissent with respect to all of such shares and
must disclose the name and address of the beneficial owner on whose behalf
the dissent is made. A beneficial owner of shares of Zappco Common Stock who
is not the record owner of such shares may assert dissenters' rights as to
shares held on such person's behalf, provided that such beneficial owner
submits a written consent of the record owner to Zappco at or before time
such rights are asserted.
A shareholder who elects to exercise dissenters' rights must deliver
his, her or its written demand, before the taking of the vote on the Merger,
to Edward J. Zapp, President of Zappco, 1015 St. Germain St. West, St. Cloud,
Minnesota 56302-0531. The written demand should specify the shareholder's
name and mailing address, the number of shares owned and that the shareholder
intends to demand the value of his or her shares.
After approval of the Merger by the shareholders at the Special Meeting,
USB, as the surviving corporation, will send a written notice to each
shareholder who filed a written demand for dissenters' rights. The notice
will contain the address to which the shareholder shall send a demand for
payment and the stock certificates in order to obtain payment and the date by
which they must be received, a form to be used in connection therewith and
other related information.
In order to receive fair value for his, her or its shares, a dissenting
shareholder must, within 30 days after the date such notice was given, send
his or her stock certificates, and all other information specified in the
notice from the surviving corporation, to the address specified in such
notice. A dissenting shareholder will retain all rights as a shareholder of
Zappco until the Effective Date. After a valid demand for payment and the
related stock certificates and other information are received, or after the
Effective Date, whichever is later, the surviving corporation will remit to
each dissenting shareholder who has complied with statutory requirements the
amount that the surviving corporation estimates to be the fair value of such
shareholder's shares, with interest commencing five days after the Effective
Date at a rate prescribed by statute. Remittance will be accompanied by
Zappco's closing balance sheet and statement of income for a fiscal year
ending not more than 16 months before the Effective Date, together with the
latest available interim financial data, an estimate of the fair value of the
shareholder's shares and a brief description of the method used to reach the
46
<PAGE>
estimate, a brief description of the procedure to be followed if such holder
is demanding supplemental payment and copies of Sections 302A.471 and
302A.473 of the MBCA.
If the dissenting shareholder believes that the amount remitted by the
surviving corporation is less than the fair value of such holder's shares,
plus interest, the shareholder may give written notice to the surviving
corporation of such holder's own estimate of the fair value of the shares,
plus interest, within 30 days after the mailing date of the remittance and
demand payment of the difference. A shareholder who fails to give such
written notice within this time period is entitled only to the amount
remitted by the surviving corporation.
Within 60 days after receipt of a demand for supplemental payment, the
surviving corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the surviving corporation
or petition a court for the determination of the fair value of the shares,
plus interest. The petition shall name as parties all shareholders who have
demanded supplemental payment and have not reached an agreement with the
surviving corporation. The court, after determining that the shareholder or
shareholders in question have complied with all statutory requirements, may
use any valuation method or combination of methods it deems appropriate to
use, whether or not used by the surviving corporation or the dissenting
shareholder, and may appoint appraisers to recommend the amount of the fair
value of the shares. The court's determination will be binding on all Zappco
shareholders who properly exercised dissenters' rights and did not agree with
the surviving corporation as to the fair value of the shares. Dissenting
shareholders are entitled to judgment for the amount by which the
court-determined fair value per share, plus interest, exceeds the amount per
share, plus interest, remitted to the shareholders by the surviving
corporation. The shareholders shall not be liable to the surviving
corporation for any amounts paid by the surviving corporation which exceed
the fair value of the shares as determined by the court, plus interest. The
costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers, will be determined by the court and assessed
against the surviving corporation, except that the court may, in its
discretion, assess part or all of those costs and expenses against any
shareholder whose action in demanding supplemental payment is found to be
arbitrary, vexatious or not in good faith. The court may award fees and
expenses to an attorney for the dissenting shareholders out of the amount, if
any, awarded to such shareholders. Fees and expenses of experts or attorneys
may also be assessed against any person who acted arbitrarily, vexatiously or
not in good faith in bringing the proceeding.
The surviving corporation may withhold the remittance of the estimated fair
value, plus interest, for any shares owned by any person who was not a
shareholder or who is dissenting on behalf of a person who was not a
beneficial owner on September 15, 1997, the date on which the proposed Merger
was first announced to the public (the "Public Announcement Date"). The
surviving corporation will forward to any such dissenting shareholder who has
complied with all requirements in exercising dissenters' rights the notice
and all other materials sent after shareholder approval of the Merger to all
shareholders who have properly exercised dissenters' rights, together with a
statement of the reason for withholding the remittance and an offer to pay
the dissenting shareholder the amount listed in the materials if the
shareholder agrees to accept that amount in full satisfaction. The
shareholder may decline this offer and demand payment by following the same
procedure as that described for demand of supplemental payment by
shareholders who owned their shares as of the Public Announcement Date. Any
shareholder who did not own shares on the Public Announcement Date and who
fails properly to demand payment will be entitled only to the amount offered
by the surviving corporation. Upon proper demand by any such shareholder,
rules and procedures applicable in connection with receipt by the surviving
corporation of the demand for supplemental payment given by a dissenting
shareholder who owned shares on the Public Announcement Date will also apply
to any shareholder properly giving a demand but who did not own shares of
record or beneficially on the Public Announcement Date, except that any such
shareholder is not entitled to receive any remittance from the surviving
corporation until the fair value of the shares, plus interest, has been
determined pursuant to such rules and procedures.
47
<PAGE>
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares, and that the
opinion of any investment banking firm as to fairness, from a financial point of
view, is not an opinion as to fair value under Sections 302A.471 and 302A.473.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "The Merger--Certain Federal Income Tax
Consequences to Zappco Shareholders."
ANY HOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE SUMMARIZED
ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE MERGER
CONSIDERATION FOR HIS OR HER SHARES. SEE APPENDIX C.
BUSINESS OF USB
On August 1, 1997, USB (formerly known as First Bank System, Inc.) acquired,
in a transaction accounted for as a pooling of interests, U.S. Bancorp, a
regional bank holding company incorporated in the state of Oregon, creating
the fourteenth largest banking organization in the United States based on
assets and serving nearly four million households and 475,000 businesses.
USB, a Delaware corporation registered under the Bank Holding Company Act, is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and
Northwestern states. USB operates five banks and eleven trust companies with
offices in 17 contiguous states from Illinois to Washington. USB also has
various other subsidiaries engaged in financial services. At June 30, 1997,
on a pro forma combined basis, USB and its consolidated subsidiaries had
consolidated assets of approximately $72 billion, consolidated deposits of
$51 billion and shareholders' equity of $6 billion.
The banking subsidiaries of USB are engaged in general retail and
commercial banking business. They provide a wide variety of services to
individuals, businesses, industry, institutional organizations, governmental
entities and other financial institutions. Depository services include
checking, savings and time certificates. Additional services include
commercial lending, financing of import/export trade, foreign exchange and
retail and institutional brokerage services. Treasury management and
receivable lockbox collection are provided for corporate customers. The
banking subsidiaries provide a full range of fiduciary activities for
individuals, estates, foundations, business corporations and charitable
organizations. Other subsidiaries of USB provide financial services related
to banking, including lease financing, discount brokerage, investment
advisory services and insurance agency and credit life insurance services.
USB was incorporated under Delaware law in 1929 and has functioned as a
multi-bank holding company since that time. Its principal executive offices are
located at 601 Second Avenue South, Minneapolis, Minnesota 55402-4302 (telephone
(612) 973-1111). For further information concerning USB, see the USB documents
incorporated by reference herein as described under "Incorporation of Certain
Documents by Reference."
RECENT DEVELOPMENTS
On October 15, 1997, USB announced that it had called for redemption of all
of the outstanding shares of its 8 1/8% Cumulative Preferred Stock, Series A.
The shares will be redeemed on November 14, 1997 at a redemption price of $25.00
per share, together with accrued and unpaid dividends from August 15, 1997 to
November 14, 1997. From and after November 14, 1997, dividends will cease to
accrue and be payable on the 8 1/8% Cumulative Preferred Stock, Series A. See
"Description of USB Capital Stock."
On October 16, 1997, USB released its third quarter 1997 earnings summary
to the public. USB reported record operating earnings of $324.8 million, or
$1.29 per fully diluted share, for the third quarter of 1997, compared with
$290.6 million, or $1.11 per fully diluted share, in the third quarter of
1996. As a result of the FBS/USB Merger, USB recorded a net loss for the
third quarter of 1997, including nonrecurring items, of $(47.6) million, or
$(0.20) per fully diluted share, compared to net income of $255.7 million, or
$0.98 per fully diluted share, in the third quarter of 1996. Nonrecurring
charges of $535.2 million in the third quarter of 1997 consisted of $440.2
million ($318.5 million after-tax) of merger-related expenses and $95.0
million ($59.8 million after-tax) of merger-related provision for credit
losses. USB's press release announcing such earnings summary is included as
Exhibit 99 of USB's Current Report on Form 8-K dated October 17, 1997. See
"Incorporation of Certain Documents by Reference."
48
<PAGE>
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to the management, executive compensation,
various benefit plans (including stock plans), voting securities and the
principal holders thereof, certain relationships and related transactions and
other related matters as to USB is set forth in or incorporated by reference
in the Annual Report on Form 10-K for the year ended December 31, 1996 of
USB, which is incorporated by reference in this Proxy Statement/Prospectus.
See "Incorporation of Certain Documents by Reference." Zappco shareholders
who wish to obtain copies of these documents may contact USB at its address
or telephone number set forth under "Incorporation of Certain Documents by
Reference."
BUSINESS OF ZAPPCO
GENERAL
Zappco is a multi-bank holding company registered under the Bank Holding
Company Act. Its principal noncash assets are Zapp Bank which has three
commercial banking offices in St. Cloud and Sartell, Minnesota, First National
which has two commercial banking offices in Little Falls, Minnesota, Melrose
State which has one commercial banking office in Melrose, Minnesota, Zapp Data,
a data processing center located in St. Cloud, Minnesota and Zapp Plaza, a real
estate partnership located in St. Cloud, Minnesota.
Zapp Bank was chartered in Minnesota in 1889. Zapp Bank provides general
commercial and consumer banking services, including commercial lending, mortgage
origination, trust and brokerage services and ATM locations. Zapp Bank also
provides a complete range of deposit products including checking accounts,
savings accounts, certificates of deposit, money market accounts and commercial
cash management.
First National was chartered in Minnesota in 1889. First National provides
general commercial and consumer banking services, including commercial lending,
mortgage origination, and ATM locations. First National also provides a
complete range of deposit products including checking accounts, savings
accounts, certificates of deposit and money market accounts.
Melrose State was chartered as a state bank in Minnesota in 1907. Melrose
State provides general commercial and consumer banking services, including
commercial lending, mortgage origination, and ATM locations. Melrose State also
provides a complete range of deposit products including checking accounts,
savings accounts, certificates of deposit, money market accounts and commercial
cash management.
The nonbank subsidiary, Zapp Data, provides data processing services
primarily to the Banks. Zapp Plaza owns and manages the building in which Zapp
Bank's main office is located.
As of June 30, 1997, Zappco had consolidated assets of $346.0 million and
total deposits of $295.0 million. Shareholders' equity on a consolidated basis
as of June 30, 1997 was $29.7 million. Zappco is a legal entity separate from
its banking and nonbanking subsidiaries. The principal sources of Zappco's
income are dividends, interest and fees from the Subsidiaries.
MARKET AREA AND COMPETITION
Zappco's market area is located in central Minnesota, primarily in the
counties of Morrison, Stearns, Sherburne and Benton. There are numerous
commercial banks, saving and loan associations, mortgage companies, finance
companies, credit unions and similar organizations in St. Cloud, Little Falls
and Melrose, Minnesota which compete for business with the Banks.
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<PAGE>
PROPERTIES AND EMPLOYEES
Zappco's executive offices are located in the same building as Zapp Bank's
main office at 1015 W. St. Germain Street, St. Cloud, Minnesota 56301. The main
bank property is owned 100% by Zapp Plaza. Zapp Bank's Midtown office is
located in a building owned by Zappco and Zapp Bank's Sartell, Minnesota office
leases space in a strip mall. First National's main office is located in
downtown Little Falls, Minnesota in a building owned by First National and its
one full service branch leases space in a mall on Little Falls' east side.
Melrose State owns the building in which it is located. Zapp Data, which is
located on St. Cloud's north side, owns the building in which it is located.
As of June 30, 1997, Zappco had a consolidated employee base of 185
full-time employees. Zappco's management generally considers its relationship
with its employees to be good.
MARKET PRICES AND DIVIDENDS ON ZAPPCO COMMON STOCK
There is no established trading market for the Zappco Common Stock. Zappco
is aware of four transactions involving the sale of Zappco Common Stock over the
last two years and six gift transactions.
Zappco maintains the Zappco, Inc. Employee Stock Ownership Plan (the "ESOP")
which owns approximately .846% of the Zappco Common Stock. The ESOP has been
valued annually as required by the terms of the ESOP. As of December 31, 1996,
that value was $1,875.00 per share. The ESOP value is determined by independent
appraisal.
Zappco has 113 shareholders of record.
During 1997 cash dividends have been declared and paid quarterly at
$14.05 per share. During 1996 and 1995 cash dividends totalling $37.85 and
$16.50 per share, respectively, were declared and paid semiannually. There
are no restrictions on the payment of dividends by Zappco other than as
prescribed by applicable corporate law and bank regulation. In the event the
Merger is not completed, the Zappco Board of Directors anticipates the
continued payment of dividends.
SUPERVISION AND REGULATION
Zappco is a registered bank holding company under the Bank Holding Company
Act and is subject to the supervision of, and regulation by, the Federal Reserve
Board.
Under the Bank Holding Company Act, a bank holding company may engage in
banking, managing or controlling banks, furnishing or performing services for
banks it controls and conducting activities that the Federal Reserve Board has
determined to be closely related to banking. Zappco must obtain the prior
approval of the Federal Reserve Board before acquiring more than five percent of
the outstanding shares of another bank or bank holding company and must provide
notice to, and in some situations obtain the prior approval of, the Federal
Reserve Board in connection with the acquisition of more than five percent of
the outstanding shares of a company engaged in a "bank-related" business.
First National and Zapp Bank are subject to the supervision of, and are
examined by, the Comptroller of the Currency. Melrose State is subject to the
supervision of, and are examined by, the State of Minnesota. All of the Banks
are members of the Federal Deposit Insurance Corporation ("FDIC"), and as such,
are subject to examination thereby. In practice, the primary federal or state
regulators make regular examinations of each of the Banks subject to its
regulatory review or participates in joint examinations with other federal or
state regulators. Areas subject to regulation by banking authorities include
the allowance for credit losses investments, loans, mergers, issuance of
securities, payment of dividends, establishment of branches and other aspects of
operations. Zappco's data processing center is subject to the supervision of
and is examined by the Comptroller of the Currency and the Federal Reserve
Board.
50
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF ZAPPCO
The following discussion and analysis provides information regarding
Zappco's financial condition and results of operations for the six month periods
ended June 30, 1997 and 1996, and for the years ended December 31, 1996, 1995
and 1994. This discussion should be read in conjunction with the consolidated
interim financial statements and the consolidated annual financial statements
and notes thereto of Zappco included elsewhere in this Proxy
Statement/Prospectus. Results of operations for the interim periods are not
necessarily indicative of that which may be expected for the entire year. Ratios
for the six month periods are presented on an annualized basis.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Zappco generated earnings of $4.4 million, including $821,000 in
nonrecurring income, for the year ended December 31, 1996, a total increase of
76.0% from the $2.5 million earned in 1995. In 1996 net interest income
increased $2.2 million, or 18.2%, and non-interest income increased $0.8
million, or 19.6%, offset by increases in non-interest expenses of $0.5 million,
or 4.2%. During the same period, average assets, average loans and average
deposits increased 9.3%, 12.1%, and 9.6%, respectively.
For the year ended December 31, 1995, net income increased $0.4 million, or
19.0%, from the $2.1 million earned in 1994. For 1995, net interest income
increased $0.5 million, or 3.8%, and non-interest income increased $0.3 million
or 9.2%. Non-interest expenses increased $0.3 million or 2.5%. During the same
period, average assets, average loans, and average deposits increased 5.5%,
4.9%, and 5.0%, respectively.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the six months ended June 30, 1997, net income was $1.7 million, a
decrease of $0.86 million, or 34%, from the same period in 1996. The six months
net income ended June 30, 1996 included nonrecurring gains of $0.82 million. Net
interest income increased $0.4 million or 5.5% and non-interest income decreased
$1.3 million or 39%, while non-interest expenses increased $0.4 million or 7.5%.
During such six month period, as compared with the same period in 1996, average
assets, average loans and average deposits increased 11.4%, 17.6% and 12.1%,
respectively.
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<PAGE>
The following table sets forth selected financial data for Zappco for the six
months ended June 30, 1997 and 1996 and for each of the three years in the
period ended December 31, 1996, 1995 and 1994.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended
(In thousands, except per share amounts) (unaudited) December 31,
----------------------- ---------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONDENSED INCOME STATEMENT DATA:
Interest Income $ 13,380 $ 12,030 $ 25,262 $ 22,350 $ 19,208
Interest Expense 6,151 5,177 10,674 10,008 7,320
--------- --------- --------- --------- ---------
Net Interest Income $ 7,229 $ 6,853 $ 14,588 $ 12,342 $ 11,888
Provision for Loan Losses 58 84 288 152 440
--------- --------- --------- --------- ---------
Net Interest Income after Provision for Loan Losses $ 7,171 $ 6,769 $ 14,300 $ 12,190 $ 11,448
Non-Interest Income 2,009 2,849 5,279 4,379 4,009
Investment Securities Gains (Losses) (7) (58) (45) 0 0
--------- --------- --------- --------- ---------
Total Non-Interest Income 2,002 2,791 5,234 4,379 4,009
Non-Interest Expense 6,391 5,944 12,865 12,343 12,039
--------- --------- --------- --------- ---------
Income Before Income Taxes $ 2,782 $ 3,616 $ 6,669 $ 4,226 $ 3,418
Applicable Income Taxes 1,116 1,087 2,293 1,707 1,327
--------- --------- --------- --------- ---------
Net Income $ 1,666 $ 2,529 $ 4,376 $ 2,519 $ 2,091
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL RATIOS: (unaudited)
-----------------------------------------------------------------
Return on Average Assets 0.98% 1.66% 1.39% 0.87% 0.76%
Return on Average Common Equity 11.37% 19.50% 16.17% 10.59% 9.51%
Net Interest Margin 4.70% 4.93% 5.11% 4.82% 4.82%
Efficiency Ratio 69.23 58.67 64.90 73.81 75.73
AVERAGE BALANCE SHEET DATA:
Total Gross Loans $ 231,345 $ 196,768 $ 207,584 $ 185,234 $ 176,659
Total Assets 339,090 305,163 315,512 288,728 273,595
Deposits 285,344 254,588 263,727 240,528 229,064
Shareholders' Equity 29,307 25,945 27,058 23,780 21,993
BALANCE SHEET DATA AT PERIOD END:
Total Gross Loans $ 235,282 $ 202,431 $ 224,772 $ 189,071 $ 183,515
Total Assets 346,241 308,214 339,221 309,287 282,463
Deposits 294,600 259,621 283,479 258,116 237,095
Shareholders' Equity 29,568 26,404 28,339 24,714 22,084
</TABLE>
52
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NET INTEREST INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net interest income is Zappco's largest single source of earnings. Net
interest income on a tax equivalent basis represents the difference between
interest earned on assets and interest paid on liabilities, with adjustments
made to reflect income on tax-exempt assets as if such income were fully
taxable. Changes in the types and volume of earning assets and interest bearing
liabilities, their related yields and overall interest rates all can have a
significant impact on net interest income.
For the year ended December 31, 1996, net interest income was $14.5 million,
an increase of $2.2 million, or 18.2%, over the year ended December 31, 1995.
This increase was largely attributable to an 11.4% increase in average earning
assets from 1995 to 1996. During 1996, net interest margin (net interest income
divided by average earning assets) increased from 4.8% to 5.1%.
For the year ended December 31, 1995, net interest income was $12.3 million,
an increase of $0.5 million, or 3.8%, over the year ended December 31, 1994.
This increase resulted from an increase in average interest earning assets of
3.9%. During 1995, net interest margin remained at 4.8%.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
For the six months ended June 30, 1997, net interest income was $7.2
million, an increase of $0.4 million, or 5.5%, over the same period in 1996.
This increase resulted from continued growth in average earning assets,
particularly in the loan portfolio.
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<PAGE>
ANALYSIS OF INTEREST INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Years Ended
June 30, December 31,
(Dollars in thousands) (unaudited)
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Net Interest Income $ 7,229 $ 6,853 $ 14,588 $ 12,343 $ 11,888
Average Balances of Earnings Assets Supported by:
Average Interest Bearing Liabilities 261,547 232,164 238,754 217,480 203,731
Average Non-Interest Bearing Liabilities 46,298 45,740 46,661 38,649 42,885
Total Average Earning Assets $ 307,845 $ 277,904 $ 285,415 $ 256,129 $ 246,616
Average Yields and Weighted Average Rates: (unaudited)
-----------------------------------------------------------------------
Investment Securities Yield 6.78% 6.12% 6.46% 5.64% 5.07%
Loan Yield 9.50 10.02 9.83 10.11 9.00
Other Earning Asset Yield 5.94 4.28 4.66 5.56 4.59
Total Gross Loans:
Earning Asset Yield 8.69 8.66 8.74 8.71 7.80
Interest-Bearing Deposits Rate 4.65 4.34 4.36 4.46 3.40
Borrowing Rate
Rate on Federal Funds Purchased 5.20 4.38 4.43 4.66 3.95
Rate on Other Borrowed Money 7.74 7.05 7.28 8.24 7.46
Net Interest Margin 4.70 4.93 5.11 4.82 4.82
</TABLE>
NON-INTEREST INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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<PAGE>
Non-Interest Income for the year ended December 31, 1996 was $5.2
million as compared with $4.4 million for the year ended December 31, 1995, a
$0.8 million, or 19.6%, increase. For the year ended December 31, 1995,
Non-Interest Income increased $0.4 million, or 9.2%, over the year ended
December 31, 1994.
The table below summarizes the components of Non-Interest Income.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended % Change From
(Dollars in thousands) (unaudited) December 31, Prior Year
------------------------------------------------------------------------------
1997 1996 1996 1995 1994 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges on Deposit
Accounts $ 530 $ 532 $ 1,686 $ 1,505 $ 1,614 10.55% (5.8)%
Settlements 0 918 918 0 0 N/A 0
Trust Income 1,124 1,083 2,161 1,890 1,701 14.33 1.00
Gain (loss) on Sales of
Securities (7) (58) (45) 0 0 N/A 0
Other 355 316 514 964 694 (46.7) 38.9
------------------------------------------------------------------------------
Total $ 2,002 $ 2,791 $ 5,234 $ 4,379 $ 4,009 19.53% 9.23%
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
For 1996, the increases in deposit service charges resulted primarily
from an increased customer base and increased volumes. The large increase in
Non-Interest Income was due to interest income that was paid along with the
settlement of a law suit with the State of Minnesota on improper taxing of U.
S. Government and U. S. Agency securities. The refund of income taxes is
reflected in income tax expense in 1996. The other portion of the increase
is a settlement by the data processing center with a major vendor on their
termination of support on a software package.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Non-Interest Income for the six months ended June 30, 1997, was $2.0
million, an decrease of $0.8 million or 30% from the same period in 1996.
The service charges on deposit accounts remained steady from the same period
in 1996. The large decrease in Non-Interest Income was due to interest
income that was paid along with the settlement of a law suit with the State
of Minnesota on improper taxing of U. S. Government and U. S. Agency
securities. The refund of income taxes is reflected in income tax expense
in 1996. The other portion of the decrease is a settlement by the data
processing Subsidiary with a major vendor on their termination of support on
a software package. Trust Income increased for the 6 month period ending
June 30, 1997, showing the continued growth in that area.
NON-INTEREST EXPENSE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Non-Interest Expense for the year ended December 31, 1996, was $12.9
million as compared with Non-Interest Expense for the year ended December 31,
1995, of $12.3 million, or 4.2%, increase. Non-Interest Expense for the year
ended December 31, 1995 reflected a $0.3 million increase or 2.5% over the
same period in 1994. The major components of Non-Interest Expense are shown
on the table below:
55
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended % Change From
(Dollars in thousands) (unaudited) December 31, Prior Year
--------------------------------------------------------------------
1997 1996 1996 1995 1994 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Employee
Benefits $ 3,653 $ 3,259 $ 6,776 $ 6,313 $ 6,255 7.33% 0.93%
Operations & Occupancy, net 2,605 2,529 5,852 5,830 5,679 0.38 2.66
Other 133 156 237 200 105 18.5 90.48
--------------------------------------------------------------------
Total $ 6,391 $ 5,944 $12,865 $12,343 $12,039 4.23% 2.53%
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1996, overall expense increases resulted
from additional ongoing expenses related to increased volume, general
expansion and inflationary increases. Salaries and benefits increased due to
increased profit sharing and salary adjustments.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Non-Interest Expense for the six months ended June 30, 1997 increased
$0.4 million, or 7.5%, over the same period in 1996, with the primary
increases occurring in salaries and benefits.
TAX EXPENSE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Income taxes for the years ended December 31, 1996, 1995 and 1994 were
$2.3 million, $1.7 and $1.3 million, respectively. The effective income tax
rate was 34.4% in 1996, 40.4% in 1995 and 38.8% in 1994, respectively.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Income taxes for the six months ended June 30, 1997 and 1996 were $1.1
million and $1.0 million, respectively. The effective income tax rate was
40.0% for the first six months of 1997 as compared with an effective income
tax rate of 30.0% for the first six months of 1996. The effective income tax
rate for 1996 was reduced by the refund received from the State of Minnesota.
LOAN PORTFOLIO REVIEW
Zappco provides loans principally to businesses and consumers in the
Central Minnesota area. Zappco had total loans of approximately $225.0
million at December 31, 1996, which is an increase of $36.0 million, or
19.0%, over the amount at December 31, 1995. Most of the growth occurred in
the commercial loan portfolio, although real estate loans and equipment
leases increased significantly as well.
At December 31, 1995, total loans were approximately $189.0 million, an
increase of $5.5 million, or 3.0%, over 1994. Most of this growth occurred
in the real estate loan portfolio.
At June 30, 1997, total loans were approximately $235.0 million, an
increase of $10.5 million from the December 31, 1996 year-end balance. All
loan categories have shown growth 1997.
Zappco's portfolio is comprised of approximately 25.0% commercial and
equipment finance, 60.0% real estate loans and 15.0% in various types of
consumer loans.
56
<PAGE>
LOAN PORTFOLIO DISTRIBUTION
The following table presents certain information with respect to the
distribution of the loan portfolio:
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31,
1997 1996 1995 1994
----------------------------------------------------------------------------
% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
Commercial Leasing $ 57,291 24.35% $ 71,046 31.61% $ 45,302 23.96% $ 48,517 26.44%
Consumer 32,686 13.89 25,877 11.51 23,541 12.45 21,603 11.77
Real Estate 141,657 60.21 124,720 55.49 117,216 62.00 110,671 60.31
Other 3,648 1.55 3,129 1.39 3,012 1.59 2,724 1.48
----------------------------------------------------------------------------
Total Loans (net of
unearned income) $235,282 100.00% $224,772 100.00% $189,071 100.00% $183,515 100.00%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Allowance for Loan Losses is maintained to reserve against inherent
loan losses. This allowance is subject to ongoing review and evaluation of
the risk profiles of the portfolio, specific exposures and general economic
trends. The Allowance for Loan Losses at December 31, 1996 was $2.7 million,
or 1.2% of loans outstanding, as compared to $2.5 million, or 1.3% of loans
outstanding as of December 31, 1995 and $2.7 million, or 1.4% of loans
outstanding as of December 31, 1994. The Allowance for Loan Losses at
June 30, 1997 was $2.5 million or 1.1% of loans outstanding.
The Provisions for Loan Losses are determined based upon an evaluation and
analysis by management of Zappco of the adequacy of the allowance for loan
losses. Provisions for Loan Losses are made in amounts to maintain the
allowance for loan losses at a level considered necessary to absorb estimated
loan losses in the loan portfolio. Factors which are considered are the quality
of the current loan portfolio, estimates and appraisals of collateral values,
historical charge-offs experience, current economic conditions, and such other
factors which, in the judgment of management, deserve consideration. The
appropriate level of Provision for Loan Loss is reviewed monthly by management
and the Board of Directors of Zappco.
57
<PAGE>
The following table presents activity in the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended Year Ended
June 30, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Balance at Beginning of Period: $ 2,745 $ 2,590 $ 2,726 $ 2,301
Provision for Loan Losses 58 288 152 440
Charge-Offs:
Commercial & Real Estate 132 179 33 19
Consumer 110 78 340 80
Credit Card & Related Accts 31 20 20 10
----------------------------------------------------------------------------
Total Charge-Offs $ 273 $ 277 $ 393 $ 109
Recoveries:
Commercial & Real Estate 7 103 91 48
Consumer 28 39 12 43
Credit Card & Related Accts 3 2 2 3
----------------------------------------------------------------------------
Total Recoveries $ 38 $ 144 $ 105 $ 94
----------------------------------------------------------------------------
Balance at End of Period: $ 2,568 $ 2,745 $ 2,590 $ 2,726
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Charge-Offs as a Percentage of
Average Outstanding Loans 0.01% 0.01% 0.02% 0.01%
</TABLE>
58
<PAGE>
The following table sets forth the allocation of allowance for loan
losses for each of the periods indicated:
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31,
1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Commercial $ 1,103 $ 1,153 $ 1,036 $ 1,063
Consumer 60 82 104 109
Real Estate 57 110 117 136
Unallocated $ 1,348 $ 1,400 $ 1,333 $ 1,418
----------------------------------------------------------------------------
Loan Loss Reserve Total $ 2,568 $ 2,745 $ 2,590 $ 2,726
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
NON-PERFORMING ASSETS
Non-Performing Assets include all nonaccrual loans, restructured loans
and other real estate and assets owned. Non-Performing Assets have generally
decreased from December 31, 1994 to June 30, 1997. Non-Performing Assets at
December 31, 1996 were $1.40 million compared with $1.29 million on June 30,
1997. Accruing loans past due over 90 days reflected an increase from
December 31, 1996 to June 30, 1997, or 0.24% of total loans.
The following table presents certain information with respect to
Non-Performing Assets:
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31,
1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Non-Accrual Loans $ 1,299 $ 1,368 $ 605 $ 2,134
Restructured Loans 0 0 0 94
----------------------------------------------------------------------------
Total Non-Performing Loans 1,299 1,368 605 2,228
Other Real Estate 0 31 600 807
----------------------------------------------------------------------------
Total Non-Performing Assets $ 1,299 $ 1,399 $ 1,205 $ 3,035
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accruing Loans 90 days
or more past due $ 579 $ 249 $ 221 $ 61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Loans $ 235,281 $ 224,772 $ 189,071 $ 183,515
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non-Performing Loans to
Total Loans 0.05% 0.06% 0.06% 1.7%
</TABLE>
59
<PAGE>
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Six Months Year Ended Year Ended Year Ended
Ended December 31, December 31, December 31,
June 30, 1997 1996 1995 1994
-------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries $19,756 $20,004 $35,583 $37,278
U.S. Agencies 51,275 44,252 34,104 20,341
State and Political 3,185 4,254 2,347 2,004
Other Securities 1,218 1,121 1,030 1,005
Other Investments 0 0 0 0
-------------------------------------------------------
Total $75,434 $69,631 $73,064 $60,628
Average Period Balance $71,613 $68,109 $63,414 $59,781
Average Yield - TE 6.78% 6.46% 5.64% 5.06%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
The December 31, 1996 Securities Portfolio of approximately $69.6 million
consisted entirely of available-for-sale securities. The December 31, 1995
Securities Portfolio consisted of $71.1 million in available-for-sale
securities and $2.0 million in held-to-maturity securities. The total amount
of investment securities decreased from $73.1 million to $69.6 million from
December 31, 1995 to December 31, 1996. During that same time period, the
percentage of investment of U. S. Treasuries and U.S. Agencies securities
decreased from 95.4% of the Securities Portfolio to 92.3%. The decrease was
primarily due to increased investments in the state and political portfolio.
From December 31, 1996 to June 30, 1997, the Securities Portfolio
increased from $69.6 million to $75.5 million, with the increase primarily in
U. S. Agencies securities. At June 30, 1997, the Securities Portfolio
consisted of $73.6 million in available-for-sale securities and $1.9 million
in held-to-maturity securities. The increase in the portfolio balance was a
result of an increase in deposits.
The total Securities Portfolio increased from $60.6 million on December 31,
1994 to $73.1 million at December 31, 1995.
60
<PAGE>
DEPOSIT DISTRIBUTION
<TABLE>
<CAPTION>
Six Months % Change
Ended Year Ended Year Ended Year Ended 1996 to % Change
June 30, Dec. 31, Dec. 31, Dec. 31, 1997 1995 to
1997 1996 1995 1994 (June 30) 1996
-----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Bearing Demand $ 45,993 $ 48,448 $ 44,837 $ 40,862 (5.1)% 8.1%
Interest Bearing:
Transaction Accounts 42,520 41,694 44,357 36,721 2.0 (6.0)
Money Market Savings 65,948 65,813 64,266 68,869 .21 2.4
Savings Certificates 100,773 93,534 85,898 77,909 7.7 8.9
CDS over $100,000 39,366 33,990 18,758 12,733 15.8 81.2
-------------------------------------------------------------------------
Total Interest Bearing $248,607 $235,031 $213,279 $196,232 5.8 10.2
-------------------------------------------------------------------------
Total Average Deposits $273,673 $253,153 $220,587 $193,706 8.1 14.8
-------------------------------------------------------------------------
Period-End Deposits $294,600 $283,479 $258,116 $237,094 3.9% 9.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
Average deposits in 1996 were $253.0 million, a $33.0 million, or 15.0%,
increase over 1995. The increases were principally a result of an increase in
the number of accounts. In 1996, continued growth was experienced in almost all
categories except money market savings and other savings.
For the first six months of 1997, average deposits increased 8.1% from the
1996 levels.
OTHER BORROWED MONEY
Other Borrowed Money consists of federal funds purchased, securities sold
under agreements to repurchase and borrowings from the Federal Home Loan Bank.
61
<PAGE>
The following table presents certain information with respect to Other
Borrowed Money:
<TABLE>
<CAPTION>
Six Months Year Ended December 31,
Ended ---------------------------------
June 30, 1997 1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase $ 5,988 $10,097 $12,841 $10,007
Federal Home Loan Bank Note 4,361 4,414 1,200 0
-----------------------------------------------------
Total $10,349 $14,511 $14,041 $10,007
Period Average $ 9,793 $ 9,458 $10,476 $ 8,711
Average Interest Rate on Amounts
Outstanding During Year 4.66% 4.77% 4.80% 3.63%
</TABLE>
Federal Funds are purchased from a correspondent bank at prevailing interest
rates. Securities are sold to bank customers under repurchase agreements at
prevailing market rates. Borrowing has been done with the Federal Home Loan
Bank since 1995 to provide funding for residential real estate.
While it is the objective of Zappco to fund principally with core deposits,
other borrowings represent an important additional source of funding. In the
normal course of providing banking services to customers, the Subsidiary banks
purchase federal funds from a correspondent bank. Accordingly, balances in this
account will fluctuate depending on customer needs. Due to the competitive
nature of the banking industry in St. Cloud, a more stable source of funding
Federal Home Loan Banks borrowings has been utilized primarily for residential
real estate loans.
As of June 30, 1997, total Other Borrowed Money was $10.3 million, down $4.5
million, or approximately 30%, from December 31, 1996.
CAPITAL RESOURCES
At December 31, 1996, common equity was $28.4 million, a 14.7% increase over
December 31, 1995, due to retention of earnings. At June 30, 1997, common
equity had increased from the December 31, 1996 balance to $29.6 million, a $1.2
million or 4.2% increase.
CAPITAL RATIOS
62
<PAGE>
The following table sets forth certain information as to the Capital Ratios
as of the dates indicated:
<TABLE>
<CAPTION>
Six Months Year Ended December 31,
Ended (unaudited)
-----------------------------------------------------
June 30, 1997 1996 1995 1994
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common Equity $29,683 $28,475 $24,658 $22,401
As a Percent of Assets 8.57% 8.38% 7.97% 7.93%
Tier 1 Capital $28,992 $27,718 $23,817 $21,460
As a Percent of Risk Adjusted Assets 10.1% 9.9% 10.71% 10.84%
Total Risk-Based Capital $31,660 $30,563 $26,407 $24,186
As a Percent of Risk Adjusted Assets 11.03% 10.92% 11.88% 12.22%
Leverage Ratio 8.38 8.16 7.74 7.60
</TABLE>
In 1989, the Federal Reserve Board adopted supervisory risk-based capital
ratios to provide capital adequacy standards for U. S. banking organizations.
The guidelines provided for a transition implementation period that ended at the
end of 1992 with required ratios increasing from 1990-1992. Under these
guidelines, at December 31, 1993, the minimum Tier 1 Capital Ratio is 4.0% and
the minimum Total Risk Adjusted Capital Ratio is 8.0%. As shown in the table
above, Tier 1 and Total Risk Adjusted Capital Ratios were 9.9% and 10.92%,
respectively, at December 31, 1996, 10.1% and 11.03 respectively at June 30,
1997.
In late 1990, the Federal Reserve Board adopted a new minimum leverage ratio
of 3.0% Tier 1 Capital to Total Assets. The definition of Tier 1 Capital for
the leverage ratio is the same as the December 31, 1992 Tier 1 Capital
definition in the risk-based capital guidelines. However, the new leverage
ratio establishes 3.0% as a minimum at which only the top-rated banking
organizations with a composite rating of "1" may operate. Other institutions
will be required to maintain leverage ratios generally in the range of at least
100 to 200 basis points above the minimum level. At June 30, 1997, December 31,
1996 and December 31, 1995, the leverage ratio was 8.38%, 8.16% and 7.74%,
respectively.
INTEREST RATE RISK MANAGEMENT
Interest Rate Risk is the exposure of earnings and capital arising from
changes in interest rates. The function of Interest Rate Risk Management is to
effectively coordinate the management of interest risk and net interest margin
of Zappco. Management's goal is to maximize net interest margin while
maintaining interest rate risk within policy guidelines. Management
accomplishes this objective by: 1) matching the rate sensitivity of assets and
liabilities; 2) selecting assets which meet acceptable credit risk/interest rate
risk/liquidity risk parameters and maximize yield; and 3) maintaining that mix
of liabilities which minimizes interest expense and limits liquidity exposure.
By positioning assets and liabilities according to this policy, management
expects to minimize interest rate risk, lock in a positive spread in each time
period and protect net interest income regardless of interest rate volatility,
level or direction.
It is the responsibility of the Subsidiary banks Asset/Liability Management
Committee ("ALCO") to monitor and manage its exposure to net interest income due
to fluctuating interest rates.
63
<PAGE>
ALCO operates under policies to review and monitor the composition of the
balance sheet generally and for specific management of investment assets,
purchased liabilities and off-balance sheet transactions. ALCO attempts to
achieve stable net interest margins by matching the balance of assets and
liabilities maturing or repricing in given periods and by adjusting rates to
market conditions and changing interest rates.
INTEREST RATE RISK MANAGEMENT GUIDELINES
To limit Zappco's interest rate risk exposure and to protect net interest
margin, the ALCO monitors the following interest rate risk measures on a monthly
basis and maintains these measures within the respective guidelines listed as
follows:
MEASURES GUIDELINES
CUMULATIVE GAP (% OF ASSETS) ACCEPTABLE RANGE
---------------------------- ----------------
0 Days +/- 5%
1 - 90 Days +/- 5%
1 - 360 Days +/- 15%
1 - 3 Years +/- 15%
3 - 7 Years +/- 15%
7 - 15 Years +/- 15%
15 Years Plus +/- 15%
Loan/Deposit Ratio < 85%
Total Risk Based Capital > 10%
Management recognizes that acceptance of interest rate risk is a normal part
of banking operations. However, excessive interest rate risk will expose
earnings and capital to potential losses. Additionally, it is not always
possible to maintain perfectly matched positions nor is it always in the best
interest of the institution. Therefore, management maintains the match between
assets and liabilities within the above guidelines to protect earnings and
capital and provide flexibility in operations.
64
<PAGE>
The following table reflects combined subsidiary Banks data:
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 1997
<TABLE>
<CAPTION>
More Not
1-3 4-12 1-2 Than Rate
Revolves Months Months Years 5 Years Related Total
-----------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Portfolio $ 0 $ 919 $ 7,352 $ 13,339 $ 51,027 $ 1,073 $ 73,710
Total Loans 76,491 24,736 39,333 56,541 40,151 392 237,644
Cash Due From Banks 20 0 0 0 0 24,782 24,802
Fed Funds Sold 1,000 0 0 0 0 129 1,129
All Other Assets 0 0 0 0 0 8,777 8,777
-----------------------------------------------------------------------------------
Total Assets $ 77,511 $ 25,655 $ 46,685 $ 69,880 $ 91,178 $ 35,153 $346,062
Demand Deposit 0 0 0 0 0 52,475 52,475
Savings & N.O.W. Accts 0 11,536 141 0 46,150 0 57,827
Money Market/Premier 5,175 10,350 0 0 36,224 0 51,749
Certificates of Deposit 0 37,327 82,763 20,022 1 0 140,122
Fed Funds Purchased 1,750 0 0 0 0 0 1,750
Other Liabilities 3,566 1,800 0 0 4,623 2,436 12,425
Equity 0 0 0 0 0 29,714 29,714
-----------------------------------------------------------------------------------
Total Liabilities & Equity $ 10,491 $ 61,013 $ 82,904 $ 20,022 $ 87,007 $ 84,625 $346,062
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Gap $ 67,020 $ (85,358) $(36,219) $ 49,858 $ 4,171 $(49,472)
Cumulative Gap $ 67,020 $ 31,662 $ (4,557) $ 45,301 $ 49,472 0
Gap/Total Assets 19.37% (10.22)% (10.47)% 14.41% 1.21% (14.30)%
Cum Gap/Total Assets 19.37% 9.15% (1.32)% 13.09% 14.30% 0.00%
</TABLE>
LIQUIDITY
The function of Liquidity Management is to ensure that adequate liquidity is
maintained at all times. Management's goal will be to maintain liquidity levels
that cover normal cyclical swings in deposit/loan demand as well as abnormal and
unexpected needs. The liquidity of Zappco will be based upon the specific mix
of assets and liabilities and their respective historical volatility.
Management recognizes the need to balance liquidity and income and will avoid
maintaining excess liquidity.
Primary Reserves consist of vault cash and deposits due from banks. Legal
or minimum reserves are established by law. Bank management monitors reserve
requirements and available primary reserves, maintaining sufficient margin to
cover daily requirements and unusual demand days.
Secondary Reserves consist of investments serving as a source of funds to
meet customer needs and a source of income before those needs materialize.
Normal liquidity needs are met with the following investments maturing within
one year.
A. U. S. Treasury Obligations (bills, notes, bonds)
65
<PAGE>
B. Federal Agency Obligations (discount notes, bonds, debentures)
C. Domestic Corporate Instruments
D. Municipal Obligations
LIQUIDITY MANAGEMENT GUIDELINES
It is the policy of Zappco to manage its funds to ensure that liquidity
needs are fully satisfied through normal bank operations. To ensure adequate
liquidity is maintained, management monitors liquidity utilizing the following
calculations and maintain these measures within the listed guidelines:
MEASURES GUIDELINES
A. Overall Liquidity Net Cash, Short Term & Marketable Securities
Net Deposits & Short Term Liabilities
Guidelines: 15% Minimum
----
B. Temporary Investments Investments, Due Within 360 Days
Volatile Liabilities 100M Cd, Federal Funds Purchased, Other
Borrowings
Guidelines: 100% Minimum
-----
C. Dependency Volatile Liabilities - Short-Term Investments
Total Earnings Assets - Short-Term Investments
Guidelines: 0% Maximum
----
In addition, the Subsidiary banks will maintain an unsecured Federal Funds
line of credit totaling $6.0 million with upstream correspondent banks, but
will not rely on this line except during short-term seasonal peaks in demand.
Should it become necessary, Zappco will secure its Federal Fund borrowings
by pledging investment securities or other eligible assets.
Deposit volatility is monitored through trend reports developed for and
reviewed by the Bank's Asset/Liability Management Committee. Customer's needs
for credit are closely monitored with monthly summaries of unfunded loan
commitments and anticipated loan commitments reviewed by the Asset/Liability
Management Committee. If necessary, each Bank may pay national rates for large
depositors including county and municipal government, school districts or
commercial customers. Under no circumstances, without the proper written
consent of the Zappco Board of Directors, will a Bank use brokered funds to
improve short-term liquidity.
66
<PAGE>
DESCRIPTION OF USB CAPITAL STOCK
The following description of the capital stock of USB does not purport to
be complete and is subject, in all respects, to applicable Delaware law and
to the provisions of the USB Certificate. The following description is
qualified by reference to the USB Certificate, the certificate of designation
for each series of preferred stock of USB, and the agreements and documents
referred to below under "--Periodic Stock Purchase Rights and Risk Event
Warrants," copies of which are incorporated by reference as exhibits to the
Registration Statement of which this Proxy Statement/Prospectus is a part.
GENERAL
The authorized capital stock of USB consists of 500,000,000 shares of USB
Common Stock, par value $1.25 per share, and 10,000,000 shares of preferred
stock, par value $1.00 per share. Under the USB Certificate, the USB Board
of Directors or a duly authorized committee thereof has the power, without
further action by the shareholders, unless action is required by applicable
laws or regulations, to provide for the issuance of preferred stock in one or
more series and to fix the voting rights, designations, preferences, and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof by adopting a resolution
or resolutions creating and designating such series.
As of the Record Date, 245,472,252 shares of USB Common Stock were
issued, 24,032,809 shares were reserved for issuance under USB's employee and
director plans and the USB Reinvestment and Purchase Plan, 44,701 shares were
reserved for issuance under outstanding warrants to purchase USB Common Stock
and 15,000,000 shares were reserved for issuance upon exercise of the
Periodic Stock Purchase Rights and Risk Event Warrants described below. As
of the Record Date, there were 6,000,000 shares of preferred stock of USB
outstanding and 12,750 shares of preferred stock of USB reserved for issuance.
PREFERRED STOCK
USB presently has one series of preferred stock issued and outstanding and
one series of preferred stock authorized for future issuance. As of the
Record Date, USB had 6,000,000 shares of USB 8 1/8% Cumulative Preferred
Stock, Series A, outstanding (the "USB 8 1/8% Preferred Stock") and 12,750
shares of its Series 1990A Preferred Stock reserved for issuance. On October
15, 1997, USB announced that it had called for redemption all of the
outstanding shares of its USB 8 1/8% Preferred Stock. The shares will be
redeemed on November 14, 1997 at a redemption price of $25.00 per share,
together with accrued and unpaid dividends from August 15, 1997 to November
14, 1997. From and after November 14, 1997, dividends will cease to accrue
and be payable on the USB 8 1/8% Preferred Stock. See "--USB 8 1/8%
Preferred Stock--Redemption."
USB 8 1/8% PREFERRED STOCK
RANK. The USB 8 1/8% Preferred Stock ranks on a parity as to payment of
dividends and distribution of assets upon dissolution, liquidation or winding up
of USB with the shares of each other currently outstanding series of preferred
stock of USB. The USB 8 1/8% Preferred Stock ranks prior to the USB Common
Stock with respect to the payment of dividends and distribution of assets upon
dissolution, liquidation or winding up of USB.
DIVIDENDS. Holders of shares of USB 8 1/8% Preferred Stock are entitled to
receive, when, as and if declared by the USB Board, or a duly authorized
committee thereof, out of assets of USB legally available for payment,
cumulative cash dividends, payable quarterly in arrears, at the rate of 8 1/8%
per share per annum. Dividends on the USB 8 1/8% Preferred Stock are payable
quarterly on the fifteenth of February, May, August and November of each year
(each, a "Dividend Payment Date"). Each declared dividend shall be payable to
holders of record as they appear at the close of business on the stock books of
USB on such record dates, not more than 45 calendar days preceding the payment
dates therefor, as are determined
67
<PAGE>
by the USB Board. Quarterly dividend periods shall commence on and include
the Dividend Payment Date and shall end on and include the day next preceding
the next following Dividend Payment Date. The right of holders of USB 8 1/8%
Preferred Stock to receive dividends is cumulative.
No full dividends will be declared or paid or set aside for payment on any
stock of USB ranking, as to dividends, on a parity with or junior to the USB
8 1/8% Preferred Stock for any period unless full cumulative dividends on the
USB 8 1/8% Preferred Stock have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set aside for
such payment on the USB 8 1/8% Preferred Stock for all dividend periods
terminating on or prior to the date of payment of such dividends. When
dividends are not paid in full on the USB 8 1/8% Preferred Stock and any
other preferred stock of USB ranking on a parity as to dividends with the USB
8 1/8% Preferred Stock, all dividends declared or paid upon shares of the USB
8 1/8% Preferred Stock and such other preferred stock shall be declared and
paid pro rata so that the amount of dividends declared and paid per share on
the USB 8 1/8% Preferred Stock and such other preferred stock shall in all
cases bear to each other the same ratio that accrued dividends per share
(which in the case of noncumulative preferred stock shall not include any
accumulation in respect of unpaid dividends for prior dividend periods) on
shares of the USB 8 1/8% Preferred Stock and such other preferred stock bear
to each other. Except as provided in the preceding sentence, unless full
cumulative dividends on the USB 8 1/8% Preferred Stock have been paid or
declared and set aside for payment, no dividends (other than dividends or
distributions paid in shares of, or options, warrants or rights to subscribe
for or purchase shares of, USB Common Stock or any other stock of USB ranking
junior to the USB 8 1/8% Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment or any other
distribution declared or made upon the USB Common Stock or any other stock of
USB ranking junior to or on a parity with the USB 8 1/8% Preferred Stock as
to dividends or upon liquidation. No USB Common Stock or any other stock of
USB ranking junior to or on a parity with the USB 8 1/8% Preferred Stock as
to dividends or upon liquidation shall be redeemed, purchased or otherwise
acquired for any consideration (and no moneys shall be paid to or made
available for a sinking fund for the redemption of any shares of any such
stock) by USB (except by conversion into or exchange for stock of USB ranking
junior to the USB 8 1/8% Preferred Stock as to dividends and upon
liquidation) unless, in each case, the full cumulative dividends on the USB 8
1/8% Preferred Stock shall have been paid or declared and set aside for
payment. Holders of shares of the USB 8 1/8% Preferred Stock shall not be
entitled to any dividend, whether payable in cash, property or stock, in
excess of the full dividends on such shares. No interest shall be payable in
respect of any dividend payment which may be in arrears on the USB 8 1/8%
Preferred Stock.
Dividends payable on shares of the USB 8 1/8% Preferred Stock (i) for any
period other than a full dividend period, shall be computed on the basis of a
360-day year consisting of twelve 30-day months and (ii) for each full
dividend period, shall be computed by dividing the annual dividend rate by
four. Any dividend payment made on shares of the USB 8 1/8% Preferred Stock
shall first be credited against the earlier accrued but unpaid dividend due
with respect to shares of such series which remains payable.
REDEMPTION. The USB 8 1/8% Preferred Stock is redeemable, in whole or in
part, from time to time at the option of USB upon not less than 30 nor more
than 60 days' notice at $25.00 per share plus all accrued and unpaid
dividends to the date of redemption.
If less than all the outstanding shares of USB 8 1/8% Preferred Stock are
to be redeemed, USB will select those to be redeemed pro rata, by lot or by a
substantially equivalent method. On and after the redemption date, dividends
will cease to accrue on the shares, and they shall be deemed to cease to be
outstanding, provided that the redemption price (including any accrued and
unpaid dividends to the date fixed for redemption) has been duly paid or
provided for.
The USB 8 1/8% Preferred Stock will not be entitled to the benefits of any
sinking fund.
Notwithstanding the foregoing, unless the full cumulative dividends on all
outstanding shares of USB 8 1/8% Preferred Stock shall have been paid or
contemporaneously are declared and paid for all past
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<PAGE>
dividend periods, no shares of USB 8 1/8% Preferred Stock shall be redeemed
unless all outstanding shares of USB 8 1/8% Preferred Stock are
simultaneously redeemed; provided, however that the foregoing shall not
prevent the purchase or acquisition of shares of USB 8 1/8% Preferred Stock
or of shares of such other series of preferred stock pursuant to a purchase
or exchange offer made on the same terms to holders of all outstanding shares
of USB 8 1/8% Preferred Stock, and, unless the full cumulative dividends on
all outstanding shares of USB 8 1/8% Preferred Stock and any other stock of
USB ranking on a parity with such series as to dividends and upon liquidation
shall have been paid or contemporaneously are declared and paid for all past
dividend periods, USB shall not purchase or otherwise acquire directly or
indirectly any shares of preferred stock of such series (except by conversion
into or exchange for stock of USB ranking junior to the preferred stock of
such series as to dividends and upon liquidation). In addition, in order to
qualify as Tier 1 capital, USB 8 1/8% Preferred Stock may not be redeemed at
USB's option without the prior approval of the Federal Reserve Board.
LIQUIDATION PREFERENCE. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of USB, the holders of the USB
8 1/8% Preferred Stock will be entitled, subject to the rights of creditors,
but before any distribution or payment to the holders of USB Common Stock or
any other security ranking junior to the USB 8 1/8% Preferred Stock on
liquidation, dissolution or winding up of USB, to receive $25.00 per share
plus accrued and unpaid dividends. In the event that, upon any such
voluntary or involuntary liquidation, dissolution or winding up, the
available assets of USB are insufficient to pay such amount on all
outstanding shares of USB 8 1/8% Preferred Stock and the corresponding
amounts payable on all shares of other classes or series of stock of USB
ranking on a parity with the USB 8 1/8% Preferred Stock in the distribution
of assets, then the holders of the USB 8 1/8% Preferred Stock and of all
other such classes or series shall share ratably in any distribution of
assets in proportion to the full amounts to which they would otherwise be
respectively entitled.
For such purposes, the consolidation or merger of USB with any other
corporation shall not be deemed to constitute a liquidation, dissolution or
winding up of USB.
VOTING RIGHTS. Except as otherwise noted or as required by law, each holder
of shares of USB 8 1/8% Preferred Stock shall be entitled to notice of
shareholders' meetings, but will not be entitled to vote. When holders of USB
8 1/8% Preferred Stock are entitled to vote, each holder, as of the record date
in connection with such vote, is entitled to one vote.
If at any time the equivalent of six quarterly dividends, whether or not
consecutive, payable on the USB 8 1/8% Preferred Stock are unpaid or not
declared and set aside for payment, the number of directors of USB shall be
increased by two and the holders of shares of the USB 8 1/8% Preferred Stock
outstanding at the time (voting separately, as a single class, with the
holders of shares of any one or more series of preferred stock of USB ranking
on a parity with the USB 8 1/8% Preferred Stock as to dividends or upon
liquidation and upon which like voting rights have been conferred and are
exercisable) shall have the right to elect two directors to serve as such
until all arrearages of dividends on the USB 8 1/8% Preferred Stock have been
paid or declared and set aside for payment at which time the terms of office
of the two directors so elected shall terminate and the number of directors
of USB shall be reduced by two (subject to any additional rights as to the
election of directors provided for the holders of shares of other preferred
stock of USB). Any director so elected may be removed by, and shall not be
removed except by, the vote of the holders of shares of the USB 8 1/8%
Preferred Stock outstanding at the time (voting separately as a single class
with the holders of shares of any one or more series of preferred stock of
USB ranking on a parity with the USB 8 1/8% Preferred Stock as to dividends
or upon liquidation and upon which like voting rights have been conferred and
are exercisable).
So long as any shares of the USB 8 1/8% Preferred Stock remain outstanding,
USB shall not, without the affirmative vote or consent of the holders of at
least two-thirds of the shares of the USB 8 1/8% Preferred Stock and of any
other similarly affected series of preferred stock of USB ranking on a parity
with the USB 8 1/8% Preferred Stock as to dividends or upon liquidation and upon
which like voting rights have been conferred and are exercisable outstanding at
the time (voting separately as a single class
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<PAGE>
without regard to series), given in person or by proxy, either in writing or
at a meeting, (i) authorize, create or issue, or increase the authorized or
issued amount of, any class or series of stock ranking prior to the USB 8
1/8% Preferred Stock as to dividends or upon liquidation or (ii) amend, alter
or repeal, whether by merger or otherwise, the provisions of the USB
Certificate so as to materially and adversely affect any of the preferences,
limitations, and relative rights of the USB 8 1/8% Preferred Stock; provided,
however, that any increase in the amount of the authorized preferred stock of
USB or the creation and issuance of other series of preferred stock of USB,
in each case ranking on a parity with or junior to the USB 8 1/8% Preferred
Stock as to dividends or upon liquidation, will not be deemed to materially
and adversely affect such preferences, limitations and relative rights.
CONVERSION RIGHTS. The USB 8 1/8% Preferred Stock is not convertible into
shares of any other class or series of the capital stock of USB.
NO OTHER RIGHTS. The shares of USB 8 1/8% Preferred Stock shall not have
any preferences, voting powers or relative, participating, optional or other
special rights except as set forth above, in the USB Certificate or as otherwise
required by law.
USB SERIES 1990A PREFERRED STOCK
In connection with the sale by USB of 12,600,000 shares of USB Common Stock
and accompanying periodic stock purchase rights and risk event warrants in a
private placement in July 1990, USB may under certain circumstances be obligated
to issue up to 12,750 shares of its Series 1990A Preferred Stock. See
"--Common Stock--Periodic Stock Purchase Rights and Risk Event Warrants" below.
The shares of Series 1990A Preferred Stock would, if issued, provide for a
liquidation preference of $100,000 per share. The dividend rate would be
adjusted quarterly and would be determined at the time of issuance.
If, at the time of any annual meeting of USB Shareholders for the election
of directors, the amount of accrued but unpaid dividends on the Series 1990A
Preferred Stock were equal to at least six quarterly dividends on such series,
then the number of directors of USB would be increased by one and the holders of
such Series 1990A Preferred Stock, voting as a separate class, would be entitled
to elect one additional director who would continue to serve the full term for
which he or she would have been elected, notwithstanding the declaration or
payment of any dividends on the Series 1990A Preferred Stock. The affirmative
vote or consent of the holders of at least two-thirds of the outstanding shares
of USB Series 1990A Preferred Stock will be required for any amendment of the
USB Certificate (including any certificate of designation or any similar
document relating to any series of preferred stock of USB) which will adversely
affect the powers, preferences, privileges or rights of the USB Series 1990A
Preferred Stock. The affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of USB Series 1990A Preferred Stock will be
required to issue, authorize, or increase the authorized amount of, or issue or
authorize any obligation or security convertible into or evidencing a right to
purchase, any additional class or series of stock ranking prior to the USB
Series 1990A Preferred Stock as to dividends or upon liquidation.
ADDITIONAL PROVISIONS. The rights of holders of USB Common Stock will be
subject to, and may be adversely affected by, the rights of holders of any
preferred stock that may be issued in the future. Any such issuance may
adversely affect the interests of holders of the USB Common Stock by limiting
the control that such holders may exert by exercise of their voting rights, by
subordinating their rights in liquidation to the rights of the holders of
preferred stock of USB and otherwise. In addition, the issuance of shares of
preferred stock of USB may, in some circumstances, deter or discourage takeover
attempts and other changes in control of USB, including takeovers and changes in
control that some holders of the USB Common Stock may deem to be in their best
interests and in the best interests of USB, by making it more difficult for a
person who has gained a substantial equity interest in USB to obtain voting
control or to
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<PAGE>
exercise control effectively. USB has no current plans or agreements with
respect to the issuance of any other shares of preferred stock, except as
described above with respect to the Series 1990A Preferred Stock.
COMMON STOCK
GENERAL. Each share of USB Common Stock is entitled to such dividends as
may from time to time be declared by the USB Board from any funds legally
available for dividends. USB may not declare any cash dividends on, or make
any payment on account of, the purchase, redemption or other retirement of,
USB Common Stock unless full dividends (including accumulated dividends, if
applicable) have been paid or declared or set apart for payment upon all
outstanding shares of the preferred stock of USB and USB is not in default or
in arrears with respect to any sinking or other analogous fund or other
agreement for the purchase, redemption or other retirement of any shares of
preferred stock of USB. Holders of USB Common Stock are entitled to one vote
per share. Shareholders do not have the right to cumulate their votes in the
election of directors. USB Common Stock has no conversion rights and the
holders of USB Common Stock have no preemptive or other rights to subscribe
for additional securities of USB. In the event of the liquidation of USB,
after the payment or provision for payment of all debts and liabilities and
subject to the rights of the holders of preferred stock of USB which may be
outstanding, the holders of USB Common Stock will be entitled to share
ratably in the remaining assets of USB. The USB Common Stock is listed on
the NYSE.
USB DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN. Pursuant to its
USB Reinvestment and Purchase Plan, USB provides eligible shareholders with a
method of investing cash dividends and optional cash payments at 100% of the
average price (as defined in the USB Reinvestment and Purchase Plan) in
additional shares of USB Common Stock without payment of any brokerage
commission or service charge. The USB Reinvestment and Purchase Plan includes
certain dollar limitations on participation and provides for eligible
shareholders to elect dividend reinvestment on only a part of the shares
registered in the name of a participant (while continuing to receive cash
dividends on remaining shares). It is anticipated that the USB Reinvestment and
Purchase Plan will continue after the Effective Date and that shareholders of
Zappco who receive shares of USB Common Stock pursuant to the Merger will have
the right to participate therein.
PERIODIC STOCK PURCHASE RIGHTS AND RISK EVENT WARRANTS. USB has entered
into (i) a Stock Purchase Agreement, dated as of May 30, 1990 (as amended, the
"Stock Purchase Agreement"), by and among Corporate Partners, L.P. ("Corporate
Partners"), Corporate Offshore Partners, L.P. ("Offshore" and, together with
Corporate Partners, the "Partnerships"), The State Board of Administration of
Florida ("State Board") solely in its capacity as a managed account and not in
its individual capacity (State Board and the Partnerships being referred to
herein collectively as the "Purchasers"), Corporate Advisors, L.P. and USB and
(ii) a Stock Purchase Agreement, dated as of May 30, 1990 (the "Florida Stock
Purchase Agreement"), by and between State Board in its individual capacity and
USB. Pursuant to the Stock Purchase Agreement, USB sold (a) to Corporate
Partners 8,856,241 shares of USB Common Stock, 10 Periodic Stock Purchase Rights
(each a "PSPR") and one Risk Event Warrant, (b) to Offshore 643,976 shares of
USB Common Stock, 10 PSPRs and one Risk Event Warrant and (c) to State Board
939,783 shares of USB Common Stock, 10 PSPRs and one Risk Event Warrant.
Pursuant to the Florida Stock Purchase Agreement, USB sold to State Board
2,160,000 shares of USB Common Stock, 10 PSPRs and one Risk Event Warrant.
The Stock Purchase Agreement and the Florida Stock Purchase Agreement
contain transfer restrictions with respect to the shares of USB Common Stock
acquired thereunder and standstill provisions limiting further acquisitions
of USB Common Stock by the Purchasers and State Board. The Stock Purchase
Agreement and the Florida Stock Purchase Agreement also grant each of the
Purchasers and State Board the right to purchase its pro rata share of any
Voting Securities (as defined in the Stock Purchase Agreement) sold by USB
for cash, subject to certain exceptions. Pursuant to the Stock Purchase
Agreement, the Purchasers have designated one person to act as a non-voting
observer of the USB Board.
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<PAGE>
Each PSPR issued to the Purchasers and State Board relates to a specific
twelve-month period commencing with the twelve-month period following closing of
the transactions contemplated under the Stock Purchase Agreement and the Florida
Stock Purchase Agreement. Each PSPR shall become exercisable in the event that
a Dividend Shortfall (as defined in the Stock Purchase Agreement) exists for the
specific twelve-month period to which such PSPR relates. A Dividend Shortfall
will be deemed to exist to the extent that USB has not paid a cash dividend
equal to $0.205 per share of USB Common Stock for each quarter within such
twelve-month period. The PSPRs will be exercisable for that number of shares of
USB Common Stock or (subject to the prior approval of the Federal Reserve Board)
depositary shares representing one one-thousandth of a share of Series 1990A
Preferred Stock ("Depositary Shares") such that the holders of PSPRs will
receive value equal to the Dividend Shortfall. Once a PSPR has become
exercisable, it will remain exercisable for a one-year period at an exercise
price of $1.25 per share of USB Common Stock or $1.00 per Depositary Share. If
a PSPR were to become exercisable and were not redeemed by USB as described
below, the issuance of Depositary Shares or USB Common Stock upon exercise of a
PSPR could adversely affect the market price of the USB Common Stock. If the
PSPRs were to be exercised for USB Common Stock, there could be substantial
dilution of the USB Common Stock.
Each Risk Event Warrant will become exercisable in the event of certain
defined change of control events with respect to USB where the value received
by holders of the USB Common Stock is less than $13.875 per share, or in
certain circumstances in the event the USB Common Stock is valued at less
than $13.875 per share on the tenth anniversary of the closing of the
transactions contemplated under the Stock Purchase Agreement. The Risk Event
Warrants will be exercisable for that number of shares of USB Common Stock at
an exercise price of $1.25 per share or, in certain circumstances (subject to
the prior approval of the Federal Reserve Board), Depositary Shares such that
the holders of Risk Event Warrants will receive value equal to such
shortfall. If the Risk Event Warrants were to become exercisable and were
not redeemed by USB as described below, the issuance of Depositary Shares or
USB Common Stock upon exercise of a Risk Event Warrant could adversely affect
the market price of the USB Common Stock. If the Risk Event Warrants were to
be exercised for USB Common Stock, there could be substantial dilution of the
USB Common Stock. In the event of a change in control at a time when the
market price of the USB Common Stock is less than $13.875 per share, the Risk
Event Warrants may have the effect of reducing the price per share to be
received by the holders of the USB Common Stock.
In the event of the exercise of a Risk Event Warrant upon the occurrence
of certain change of control events, USB may, at its option (subject to the
prior approval of the Federal Reserve Board), elect to have such Risk Event
Warrant become exercisable for other securities of USB acceptable to the
holder of such Risk Event Warrant in lieu of the shares of USB Common Stock
for which such Risk Event Warrant would otherwise become exercisable. In
addition, USB has the right (subject to the prior approval of the Federal
Reserve Board) to redeem any PSPR at a price equal to the Dividend Shortfall
and any Risk Event Warrant at a price equal to the Value Shortfall (as
defined in the Stock Purchase Agreement) or the Termination Shortfall Amount
(as defined in the Stock Purchase Agreement), as applicable, after such PSPR
or Risk Event Warrant, as the case may be, shall have become exercisable.
USB also has entered into a registration rights agreement with the Purchasers
and with State Board pursuant to which the Purchasers and State Board,
respectively, are granted certain rights to cause USB to register with the
Commission the USB Common Stock acquired pursuant to the Stock Purchase
Agreement and the Florida Stock Purchase Agreement and the securities
acquired upon exercise of the PSPRs and the Risk Event Warrants.
The foregoing is a summary of the transactions contemplated by the Stock
Purchase Agreement and the Florida Stock Purchase Agreement and related
documents and is qualified in its entirety by the more detailed information
contained in such agreements and documents, copies of which are incorporated by
reference as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
CERTAIN PROVISIONS OF THE USB CERTIFICATE AND USB BYLAWS
The USB Certificate requires the affirmative vote of the holders of 80% of
the "Voting Stock" (defined therein) of USB to approve certain mergers,
consolidations, reclassifications, dispositions of assets
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<PAGE>
or liquidation, involving or proposed by certain significant shareholders,
unless certain price and procedural requirements are met or unless the
transaction is approved by the "Continuing Directors" (defined therein). In
addition, the USB Certificate provides for classification of the USB Board
into three separate classes, sets a maximum board size of 30 and authorizes
action by the shareholders of USB only pursuant to a meeting and not by a
written consent. The foregoing provisions of the USB Certificate can only be
amended by the affirmative vote of the holders of not less than 80% of the
outstanding USB voting stock, except with respect to any amendment to the USB
Certificate to reduce the maximum number of USB directors to the greater of
(i) the number of directors then in office and (ii) 24, which amendment would
require the approval of the holders of a majority of the outstanding of USB
Common Stock pursuant to Delaware Law. The USB Bylaws provide that special
meetings of shareholders may be called only by the USB Board or the chief
executive officer. The overall effect of these provisions may be to delay or
prevent attempts by other corporations or groups to acquire control of USB
without negotiation with the USB Board.
DESCRIPTION OF ZAPPCO CAPITAL STOCK
The following description of the capital stock of Zappco does not purport to
be complete and is subject, in all respects, to applicable Minnesota law and to
the provisions of the Zappco Articles. The following description is qualified
by reference to the Zappco Articles, a copy of which is included as an exhibit
to the Registration Statement of which this Proxy Statement/Prospectus is a
part.
GENERAL
The authorized capital stock of Zappco consists of 25,000 shares of Zappco
Common Stock, par value $1.00 per share, and 10,000 shares of Preferred Stock,
par value $100 per share. As of the Record Date, 15,842 shares of Zappco Common
Stock and no shares of Preferred Stock were issued and outstanding. The Zappco
Board of Directors has the right, from any unissued Preferred Stock, to
designate a series and to fix the dividend rate, the redemption price, the
liquidation price, the conversion rights and the sinking or purchase fund rights
of shares of any class, or any series of any class, or the number of shares
constituting the series of any class.
Each share of Zappco Common Stock is entitled to receive, when, as and if
declared by the Zappco Board of Directors, out of earnings or surplus legally
available therefore, dividends payable either in cash, in property or in shares
of capital stock of Zappco, provided that all dividends due and owing to any
holders of Preferred Stock have been paid. Holders of Common Stock are entitled
to one vote per share. No shareholders have the right to cumulate their votes
in the election of directors, and no shareholders have preemptive rights or
other rights to subscribe for additional securities of Zappco.
ADJOURNMENT OF THE SPECIAL MEETING
(Proposal No. 3)
In the event that there are not sufficient votes to approve the Merger
Agreement at the time of the Special Meeting, such proposal could not be
approved unless the Special Meeting were adjourned in order to permit further
solicitation of proxies from Zappco shareholders. In order to allow proxies
that have been received by Zappco at the time of the Special Meeting to be voted
for such adjournment, if necessary, Zappco is submitting the question of
adjournment under such circumstances to its shareholders as a separate matter
for their consideration. A majority of the shares represented in person or by
proxy and voting at the Special Meeting is required to approve any adjournment,
even if such number of shares is less than a quorum. THE BOARD OF DIRECTORS OF
ZAPPCO RECOMMENDS THAT ZAPPCO SHAREHOLDERS VOTE FOR THE PROPOSAL TO ADJOURN THE
SPECIAL MEETING IF NECESSARY TO PERMIT FURTHER SOLICITATION OF PROXIES.
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LEGAL OPINIONS
The validity of the securities offered hereby has been passed upon for USB
by Dorsey & Whitney LLP, Minneapolis, Minnesota. Dorsey & Whitney LLP and
certain of its members are indebted to and have other banking and trust
relationships with certain banking subsidiaries of USB.
The opinions of counsel described under "The Merger--Certain Federal Income
Tax Consequences To Zappco Shareholders" have been rendered by Fredrikson &
Byron, P.A., Minneapolis, Minnesota, special counsel to Zappco.
EXPERTS
The consolidated financial statements of First Bank System, Inc. included in
its Annual Report on Form 10-K for the year ended December 31, 1996 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such
consolidated financial statements have been incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The supplemental consolidated financial statements of U.S. Bancorp at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in U.S. Bancorp's Current Report on Form 8-K dated
September 30, 1997, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon and incorporated herein by
reference, which is based in part on the reports of Deloitte & Touche LLP and
Coopers & Lybrand L.L.P., independent auditors. The supplemental consolidated
financial statements referred to above are included in reliance upon such
reports given upon the authority of such firms as experts in accounting and
auditing.
The financial statements of U.S. Bancorp (prior to its combination with
First Bank System, Inc. as of August 1, 1997), incorporated by reference in this
prospectus through the incorporation by reference of the Current Report on Form
8-K dated September 30, 1997, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing therein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated statements of income, shareholders' equity and cash flows
of West One Bancorp and Subsidiaries for the year ended December 31, 1994,
incorporated by reference in this prospectus, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The consolidated financial statements of Zappco included herein have been
audited by Larson, Allen, Weishair & Co., LLP, independent auditors, as
indicated in their reports thereon (which reports express an unqualified
opinion and include an explanatory paragraph referring to the change in
accounting for investments in debt and marketable equity securities in 1994),
included herein. Such consolidated financial statements are included herein
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
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Page
----
Consolidated Balance Sheets
June 30, 1997 and 1996 F-2
Consolidated Income Statements
for the Six Months Ended June 30, 1997 and 1996 F-4
Independent Auditor's Report F-6
Consolidated Balance Sheets
December 31, 1996 and 1995 F-7
Consolidated Statements of Income
for the Years Ended December 31, 1996 and 1995 F-8
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995 F-9
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995 F-10
Notes to Consolidated Financial Statements F-12
Independent Auditor's Report F-27
Consolidated Balance Sheets
December 31, 1995 and 1994 F-28
Consolidated Statements of Income
For the Years Ended December 31, 1995 and 1994 F-29
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1995 and 1994 F-30
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995 and 1994 F-31
Notes to Consolidated Financial Statments F-33
F-1
<PAGE>
ZAPPCO, INC
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET
June 30, 1997
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
06/30/97 06/30/96
-------- --------
<S> <C> <C>
ASSETS
Non Interest Bearing Balances $18,989 15,861
Interest Bearing Balances 0 0
Securities 73,762 70,577
Federal Funds Sold 129 0
Loans & Leases
Net of Unearned Income 236,764 204,185
Less:Allowance for Loan & Leases (2,568) (2,731)
-------- --------
Net Loans 234,196 201,454
Assets in Trading Acct 0 0
Premise & Fixed Assets* 14,676 15,294
Other Real Estate Owned 0 662
Dividends Receivable 0 0
Intangible Assets 691 790
Other Assets 3,588 4,761
-------- --------
-------- --------
TOTAL ASSETS $346,031 $309,399
</TABLE>
F-2
<PAGE>
ZAPPCO, INC
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET
June 30, 1997
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
06/30/97 06/30/96
-------- --------
<S> <C> <C>
LIABILITIES
Deposits
Non Interest Bearing $ 45,928 $ 39,444
Interest Bearing 249,115 220,404
Fed Funds Purchased 751 2,984
Commercial Paper 0 0
Repurchase Agreements 5,366 4,925
Other Borrowings less than 1 yr 522 1,428
Other Borrowings greater than 1 yr 4,360 1,200
Mortgages 8,394 8,673
Minority Interest 0 0
Other Liabilities 1,811 3,146
-------- --------
TOTAL LIABILITIES $316,247 $282,204
CAPITAL
Common Stock $ 16 $ 16
Mandatory Convertible Securities 100 200
Surplus 5,822 5,822
U/P* 23,846 21,157
-------- --------
TOTAL CAPITAL $29,784 $27,195
-------- --------
-------- --------
TOTAL CAPITAL & LIABILITIES $346,031 $309,399
TIER 1 CAPITAL RATIO: 8.33% 8.42%
BOOK VALUE PER SHARE IS: $1,873.75 $1,704.01
</TABLE>
* These accounts contain a consolidation adjustment to eliminate the inter
company gain on the sale of the Tempo property and interest earned on the
Contract.
F-3
<PAGE>
ZAPPCO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INCOME STATEMENT
June 30, 1997
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
06/30/97 06/30/96
-------- --------
<S> <C> <C>
INTEREST INCOME
Interest & Fees on Loans $10,642 $9,281
Interest on Municipals-Loans 61 71
Lease Income 64 31
Interest-Depository Institutions 1 237
Interest US Treas,Agencies 2,209 2,255
Interest-Municipal securities 91 57
Interest on Taxable Municipals 0 0
US Securities Equity 36 31
Income from Subsidiaries 0 0
Income on Federal Funds Sold 65 107
------- -------
------- -------
TOTAL INTEREST INCOME $13,169 $12,070
NONINTEREST INCOME
Trust Income $1,124 $1,083
Service Charge on Deposit Accts 543 543
Net Bond Profit (7) (59)
Other Non Interest Income 832 1,401
------- -------
------- -------
TOTAL NON INTEREST INCOME $2,492 $2,968
</TABLE>
F-4
<PAGE>
ZAPPCO, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INCOME STATEMENT
June 30, 1997
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
06/30/97 06/30/96
-------- --------
<S> <C> <C>
INTEREST EXPENSES
Interest-Deposits of 100M & more $ 981 $ 544
Interest-Other Deposits 4,539 4,090
Interest on FF Borrowed 46 22
Interest on Borrowed Funds 556 519
Other Interest Expenses 0 0
------ ------
TOTAL INTEREST EXPENSE $6,122 $5,175
NONINTEREST EXPENSE
Salaries & Benefits $3,653 $3,258
Expense of Premises & FA 1,173 1,094
Other Non Interest Expense 1,869 1,812
------ ------
TOTAL NON INTEREST EXPENSE $6,695 $6,164
Provision for Loan Loss 58 84
Applicable Taxes 1,118 1,086
EXTRAORDINARY ITEMS 0 0
------ ------
NET INCOME $1,668 $2,529
</TABLE>
F-5
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Zappco, Inc. And Subsidiaries
St. Cloud, Minnesota
We have audited the accompanying consolidated balance sheets of Zappco, Inc.
And Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by Management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zappco,
Inc. And Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
January 31, 1997
F-6
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $ 18,396,692 $ 19,429,272
FEDERAL FUNDS SOLD 9,008,128 9,880,561
SECURITIES AVAILABLE FOR SALE 69,631,008 71,071,357
SECURITIES HELD TO MATURITY - 1,993,118
LOANS 224,772,141 189,071,362
Less: Allowance for Loan Losses (2,745,480) (2,590,205)
------------ ------------
Net Loans $222,026,661 $186,481,157
LAND, PREMISES AND EQUIPMENT (NET) 15,337,470 15,181,493
OTHER REAL ESTATE 30,841 600,000
ACCRUED INCOME AND OTHER ASSETS 4,049,354 3,809,644
COST IN EXCESS OF NET ASSETS ACQUIRED (NET) 740,405 840,742
------------ ------------
Total Assets $339,220,559 $309,287,344
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand Deposits $ 48,447,676 $ 44,837,154
Savings and NOW Deposits 108,378,606 108,650,740
Certificates of Deposits 126,652,691 104,628,484
------------ ------------
Total Deposits $283,478,973 $258,116,378
OTHER BORROWINGS 14,510,920 14,041,031
ACCRUED EXPENSES AND OTHER LIABILITIES 3,093,751 1,731,716
NOTES PAYABLE 9,698,404 10,484,480
------------ ------------
Total Liabilities $310,782,048 $284,373,605
------------ ------------
MANDATORY CONVERTIBLE EQUITY SECURITIES $ 100,000 $ 200,000
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock $ 15,842 $ 15,842
Capital Surplus 5,822,100 5,822,100
Undivided Profits 22,596,472 18,820,109
Net Unrealized Gain (Loss) on
Available-For-Sale Securities (95,903) 55,688
------------ ------------
Total Stockholders' Equity $ 28,338,511 $ 24,713,739
------------ ------------
Total Liabilities and Stockholders' Equity $339,220,559 $309,287,344
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
INTEREST INCOME
Loans $20,376,621 $ 18,695,354
Investment Securities 3,973,301 3,176,698
Other Investment Securities Exempt
from Federal Income Taxes 126,996 91,209
Deposits With Banks - -
Federal Funds Sold and Other 784,634 387,016
----------- ------------
Total Interest Income $25,261,552 $ 22,350,277
----------- ------------
INTEREST EXPENSE
Savings and NOW Accounts $ 2,818,570 $ 3,279,227
Certificates of Deposit 6,495,497 5,359,642
Notes Payable and Other Borrowed Funds 1,359,578 1,368,646
----------- ------------
Total Interest Expense $10,673,645 $ 10,007,515
----------- ------------
NET INTEREST INCOME BEFORE PROVISION
FOR POSSIBLE LOAN LOSSES $14,587,907 $ 12,342,762
PROVISION FOR POSSIBLE LOAN LOSSES 287,518 152,000
----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES $14,300,389 $ 12,190,762
----------- ------------
NON-INTEREST INCOME
Trust Department $ 2,161,261 $ 1,890,144
Service Charges, Commissions and Fees 1,686,140 1,524,904
Other 1,386,192 963,561
----------- ------------
Total Non-Interest Income $ 5,233,593 $ 4,378,609
----------- ------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits $ 6,776,271 $ 6,312,814
Operations and Occupancy 5,851,661 5,830,044
Other 237,383 200,423
----------- ------------
Total Non-Interest Expense $12,865,315 $ 12,343,281
----------- ------------
INCOME BEFORE INCOME TAX PROVISION $ 6,668,667 $ 4,226,090
INCOME TAX PROVISION 2,292,684 1,707,112
----------- ------------
NET INCOME $ 4,375,983 $ 2,518,978
----------- ------------
----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Net Unrealized
----------------- Gain (Loss) on
Shares Capital Undivided Available for
Issued Amount Surplus Profits Sale Securities Total
------ ------ ------- --------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance
December 31, 1994 15,842 $15,842 $5,822,100 $16,562,524 $(316,865) $22,083,601
Plus: Net Income - - - 2,518,978 - 2,518,978
Less: Dividends
($16.50/Share) - - - (261,393) - (261,393)
Net Unrealized Gain on
Available for Sale Securities - - - - 372,553 372,553
------ ------- ---------- ----------- --------- -----------
Balance
December 31, 1995 15,842 $15,842 $5,822,100 $18,820,109 $ 55,688 $24,713,739
Plus: Net Income - - - 4,375,983 - 4,375,983
Less: Dividends
($37.85/Share) - - - (599,620) - (599,620)
Net Unrealized Loss on
Available for Sale Securities - - - - (151,591) (151,591)
------ ------- ---------- ----------- --------- -----------
Balance
December 31, 1996 15,842 $15,842 $5,822,100 $22,596,472 $ (95,903) $28,338,511
------ ------- ---------- ----------- --------- -----------
------ ------- ---------- ----------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,375,983 $ 2,518,978
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,529,184 1,409,167
Net Discount Accretion (11,991) (61,771)
Provision for Loan Losses 287,518 152,000
(Increase) Decrease in Accrued Income
and Other Assets (239,710) 501,648
Increase (Decrease) in Accrued Expenses and
Other Liabilities 1,202,113 (204,399)
(Gain) Loss on Sale of Property and Equipment (9,060) 3,094
(Gain) Loss on Sale of Other Real Estate 75,357 (22,020)
Loss on Sale of Available for Sale Securities 45,583 -
------------ ------------
Net Cash Provided by Operating Activities $ 7,254,977 $ 4,296,697
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Available for Sale Securities $(42,545,996) $(13,198,220)
Proceeds from Sales of Available for Sale Securities 8,228,991 -
Proceeds from Maturities of Available for Sale Securities 37,462,234 5,807,282
Purchases of Held to Maturity Securities - (15,725,142)
Proceeds from Sales of Held to Maturity Securities - 1,114,577
Proceeds from Maturities of Held to Maturity Securities - 10,252,473
Net (Increase) Decrease in Federal Funds Sold 872,433 (6,722,886)
Net Increase in Loans (35,863,863) (6,227,103)
Purchases of Property and Equipment (1,602,029) (1,040,871)
Proceeds from Sale of Property and Equipment 26,265 3,874
Proceeds from Sale of Other Real Estate 524,643 209,264
------------ ------------
Net Cash Used by Investing Activities $(32,897,322) $(25,526,752)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits $ 3,610,522 $ 3,974,873
Net Increase (Decrease) in Savings and NOW Deposits (272,134) 3,060,385
Net Increase in Certificates of Deposit 22,024,207 13,986,467
Principal Payments on Notes Payable (786,076) (944,644)
Payments on Convertible Equity Securities (100,000) (100,000)
Increase in Other Borrowings 469,889 4,033,808
Dividends Paid (336,643) (126,736)
------------ ------------
Net Cash Provided by Financing Activities $ 24,609,765 $ 23,884,153
------------ ------------
NET INCREASE (DECREASE) IN CASH $ (1,032,580) $ 2,654,098
Cash - Beginning 19,429,272 16,775,174
------------ ------------
CASH - ENDING $ 18,396,692 $ 19,429,272
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash Payments for:
Interest to Depositors $ 8,988,540 $ 5,169,463
------------ ------------
------------ ------------
Interest on Long-Term and Other Borrowed Money $ 1,363,612 $ 1,348,356
------------ ------------
------------ ------------
Income Taxes $ 2,932,388 $ 1,491,242
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other Real Estate Acquired in Settlement of Loans $ 30,841 $ 864,873
------------ ------------
------------ ------------
Loans and Other Real Estate Charged Off of the
Allowance for Loan Losses (Net of Recoveries) $ 276,058 $ 288,259
------------ ------------
------------ ------------
Loans Originated from Sale of OREO $ - $ 217,500
------------ ------------
------------ ------------
Increase (Decrease) in Deferred Tax Asset
Related to SFAS 115 $ 103,055 $ (253,271)
------------ ------------
------------ ------------
Transfer of Securities from Held-to-Maturity to
Available-for-Sale $ 1,993,118 $ 46,048,907
------------ ------------
------------ ------------
Transfer of Real Estate from Other Real Estate to
Land, Premises and Equipment $ - $ 402,371
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Zappco, Inc. (Company), through its operating subsidiaries, is
primarily engaged in commercial banking and related services and
grants commercial, residential, consumer and agricultural loans to
customers throughout the Central Minnesota area.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries, Zapp Bank, N.A.,
(wholly owned) First National Bank of Little Falls (96% owned),
Melrose State Bank (wholly owned), Zapp Data, Inc., a wholly owned
data processing service bureau, and Zapp Bank Plaza Partnership #1
(98.8% owned by Zappco, Inc. and 1.2% owned by Zapp Data, Inc.).
The First National Bank of Little Falls (Little Falls) has been
reflected as a wholly owned subsidiary of the Company in the
consolidated financial statements because the Company has
agreements which provide that the Company has first option to
repurchase these shares at minimal cost from the three directors
of Little Falls who own the remaining 4% of outstanding stock. In
addition, the rights to all dividends have been assigned to the
Company.
Significant intercompany balances and transactions have been
eliminated from the consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates
also affect the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows,
cash and cash equivalents are defined as those amounts included in
the balance sheet caption "cash and due from banks." At times
these balances may be in excess of FDIC insurance limits.
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of bonds, notes and
debentures not classified as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for
sale securities are reported as a net amount in a separate
component of stockholders' equity until realized. Gains and
losses on the sale of available for sale securities are determined
using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over
the period to maturity.
F-12
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES HELD TO MATURITY
Held to maturity securities consist of bonds, notes, debentures
and equity securities for which the subsidiary banks have the
positive intent and ability to hold to maturity. Held to maturity
securities are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the
interest method over the period to maturity.
LOANS
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. Interest on
loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an
indication that the borrower may be unable to meet payments as
they become due. Upon such discontinuance, all unpaid accrued
interest is reversed.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable
losses. Management determines the adequacy of the allowance based
upon reviews of individual loans and related off-balance sheet
commitments, recent loss experience, current economic conditions,
the risk characteristics of the various categories of loans and
other pertinent factors. Loans deemed uncollectible are charged
to the allowance. Provisions for loan losses and recoveries on
loans previously charged off are added to the allowance. While
management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary
if there are significant changes in economic conditions.
LAND, PREMISES AND EQUIPMENT
Property and equipment owned are stated at cost less accumulated
depreciation which is computed on the straight-line and
accelerated methods over the estimated useful lives of the assets.
Accelerated depreciation did not materially exceed straight-line
depreciation for the years ended December 31, 1996 and 1995. Both
accelerated and straight-line methods are used for income tax
reporting purposes.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure is carried in other assets at
the lower of the recorded investment in the property or its fair
value less selling costs. Prior to foreclosure, the value of the
underlying loan is written down to the fair market value of the
real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged
against operating expenses. Operating expenses of such
properties, net of related income, and gains and losses on their
disposition are included in other expenses.
F-13
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired resulted from the Company's
purchase of capital stock and partnership units of its
subsidiaries. These intangible assets are being amortized over a
20-year period on a straight-line basis.
INCOME TAXES
The Company files a consolidated federal and a unitary Minnesota
income tax return with the subsidiaries, excluding Zapp Bank Plaza
Partnership which files separate federal and state partnership tax
returns. The provision for income taxes is allocated on a
separate entity basis.
Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income such
as interest on state and municipal securities) and include
deferred taxes on temporary differences in the recognition of
income and expense for tax and financial statement purposes.
Deferred taxes are computed using the asset and liability approach
as prescribed in SFAS 109, ACCOUNTING FOR INCOME TAXES.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") 114,
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended by
SFAS 118. Generally, SFAS 114 requires creditors to establish a
valuation allowance when it becomes probable that all principal
and interest due under the contractual terms of a loan will not be
collected. The impairment is measured as the difference between
the recorded amount of the loan and the present value of expected
future cash flows based on the loan's effective interest rate,
observable market price, or fair value for a collateral dependent
loan. The adoption of these standards did not have a material
effect on 1995 results of operations or financial position.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Company's subsidiary banks
have entered into off balance sheet financial instruments
consisting of commitments to extend credit, line-of-credit
arrangements, commitments under credit card arrangements and
letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
F-14
<PAGE>
NOTE 2 INVESTMENT SECURITIES
Debt and equity securities have been classified in the
consolidated balance sheet according to management's intent. The
carrying amounts of investment securities and their approximate
market values at December 31, were as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized
December 31, 1996 Amount Gains Losses Market Value
----------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $19,972,763 $ 49,527 $ (17,900) $20,004,390
U.S. Government Agency
Securities 44,433,785 117,490 (299,359) 44,251,916
State and Municipal Securities 4,264,961 22,615 (33,474) 4,254,102
Equity Securities 1,120,600 0 0 1,120,600
----------- -------- --------- -----------
Total $69,792,109 $189,632 $(350,733) $69,631,008
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized
December 31, 1995 Amount Gains Losses Market Value
----------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $35,538,487 $125,074 $ (80,635) $35,582,926
U.S. Government Agency
Securities 32,078,863 221,139 (171,736) 32,128,266
State and Municipal Securities 2,330,161 9,034 (9,330) 2,329,865
Equity Securities 1,030,300 0 0 1,030,300
----------- -------- --------- -----------
Total $70,977,811 $355,247 $(261,701) $71,071,357
----------- -------- --------- -----------
----------- -------- --------- -----------
</TABLE>
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized
December 31, 1995 Amount Gains Losses Market Value
----------------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government Agency
Securities $1,976,141 $1,892 $(656) $1,977,377
State and Municipal Securities 16,977 0 0 16,977
---------- ------ ------ ----------
Total $1,993,118 $1,892 $(656) $1,994,354
---------- ------ ------ ----------
---------- ------ ------ ----------
</TABLE>
Market value of investment securities was determined from bond
portfolio reports used by the Company. The equity securities
consist mainly of stock in the Federal Reserve Bank, the Federal
Home Loan Bank and the United Banker's Bank.
F-15
<PAGE>
NOTE 2 INVESTMENT SECURITIES (CONTINUED)
On December 5, 1995, as a result of a one-time reassessment
allowed by the Financial Accounting Standards Board Special
Report, "A Guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" issued in
November 1995, the Company's subsidiary banks transferred
securities with a total net book value of $46,048,907 from the
held-to-maturity portfolio to the available-for-sale portfolio.
Various derivative financial instruments were included in the
subsidiary banks' invested assets classified as available for sale
at December 31, 1995. These derivatives are generally valued
based on independent pricing models. Individual derivative
financial instruments, however, may be difficult to price and may
be thinly traded. Accordingly, they are typically subject to
greater market and credit risk than nonderivative financial
instruments. At December 31, 1995, the market value of the banks'
positions in derivative financial instruments approximated 4% of
the banks' total invested assets. The banks held no derivative
financial instruments at December 31, 1996.
Investment securities with carrying values of approximately
$55,084,000 and $50,328,000 were pledged to secure public and
trust deposits as required or permitted by law as of December 31,
1996 and 1995, respectively.
On October 31, 1995, a U.S. Treasury Bond carried in the
held-to-maturity portfolio of one of the Company's subsidiary
banks was sold in response to a tender offer. The security was
sold at its amortized cost of $1,114,577.
The securities disclosed as held to maturity as of December 31,
1995, were transferred to the available for sale category during
1996.
The maturities of investment securities at December 31, 1996, were
as follows:
Carrying Approximate
AVAILABLE FOR SALE Amount Market Value
------------------ -------- ------------
Due in One Year or Less $15,956,734 $16,020,180
Due in One to Five Years 37,284,978 37,122,208
Due in Five to Ten Years 11,331,883 11,336,490
Due after Ten Years 4,097,914 4,031,530
----------- -----------
Total $68,671,509 $68,510,408
Equity Securities 1,120,600 1,120,600
----------- -----------
Total $69,792,109 $69,631,008
----------- -----------
----------- -----------
F-16
<PAGE>
NOTE 3 LOANS
The components of loans in the consolidated balance sheets were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Commercial and Agricultural $ 71,045,936 $ 45,301,633
Real Estate 124,720,004 117,216,229
Installment 25,877,190 23,541,362
Other 3,129,011 3,012,138
------------- -------------
Total $ 224,772,141 $ 189,071,362
------------- -------------
------------- -------------
</TABLE>
Nonaccrual and renegotiated loans totaled approximately $1,368,167 and
$604,700 at December 31, 1996 and 1995, respectively. Interest income
on these loans is recorded only when received.
NOTE 4 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses during the years ended
December 31, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, Beginning of Period $ 2,590,205 $ 2,726,464
Provision 287,518 152,000
Loans Charged Off (276,058) (393,445)
Recoveries of Loans Previously Charged Off 143,815 105,186
----------- -----------
Balance, End of Period $ 2,745,480 $ 2,590,205
----------- -----------
----------- -----------
</TABLE>
NOTE 5 LAND, PREMISES AND EQUIPMENT
Components of land, premises and equipment included in the consolidated
balance sheets at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cost
Land $ 1,193,509 $ 1,193,509
Bank Premises 10,468,940 10,448,419
Furniture and Equipement 9,338,723 8,003,505
Leasehold Improvements 4,821,583 4,693,835
------------ ------------
Total Cost $ 25,822,755 $ 24,339,268
Less: Accumulated Depreciation 10,485,285 9,157,775
------------ ------------
Net Book Value $ 15,337,470 $ 15,181,493
------------ ------------
------------ ------------
</TABLE>
F-17
<PAGE>
NOTE 5 LAND, PREMISES AND EQUIPMENT (CONTINUED)
Zapp Bank Plaza Partnership operates the main bank facility in St.
Cloud, Minnesota. They lease a portion of two floors (approximately
25%) of the office building to unrelated entities under noncancelable
operating leases. Zappco, Inc. owns and operates a branch bank
facility in St. Cloud, Minnesota, of which approximately 50% is leased
to unrelated entities.
Total rent income under noncancelable operating leases from unrelated
entities was approximately $628,165 and $644,000 for the years ended
December 31, 1996 and 1995, respectively.
The following is a schedule by year of future minimum rental income to
be received under noncancelable operating leases.
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -----------
<S> <C>
1997 $ 532,000
1998 463,100
1999 380,600
2000 334,100
2001 5,200
-----------
Total $ 1,715,000
-----------
-----------
</TABLE>
Zapp Bank, N.A. and First National Bank of Little Falls currently lease
other facilities under noncancelable operating leases expiring in 1998
and 1999, respectively. Zapp Data, Inc. leased a computer system
under a noncancelable operating lease that expired in 1995. Total rent
expense under noncancelable and cancelable operating leases paid to
outside entities was approximately $116,400 and $202,600 for the years
ended December 31, 1996 and 1995, respectively.
The following is a schedule by year of future minimum rental payments
required under noncancelable operating leases as of December 31, 1996.
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- ---------
<S> <C>
1997 $ 70,600
1998 58,000
1999 29,200
---------
Total $ 157,800
---------
---------
</TABLE>
F-18
<PAGE>
NOTE 6 CERTIFICATES OF DEPOSIT
Certificates of Deposit in excess of $100,000 totaled approximately
$26,684,000 and $15,257,000 at December 31, 1996 and 1995,
respectively.
The following is a schedule by year of the aggregate amount of
maturities of certificates of deposit.
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -------------
<S> <C>
1997 $ 104,961,352
1998 20,572,308
1999 1,105,437
2000 9,284
2001 4,310
-------------
Total $ 126,652,691
-------------
-------------
</TABLE>
NOTE 7 NOTES PAYABLE
<TABLE>
<CAPTION>
Description Security 1996 1995
------------------------ ---------- ----------- ------------
<S> <C> <C> <C>
Zappco, Inc.
Note Payable, Subsidiary
Bearing Interest at Prime, Stock
Due April 30, 1997 $ 946,168 $ 1,494,073
Note Payable, Subsidiary
Bearing Interest at Prime, Stock
Due April 30, 1997 200,000 200,000
Zapp Bank Plaza Partnership #1
Mortgage Payable, Real Estate
Bearing Interest at 7.50%,
Monthly installments through
January 1, 2004 8,552,236 8,790,407
---------- ------------
Total Long-Term Debt $9,698,404 $ 10,484,480
---------- ------------
---------- ------------
</TABLE>
F-19
<PAGE>
NOTE 7 NOTES PAYABLE (CONTINUED)
Maturity requirements on long-term debt are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -----------
<S> <C>
1997 $ 1,402,829
1998 276,586
1999 298,058
2000 321,197
2001 346,132
Later Years 7,053,602
-----------
Total $ 9,698,404
-----------
-----------
</TABLE>
NOTE 8 OTHER BORROWINGS
The components of other borrowings in the consolidated balance sheet
are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Securities Sold Under Agreements to
Repurchase $ 9,346,747 $ 12,841,031
Federal Funds Purchased 750,000 0
Federal Home Loan Bank Advances 4,414,173 1,200,000
------------ ------------
Total $ 14,510,920 $ 14,041,031
------------ ------------
------------ ------------
</TABLE>
The book value of the securities underlying the securities sold under
agreements to repurchase (agreements) were approximately $12,400,000
and $15,600,000 for the years ended December 31, 1996 and 1995,
respectively. These securities were under the respective
institution's control.
The maximum amount of outstanding agreements at any month end during
the previous year was $9,346,747. The daily average amount of
outstanding agreements during 1996 was $7,792,521.
F-20
<PAGE>
NOTE 8 OTHER BORROWINGS (CONTINUED)
The Federal Home Loan Bank advances bear interest ranging from 6.64%
to 7.04% and are secured by first mortgage residential loans totaling
approximately $13,531,000. Maturity requirements on Federal Home Loan
Bank advances are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, Amount
------------------------- -----------
<S> <C>
1997 $ 114,685
1998 122,662
1999 131,194
2000 140,321
2001 150,043
Later Years 3,755,268
-----------
Total $ 4,414,173
-----------
-----------
</TABLE>
NOTE 9 MANDATORY CONVERTIBLE EQUITY SECURITIES
The mandatory convertible equity securities were issued to the former
stockholders of Melrose Bancshares, Inc. and bear interest at Norwest
Bank Minneapolis prime rate. At maturity these notes shall be
converted to preferred stock of Zappco, Inc. These shares of preferred
stock will only have preference upon liquidation. On September 30,
1996 and 1995, the Company converted $100,000 of the equity securities
to preferred stock of Zappco, Inc. The preferred stock was then
immediately redeemed for $100,000. The notes mature and preferred
stock will be issued as follows:
<TABLE>
<CAPTION>
Number of Shares of
September 30, Amount Preferred Stock to be Issued
------------- ------------- -----------------------------
<S> <C> <C>
1997 $ 100,000 1,000
------------- ----------
Total $ 100,000 1,000
------------- ----------
------------- ----------
</TABLE>
NOTE 10 COMMON STOCK, PREFERRED STOCK, AND CAPITAL SURPLUS
Common stock has a par value of $1 per share. There were 25,000 shares
of common stock authorized and 15,842 shares issued and outstanding at
December 31, 1996 and 1995.
Preferred stock has a par value of $100 per share and is non-voting.
There are 10,000 shares authorized and no shares issued or outstanding
at December 31, 1996 and 1995.
Capital surplus represents profits segregated by the Board of
Directors' resolution.
F-21
<PAGE>
NOTE 11 INCOME TAXES
The consolidated provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Current Provision $ 2,309,684 $ 1,496,112
Deferred Provision (17,000) 211,000
----------- -----------
Total $ 2,292,684 $ 1,707,112
----------- -----------
----------- -----------
</TABLE>
The provision for federal income taxes is less than that computed by
applying the federal statutory rate of 34% in 1996 and 1995, as
indicated in the following analysis:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Tax Based on statutory rate $ 2,267,347 $ 1,437,000
Increase (Decrease) Due to -
Interest on Investment Securities
Exempt from Federal Income Taxes (83,000) (74,000)
State Income Taxes, Net of
Federal Income Tax Benefit 437,000 279,000
State Tax Refund Received Net of
Federal Taxes (320,000) 0
Amortization of Cost in
Excess of Net Assets Acquired,
Not Deductible for Tax Purposes 42,000 42,000
Other Permanent Differences (50,663) 23,112
----------- -----------
Income Tax Provision $ 2,292,684 $ 1,707,112
----------- -----------
----------- -----------
</TABLE>
The deferred provision for income taxes results from temporary
differences in the recognition of certain income and expense items for
tax and financial reporting purposes, principally depreciation and the
provision for possible loan losses. Deferred tax assets of
approximately $32,000 are included in other assets at December 31,
1996.
F-22
<PAGE>
NOTE 12 COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course
of business and which involve elements of credit risk, interest rate
risk and liquidity risk of its subsidiary banks. These commitments and
contingent liabilities are commitments to extend credit, line-of-credit
arrangements, credit card arrangements, and letters of credit. A
summary of the subsidiary banks' commitments and contingent liabilities
at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Amount
<S> <C>
Commitments to Extend Credit $ 16,321,300
Line-of-Credit Arrangements 40,680,800
Credit Card Arrangements 10,866,700
Letters of Credit 3,353,900
------------
Total $ 71,222,700
------------
------------
</TABLE>
Commitments to extend credit, line-of-credit arrangements, credit
card arrangements, and letters of credit all include exposure to some
credit loss in the event of nonperformance of the customer. The
subsidiary banks' procedures for credit commitments and contingent
liabilities are the same as those for extension of credit that are
recorded on the consolidated statements of condition.
NOTE 13 EMPLOYEE BENEFIT PLAN
During 1992 the Company adopted an Employee Stock Ownership Plan
(ESOP) as part of the existing defined contribution plan, which covers
substantially all employees over the age of 21 who have completed one
year of service, as defined. Participants are vested over a five-year
period. The contribution to the Plan is determined annually by the
board of directors. The Company's cash contribution to the ESOP was
approximately $659,300 and $435,000 for the years ended December 31,
1996 and 1995, respectively. Contributions will be used to purchase
additional shares of the Company's stock as they become available from
current stockholders. The ESOP has a total of 134 shares allocated to
participants as of December 31, 1996.
An ESOP participant may elect to receive the full value of his or her
account in whole shares of employer securities (with fractional shares
to be paid in cash) or receive the fair market value of the employer
securities as of the date of the distribution in cash from the Company.
The Company's potential repurchase obligation under this arrangement
was approximately $234,500 and $161,900 for the years ended
December 31, 1996 and 1995, respectively.
F-23
<PAGE>
NOTE 14 RELATED PARTY TRANSACTIONS
The Company's subsidiary banks have entered into transactions with
their directors, significant shareholders and their affiliates (related
parties). Such transactions were made in the ordinary course of
business on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features. The aggregate amount of loans to such
related parties at December 31, 1996 and 1995, was approximately
$4,965,000 and $5,190,000, respectively.
NOTE 15 CONCENTRATIONS OF CREDIT
The majority of the subsidiary banks' loans and commitments have been
granted to customers in each bank's market area. The majority of
these customers are depositors of the banks. Investments in state and
municipal securities involve governmental entities, the majority of
which are within the State of Minnesota. The concentrations of credit
by type of loan are set forth in Note 3. The distribution of
commitments to extend credit approximates the distribution of loans
outstanding. Letters of credit were granted primarily to commercial
borrowers. The Company, as a matter of policy, does not extend credit
to any single borrower or group of related borrowers in excess of
$4,324,000.
NOTE 16 REGULATORY MATTERS
The Company has two subsidiary banks (Zapp Bank, N.A. and First
National Bank of Little Falls) that are national banks and one
subsidiary bank (Melrose State Bank) that is a state bank.
National banks are subject to the dividend restrictions set forth by
the Comptroller of the Currency. Under such restrictions, the banks
may not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings
(as defined) plus the retained earnings (as defined) from the prior two
years.
The state bank is subject to the dividend restrictions set forth by the
Minnesota Department of Commerce. Under such restrictions, the bank
may not, without prior approval of the Minnesota Department of
Commerce, declare dividends in excess of the sum of 50% of the prior
three year's earnings (as defined) subject to other minimum capital
percentages and classified asset percentages.
F-24
<PAGE>
NOTE 16 REGULATORY MATTERS (CONTINUED)
The dividends that the Company's subsidiary banks could declare during
1997 without prior regulatory approval are as follows:
<TABLE>
<CAPTION>
Subsidiary Unrestricted Dividends
-------------------------------- -------------------------------------
<S> <C>
Zapp Bank, N.A. $2,525,215 plus 1997 current earnings
First National Bank of Little Falls $553,355 plus 1997 current earnings
Melrose State Bank $152,793
</TABLE>
The subsidiary banks are also required to maintain minimum amounts of
capital to total "risk weighted" assets, as defined by banking
regulators. At December 31, 1996, the subsidiary banks are required
to have minimum Tier 1 and Total capital ratios of 4.0% and 8.0%,
respectively. Each bank's actual risk weighted capital ratios at that
date were as follows:
<TABLE>
<CAPTION>
Tier 1 Capital Total Capital
-------------- -------------
<S> <C> <C>
Zapp Bank, N.A. 10.90% 12.13%
-------------- -------------
-------------- -------------
First National Bank of Little Falls 15.53% 16.78%
-------------- -------------
-------------- -------------
Melrose State Bank 11.17% 12.86%
-------------- -------------
-------------- -------------
</TABLE>
NOTE 17 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS, FEDERAL
FUNDS SOLD, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
For short-term instruments, the carrying amount is a reasonable
estimate of fair value.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
For these short-term receivables and payables, the carrying amount is a
reasonable estimate of fair value.
SECURITIES AVAILABLE FOR SALE
For securities held as investments, fair value equals quoted market
price, if available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
F-25
<PAGE>
NOTE 17 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered for deposits of similar
remaining maturities.
LONG-TERM DEBT
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
COMMITMENTS TO EXTEND CREDIT, LINE-OF-CREDIT ARRANGEMENTS, CREDIT CARD
ARRANGEMENTS, AND LETTERS OF CREDIT
For these commitments, the carrying amount is a reasonable estimate
of fair value, since the stated fees and interest rates charged on
these arrangements does not significantly vary from the terms
currently being offered.
<TABLE>
<CAPTION>
1996
------------------------------------
Carrying Amount Fair Value
--------------- ---------------
<S> <C> <C>
Financial Assets:
Securities Available for Sale $ 69,631,008 $ 69,631,008
--------------- ---------------
--------------- ---------------
Loans $ 224,772,141
Less: Allowance for Loan Losses (2,745,480)
---------------
Net Loans $ 222,026,661 $ 221,146,000
--------------- ---------------
--------------- ---------------
Financial Liabilities:
Demand Deposits $ 48,447,676 $ 48,447,676
--------------- ---------------
--------------- ---------------
Savings and NOW Deposits $ 108,378,606 $ 108,378,606
--------------- ---------------
--------------- ---------------
Certificates of Deposit $ 126,652,691 $ 127,019,000
--------------- ---------------
--------------- ---------------
Notes Payable $ 9,698,404 $ 9,698,404
--------------- ---------------
--------------- ---------------
Mandatory Convertible Equity Securities $ 100,000 $ 100,000
--------------- ---------------
--------------- ---------------
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Zappco, Inc. And Subsidiaries
St. Cloud, Minnesota
We have audited the accompanying consolidated balance sheets of Zappco, Inc. And
Subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by Management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zappco, Inc. And
Subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As described in Note 1 to the financial statements and as required by generally
accepted accounting principles, the Company changed its method of accounting for
investments in debt and marketable equity securities in 1994.
LARSON, ALLEN, WEISHAIR & CO., LLP
St. Cloud, Minnesota
January 26, 1996
F-27
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 19,429,272 $ 16,775,174
FEDERAL FUNDS SOLD 9,880,561 3,157,675
SECURITIES AVAILABLE FOR SALE 71,071,357 16,965,359
SECURITIES HELD TO MATURITY 1,993,118 43,662,491
LOANS 189,071,362 183,515,018
Less: Allowance for Loan Losses (2,590,205) (2,726,464)
------------ ------------
Net Loans $186,481,157 $180,788,554
LAND, PREMISES AND EQUIPMENT (NET) 15,181,493 15,054,048
OTHER REAL ESTATE 600,000 807,115
ACCRUED INCOME AND OTHER ASSETS 3,809,644 4,311,292
COST IN EXCESS OF NET ASSETS ACQUIRED (NET) 840,742 941,080
------------ ------------
Total Assets $309,287,344 $282,462,788
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand Deposits $ 44,837,154 $ 40,862,281
Savings and NOW Deposits 108,650,740 105,590,355
Certificates of Deposits 104,628,484 90,642,017
------------ ------------
Total Deposits $258,116,378 $237,094,653
OTHER BORROWINGS 14,041,031 10,007,223
ACCRUED EXPENSES AND OTHER LIABILITIES 1,731,716 1,548,187
NOTES PAYABLE 10,484,480 11,429,124
------------ ------------
Total Liabilities $284,373,605 $260,079,187
------------ ------------
MANDATORY CONVERTIBLE EQUITY SECURITIES $ 200,000 $ 300,000
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock $ 15,842 $ 15,842
Capital Surplus 5,822,100 5,822,100
Undivided Profits 18,820,109 16,562,524
Net Unrealized Gain (Loss) on Available-For-Sale
Securities 55,688 (316,865)
------------ ------------
Total Stockholders' Equity $ 24,713,739 $ 22,083,601
------------ ------------
Total Liabilities and Stockholders' Equity $309,287,344 $282,462,788
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-28
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
INTEREST INCOME
Loans $ 18,695,354 $ 16,130,584
Investment Securities 3,176,698 2,681,560
Other Investment Securities Exempt
from Federal Income Taxes 91,209 107,026
Deposits With Banks - 9,078
Federal Funds Sold and Other 387,016 279,739
------------ ------------
Total Interest Income $ 22,350,277 $ 19,207,987
------------ ------------
INTEREST EXPENSE
Savings and NOW Accounts $ 3,279,227 $ 2,393,069
Certificates of Deposit 5,359,642 3,715,297
Notes Payable and Other Borrowed Funds 1,368,646 1,211,910
------------ ------------
Total Interest Expense $ 10,007,515 $ 7,320,276
------------ ------------
NET INTEREST INCOME BEFORE PROVISION FOR POSSIBLE LOAN
LOSSES $ 12,342,762 $ 11,887,711
PROVISION FOR POSSIBLE LOAN LOSSES 152,000 440,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN
LOSSES $ 12,190,762 $ 11,447,711
------------ ------------
NON-INTEREST INCOME
Trust Department $ 1,890,144 $ 1,701,467
Service Charges, Commissions and Fees 1,524,904 1,614,310
Other 963,561 693,371
------------ ------------
Total Non-Interest Income $ 4,378,609 $ 4,009,148
------------ ------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits $ 6,312,814 $ 6,254,530
Operations and Occupancy 5,830,044 5,678,868
Other 200,423 105,549
------------ ------------
Total Non-Interest Expense $ 12,343,281 $ 12,038,947
------------ ------------
INCOME BEFORE INCOME TAX PROVISION $ 4,226,090 $ 3,417,912
INCOME TAX PROVISION 1,707,112 1,327,091
------------ ------------
NET INCOME $ 2,518,978 $ 2,090,821
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-29
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK NET UNREALIZED
--------------- GAIN (LOSS) ON
SHARES CAPITAL UNDIVIDED AVAILABLE FOR
ISSUED AMOUNT SURPLUS PROFITS SALE SECURITIES TOTAL
------ ------- ---------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 15,842 $15,842 $5,822,100 $14,717,254 $ - $20,555,196
Plus: Net Income - - - 2,090,821 - 2,090,821
Less: Dividends ($15.50/ Share) - - - (245,551) - (245,551)
Net Unrealized (Loss) on Available
for Sale Securities - - - - (316,865) (316,865)
------ ------- ---------- ----------- --------------- -----------
Balance December 31, 1994 15,842 $15,842 $5,822,100 $16,562,524 $(316,865) $22,083,601
Plus: Net Income - - - 2,518,978 - 2,518,978
Less: Dividends ($16.50/ Share) - - - (261,393) - (261,393)
Net Unrealized Gain on Available
for Sale Securities - - - - 372,553 372,553
------ ------- ---------- ----------- --------------- -----------
Balance December 31, 1995 15,842 $15,842 $5,822,100 $18,820,109 $ 55,688 $24,713,739
------ ------- ---------- ----------- --------------- -----------
------ ------- ---------- ----------- --------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-30
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,518,978 $ 2,090,821
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,409,167 1,314,382
Net Premium Amortization (Discount Accretion) (61,771) 16,369
Provision for Loan Losses 152,000 440,000
(Increase) Decrease in Accrued Income and Other
Assets 501,648 (650,713)
Increase (Decrease) in Accrued Expenses and Other
Liabilities (204,399) 263,709
Loss on Sale of Property and Equipment 3,094 35,308
(Gain) Loss on Sale of Other Real Estate (22,020) 12,242
------------ ------------
Net Cash Provided by Operating Activities $ 4,296,697 $ 3,522,118
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Available for Sale Securities $(13,198,220) $ (5,646,965)
Proceeds from Maturities of Available for Sale
Securities 5,807,282 1,250,000
Purchases of Held to Maturity Securities (15,725,142) (18,859,462)
Proceeds from Sales of Held to Maturity Securities 1,114,577 -
Proceeds from Maturities of Held to Maturity
Securities 10,252,473 20,036,400
Net (Increase) Decrease in Federal Funds Sold (6,722,886) 11,692,325
Net Increase in Loans (6,227,103) (12,125,477)
Purchases of Property and Equipment (1,040,871) (911,188)
Proceeds from Sale of Property and Equipment 3,874 2,780
Proceeds from Sale of Other Real Estate 209,264 231,926
------------ ------------
Net Cash Used by Investing Activities $(25,526,752) $ (4,329,661)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits $ 3,974,873 $ 1,042,020
Net Increase in Savings and NOW Deposits 3,060,385 676,612
Net Increase in Certificates of Deposit 13,986,467 2,710,620
Principal Payments on Notes Payable (944,644) (707,027)
Payments on Convertible Equity Securities (100,000) (100,000)
Increase in Other Borrowings 4,033,808 1,325,263
Dividends Paid (126,736) (118,815)
------------ ------------
Net Cash Provided by Financing Activities $ 23,884,153 $ 4,828,673
------------ ------------
NET INCREASE IN CASH $ 2,654,098 $ 4,021,130
Cash - Beginning 16,775,174 12,754,044
------------ ------------
CASH - ENDING $ 19,429,272 $ 16,775,174
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-31
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest to Depositors $ 5,169,463 $ 5,853,685
------------ ------------
------------ ------------
Interest on Long-Term and Other Borrowed Money $ 1,348,356 $ 1,254,982
------------ ------------
------------ ------------
Income Taxes $ 1,491,242 $ 1,569,505
------------ ------------
------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Other Real Estate Acquired in Settlement of Loans $ 864,873 $ 193,680
------------ ------------
------------ ------------
Loans and Other Real Estate Charged Off to the
Allowance for Loan Losses (Net of Recoveries) $ 288,259 $ 14,447
------------ ------------
------------ ------------
Loans Originated from Sale of OREO $ 217,500 $ -
------------ ------------
------------ ------------
Increase (Decrease) in Deferred Tax Asset Related to
SFAS 115 $ (253,271) $ 215,413
------------ ------------
------------ ------------
Transfer of Securities from Held-to-Maturity to
Available-for-Sale $ 46,048,907 $ -
------------ ------------
------------ ------------
Transfer of Real Estate from Other Real Estate to
Land, Premises and Equipment $ 402,371 $ -
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-32
<PAGE>
ZAPPCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Zappco, Inc. (Company), through its operating subsidiaries, is primarily engaged
in commercial banking and related services and grants commercial, residential,
consumer and agricultural loans to customers throughout the Central Minnesota
area.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Zapp Bank, N.A., (wholly owned) First National
Bank of Little Falls (97.3% owned), Melrose State Bank (wholly owned), Zapp
Data, Inc., a wholly owned data processing service bureau, and Zapp Bank Plaza
Partnership #1 (98.8% owned by Zappco, Inc. and 1.2% owned by Zapp Data, Inc.).
Effective March 11, 1994, Melrose Bancshares, Inc., a wholly owned holding
company that owned 100% of the outstanding stock of Melrose State Bank, was
merged into Zappco, Inc. All shares of stock of Melrose Bancshares, Inc. were
surrendered to Zappco, Inc. and canceled. Since Zappco, Inc. was the sole
shareholder of all of the shares of stock of Melrose Bancshares, Inc., no
conversion of the shares of Melrose Bancshares, Inc. was necessary. This merger
had no effect on 1994 earnings.
The First National Bank of Little Falls (Little Falls) has been reflected as a
wholly owned subsidiary of the Company in the consolidated financial statements
because the Company has agreements which provide that the Company has first
option to repurchase these shares at minimal cost from the two directors of
Little Falls who own the remaining 2.7% of outstanding stock. In addition, the
rights to all dividends have been assigned to the Company.
Significant intercompany balances and transactions have been eliminated from the
consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks." At times these balances may be in excess of FDIC
insurance limits.
F-33
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES AVAILABLE FOR SALE
Available for sale securities consist of bonds, notes and debentures not
classified as held to maturity securities. Unrealized holding gains and losses,
net of tax, on available for sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses on
the sale of available for sale securities are determined using the
specific-identification method. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity.
SECURITIES HELD TO MATURITY
Held to maturity securities consist of bonds, notes, debentures and equity
securities for which the subsidiary banks have the positive intent and ability
to hold to maturity. Held to maturity securities are reported at cost, adjusted
for premiums and discounts that are recognized in interest income using the
interest method over the period to maturity.
LOANS
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. Interest on loans is accrued and credited to
income based on the principal amount outstanding. The accrual of interest on
loans is discontinued when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due. Upon such
discontinuance, all unpaid accrued interest is reversed.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual loans and related off-balance sheet commitments, recent loss
experience, current economic conditions, the risk characteristics of the various
categories of loans and other pertinent factors. Loans deemed uncollectible are
charged to the allowance. Provisions for loan losses and recoveries on loans
previously charged off are added to the allowance. While management uses the
best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions.
LAND, PREMISES AND EQUIPMENT
Property and equipment owned are stated at cost less accumulated depreciation
which is computed on the straight-line and accelerated methods over the
estimated useful lives of the assets. Accelerated depreciation did not
materially exceed straight-line depreciation for the years ended December 31,
1995 and 1994. Both accelerated and straight-line methods are used for income
tax reporting purposes.
F-34
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure is carried in other assets at the lower of
the recorded investment in the property or its fair value less selling costs.
Prior to foreclosure, the value of the underlying loan is written down to the
fair market value of the real estate to be acquired by a charge to the allowance
for loan losses, if necessary. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of related
income, and gains and losses on their disposition are included in other
expenses.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired resulted from the Company's purchase of
capital stock and partnership units of its subsidiaries. These intangible
assets are being amortized over a 20-year period on a straight-line basis.
INCOME TAXES
The Company files a consolidated federal and a unitary Minnesota income tax
return with the subsidiaries, excluding Zapp Bank Plaza Partnership which files
separate federal and state partnership tax returns. The provision for income
taxes is allocated on a separate entity basis.
Provisions for income taxes are based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and include deferred taxes on temporary differences in the
recognition of income and expense for tax and financial statement purposes.
Deferred taxes are computed using the asset and liability approach as prescribed
in SFAS 109, ACCOUNTING FOR INCOME TAXES.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY CREDITORS FOR
IMPAIRMENT OF A LOAN, as amended by SFAS 118. Generally, SFAS 114 requires
creditors to establish a valuation allowance when it becomes probable that all
principal and interest due under the contractual terms of a loan will not be
collected. The impairment is measured as the difference between the recorded
amount of the loan and the present value of expected future cash flows based on
the loan's effective interest rate, observable market price, or fair value for a
collateral dependent loan. The adoption of these standards did not have a
material effect on 1995 results of operations or financial position.
F-35
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Effective January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS
IN DEBT AND EQUITY SECURITIES. Generally, SFAS 115 requires that investments in
debt securities and equity securities with readily determinable fair values be
classified into three categories which then establish the accounting
requirements. The accounting for two of the categories, trading securities and
held-to-maturity securities, is essentially the same as prior practice. The new
category, available-for-sale securities, is accounted for at fair value with
unrealized holding gains or losses being reported in stockholders' equity. As a
result of adopting this statement, $12,760,736 of investment securities were
reclassified as available for sale with $56,200, net of tax, being recorded as
an unrealized gain in stockholders' equity as of January 1, 1994.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Company's subsidiary banks have entered
into off balance sheet financial instruments consisting of commitments to extend
credit, line-of-credit arrangements, commitments under credit card arrangements
and letters of credit. Such financial instruments are recorded in the financial
statements when they become payable.
NOTE 2 INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheet according to management's intent. The carrying amounts of investment
securities and their approximate market values at December 31, were as follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized
December 31, 1995 Amount Gains Losses Market Value
- ----------------------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 35,538,487 $ 125,074 $ (80,635) $ 35,582,926
U.S. Government Agency
Securities 32,078,863 221,139 (171,736) 32,128,266
State and Municipal Securities 2,330,161 9,034 (9,330) 2,329,865
Equity Securities 1,030,300 0 0 1,030,300
------------ ---------- ---------- ------------
Total $ 70,977,811 $ 355,247 $ (261,701) $ 71,071,357
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
December 31, 1994
- -----------------------------
U.S. Treasury Securities $ 6,499,741 $ 0 $ (164,663) $ 6,335,078
U.S. Government Agency
Securities 9,993,396 0 (367,615) 9,625,781
Equity Securities 1,004,500 0 0 1,004,500
------------ ---------- ---------- ------------
Total $ 17,497,637 $ 0 $ (532,278) $ 16,965,359
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
F-36
<PAGE>
NOTE 2 INVESTMENT SECURITIES (CONTINUED)
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized
December 31, 1995 Amount Gains Losses Market Value
- ----------------------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Government Agency
Securities $ 1,976,141 $ 1,892 $ (656) $ 1,977,377
State and Municipal Securities 16,977 0 0 16,977
------------ ---------- ---------- ------------
Total $ 1,993,118 $ 1,892 $ (656) $ 1,994,354
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
December 31, 1994
- -----------------------------
U.S. Treasury Securities $ 30,943,596 $ 0 $(1,052,087) $ 29,891,509
U.S. Government Agency
Securities 10,714,832 10,535 (266,350) 10,459,017
State and Municipal Securities 2,004,063 5,808 (51,225) 1,958,646
------------ ---------- ----------- ------------
Total $ 43,662,491 $ 16,343 $(1,369,662) $ 42,309,172
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
Market value of investment securities was determined from bond portfolio reports
used by the Company. The equity securities consist mainly of stock in the
Federal Reserve Bank, the Federal Home Loan Bank and the United Banker's Bank.
On December 5, 1995, as a result of a one-time reassessment allowed by the
Financial Accounting Standards Board Special Report, "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities" issued in November 1995, the Company's subsidiary banks transferred
securities with a total net book value of $46,048,907 from the held-to-maturity
portfolio to the available-for-sale portfolio.
Various derivative financial instruments are included in the subsidiary banks'
invested assets classified as available for sale at December 31, 1995. These
derivatives are generally valued based on independent pricing models.
Individual derivative financial instruments, however, may be difficult to price
and may be thinly traded. Accordingly, they are typically subject to greater
market and credit risk than nonderivative financial instruments. At December
31, 1995, the market value of the banks' positions in derivative financial
instruments approximated 4% of the banks' total invested assets.
Investment securities with carrying values of approximately $50,328,000 and
$40,598,000 were pledged to secure public and trust deposits as required or
permitted by law as of December 31, 1995 and 1994, respectively.
F-37
<PAGE>
NOTE 2 INVESTMENT SECURITIES (CONTINUED)
On October 31, 1995, a U.S. Treasury Bond carried in the held-to-maturity
portfolio of one of the Company's subsidiary banks was sold in response to a
tender offer. The security was sold at its amortized cost of $1,114,577. A
municipal security classified as held to maturity was called at 101% during
1994, resulting in a gross gain of $2,500. No securities were sold during 1994.
The maturities of investment securities at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- ----------------------------
Carrying Approximate Carrying Approximate
Amount Market Value Amount Market Value
- ----------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 29,258,345 $ 29,182,033 $ 1,993,118 $ 1,994,354
Due in One to Five Years 38,095,994 38,238,102 0 0
Due in Five to Ten Years 2,277,015 2,294,226 0 0
Due after Ten Years 316,157 326,696 0 0
------------ ------------ ------------ ------------
Total $ 69,947,511 $ 70,041,057 $ 1,993,118 $ 1,994,354
Equity Securities 1,030,300 1,030,300 0 0
------------ ------------ ------------ ------------
Total $ 70,977,811 $ 71,071,357 $ 1,993,118 $ 1,994,354
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
NOTE 3 LOANS
The components of loans in the consolidated balance sheets were as follows:
1995 1994
------------- -------------
Commercial and Agricultural $ 45,301,633 $ 48,516,628
Real Estate 117,216,229 110,670,911
Installment 23,541,362 21,603,515
Other 3,012,138 2,723,964
------------- -------------
Total $ 189,071,362 $ 183,515,018
------------- -------------
------------- -------------
Nonaccrual and renegotiated loans totaled approximately $604,700 and $2,227,700
at December 31, 1995 and 1994, respectively. Interest income on these loans is
recorded only when received.
F-38
<PAGE>
NOTE 4 ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses during the years ended December
31, 1995 and 1994, are summarized as follows:
1995 1994
------------- -------------
Balance, Beginning of Period $ 2,726,464 $ 2,300,911
Provision 152,000 440,000
Loans Charged Off (393,445) (108,888)
Recoveries of Loans Previously
Charged Off 105,186 94,441
------------- -------------
Balance, End of Period $ 2,590,205 $ 2,726,464
------------- -------------
------------- -------------
NOTE 5 LAND, PREMISES AND EQUIPMENT
Components of land, premises and equipment included in the consolidated balance
sheets at December 31, 1995 and 1994, were as follows:
1995 1994
------------- -------------
Cost
Land $ 1,193,509 $ 1,132,509
Bank Premises 10,448,419 10,133,673
Furniture and Equipment 8,003,505 6,791,680
Leasehold Improvements 4,693,835 5,019,729
------------- -------------
Total Cost $ 24,339,268 $ 23,077,591
Less: Accumulated Depreciation 9,157,775 8,023,543
------------- -------------
Net Book Value $ 15,181,493 $ 15,054,048
------------- -------------
------------- -------------
Zapp Bank Plaza Partnership operates the main bank facility in St. Cloud,
Minnesota. They lease a portion of two floors (approximately 40%) of the office
building to unrelated entities under noncancelable operating leases. Zappco,
Inc. owns and operates a branch bank facility in St. Cloud, Minnesota, of which
approximately 50% is leased to unrelated entities.
Total rent income under noncancelable operating leases from unrelated entities
was approximately $644,000 and $585,000 for the years ended December 31, 1995
and 1994, respectively.
F-39
<PAGE>
NOTE 5 LAND, PREMISES AND EQUIPMENT (CONTINUED)
The following is a schedule by year of future minimum rental income to be
received under noncancelable operating leases.
Years Ending December 31, Amount
------------------------- -----------
1996 $ 583,100
1997 450,100
1998 452,600
1999 374,200
2000 335,900
Later Years 5,500
-----------
Total $ 2,201,400
-----------
-----------
Zapp Bank, N.A. and First National Bank of Little Falls currently lease other
facilities under noncancelable operating leases expiring in 1998 and 1999,
respectively. Zapp Data, Inc. leased a computer system under a noncancelable
operating lease that expired in 1995. Total rent expense under noncancelable
and cancelable operating leases paid to outside entities was approximately
$202,600 and $261,000 for the years ended December 31, 1995 and 1994,
respectively.
The following is a schedule by year of future minimum rental payments required
under noncancelable operating leases as of December 31, 1995.
Years Ending December 31, Amount
------------------------- -----------
1996 $ 82,300
1997 66,000
1998 53,400
1999 29,200
-----------
Total $ 230,900
-----------
-----------
NOTE 6 JUMBO CERTIFICATES OF DEPOSIT
Certificates of Deposit in excess of $100,000 totaled approximately $15,257,000
and $11,932,000 at December 31, 1995 and 1994, respectively.
F-40
<PAGE>
NOTE 7 NOTES PAYABLE
Description Security 1995 1994
- -------------------------------- ------------ ----------- -----------
Zappco, Inc.
Note Payable, Subsidiary
Bearing Interest at Prime, Stock
Due April 30, 1996 $ 1,494,073 $ 1,992,704
Note Payable, Subsidiary
Bearing Interest at Prime, Stock
Due April 30, 1996 200,000 425,000
Zapp Bank Plaza Partnership #1
Mortgage Payable, Real Estate
Bearing Interest at 7.50%,
Monthly installments through
January 1, 2004 8,790,407 9,011,420
----------- -----------
$10,484,480 $11,429,124
----------- -----------
----------- -----------
Maturity requirements on long-term debt are as follows:
Years Ending December 31, Amount
------------------------- ------------
1996 $ 1,932,244
1997 256,661
1998 276,586
1999 298,058
2000 321,197
Later Years 7,399,734
------------
Total $ 10,484,480
------------
------------
F-41
<PAGE>
NOTE 8 OTHER BORROWINGS
The components of other borrowings in the consolidated balance sheet are as
follows:
1995 1994
------------- -------------
Securities Sold Under Agreements to
Repurchase $ 12,841,031 $ 9,082,223
Federal Funds Purchased 0 925,000
Federal Home Loan Bank Advances 1,200,000 0
------------- -------------
Total $ 14,041,031 $ 10,007,223
------------- -------------
------------- -------------
The Federal Home Loan Bank advances bear interest at 6.64% and are secured by
first mortgage residential loans totaling $9,048,952. Maturity requirements on
Federal Home Loan Bank advances are as follows:
Years Ending December 31, Amount
------------------------- ------------
1996 $ 9,704
1997 30,432
1998 32,516
1999 34,741
2000 37,120
Later Years 1,055,487
----------
Total $1,200,000
----------
----------
NOTE 9 MANDATORY CONVERTIBLE EQUITY SECURITIES
The mandatory convertible equity securities were issued to the former
stockholders of Melrose Bancshares, Inc. and bear interest at Norwest Bank
Minneapolis prime rate. At maturity these notes shall be converted to preferred
stock of Zappco, Inc. These shares of preferred stock will only have preference
upon liquidation. On September 30, 1995 and 1994, the Company converted
$100,000 of the equity securities to preferred stock of Zappco, Inc. The
preferred stock was then immediately redeemed for $100,000. The notes mature
and preferred stock will be issued as follows:
Number of Shares of
September 30, Amount Preferred Stock to be Issued
------------- ---------- ----------------------------
1996 $ 100,000 1,000
1997 100,000 1,000
---------- ---------
Total $ 200,000 2,000
---------- ---------
---------- ---------
F-42
<PAGE>
NOTE 10 COMMON STOCK, PREFERRED STOCK, AND CAPITAL SURPLUS
Common stock has a par value of $1 per share. There were 25,000 shares of
common stock authorized and 15,842 shares issued and outstanding at December 31,
1995 and 1994.
Preferred stock has a par value of $100 per share and is non-voting. There are
10,000 shares authorized and no shares issued or outstanding at December 31,
1995 and 1994.
Capital surplus represents profits segregated by the Board of Directors'
resolution.
NOTE 11 INCOME TAXES
The consolidated provision for income taxes consisted of the following:
1995 1994
------------ ------------
Current Provision $ 1,496,112 $ 1,514,091
Deferred Provision 211,000 (187,000)
------------ ------------
Total $ 1,707,112 $ 1,327,091
------------ ------------
------------ ------------
The provision for federal income taxes is less than that computed by applying
the federal statutory rate of 34% in 1995 and 1994, as indicated in the
following analysis:
1995 1994
------------ ------------
Tax Based on statutory rate $ 1,437,000 $ 1,162,000
Increase (Decrease) Due to -
Interest in Investment Securities
Exempt from Federal Income Taxes (74,000) (90,000)
State Income Taxes, Net of
Federal Income Tax Benefit 279,000 221,000
Amortization of Cost in
Excess of Net Assets Acquired,
Not Deductible for Tax Purposes 42,000 42,000
Other Permanent Differences 23,112 (7,909)
------------ ------------
Income Tax Provision $ 1,707,112 $ 1,327,091
------------ ------------
------------ ------------
F-43
<PAGE>
NOTE 11 INCOME TAXES (CONTINUED)
The deferred provision for income taxes results from temporary differences in
the recognition of certain income and expense items for tax and financial
reporting purposes, principally depreciation and the provision for possible loan
losses. Deferred tax liabilities of approximately $6,000 are included in other
liabilities at December 31, 1995, and deferred tax assets of approximately
$243,000 are included in other assets at December 31, 1994.
NOTE 12 COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk and
liquidity risk of its subsidiary banks. These commitments and contingent
liabilities are commitments to extend credit, line-of-credit arrangements,
credit card arrangements, and letters of credit. A summary of the subsidiary
banks' commitments and contingent liabilities at December 31, 1995, is as
follows:
Amount
-------------
Commitments to Extend Credit $ 17,555,508
Line-of-Credit Arrangements 28,847,742
Credit Card Arrangements 10,275,080
Letters of Credit 5,142,872
-------------
Total $ 61,821,202
-------------
-------------
Commitments to extend credit, line-of-credit arrangements, credit card
arrangements, and letters of credit all include exposure to some credit loss in
the event of nonperformance of the customer. The subsidiary banks' procedures
for credit commitments and contingent liabilities are the same as those for
extension of credit that are recorded on the consolidated statements of
condition.
One of the Company's subsidiary banks entered into a cash management agreement
with American Bank, N.A. of St. Paul, Minnesota, during 1994. As part of the
agreement, American Bank issued an unsecured Federal Fund Facility through which
the subsidiary bank may purchase up to $5,000,000 in Federal Funds to cover any
overdrafts that may exist in its correspondent account with American Bank, N.A.
F-44
<PAGE>
NOTE 13 EMPLOYEE BENEFIT PLAN
During 1992 the Company adopted an Employee Stock Ownership Plan (ESOP) as part
of the existing defined contribution plan, which covers substantially all
employees over the age of 21 who have completed one year of service, as defined.
Participants are vested over a five-year period. The annual contribution to the
Plan is determined annually by the board of directors. The Company's cash
contribution to the ESOP was approximately $435,000 and $430,000 for the years
ended December 31, 1995 and 1994, respectively. Contributions will be used to
purchase additional shares of the Company's stock as they become available from
current stockholders. The ESOP has a total of 128 shares allocated to
participants as of December 31, 1995.
An ESOP participant may elect to receive the full value of his or her account in
whole shares of employer securities (with fractional shares to be paid in cash)
or receive the fair market value of the employer securities as of the date of
the distribution in cash from the Company. The Company's potential repurchase
obligation under this arrangement was approximately $161,900 and $90,500 for the
years ended December 31, 1995 and 1994, respectively.
NOTE 14 RELATED PARTY TRANSACTIONS
The Company's subsidiary banks have entered into transactions with their
directors, significant shareholders and their affiliates (related parties).
Such transactions were made in the ordinary course of business on substantially
the same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans to such
related parties at December 31, 1995 and 1994, was approximately $5,190,000 and
$5,238,000, respectively.
NOTE 15 CONCENTRATIONS OF CREDIT
The majority of the subsidiary banks' loans and commitments have been granted to
customers in each bank's market area. The majority of these customers are
depositors of the banks. Investments in state and municipal securities involve
governmental entities, the majority of which are within the State of Minnesota.
The concentrations of credit by type of loan are set forth in Note 3. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Letters of credit were granted primarily to commercial
borrowers. The Company, as a matter of policy, does not extend credit to any
single borrower or group of related borrowers in excess of $3,937,000.
F-45
<PAGE>
NOTE 16 REGULATORY MATTERS
The Company has two subsidiary banks (Zapp Bank, N.A. and First National Bank of
Little Falls) that are national banks and one subsidiary bank (Melrose State
Bank) that is a state bank.
National banks are subject to the dividend restrictions set forth by the
Comptroller of the Currency. Under such restrictions, the banks may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus the
retained earnings (as defined) from the prior two years.
The state bank is subject to the dividend restrictions set forth by the
Minnesota Department of Commerce. Under such restrictions, the bank may not,
without prior approval of the Minnesota Department of Commerce, declare
dividends in excess of 50% of the prior year's earnings (as defined) subject to
other minimum capital percentages and classified asset percentages.
The dividends that the Company's subsidiary banks could declare during 1996
without prior regulatory approval are as follows:
Subsidiary Unrestricted Dividends
- -------------------------------------- -------------------------------------
Zapp Bank, N.A. $1,237,512 plus 1996 current earnings
First National Bank of Little Falls $286,577 plus 1996 current earnings
Melrose State Bank $111,888
The subsidiary banks are also required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by banking regulators. At December 31,
1995, the subsidiary banks are required to have minimum Tier 1 and Total capital
ratios of 4.0% and 8.0%, respectively. Each bank's actual risk weighted capital
ratios at that date were as follows:
Tier 1 Capital Total Capital
-------------- -------------
Zapp Bank, N.A. 11.27% 12.61%
-------------- -------------
-------------- -------------
First National Bank of Little Falls 11.31% 12.02%
-------------- -------------
-------------- -------------
Melrose State Bank 12.29% 13.54%
-------------- -------------
-------------- -------------
F-46
<PAGE>
NOTE 17 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN BANKS, FEDERAL FUNDS SOLD,
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
For short-term instruments, the carrying amount is a reasonable estimate of fair
value.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE
For these short-term receivables and payables, the carrying amount is a
reasonable estimate of fair value
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
For securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
LONG-TERM DEBT
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT, LINE-OF-CREDIT ARRANGEMENTS, CREDIT CARD
ARRANGEMENTS, AND LETTERS OF CREDIT
For these commitments, the carrying amount is a reasonable estimate of fair
value, since the stated fees and interest rates charged on these arrangements
does not significantly vary from the terms currently being offered.
F-47
<PAGE>
NOTE 17 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
1995
------------------------------
Carrying
Amount Fair Value
------------ ------------
Financial Assets:
Securities Available for Sale $ 71,071,357 $ 71,071,357
------------ ------------
------------ ------------
Securities Held to Maturity $ 1,993,118 $ 1,994,354
------------ ------------
------------ ------------
Loans $189,071,362
Less: Allowance for Loan Losses (2,590,205)
------------
Net Loans $186,481,157 $187,580,000
------------ ------------
------------ ------------
Financial Liabilities:
Demand Deposits $ 44,837,154 $ 44,837,154
------------ ------------
------------ ------------
Savings and NOW Deposits $108,650,740 $108,650,740
------------ ------------
------------ ------------
Certificates of Deposit $104,628,484 $105,085,000
------------ ------------
------------ ------------
Notes Payable $ 10,484,480 $ 10,484,480
------------ ------------
------------ ------------
Mandatory Convertible Equity Securities $ 200,000 $ 200,000
------------ ------------
------------ ------------
F-48
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
U.S. BANCORP
AND
ZAPPCO, INC.
DATED: SEPTEMBER 12, 1997
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TABLE OF CONTENTS
Page
ARTICLE 1
MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
1.1. Effect of Merger. . . . . . . . . . . . . . . . . . . . A-1
1.2. Conversion of Seller Common Stock . . . . . . . . . . . A-2
1.3. Adjustments to Purchase Price . . . . . . . . . . . . . A-2
1.4. Additional Acquiror Common Stock; Adjustments . . . . . A-3
1.5. Rights of Holders of Seller Common Stock;
Capital Stock of Acquiror. . . . . . . . . . . . . . . . A-3
1.6. No Fractional Shares . . . . . . . . . . . . . . . . . . A-4
1.7. Exchange of Certificates . . . . . . . . . . . . . . . . A-4
1.8. Dissenting Shares . . . . . . . . . . . . . . . . . . . A-5
1.9. Noncompetition Agreement . . . . . . . . . . . . . . . . A-5
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF ACQUIROR . . . . . . . . . . . . . A-6
2.1. Organization and Qualification . . . . . . . . . . . . . A-6
2.2. Authority Relative to this Agreement; Non-Contravention A-6
2.3. Validity of Acquiror Common Stock . . . . . . . . . . . A-7
2.4. Capital Stock . . . . . . . . . . . . . . . . . . . . . A-7
2.5. 1934 Act Reports . . . . . . . . . . . . . . . . . . . . A-7
2.6. No Material Adverse Changes . . . . . . . . . . . . . . A-7
2.7. Reports and Filings . . . . . . . . . . . . . . . . . . A-8
2.8. Disclosure . . . . . . . . . . . . . . . . . . . . . . . A-8
2.9. Regulatory Approvals . . . . . . . . . . . . . . . . . . A-8
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . A-8
3.1. Organization and Qualification . . . . . . . . . . . . . A-8
3.2. Authority Relative to this Agreement; Non-Contravention A-9
3.3. Capitalization . . . . . . . . . . . . . . . . . . . . . A-9
3.4. Financial Statements . . . . . . . . . . . . . . . . . . A-9
3.5. Loans . . . . . . . . . . . . . . . . . . . . . . . . . A-10
3.6. Reports and Filings . . . . . . . . . . . . . . . . . . A-11
3.7. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . A-11
3.8. Absence of Undisclosed Liabilities . . . . . . . . . . . A-11
3.9. No Material Adverse Changes . . . . . . . . . . . . . . A-11
3.10. Absence of Certain Developments . . . . . . . . . . . . A-11
3.11. Properties . . . . . . . . . . . . . . . . . . . . . . . A-13
3.12. Tax Matters . . . . . . . . . . . . . . . . . . . . . . A-15
3.13. Contracts and Commitments . . . . . . . . . . . . . . . A-15
3.14. Litigation . . . . . . . . . . . . . . . . . . . . . . . A-16
3.15. No Brokers or Finders . . . . . . . . . . . . . . . . . A-16
3.16. Employees . . . . . . . . . . . . . . . . . . . . . . . A-16
3.17. Employee Benefit Plans . . . . . . . . . . . . . . . . . A-17
3.18. Insurance . . . . . . . . . . . . . . . . . . . . . . . A-20
3.19. Affiliate Transactions . . . . . . . . . . . . . . . . . A-20
3.20. Compliance with Laws; Permits . . . . . . . . . . . . . A-21
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3.21. Administration of Fiduciary Accounts . . . . . . . . . . A-21
3.22. Disclosure . . . . . . . . . . . . . . . . . . . . . . . A-22
3.23. Regulatory Approvals . . . . . . . . . . . . . . . . . . A-22
3.24. Interest Rate Risk Management Instruments . . . . . . . A-22
3.25. Disclosures in Schedules . . . . . . . . . . . . . . . . A-22
3.26. Fairness Opinion . . . . . . . . . . . . . . . . . . . . A-22
ARTICLE 4
CONDUCT OF BUSINESS PENDING THE MERGER . . . . . . . . . . . . . . . A-22
4.1. Conduct of Business . . . . . . . . . . . . . . . . . . A-22
ARTICLE 5
ADDITIONAL COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . A-25
5.1. Filings and Approvals . . . . . . . . . . . . . . . . . A-25
5.2. Certain Loans and Related Matters . . . . . . . . . . . A-25
5.3. Monthly Financial Statements and Pay Listings . . . . . A-25
5.4. Expenses . . . . . . . . . . . . . . . . . . . . . . . . A-25
5.5. No Negotiations, etc. . . . . . . . . . . . . . . . . . A-26
5.6. Notification of Certain Matters . . . . . . . . . . . . A-26
5.7. Access to Information; Confidentiality; Nonsolicitation of
Employees . . . . . . . . . . . . . . . . . . . . . . . A-26
5.8. Filing of Tax Returns and Adjustments . . . . . . . . . A-27
5.9. Shareholder Approval; Registration Statement . . . . . . A-27
5.10. Establishment of Accruals . . . . . . . . . . . . . . . A-29
5.11. Employee Matters . . . . . . . . . . . . . . . . . . . . A-29
5.12. Tax Treatment . . . . . . . . . . . . . . . . . . . . . A-29
5.13. Loan Participations . . . . . . . . . . . . . . . . . . A-30
5.14. Affiliate/Representation Letters . . . . . . . . . . . . A-30
5.15. Updated Schedules . . . . . . . . . . . . . . . . . . . A-30
5.16. 280G Approval . . . . . . . . . . . . . . . . . . . . . A-30
5.17. Agreement to Purchase Converted Shares . . . . . . . . . A-30
5.18. Purchase of Certain Assets at Book Value . . . . . . . . A-30
ARTICLE 6
CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31
6.1. Conditions to Obligations of Each Party . . . . . . . . A-31
6.2. Additional Conditions to Obligation of Seller . . . . . A-32
6.3. Additional Conditions to Obligation of Acquiror . . . . A-33
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . A-34
7.1. Termination . . . . . . . . . . . . . . . . . . . . . . A-34
7.2. Effect of Termination . . . . . . . . . . . . . . . . . A-35
7.3. Amendment . . . . . . . . . . . . . . . . . . . . . . . A-35
7.4. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . A-35
ARTICLE 8
THE DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-35
8.1. Option Deposit and Escrow Deposit . . . . . . . . . . . A-35
8.2. Release of Deposit to Seller . . . . . . . . . . . . . . A-35
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8.3. Refund of Deposit to Acquiror . . . . . . . . . . . . . A-36
ARTICLE 9
GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . A-36
9.1. Public Statements . . . . . . . . . . . . . . . . . . . A-36
9.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . A-36
9.3. Interpretation . . . . . . . . . . . . . . . . . . . . . A-37
9.4. Severability . . . . . . . . . . . . . . . . . . . . . . A-37
9.5. Miscellaneous . . . . . . . . . . . . . . . . . . . . . A-37
9.6. Investigation of Representations, Warranties
and Covenants . . . . . . . . . . . . . . . . . . . . A-37
9.7. No Survival of Representations . . . . . . . . . . . . . A-37
9.8. Schedules . . . . . . . . . . . . . . . . . . . . . . . A-38
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38
Exhibit A -- Form of Affiliate/Shareholder Letter
Exhibit B -- Form of Escrow Agreement
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated
September 12, 1997, is made and entered into by and between U.S. Bancorp, a
Delaware corporation ("Acquiror"), and Zappco, Inc., a Minnesota corporation
("Seller").
WHEREAS, the respective Boards of Directors of Acquiror and Seller
have determined that it is advisable and in the best interests of Acquiror
and Seller and their respective shareholders to consummate the merger of
Seller with and into Acquiror as described in Article1 of this Agreement (the
"Merger");
WHEREAS, as a result of the Merger, all of the outstanding shares
of the common stock, $1.00 par value, of Seller (the "Seller Common Stock"),
will be converted into shares of the common stock, $1.25 par value, of
Acquiror ("Acquiror Common Stock") on the terms and subject to the conditions
set forth in this Agreement;
WHEREAS, Seller owns (a) all of the issued and outstanding capital
stock of each of Zapp Bank, National Association, First National Bank of
Little Falls, and Melrose State Bank (individually, a "Bank" and,
collectively, the "Banks"); (b) all of the issued and outstanding capital
stock of Zapp Data, Inc. ("ZDI"); and (c) owns a 98.8% general partnership in
Zapp Bank Plaza Partnership ("ZBPP") (the Banks, ZDI and ZBPP are hereinafter
collectively referred to as the "Subsidiaries"); and
WHEREAS, Acquiror and Seller desire that the Merger be made on the
terms and subject to the conditions set forth in this Agreement and that the
Merger 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:
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"), Seller will merge
with and into Acquiror. Acquiror, 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 252 of the Delaware General Corporation
Law (the "DGCL") and Section 601 of the Minnesota Business Corporation Act
(the "MBCA").
1.1. EFFECT OF MERGER.
(a) At the Effective Time (as defined in Section1.1(d)), Seller
shall be merged with and into Acquiror, and the separate existence of Seller
shall cease. The Charter (as defined in Section 2.2) and the Bylaws of
Acquiror, as in effect immediately prior to the Effective Time, shall be the
Charter and the Bylaws of the Surviving Corporation, until the same may be
amended as provided therein and in accordance with applicable law. The
directors and officers of Acquiror immediately prior to the Effective Time
will be the directors and officers of the Surviving Corporation, in each case
until their respective successors are duly elected or appointed and shall
qualify.
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(b) At the Effective Time and thereafter, the Surviving
Corporation shall be responsible and liable for all the liabilities, debts,
obligations and penalties of each of Acquiror and Seller.
(c) At the Effective Time and thereafter, the Surviving
Corporation shall possess all the rights, privileges, immunities and
franchises, of a public as well as of a private nature, of each of Acquiror
and Seller; 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 Acquiror and Seller, 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 Acquiror or
Seller, shall not revert or be in any way impaired by reason of the Merger.
(d) To effect the Merger, the parties hereto will cause an
appropriate certificate of merger and articles of merger relating to the
Merger to be filed with the Secretary of State of Delaware and Minnesota,
respectively. The Merger shall become effective upon the filing of such
certificate of merger and articles of merger. As used herein, the term
"Effective Date" shall mean the date on which the Merger shall become
effective as provided in the preceding sentence and the term "Effective Time"
shall mean the time on the Effective Date when the Merger shall become
effective.
1.2. CONVERSION OF SELLER COMMON STOCK. To effectuate the Merger
and subject to the terms and conditions of this Agreement:
(a) At the Effective Time, each issued and outstanding share of
Seller Common Stock (other than shares to be canceled pursuant to Section
1.2(b) and Dissenting Shares (as defined in Section1.8))(the "Converted
Shares") shall be converted into such number of shares of Acquiror Common
Stock as shall be determined in accordance with the following sentence, all
subject to adjustment as provided in Section 1.4. The number of shares of
Acquiror Common Stock into which each Converted Share shall convert
(hereinafter the "Exchange Rate") shall be determined in accordance with the
following formula:
Exchange Rate = (X DIVIDED BY Y) DIVIDED BY Z
Where:
X = $68 million (the "Purchase Price"), adjusted as provided in
Section 1.3;
Y = the average of the closing prices of Acquiror Common Stock
as quoted on the New York Stock Exchange for the ten
consecutive trading days ending with the day preceding the
Effective Date (the "Average Closing Price"); and
Z = the number of shares of Seller Common Stock outstanding
immediately prior to the Effective Time.
(b) Each share of Seller Common Stock held as treasury stock of
Seller or held directly or indirectly by Acquiror, 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 thereto.
1.3. ADJUSTMENTS TO PURCHASE PRICE.
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(a) On a date that is five business days prior to the Effective
Date, Seller shall deliver to Acquiror a balance sheet of Seller dated as of
the last day of the month immediately preceding the Effective Date (the
"Final Balance Sheet"). The Purchase Price shall be (x) increased by the
amount, if any, by which the Final Retained Earnings (as defined below)
exceeds $22,596,472 and (y) decreased by the amount, if any, by which Final
Retained Earnings is less than $22,596,472. Acquiror and Seller shall
cooperate and promptly commence good faith negotiations to resolve any
disputes regarding the Final Balance Sheet. The "Final Retained Earnings"
shall be equal to the amount of Seller's retained earnings (referred to
therein as "undivided profits") as reflected on the Final Balance Sheet
(which Final Balance Sheet shall be as mutually agreed to by Seller and
Acquiror) plus an amount equal to the product of (x) the Average Daily
Retained Earnings (as defined below) times (y) the number of days from but
excluding the date of the Final Balance Sheet to and including the Effective
Date. The "Average Daily Retained Earnings" shall be equal to the quotient
derived by calculating the difference between retained earnings as reflected
on the Final Balance Sheet and $22,596,472 and dividing that difference (if
positive) by the number of calendar days in the period from but excluding
December 31, 1996 to and including the date of Final Balance Sheet.
(b) In determining the Final Retained Earnings and the Average
Daily Retained Earnings, Seller shall prepare the Final Balance Sheet in
accordance with the accounting methods and practices used by Seller in
preparing the Seller Financial Statements (as defined in Section 3.4), except
that in no event will any gains on sale of assets not in the ordinary course
of business or other extraordinary or unusual items be included in
determining the Final Retained Earnings. Without limiting the generality of
the foregoing, Seller shall continue to make provision for loan losses and
other reserves on the balance sheets of the Banks in a manner consistent with
past practices, and Seller shall not alter or vary its practices and policies
relating to classified loans and loan write-offs.
1.4. ADDITIONAL ACQUIROR COMMON STOCK; ADJUSTMENTS. If, between
the date hereof and the Effective Time, shares of Acquiror 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, 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
Acquiror Common Stock issued to holders of Converted Shares at the Effective
Time pursuant to this Agreement will be appropriately and proportionately
adjusted so that the number of such shares of Acquiror Common Stock (or such
class of shares into which shares of Acquiror Common Stock have been changed)
that will be issued in exchange for the Converted Shares will equal the
number of such shares that the holders of Converted Shares 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 Time.
1.5. RIGHTS OF HOLDERS OF SELLER COMMON STOCK; CAPITAL STOCK OF
ACQUIROR.
(a) At and after the Effective Time and until surrendered for
exchange, each outstanding stock certificate which immediately prior to the
Effective Time represented the Converted Shares shall be deemed for all
purposes to evidence ownership of and to represent the number of whole shares
of Acquiror Common Stock into which such Converted Shares shall have been
converted, and the record holder of such outstanding stock certificate shall,
after the Effective Time, be entitled to vote the shares of Acquiror Common
Stock into which such shares of Seller Common Stock shall have been converted
on any matters on which the holders of record of Acquiror Common Stock, as of
any date subsequent to the Effective Time, shall be entitled to vote. In any
matters relating to such stock certificates, Acquiror may rely conclusively
upon the record of shareholders maintained by Seller containing the names and
addresses of the holders of record of Seller Common Stock at the Effective
Time.
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(b) At and after the Effective Time, each share of capital stock
of Acquiror issued and outstanding immediately prior to the Effective Time
shall remain an issued and existing share of capital stock of the Surviving
Corporation and shall not be affected by the Merger.
1.6. NO FRACTIONAL SHARES. No fractional shares of Acquiror Common
Stock, and no certificates representing any fractional shares, shall be
issued upon the surrender for exchange of certificates representing Seller
Common Stock nor in connection with the shares of Acquiror Common Stock to be
received, if any, pursuant to Section 1.4. In lieu of any fractional share,
Acquiror shall pay to each holder of Seller Common Stock who otherwise would
be entitled to receive a fractional share of Acquiror Common Stock an amount
of cash (without interest) equal to the product of (a) the Average Closing
Price multiplied by (b) the fractional share interest to which such holder
would otherwise be entitled.
1.7. EXCHANGE OF CERTIFICATES.
(a) PAYMENT OF MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES. At
the Effective Time, each holder of a Converted Share may surrender such
certificate or certificates to Acquiror to effect the exchange of such
certificate or certificates on such holder's behalf. After surrender to
Acquiror of any certificate which prior to the Effective Date represented a
Converted Share, Acquiror shall distribute to the person in whose name such
certificate is registered, a certificate or certificates representing the
number of whole shares of Acquiror Common Stock issuable to such holder under
Section 1.2(a)(i) plus cash payments in lieu of fractional shares, if any, as
provided in Section 1.6 (the "Merger Consideration"); provided, however, that
certificates surrendered for exchange by any person deemed an "affiliate" of
Seller (as defined in Section 5.14) or otherwise designated by Acquiror as
provided in Section 5.14 shall not be exchanged for the Merger Consideration
until Acquiror has received a written agreement from such person as provided
in Section 5.14.
(b) FAILURE TO SURRENDER CERTIFICATES. If outstanding
certificates formerly representing Converted Shares are not surrendered prior
to the date on which the Merger Consideration to which any holder of such
shares is entitled as a result of the Merger would otherwise escheat to or
become the property of any governmental unit or agency, the unclaimed
consideration shall, to the extent permitted by abandoned property and any
other applicable law, become the property of Acquiror (and to the extent not
in Acquiror's possession shall be paid over to Acquiror), free and clear of
any and all claims or interest of any person. Notwithstanding the foregoing,
neither Acquiror nor any other person shall be liable to any former holder of
Seller Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or other similar laws.
(c) LOST CERTIFICATES. In the event that any certificate
representing Seller Common Stock shall have been lost, stolen or destroyed,
Acquiror shall pay in exchange for such lost, stolen or destroyed
certificate, upon the making of an affidavit of that fact by the holder
thereof in form satisfactory to Acquiror, the Merger Consideration; provided,
however, that Acquiror may, in its sole discretion and as a condition
precedent to the issuance and payment of the Merger Consideration to which
the holder of such certificate is entitled as a result of the Merger, 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 Acquiror, Seller or any other party with respect to the certificate
alleged to have been lost, stolen or destroyed.
(d) DIVIDENDS. Until outstanding certificates formerly
representing Converted Shares are surrendered as provided in Section 1.7(a),
no dividend or distribution payable to holders of record of Acquiror 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
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of any dividends or distributions (without interest) theretofore paid with
respect to such whole shares of Acquiror Common Stock, but not paid to such
holder, and which dividends or distributions had a record date occurring on
or subsequent to the Effective Time.
(e) FULL SATISFACTION. All Merger Consideration issued and paid
upon the surrender for exchange of Converted Shares in accordance with the
terms and conditions of this Agreement shall be deemed to have been issued
and paid in full satisfaction of all rights pertaining to such Converted
Shares.
1.8. DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the
contrary, any shares of Seller Common Stock held by a holder (a "Dissenting
Shareholder") who has demanded and perfected his demand for appraisal of his
Shares in accordance with Sections 471 and 473 of the MBCA and as of the
Effective Time has neither effectively withdrawn nor lost his right to such
appraisal shall not represent a right to receive shares of Acquiror Common
Stock pursuant to Section 1.2 above, but in lieu thereof the holder thereof
shall be entitled to only such rights as are granted by the MBCA. Acquiror
shall make any and all payments to holders of shares of Seller Common Stock
with respect to such demands.
(b) Notwithstanding the provisions of Section 1.8(a) above, if any
Dissenting Shareholder demanding appraisal of such Dissenting Shareholder's
shares of Seller Common Stock ("Dissenting Shares") under the MBCA shall
effectively withdraw or lose (through failure to perfect or otherwise) his
right to appraisal, then as of the Effective Time or the occurrence of such
event, whichever later occurs, such Dissenting Shares shall automatically be
converted into and represent only the right to receive the Merger
Consideration as provided in Section 1.2 above upon surrender of the
certificate or certificates representing such Dissenting Shares.
(c) Seller shall give Acquiror prompt notice of any demands by a
Dissenting Shareholder for payment, or notices of intent to demand payment
received by Seller under Sections 473 of the MBCA and Acquiror shall have the
right to participate in all negotiations and proceedings with respect to such
demands. Seller shall not, except with the prior written consent of Acquiror
(which will not be unreasonably withheld or delayed) or as otherwise required
by law, make any payment with respect to, or settle, or offer to settle, any
such demands.
1.9. NONCOMPETITION AGREEMENT. Simultaneously with the execution
of this Agreement, each of Edward J. Zapp and John Leisen shall enter into a
noncompetition agreement (the "Noncompetition Agreement") with Acquiror
providing: (i) that such individuals shall not, for a period of five years
after the Effective Date, (A) engage in the banking or financial services
business as an advisor, employee, consultant, agent, partner, principal,
director, owner or stockholder of any corporation or other business entity
within a 50-mile radius of the main office and each of the branch offices of
the Banks (subject to certain exceptions); (B) directly or indirectly solicit
the banking or financial services business of any past or present customer of
any Bank or encourage any such customer to terminate or alter such customer's
relationship with any Bank (or its successor by merger); or (C) directly or
indirectly, hire for employment any individual who, as of the date of this
Agreement, was an employee or agent of Seller or any Bank or who subsequent
to the date of this Agreement became an employee of Seller or any Bank (or
any successors by merger) (subject to certain exceptions); (ii) for
consideration to be paid by Acquiror to each such individual in an annual
amount of $200,000 for the period specified therein, subject to annual
adjustment as therein provided and subject to such individual's compliance
with the noncompetition provisions therein; and (iii) for certain retiree
medical benefits for each such individual as therein provided.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror hereby represents and warrants to Seller as follows:
2.1. ORGANIZATION AND QUALIFICATION. Acquiror 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. Acquiror is registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended (the "Bank Holding
Company Act"). Acquiror 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 Acquiror and its subsidiaries, taken as a whole.
2.2. AUTHORITY RELATIVE TO THIS AGREEMENT; NON-CONTRAVENTION.
Acquiror 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 Acquiror and the consummation by Acquiror of
the transactions contemplated hereby have been duly authorized by the Board
of Directors of Acquiror, and no other corporate proceedings on the part of
Acquiror are necessary to authorize this Agreement, the Merger and such
transactions. This Agreement has been duly executed and delivered by Acquiror
and constitutes a valid and binding obligation of Acquiror, enforceable in
accordance with its terms. Acquiror 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 or 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 Acquiror 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; the Minnesota Department of Commerce (the "Commerce Department"); 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 New York
Stock Exchange (the "NYSE"); state securities or blue sky laws, and the rules
and regulations thereunder ("Blue Sky Laws"); and the filing of a certificate
of merger with the Secretary of State of Delaware and the articles of merger
with the Secretary of State of Minnesota, no authorization, consent or
approval of, or filing with, any public body, court or authority is necessary
on the part of Acquiror 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 Acquiror and its subsidiaries,
taken as a whole, or the consummation of the transactions contemplated
hereby. As used in this Agreement, the term "Charter" (x) 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 certificates of
merger or consolidation and (y) with respect to any partnership shall mean
those agreements and instruments that at that time
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constitute the partnership agreement as filed or recorded under the
partnership or other applicable law of the jurisdiction of organization,
including any amendments thereto.
2.3. VALIDITY OF ACQUIROR COMMON STOCK. The shares of Acquiror
Common Stock to be issued pursuant to this Agreement will be, when issued,
duly authorized, validly issued, fully paid and nonassessable and free and
clear of any lien, pledge, security interest, encumbrance or charge of any
kind.
2.4. CAPITAL STOCK. The authorized capital stock of Acquiror
consists of 500,000,000 shares of Acquiror Common Stock, par value $1.25 per
share, and 10,000,000 shares of preferred stock, par value $1.00 per share.
As of August 1, 1997, (a) 244,677,851 shares of Acquiror Common Stock were
issued and outstanding (including 833,816 shares of Acquiror Common Stock
held in treasury), 40,706,117 shares of Acquiror Common Stock were reserved
for issuance pursuant to Acquiror's employee stock option, incentive,
employee stock purchase and dividend reinvestment plans; (b) 6,000,000 shares
of 8-1/8% Cumulative Preferred Stock, Series A, were issued and outstanding;
and (d) 12,750 shares of Series 1990A Preferred Stock were reserved for
issuance.
2.5. 1934 ACT REPORTS.
(a) Prior to the execution of this Agreement, Acquiror has
delivered or made available to Seller complete and accurate copies of (i)
Acquiror's Annual Reports on Form10-K for the years ended December 31, 1996,
1995 and 1994, as amended (the "Acquiror 10-K Reports"), as filed under the
1934 Act with the Securities and Exchange Commission (the "SEC"), (ii) all
Acquiror proxy statements and annual reports to shareholders used in
connection with meetings of Acquiror shareholders held since January 1, 1995,
and (iii) Acquiror's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (the "Acquiror 10-Q Report"), as filed under the 1934 Act with the
SEC. As of their respective dates, such documents (x) 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 (y) complied
as to form in all material respects with the applicable laws and rules and
regulations of the SEC. Since January 1, 1994, Acquiror has filed in a
timely manner all reports that it was required to file with the SEC pursuant
to the 1934 Act.
(b) The Acquiror financial statements (including any footnotes
thereto) contained in the Acquiror 10-K Reports and the Acquiror 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 Acquiror 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 June 30, 1997, there has
been no material adverse change in, and no event, occurrence or development
in the business of Acquiror or its subsidiaries, taken as a whole, 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 Acquiror
and its subsidiaries, taken as a whole, or the ability of Acquiror to
consummate the transactions contemplated hereby; provided, however, that a
material adverse change or a material adverse effect shall not be deemed to
include the impact of (a) changes in banking and similar laws of general
applicability or interpretations thereof by courts or governmental
authorities and (b) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to banks and their holding
companies generally.
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2.7. REPORTS AND FILINGS. Since January 1, 1994, each of Acquiror
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 "Acquiror 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 Acquiror and its
subsidiaries, taken as a whole. As of their respective dates or as
subsequently amended prior to the date hereof, each of the Acquiror
Regulatory Reports was true and correct in all material respects and complied
in all material respects with applicable laws, rules and regulations.
2.8. DISCLOSURE. The representations and warranties of Acquiror
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 Acquiror which has not been disclosed to Seller pursuant to this
Agreement and the Schedules hereto which would have or would reasonably be
expected to have a material adverse effect on the business, operations or
financial condition of Acquiror and its subsidiaries, taken as a whole, or
the ability of Acquiror to consummate the transactions contemplated hereby.
2.9. REGULATORY APPROVALS. As of the date hereof, Acquiror is not
aware of any fact that would likely result in the regulatory approvals
specified in Section 5.1 not being obtained.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Acquiror as follows:
3.1. ORGANIZATION AND QUALIFICATION.
(a) Seller is a corporation duly organized, validly existing and
in good standing under the laws of the State of Minnesota, and has the
requisite corporate power to carry on its business as now conducted. Seller
is registered as a bank holding company under the Bank Holding Company Act.
ZDI is a corporation duly organized, validly existing and in good standing
under the laws of the State of Minnesota and has the requisite corporate
power to carry on its business as now conducted. Each of Zapp Bank, National
Association, and First National Bank of Little Falls is a national banking
corporation duly organized, validly existing and in good standing under the
federal laws of the United States of America, and has the requisite corporate
power to carry on its business as now conducted. Melrose State Bank is a
banking corporation duly organized, validly existing and in good standing
under the laws of the State of Minnesota and has the requisite corporate
power to carry on its business as now conducted. ZBPP is a general
partnership duly organized, validly existing and in good standing under the
laws of the State of Minnesota and has the requisite power as a partnership
to carry on its business as now conducted. The copies of the Charter and
Bylaws, if applicable, of each of Seller and the Subsidiaries which have been
provided to Acquiror prior to the date of this Agreement are correct and
complete and reflect all amendments made thereto through the date hereof.
Each of Seller 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 Seller and the Subsidiaries, taken as a
whole.
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3.2. AUTHORITY RELATIVE TO THIS AGREEMENT; NON-CONTRAVENTION.
Seller 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 Seller and the consummation by Seller of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Seller and, other than the approval of the Merger by a majority
of the shareholders of Seller, no other corporate proceedings on the part of
Seller are necessary to authorize this Agreement, the Merger and such
transactions. This Agreement has been duly executed and delivered by Seller
and constitutes a valid and binding obligation of Seller, enforceable in
accordance with its terms. Except as disclosed on Schedule 3.2(a), neither
Seller nor any Subsidiary is subject to, or obligated under, any provision of
(i) its Charter or Bylaws, (ii) any agreement, arrangement or understanding,
(iii) any license, franchise or permit or (iv) 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, or the consummation 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 Seller and the 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 and the Commerce Department and the filing of a certificate of merger
with the Secretary of State of Delaware and the articles of merger with the
Secretary of State of Minnesota, no authorization, consent or approval of, or
filing with, any public body, court or authority is necessary on the part of
Seller or any Subsidiary for the consummation by Seller 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 Seller and the Subsidiaries,
taken as a whole, or the consummation of the transactions contemplated hereby.
3.3. CAPITALIZATION. The authorized, issued and outstanding
capital stock of each of Seller and the Subsidiaries as of the date hereof is
set forth on Schedule 3.3. Except as set forth on Schedule 3.3, all of the
issued and outstanding shares of capital stock of each of the Subsidiaries
are owned by Seller, 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. The issued and
outstanding shares of capital stock of each of Seller 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 set forth
on Schedule 3.3, there are no options, warrants, conversion privileges or
other rights, agreements, arrangements or commitments obligating Seller or
any Subsidiary to issue, sell, purchase or redeem any shares of their capital
stock or securities or obligations of any kind convertible into or
exchangeable for any shares of their capital stock or of any of their
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 Seller or any Subsidiary, or the earnings or
other attributes of Seller or any Subsidiary. Seller has heretofore delivered
to Acquiror true and correct copies of all such agreements, arrangements
(including all stock option plans) or commitments identified on Schedule 3.3.
3.4. FINANCIAL STATEMENTS.
(a) Seller has furnished Acquiror with copies of the consolidated
balance sheets of Seller and Subsidiaries as of December 31, 1996, 1995 and
1994 and the related statements of operations, changes in shareholders'
equity and cash flows for the years then ended (collectively, together with
any notes thereto, the "Seller Annual Financial Statements"). The Seller
Annual Financial Statements have been audited by Larson Allen Weishair & Co.
LLP. Seller has furnished Acquiror with copies of
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the consolidated balance sheets of Seller and Subsidiaries as of July 31,
1997 and the related statements of operations for the seven-month period then
ended. The consolidated balance sheet of Seller and Subsidiaries as of July
31, 1997 is herein referred to as the "Latest Seller Balance Sheet," and the
related statement of income for the seven-month period then ended are herein
referred to as the "Related Seller Statements." The Annual Seller Financial
Statements, the Latest Seller Balance Sheet and the Related Seller Statements
are collectively referred to as the "Seller Financial Statements." The
Seller Annual Financial Statements have been prepared in accordance with
generally accepted accounting principles (except as disclosed on Schedule
3.4(a)) applied on a consistent basis during the periods involved, and the
Latest Seller Balance Sheet and the Related Seller Statements have been
prepared on a basis consistent with the Seller Annual Financial Statements.
The Seller Financial Statements fairly present the consolidated financial
position of Seller and Subsidiaries as of the dates thereof and the
consolidated results of operations and, as applicable, changes in
shareholders' equity and cash flows for the periods then ended; provided,
however, that the representation contained herein shall not constitute a
representation as to the adequacy of the loan loss reserves contained in the
Seller Financial Statements.
(b) Seller has furnished Acquiror with copies of the balance
sheets of each Subsidiary as of December 31, 1996, 1995 and 1994 and the
related statements of operations, changes in shareholders' equity and cash
flows for the years then ended (together with any notes thereto, the
"Subsidiary Annual Financial Statements"). Seller has furnished Acquiror
with copies of the balance sheets of each Subsidiary as of July 31, 1997 and
the related statement of operations for the seven-month period then ended.
The balance sheets of the Subsidiaries as of July 31, 1997 are herein
referred to collectively as the "Latest Subsidiary Balance Sheets," and the
related statement of income for the seven-month period then ended are herein
referred to as the "Related Subsidiary Statements." The Annual Subsidiary
Financial Statements, the Latest Subsidiary Balance Sheets and the Related
Seller Statement are collectively referred to as the "Subsidiary Financial
Statements." The Subsidiary Annual Financial Statements have been prepared
in accordance with generally accepted accounting principles (except as
disclosed on Schedule 3.4(b)) applied on a consistent basis during the
periods involved, and the Latest Subsidiary Balance Sheets and the Related
Subsidiary Statements have been prepared on a basis consistent with the
Seller Annual Financial Statements. The Subsidiary Financial Statements
fairly present the financial position of the Subsidiaries as of the dates
thereof and the results of operations and, as applicable, changes in
shareholder's equity and cash flows for the periods then ended; provided,
however, that the representation contained herein shall not constitute a
representation as to the adequacy of the loan loss reserves contained in the
Subsidiary Financial Statements.
(c) The Latest Seller Balance Sheet and the Latest Subsidiary
Balance Sheets are collectively referred to as the "Latest Balance Sheets,"
and the Related Seller Statements and the Related Subsidiary Statements are
collectively referred to as the "Related Statements."
3.5. LOANS.
(a) The documentation relating to each loan made by a 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).
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(b) Except as shown on the books and records of Seller as provided
to Acquiror on or prior to the date hereof, there are no loans, leases, other
extensions of credit or commitments to extend credit of any Bank that have
been or, to the knowledge of Seller, should have been classified by any Bank
as non-accrual, as restructured, as 90 days past due, as still accruing and
doubtful of collection or any comparable classification. In response to a
request for information by Acquiror, Seller has provided to Acquiror written
information concerning the loan portfolios of each Bank that is true, correct
and complete in all material respects, andno material information with
respect to the loan portfolios of each Bank has been withheld from Acquiror.
3.6. REPORTS AND FILINGS. Since January 1, 1994, each of Seller
and the Subsidiaries has filed each report or other filing that it was
required to file with any federal or state banking, bank holding company or
other applicable regulatory authorities having jurisdiction over it (together
with all exhibits thereto, the "Seller Regulatory Reports"). Seller has
provided or made available to Acquiror copies of all of the Seller Regulatory
Reports. As of their respective dates or as subsequently amended prior to
the date hereof, each of the Seller Regulatory Reports was true and correct
in all material respects and complied in all material respects with
applicable laws, rules and regulations.
3.7. SUBSIDIARIES. Except for the stock of the Subsidiaries owned
by Seller and except as otherwise disclosed on Schedule 3.7, neither the
Seller nor any Subsidiary owns any stock, partnership interest, joint venture
interest or any other security issued by any other corporation, organization
or entity, except securities owned by any Bank in the ordinary course of its
business.
3.8. ABSENCE OF UNDISCLOSED LIABILITIES. Except as otherwise
disclosed in Schedule 3.8, all of the obligations or liabilities (whether
accrued, absolute, contingent, unliquidated or otherwise, whether due or to
become due, and regardless of when asserted, including Taxes (as defined in
Section 3.12)) 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. Neither Seller nor any Subsidiary have any
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, none of which is a material uninsured
liability, or (c) as otherwise disclosed on Schedule 3.8. As of the date of
this Agreement, there are no agreements or commitments binding any Bank to
extend credit, in the amount per "one borrower" (as combined and aggregated
as set forth in 12 C.F.R. Section 32.5), of $500,000 or more, except as set
forth on Schedule 3.8.
3.9. 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 Seller or any of 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 Seller and the Subsidiaries, taken as a whole, or the
ability of Seller to consummate the transactions contemplated hereby;
provided, however, that a material adverse change or a material adverse
effect shall not be deemed to include the impact of (a) changes in banking
and similar laws of general applicability or interpretations thereof by
courts or governmental authorities and (b) changes in generally accepted
accounting principles or regulatory accounting requirements applicable to
banks and their holding companies generally.
3.10. ABSENCE OF CERTAIN DEVELOPMENTS. Except as contemplated
by this Agreement or as set forth in the Latest Balance Sheets, the Related
Statements or on Schedule 3.10, since July 31, 1997, neither Seller nor any
Subsidiary has:
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(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 deposit and other bank obligations and investment
securities in the ordinary course of business;
(b) redeemed, purchased, acquired or offered to acquire, directly
or indirectly, any shares of capital stock or other securities of Seller or
any Subsidiary;
(c) split, combined or reclassified any outstanding shares of
capital stock of Seller or any Subsidiary 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 Seller or any Subsidiary or other
securities;
(d) borrowed any amount or incurred or become subject to any
material liability, except liabilities and deposit obligations incurred in
the ordinary course of business, but in no event has Seller or any Subsidiary
entered into any long-term borrowings with terms of greater than one year;
(e) discharged or satisfied any material lien or encumbrance on
the properties or assets of Seller or any Subsidiary or paid any material
liability other than in the ordinary course of business;
(f) sold, assigned, transferred, mortgaged, pledged or subjected
to any lien or other encumbrance any of the assets of Seller or any
Subsidiary, except (A) in the ordinary course of business, including real
estate acquired through foreclosure or deed in lieu of foreclosure ("OREO")
(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 Seller
or the Subsidiaries, taken as a whole;
(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, in each case, other than in the
ordinary course of business and consistent with past practice as such past
practice has been disclosed to Acquiror;
(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;
(k) made any single or group of related capital expenditures or
commitment therefor in excess of $25,000 or entered into any lease or group
of related leases with the same party which involves aggregate lease payments
payable of more than $50,000 for any individual lease or involves more than
$100,000 for any group of related leases in the aggregate;
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(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 Seller;
(m) taken any other action or entered into any other transaction
other than in the ordinary course of business;
(n) made any change in its accounting methods or practices, other
than changes required by law or regulation made in accordance with generally
accepted accounting principle or regulatory accounting principles generally
applicable to depository institutions such as the Banks, as the case may be;
or
(o) agreed to do any of the foregoing.
3.11. PROPERTIES.
(a) Each of Seller 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 OREO), free and clear of all liens and encumbrances, except
for (i) mortgages on real property set forth on Schedule 3.11, (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 Seller or any Subsidiary, which leases are identified on
Schedule 3.11, and (v) property disposed of since the date of the Latest
Balance Sheets in the ordinary course of business; provided, that no disposal
of any real property shall be considered to be in the ordinary course of
business.
(b) Schedule 3.11 correctly sets forth a brief description,
including the term, of each lease for real or personal property to which
Seller or any Subsidiary is a party as lessee. Seller has delivered to
Acquiror complete and accurate copies of each of the leases described on
Schedule 3.11, 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 Acquiror. The leases described on Schedule 3.11 are in
full force and effect in all material respects. Each of Seller and the
Subsidiaries, as the case may be (if lessee under such lease), has a valid
and existing leasehold interest under each lease described on Schedule 3.11
for the term set forth therein. With respect to the leases described on and
except as set forth on Schedule 3.11, neither Seller nor any Subsidiary is in
default, and, to the best knowledge of Seller, none of the other parties to
any of such leases is in default, and, to the best knowledge of Seller, no
circumstances (not in the control of Seller or any Subsidiary) exist which
could result in such a default under any of such leases.
(c) To the best knowledge of Seller, there has been no
cancellation, breach or anticipated breach by any other party to any lease
described on Schedule 3.11. The rent rolls set forth on Schedule 3.11 are
true and complete in all material respects and describe all occupancies and
the material terms of each occupancy.
(d) Except as set forth in Schedule 3.11, all of the buildings,
fixtures, furniture and equipment necessary for the conduct of the business
of Seller or any Subsidiary are in good condition and repair, ordinary wear
and tear excepted, and are usable in the ordinary course of business. Each
of Seller and the Subsidiaries owns, or leases under valid leases, all
buildings, fixtures, furniture,
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personal property, land improvements and equipment necessary for the conduct
of its business as it is presently being conducted.
(e) Except as set forth in Schedule 3.11, neither Seller nor any
Subsidiary and none of the buildings owned or leased by Seller or any
Subsidiary 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 Seller and the Subsidiaries,
taken as a whole; and neither Seller nor any Subsidiary 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 Seller or any
Subsidiary. Except as set forth in Schedule 3.11, no Hazardous Materials (as
defined below) have been deposited or disposed of in, on or under Seller's or
any Subsidiary's owned or leased properties (including properties owned,
managed or controlled by any Bank in connection with its lending or fiduciary
operations) during the period in which Seller or any Subsidiary has owned,
occupied, managed, controlled or operated such properties. Except as set
forth on Schedule 3.11, to the best knowledge of Seller, no prior owners,
occupants or operators of all or any part of Seller's or any Subsidiary's
owned or leased properties (including properties owned, managed or controlled
by any 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 Materials. Except as disclosed on Schedule 3.11, no asbestos
or any material amount of ureaformaldehyde materials exists in or on any of
Seller's or the Subsidiary's owned or leased properties (including properties
owned, managed or controlled by any 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.
As used in this Section 3.11, the following terms shall have the
following meanings:
(i) "Hazardous Materials" means any dangerous, toxic or hazardous
pollutant, contaminant, chemical, waste, material or substance as defined
in or governed by any federal, state or local law, statute, code,
ordinance, regulation, rule or other requirement relating to such substance
or otherwise relating to the environment or human health or safety,
including without limitation any waste, material, substance, pollutant,
petroleum or petroleum by product or contaminant that might cause any
injury to human health or safety or to the environment or might subject
Seller or any Subsidiary or, after the Effective Time, Acquiror or any of
its affiliates, or any of their respective directors or officers, to any
imposition of costs or liability under any Environmental Laws.
(ii) "Environmental Laws" means all applicable federal, state, local
and foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to pollution,
contamination or protection of health, safety or the environment
(including, without limitation, all applicable federal, state, local and
foreign laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to Hazardous Materials
in effect as of the date of this Agreement).
(f) Except as set forth in Schedule 3.11, 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 Seller, have there ever
been any such tanks located under, in or about, any of Seller's or the
Subsidiary's owned or leased properties (including properties owned, managed
or controlled by any Bank in connection with its lending or fiduciary
operations).
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3.12. TAX MATTERS. Except as disclosed on Schedule 3.12, each
of Seller and the Subsidiaries and all members of any consolidated,
affiliated, combined or unitary group of which Seller or any Subsidiary 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 Time, and have
paid (or have accrued or will accrue, prior to the Effective Time, amounts
for the payment of) all Taxes relating to the time periods covered by such
returns and reports. Except as disclosed on Schedule 3.12, the accrued taxes
payable accounts for Taxes reflected on the Latest Balance Sheets (or the
notes thereto) are sufficient for the payment of all unpaid Taxes of Seller
or any Subsidiary accrued for or applicable to all periods ended on or prior
to the date of the Latest Balance Sheets or which may subsequently be
determined to be owing with respect to any such period. Except as disclosed
on Schedule 3.12, neither Seller nor any Subsidiary 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 Seller 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 employee or third party. Except as disclosed on
Schedule 3.12, all Taxes which will be due and payable, whether now or
hereafter, for any period ending on, prior to or including the Effective
Time, shall have been paid by or on behalf of Seller and the Subsidiaries or
shall be reflected on the books of Seller and the Subsidiaries as an accrued
Tax liability determined in a manner which is consistent with past practices
and the Latest Balance Sheets, without taking account of the Merger. The
aggregate amount of all such accruals for Tax liability for any such period
will be set forth on Schedule 3.12 (and a good faith estimate of such amount
shall be provided in writing to Acquiror at least 10 days prior to the
Effective Time). In the five years prior to the date of this Agreement, no
Tax returns of Seller or any Subsidiary have been audited by any governmental
authority other than as disclosed on Schedule 3.12; and, except as set forth
on Schedule 3.12, there are no unresolved questions, claims or disputes
asserted by any relevant taxing authority concerning the liability for Taxes
of Seller or any Subsidiary. Neither Seller nor any Subsidiary has made an
election under Section 341(f) of the Code for any taxable years not yet
closed for statute of limitations purposes. In the five years prior to the
date of this Agreement, no demand or claim has been made against Seller or
any Subsidiary with respect to any Taxes arising out of membership or
participation in any consolidated, affiliated, combined or unitary group of
which Seller or any Subsidiary was at any time a member. The tax
identification number for Seller and each Subsidiary are set forth on
Schedule 3.12. 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,
deposits, 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 Seller, the Subsidiaries and all members of any
consolidated, affiliated, combined or unitary group of which Seller or any
Subsidiary is a member.
3.13. CONTRACTS AND COMMITMENTS.
(a) Except as set forth on Schedule 3.13, neither Seller nor any
Subsidiary (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
relating to any consulting services or to severance pay for any 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
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purchase price in excess of $50,000 for any individual contract or $100,000
for any group of related contracts in the aggregate, (B) other contract or
group of related contracts with the same party continuing over a period of
more than six months from the date or dates thereof, which is not entered
into in the ordinary course of business and is either not terminable by it on
30 days' or less notice without penalty or involves more than $50,000 for any
individual contract or $100,000 in the aggregate for any group of related
contracts, (C) contract, agreement, arrangement or understanding that
restricts its ability to engage in any and all activities permissible under
applicable laws and regulations, or (D) other agreement material to the
business of Seller and the Subsidiaries, taken as a whole, which is not
entered into in the ordinary course of business, or (v) has any commitments
for capital expenditures in excess of $25,000.
(b) Except as disclosed on Schedule 3.13, (i) to the best
knowledge of Seller, since the date of the Latest Balance Sheets, no customer
has indicated that it will stop or decrease the rate of business done with
Seller or any Subsidiary (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 Seller
and the Subsidiaries, taken as a whole; (ii) each of Seller and the
Subsidiaries has 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 3.13, and neither Seller nor any Subsidiary is in receipt
of any claim of default under any contract or commitment set forth on
Schedule 3.13, 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 Seller and the
Subsidiaries, taken as a whole; (iii) neither Seller nor any Subsidiary has
any present expectation or intention of not fully performing any material
obligation pursuant to any contract or commitment set forth on Schedule 3.13;
and (iv) to the best knowledge of Seller, there has been no cancellation,
breach or anticipated breach by any other party to any contract or commitment
set forth on Schedule 3.13, 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
Seller and the Subsidiaries, taken as a whole.
3.14. LITIGATION. Except as set forth on Schedule 3.14, there
are no actions, suits, proceedings, orders or investigations pending or, to
the best knowledge of Seller, threatened against Seller or any Subsidiary, 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. None of the matters set forth on Schedule 3.14, 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 Seller
and the Subsidiaries, taken as a whole.
3.15. NO BROKERS OR FINDERS. Except as provided in the letter
agreement effective September 10, 1997 between Seller and Dain Bosworth
Incorporated, 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 Seller or any
Subsidiary.
3.16. EMPLOYEES. Except as set forth on Schedule 3.16, Seller
does not have any knowledge of the announced or anticipated resignation of
any officer of Seller or any Subsidiary. Except as set forth on Schedule
3.16, each of Seller and the Subsidiaries have each complied with all laws
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 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 Seller
and the Subsidiaries, taken as a whole.
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3.17. EMPLOYEE BENEFIT PLANS.
(a) DEFINITIONS. For the purpose of this Section 3.17, "ERISA"
means the Employee Retirement Income Security Act of 1974, as amended, and
the term "plan" means every plan, fund, contract, program and arrangement
(whether written or not) which is maintained or contributed to by Seller or
any Subsidiary for the benefit of present or former employees, including but
not limited to those intended to provide: (a) medical, surgical, health care,
hospitalization, dental, vision, workers' compensation, life insurance,
death, disability, legal services, severance, sickness or accident benefits
(whether or not defined in Section 3(1) of ERISA), (b) pension, profit
sharing, stock bonus, retirement, supplemental retirement or deferred
compensation benefits (whether or not tax qualified and whether or not
defined in Section 3(2) of ERISA), (c) bonus, incentive compensation, stock
option, stock appreciation right, phantom stock or stock purchase benefits,
or (d) salary continuation, unemployment, supplemental unemployment,
termination pay, vacation or holiday benefits (whether or not defined in
Section 3(3) of ERISA).
The term "plan" shall also include every such plan, fund, contract,
program and arrangement: (a) which Seller or any Subsidiary has committed to
implement, establish, adopt or contribute to in the future, (b) for which
Seller or any Subsidiary is or may be financially liable as a result of the
direct sponsor's affiliation to Seller or any Subsidiary or its owners
(whether or not such affiliation exists at the date of this Agreement and
notwithstanding that the plan is not maintained by Seller or any Subsidiary
for the benefit of its employees or former employees), (c) which is in the
process of terminating (but such term does not include any arrangement that
has been terminated and completely wound up prior to the date of this
Agreement such that Seller or any Subsidiary has no present or potential
liability with respect to such arrangement), or (d) for or with respect to
which Seller or any Subsidiary is or may become liable under any common law
successor doctrine, express successor liability provisions of law, provisions
of a collective bargaining agreement, labor or employment law or agreement
with a predecessor employer.
(b) DISCLOSURE OF PLANS AND OTHER INFORMATION. Schedule 3.17 sets
forth all plans by name and brief description identifying: (i) the type of
plan, (ii) the funding arrangements for the plan, (iii) the sponsorship of
the plan, and (iv) the participating employers in the plan.
Each plan identified on Schedule 3.17 is further identified by
reference to one or more of the following characteristics as may apply to
such plan: (i) defined contribution plan as defined in Section 3(34) of ERISA
or Section 414(i) of the Code; (ii) defined benefit plan as defined in
Section 3(35) of ERISA or Section 414(j) of the Code; (iii) plan which is or
is intended to be tax qualified under Section 401(a) or 403(a) of the Code;
(iv) plan which is or is intended to be an employee stock ownership plan as
defined in Section 4975(e)(7) of the Code (and whether or not such plan has
entered into an exempt loan); (v) nonqualified deferred compensation
arrangement; (vi) employee welfare benefit plan as defined in Section 3(1) of
ERISA; (vii) multiemployer plan as defined in Section 3(37) of ERISA or
Section 414(f) of the Code; (viii) plan maintained by more than one employer
as defined in Section 413(c) of the Code (a "multiple employer plan"); (ix)
plan providing benefits after separation from service or termination of
employment; (x) plan which owns any Subsidiary or other employer securities
as an investment; (xi) plan which provides benefits (or provides increased
benefits or vesting) as a result of a change in control of Seller or any
Subsidiary; (xii) plan which is maintained pursuant to collective bargaining;
and (xiii) a plan funded, in whole or in part, through a voluntary employees'
beneficiary association exempt from tax under Section 501(c)(9) of the Code.
Schedule 3.17 sets forth the identity of each corporation, trade or
business (separately for each category below that applies): (i) which is (or
was during the preceding five years) under common control with Seller or any
Subsidiary within the meaning of Section 414(b) or (c) of the Code;
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(ii) which is (or was during the preceding five years) in an affiliated
service group with Seller or any Subsidiary within the meaning of Section
414(m) of the Code; (iii) which is (or was during the preceding five years)
the legal employer of persons providing services to Seller or any Subsidiary
as leased employees within the meaning of Section 414(n) of the Code; and
(iv) with respect to which Seller or any Subsidiary is a successor employer
for purposes of group health or other welfare plan continuation rights
(including Section 601 et. seq. of ERISA) or the Family and Medical Leave Act.
To the extent that they exist, Seller has furnished Acquiror with
true and complete copies of: (i) the most recent determination letter, if
any, received by Seller or any Subsidiary from the Internal Revenue Service
regarding each plan; (ii) the most recent determination or opinion letter
ruling from the Internal Revenue Service that each trust established in
connection with plans which are intended to be tax exempt under Section
501(a) or (c) of the Code are so tax exempt; (iii) all pending applications
for rulings, determinations, opinions, no-action letters and the like filed
with any governmental agency (including but not limited to the Department of
Labor, Internal Revenue Service, Pension Benefit Guaranty Corporation and the
Securities and Exchange Commission); (iv) the financial statements for each
plan for the three most recent fiscal or plan years (in audited form if
required by ERISA) and, where applicable, Annual Report/Return (Form 5500)
with schedules, if any, and attachments for each plan; (v) the most recently
prepared actuarial valuation report for each plan (including but not limited
to reports prepared for funding, deduction and financial accounting
purposes); (vi) plan documents, trust agreements, insurance contracts,
service agreements and all related contracts and documents (including any
employee summaries and material employee communications) with respect to each
plan; and (vii) collective bargaining agreements (including side agreements
and letter agreements) relating to the establishment, maintenance, funding
and operation of any plan.
Schedule 3.17 identifies each employee of Seller or any Subsidiary
who is: (i) absent from active employment due to short or long term
disability; (ii) absent from active employment on a leave pursuant to the
Family and Medical Leave Act or a comparable state law; (iii) absent from
active employment on any other leave or approved absence; (iv) absent from
active employment due to military service (under conditions that give the
employee rights to re-employment); or (v) not an "at will" employee.
With respect to continuation rights arising under federal or state
law as applied to plans that are group health plans (as defined in Section
601 et. seq. of ERISA), Schedule 3.17 identifies: (i) each employee, former
employee or qualifying beneficiary who has elected continuation; and (ii)
each employee, former employee or qualifying beneficiary who has not elected
continuation coverage but is still within the period in which such election
may be made.
(c) COMPLIANCE WITH LAW. Except as disclosed on Schedule 3.17:
(i) all plans intended to be tax qualified under Section 401(a)
or Section 403(a) of the Code have received a determination letter stating
that they are so qualified;
(ii) all trusts established in connection with plans which are
intended to be tax exempt under Section 501(a) or (c) of the Code have
received a determination letter stating that they are so tax exempt;
(iii) 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;
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(iv) all plans have been administered materially in accordance
with the documents and instruments governing the plans;
(v) to the best knowledge of Seller, all reports and filings
with governmental agencies (including but not limited to the Department of
Labor, Internal Revenue Service, Pension Benefit Guaranty Corporation and
the Securities and Exchange Commission) required in connection with each
plan have been timely made;
(vi) to the best knowledge of Seller, all disclosures and
notices required by law or plan provisions to be given to participants and
beneficiaries in connection with each plan have been properly and timely
made;
(vii) subject to obtaining the approval provided in Section
5.16, no plan, separately or in the aggregate, requires or would result 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 be a factor in causing payments to
be made by Acquiror or Seller or any Subsidiary that are not deductible (in
whole or in part) under Section 280G of the Code; and
(viii) each of Seller and the Subsidiaries has made a good faith
effort to comply with the reporting and taxation requirements for FICA
taxes with respect to any deferred compensation arrangements under Section
3121(v) of the Code.
(d) FUNDING. Except as disclosed on Schedule 3.17:
(i) all contributions, premium payments and other payments
required to be made in connection with the plans as of the date of this
Agreement have been made;
(ii) proper accrual has been made on the books of each of
Seller and the Subsidiaries for all contributions, premium payments and
other payments due in the current fiscal year but not made as of the date
of this Agreement;
(iii) subject to obtaining the approval provided in Section
5.16, no contribution, premium payment or other payment has been made in
support of any plan that is in excess of the allowable deduction for
federal income tax purposes for the year with respect to which the
contribution was made (whether under Section 162, Section 280G, Section
404, Section 419, Section 419A of the Code or otherwise); and
(iv) there is no plan that is subject to Section 301 et. seq.
of ERISA or Section 412 of the Code.
(e) ABSENCE OF CERTAIN CLAIMS. Except as disclosed on Schedule 3.17:
(i) no action, suit, charge, complaint, proceeding, hearing,
investigation or claim is pending with regard to any plan other than
routine uncontested claims for benefits;
(ii) the consummation of the transactions contemplated by this
Agreement will not cause any plan to increase benefits payable to any
participant or beneficiary;
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(iii) the consummation of the transactions contemplated by this
Agreement will not: (A) entitle any current or former employee of Seller or
any Subsidiary to severance pay, unemployment compensation or any other
payment, benefit or award, or (B) accelerate or modify the time of payment
or vesting, or increase the amount of any benefit, award or compensation
due any such employee;
(iv) no plan is currently under examination or audit by the
Department of Labor, the Internal Revenue Service, the Pension Benefit
Guaranty Corporation or the Securities and Exchange Commission;
(v) neither Seller nor any Subsidiary has any actual or
potential liability arising under Title IV of ERISA as a result of any plan
that has terminated or is in the process of terminating;
(vi) neither Seller nor any Subsidiary has any actual or
potential liability under section 4201 et. seq. of ERISA for either a
complete withdrawal or a partial withdrawal from a multiemployer plan; and
(vii) with respect to the plans, neither Seller nor any
Subsidiary has any liability (either directly or as a result of
indemnification) for (and the transaction contemplated by this Agreement
will not cause any liability for): (A) any excise taxes under section 4971
through section 4980B, section 4999, section 5000 or any other section of
the Code, or (B) any penalty under section 502(i), section 502(l), Part 6
of Title I or any other provision of ERISA, or (C) any excise taxes,
penalties, damages or equitable relief as a result of any prohibited
transaction, breach of fiduciary duty or other violation under ERISA or any
other applicable law.
(f) POST-SEPARATION BENEFITS. Except as disclosed on Schedule 3.17:
(i) all accruals required under FAS 106 have been properly
accrued on the financial statements of each of Seller and the Subsidiaries;
(ii) no condition, agreement or plan provision limits the
right of Seller or any Subsidiary to amend, cut back or terminate any plan
(except to the extent such limitation arises under ERISA); and
(iii) neither Seller nor any Subsidiary has any liability for
life insurance, death or medical benefits after separation from employment
other than: (A) death benefits under the plans identified on Schedule 3.17,
or (B) health care continuation benefits described in section 4980B of the
Code.
3.18. INSURANCE. Schedule 3.18 hereto lists each insurance policy
maintained by Seller or any Subsidiary with respect to its properties and
assets. Prior to the date hereof, Seller has delivered to Acquiror complete and
accurate copies of each of the insurance policies described on Schedule3.18.
All such insurance policies are in full force and effect, and neither Seller nor
any Subsidiary is in default with respect to its obligations under any of such
insurance policies.
3.19. AFFILIATE TRANSACTIONS. Except as set forth on
Schedule 3.19, neither Seller nor any Subsidiary, or any of their respective
executive officers or directors, or any member of the immediate family of any
such executive officer or director (which for the purposes hereof shall mean a
spouse, minor child or adult child living at the home of any such executive
officer or director), or any
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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 Seller or any Subsidiary (other than normal employment
arrangements or deposit account relationships) or any interest in any
property, real, personal or mixed, tangible or intangible, used in or
pertaining to the business of Seller or any Subsidiary.
3.20. COMPLIANCE WITH LAWS; PERMITS. To the best knowledge of
Seller, each of Seller 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 Seller or any Subsidiary and to which Seller or any
Subsidiary may be subject (including, without limitation, the Occupational
Safety and Health Act of 1970, the Home Owners Loan Act, the Federal Deposit
Insurance Act, as amended (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 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 Seller and the Subsidiaries, taken as a whole, or
Seller's ability to consummate the transactions contemplated hereby; and no
claims have been filed by any such governments or agencies against Seller or any
Subsidiary 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
Seller 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 Seller and
the Subsidiaries, taken as whole, or the ability of Seller to consummate the
transactions contemplated hereby. Neither Seller nor any Subsidiary is subject
to any cease and desist order, written agreement or memorandum of understanding
with, or is a 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 banks or bank holding companies or engaged in the
insurance of bank deposits (collectively, the "Bank Regulators"), nor have any
of Seller or 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 Seller or any Bank is subject to
Section 32 of the FDIA.
3.21. ADMINISTRATION OF FIDUCIARY ACCOUNTS. Each Bank has
properly administered, in all respects material and which could reasonably be
expected to be material to the business, operations or financial condition of
Seller 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. None of Seller,
the Subsidiaries or any of their respective officers or directors 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 Seller 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.
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3.22. DISCLOSURE. The representations and warranties of Seller
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 Seller which has not
been disclosed to Acquiror pursuant to this Agreement and the Schedules hereto
which would have or would reasonably be expected to have a material adverse
effect on the business, operations or financial condition of Seller and the
Subsidiaries, taken as a whole, or the ability of Seller to consummate the
transactions contemplated hereby.
3.23. REGULATORY APPROVALS. As of the date hereof, Seller is not
aware of any fact that would likely result in the regulatory approvals specified
in Section 5.1 not being obtained.
3.24. INTEREST RATE RISK MANAGEMENT INSTRUMENTS.
(a) Schedule 3.24 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 Seller or any Bank is a party or by which
any of their properties or assets may be bound. Seller has delivered to
Acquiror 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 Seller or any Bank 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 the knowledge of Seller, 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. Each of Seller and 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 the knowledge of
Seller, there are no breaches, violations or defaults or allegations or
assertions of such by any party thereunder.
3.25. DISCLOSURES IN SCHEDULES. Any matter disclosed in any
Schedule to this Agreement shall be deemed to have been disclosed in all
Schedules to this Agreement.
3.26. FAIRNESS OPINION. The Board of Directors of Seller has
received the opinion of Dain Bosworth Incorporated, financial advisor to the
Board of Directors of Seller, dated September 11, 1997 (the "Fairness Opinion")
to the effect that the Merger Consideration is fair to the shareholders of
Seller from a financial point of view, and such opinion is in a form and
substance reasonably satisfactory to the Board of Directors.
ARTICLE 4
CONDUCT OF BUSINESS PENDING THE MERGER
4.1. CONDUCT OF BUSINESS. From the date of this Agreement to the
Effective Time, unless Acquiror 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 Seller and the Subsidiaries shall be conducted
only in, and neither Seller nor any Subsidiary 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 Seller nor any Subsidiary 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; (iii) redeem, purchase, acquire or
offer to acquire, directly or indirectly, any shares of capital stock of or
any other ownership interest in Seller or any Subsidiary (iv) split, combine
or reclassify any outstanding shares of capital stock of Seller or any
Subsidiary, 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 Seller, except that the Banks shall be permitted to pay dividends on
the shares of common stock of the Banks owned by Seller; (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
Seller or any Bank enter into any long-term borrowings with a term of greater
than one year; (vi) discharge or satisfy any material lien or encumbrance on
the properties or assets of Seller or any Subsidiary or pay any material
liability, except otherwise in the ordinary course of business, (vii) sell,
assign, transfer, mortgage, pledge or subject to any lien or other
encumbrance any of its assets, except (A) in the ordinary course of business;
provided, that any such sale, assignment or transfer of any real property
shall not be considered in the ordinary course of business, (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; (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 Seller, except in exchange for debt
previously contracted, including OREO; (x) other than as set forth on
Schedule 3.10, make any single or group of related capital expenditures or
commitments therefor in excess of $25,000 or enter into any lease or group of
related leases with the same party which involves aggregate lease payments
payable of more than $50,000 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 4.1(b);
(c) neither Seller nor any Subsidiary 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, except in the ordinary
course of business consistent with past practice as disclosed on Schedule 3.17;
(d) neither Seller nor any Subsidiary 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 and to the extent required by law
or as disclosed on Schedule 3.17;
(e) each of Seller and the Subsidiaries shall use commercially
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
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providing coverage substantially equal to the coverage under the canceled,
terminated or lapsed policies are in full force and effect;
(f) neither Seller nor any Subsidiary 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 3.14 or to which Seller or any Subsidiary becomes
a party after the date of this Agreement, without prior consultation with
Acquiror;
(g) each of Seller and the Subsidiaries shall use commercially
reasonable efforts to preserve intact in all material respects the business
organization and the goodwill of each of Seller and the Subsidiaries and to keep
available the services of its officers and employees as a group and preserve
intact material agreements and credit facilities, and Seller shall confer on a
regular and frequent basis with representatives of Acquiror, as reasonably
requested by Acquiror, to report on operational matters and the general status
of ongoing operations;
(h) neither Seller nor any Subsidiary 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 Acquiror, take any
action that would have or could reasonably be expected to have a material effect
on the Bank's asset/liability position;
(i) none of the Banks shall make any agreements or commitments
binding it to extend credit except in a manner consistent with past practice and
in accordance with each Bank's lending policies as disclosed to Acquiror, and
none of the Banks shall make any agreements or commitments binding it to extend
credit in an amount in excess of $500,000, or sell, assign or otherwise transfer
any participation in any loan, in each case without prior or prompt subsequent
notification to Acquiror;
(j) with respect to properties leased by Seller or any Subsidiary,
neither Seller nor any Subsidiary shall renew, exercise an option to extend,
cancel or surrender any lease of real property nor allow any such lease to
lapse, without the consent of Acquiror, which consent shall not be unreasonably
withheld;
(k) neither Seller nor any Subsidiary shall make any change in its
accounting methods or practices, other than changes required by law or
regulation made in accordance with generally accepted accounting principle or
regulatory accounting principles generally applicable to depository institutions
such as the Banks, as the case may be;
(l) neither Seller nor any Subsidiary shall renew for any period in
excess of one month its agreement with Deluxe Corporation (or its affiliates);
and
(m) neither Seller nor any Subsidiary shall agree to do any of the
foregoing.
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.
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ARTICLE 5
ADDITIONAL COVENANTS AND AGREEMENTS
5.1. FILINGS AND APPROVALS. Acquiror and Seller will use all
reasonable efforts and will cooperate with the other 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 any other
applicable regulatory authorities and provide copies of the non-confidential
portions 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 non-confidential
portions of each such application, registration statement or other document and
will discuss with the other party which portions of this Agreement shall be
designated as confidential portions of such applications. Each party will use
all reasonable efforts and will cooperate with the other party 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. Seller will furnish to
Acquiror a complete and accurate list as of the end of each calendar month after
July 1997, 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 Banks classified as non-accrual, as
restructured, as 90 days past due, as still accruing and doubtful of collection
or any comparable classification, (c) all OREO, including in-substance
foreclosures and real estate in judgment, (d) any current repurchase obligations
of the Banks 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 Banks.
5.3. MONTHLY FINANCIAL STATEMENTS AND PAY LISTINGS. Seller shall
furnish Acquiror with Seller's and each Subsidiary's balance sheets as of the
end of each calendar month after July 1997 and the related statements of income,
within 15 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 Seller and each of
the Subsidiaries, respectively, as of the dates thereof and the results of
operations of Seller and each of the Subsidiaries, respectively, for the periods
then ended. Seller shall make available to Acquiror with Seller's and each
Subsidiary's payroll listings as of the end of each pay period after July 1997,
within one week after the end of such pay period.
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; provided, however, that Acquiror shall
reimburse Seller for the following costs and expenses: (a) Acquiror shall
reimburse Seller in an amount not to exceed $200,000 (excluding the cost of
obtaining the Fairness Opinion) for costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby and (b) Acquiror
shall reimburse Seller for the cost of obtaining the Fairness Opinion. Acquiror
and Seller agree that the Final Balance Sheet and Final Retained Earnings shall
be adjusted to the extent necessary appropriately to effect the agreements set
forth in the Section 5.4.
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5.5. NO NEGOTIATIONS, ETC.
(a) Seller will not, and will cause the Subsidiaries and Seller's and
each Subsidiary's 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, Seller or any Subsidiary or
other similar transaction or business combination involving Seller or any
Subsidiary, or participate in any negotiations in connection with or in
furtherance of any of the foregoing or permit any person other than Acquiror and
its representatives to have any access to the facilities of, or furnish to any
person other than Acquiror and its representatives any non-public information
with respect to, Seller or any Subsidiary in connection with or in furtherance
of any of the foregoing. Seller shall promptly notify Acquiror if any such
proposal or offer, or any inquiry from or contact with any person with respect
thereto, is made, and shall promptly provide Acquiror with such information
regarding such proposal, offer, inquiry or contact as Acquiror may request.
(b) Acquiror will not, and will cause its subsidiaries and Acquiror's
and its subsidiaries' respective officers, directors, employees, agents and
affiliates not to, directly or indirectly negotiate with 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, any bank with its principal offices located in, or within a
50-mile radius of, St. Cloud, Minnesota.
5.6. NOTIFICATION OF CERTAIN MATTERS. Each party shall give prompt
notice to the other parties 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 Time or at any time prior to the Effective Time 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; NONSOLICITATION OF
EMPLOYEES.
(a) Seller shall permit and shall cause the Subsidiaries to permit
Acquiror 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 Acquiror and to the internal auditors, loan review officers, employees,
attorneys, accountants and other representatives of Acquiror all books, papers
and records relating to the assets, stock, properties, operations, obligations
and liabilities of Seller and the Subsidiaries including, without limitation,
all books of account (including, without limitation, the general ledgers), 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 Acquiror may
have a reasonable interest, including, without limitation, its interest in
planning for integration and transition with respect to the business of Seller
and the Subsidiaries; provided, however, that the foregoing rights granted to
Acquiror 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 Seller set forth herein. In addition, Seller shall
cause the Subsidiaries to instruct their officers,
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employees, counsel and accountants to be available for, and respond to any
questions of, such Acquiror representatives at reasonable hours and with
reasonable notice by Acquiror to such individuals, and to cooperate fully
with Acquiror in planning for the integration of the business of Seller and
the Subsidiaries with the business of Acquiror and its affiliates.
(b) All information furnished by Seller pursuant hereto shall be
treated as the sole property of Seller and shall be kept confidential in
accordance with the terms contained in paragraphs numbered 2 through 5 and
paragraphs numbered 7, 12 and 13 of the Confidentiality Agreement dated June 16,
1997 between Acquiror and Seller (the "Confidentiality Agreement") until the
Effective Time.
(c) 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.
(d) Acquiror shall be bound by its agreements contained in paragraphs
numbered 8 and 10 of the Confidentiality Agreement until the Effective Time.
5.8. FILING OF TAX RETURNS AND ADJUSTMENTS.
(a) Seller and 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
Time 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 Time;
provided, however, that neither Seller nor any Subsidiary 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 Acquiror; provided, further, that neither Seller
nor any Subsidiary 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 Acquiror. In the event the granting or
withholding of such approval by Acquiror results in additional Taxes owing for
any Tax period ending on or before the Effective Time, liability for such
additional Taxes shall not cause any representation of Seller relating to Taxes
to be untrue. Seller shall provide Acquiror with a copy of appropriate
workpapers, schedules, drafts and final copies of each federal and state income
Tax return or election of Seller and the Subsidiaries (including returns of all
Plans) at least ten days before filing such return or election and shall
reasonably cooperate with any request by Acquiror in connection therewith.
(b) Acquiror, in its sole and absolute discretion, will file (or
cause to be filed) all Tax returns of Seller and the Subsidiaries due after the
Effective Time. After the Effective Time, Acquiror, 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 Seller and the Subsidiaries for
all Tax periods. To the extent Acquiror amends any such Tax returns, other than
an amendment at the request of the applicable federal, state, local or foreign
Tax authority, and such amendment results in additional Taxes owing for any Tax
period ending on or before the Effective Time, such additional Taxes shall not
cause any representation of Seller relating to Taxes to be untrue.
5.9. SHAREHOLDER APPROVAL; REGISTRATION STATEMENT.
(a) Seller 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 Acquiror. The Board of Directors of Seller shall
recommend that the shareholders approve this Agreement and
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the Merger, and shall use its best efforts (including, without limitation,
soliciting proxies for such approval) to obtain such shareholder approval.
(b) For the purposes of (i) holding a meeting of the shareholders of
Seller to approve this Agreement and the Merger and (ii) registering the
Acquiror Common Stock to be issued to holders of Seller Common Stock in
connection with the Merger with the SEC and with applicable state securities
authorities, the parties hereto shall cooperate in the preparation of a
registration statement on Form S-4 (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/proxy statement
satisfying all applicable requirements of the 1933 Act, the 1934 Act and
applicable Blue Sky Laws (such prospectus/proxy statement, together with any and
all amendments or supplements thereto, being herein referred to as the
"Prospectus/Proxy Statement").
(c) Acquiror shall furnish such information concerning Acquiror as
is necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to Acquiror, to be prepared in accordance with Section 5.9(b).
Acquiror agrees promptly to notify Seller if at any time prior to the Seller
shareholder meeting any information provided by Acquiror 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.
(d) Seller shall furnish Acquiror with such information concerning
Seller and the Subsidiaries as is necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to Seller and the
Subsidiaries, to be prepared in accordance with Section 5.9(b). Seller
agrees promptly to notify Acquiror if at any time prior to the Seller
shareholder meeting any information provided by Seller in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect, and to provide Acquiror with the information needed to correct such
inaccuracy or omission.
(e) Acquiror shall promptly file the Registration Statement with the
SEC and applicable state securities agencies. Acquiror shall use reasonable
efforts to cause the Registration Statement to become effective under the 1933
Act and applicable Blue Sky Laws at the earliest practicable date. Seller
hereby authorizes Acquiror to utilize in the Registration Statement the
information concerning Seller and the Subsidiaries provided to Acquiror for the
purpose of inclusion in the Prospectus/Proxy Statement. Seller shall have the
right to review and comment on the form of proxy statement included in the
Registration Statement. Acquiror shall advise Seller promptly when the
Registration Statement has become effective and of any supplements or amendments
thereto, and Acquiror shall furnish Seller with copies of all such documents.
Prior to the Effective Time 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.
(f) Acquiror shall use reasonable efforts to cause to be delivered to
Seller a letter relating to the Registration Statement from Ernst & Young LLP,
Acquiror's independent auditors, dated a date within two business days before
the date on which the Registration Statement shall become effective and
addressed to Seller, in form and substance reasonably satisfactory to Seller and
customary in scope and substance for letters delivered by independent public
accountants in connection with registration statements similar to the
Registration Statement.
(g) Seller shall use reasonable efforts to cause to be delivered to
Acquiror a letter relating to the Registration Statement from Larsen Allen
Weishair LLP, Seller's independent auditors, dated a date within two business
days before the date on which the Registration Statement shall become effective
and addressed to Acquiror, in form and substance reasonably satisfactory to
Acquiror
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and customary in scope and substance for letters delivered by independent
public accountants in connection with registration statements similar to the
Registration Statement.
(h) Acquiror shall bear the costs of all SEC filing fees with respect
to the Registration Statement and the costs of qualifying the shares of Acquiror
Common Stock under the Blue Sky Laws, to the extent necessary. Acquiror shall
bear all printing and mailing costs in connection with the preparation and
mailing of the Prospectus/Proxy Statement to Seller shareholders. Acquiror and
Seller shall each bear their own legal and accounting expenses in connection
with the Registration Statement.
5.10. ESTABLISHMENT OF ACCRUALS. If requested by Acquiror, on the
business day immediately prior to the Effective Time, the Banks shall,
consistent with generally accepted accounting principles, establish such
additional accruals and reserves as may be necessary to conform the Banks'
accounting and credit loss reserve practices and methods to those of Acquiror
(as such practices and methods are to be applied to the Banks from and after
the Effective Time) and reflect Acquiror's plans with respect to the conduct
of the Banks' business following the Merger and to provide for the costs and
expenses relating to the consummation by the Banks of the transactions
contemplated by this Agreement. The establishment of such accruals and
reserves shall not be an adjustment to the Final Balance Sheet or the Final
Retained Earnings and shall not, in and of itself, constitute a breach of any
representation or warranty of Seller contained in this Agreement or
constitute a material adverse change in the business, operations or financial
condition of Seller and the Banks, taken as a whole.
5.11. EMPLOYEE MATTERS.
(a) GENERAL. Subject to the following agreements, after the
Effective Time, Acquiror shall have the right to continue, amend, merge or
terminate any of the Plans (as defined in Section 3.17) in accordance with
the terms thereof and subject to any limitation arising under applicable law,
including tax qualification requirements. Until Acquiror shall take such
action, however, such Plans shall continue in force for the benefit of
present and former employees of Seller or any Subsidiary who have any present
or future entitlement to benefits under any of the Plans ("Seller Employees").
(b) SALARY CONTINUATION AGREEMENTS. Acquiror expressly assumes and
agrees to be bound by the terms of the salary continuation agreements with each
of Edward J. Zapp and John Leisen as disclosed to Acquiror (the "Salary
Continuation Agreements").
(c) SEVERANCE. Acquiror shall enter into a severance agreement
substantially in the form provided by Acquiror to Seller with each of the eight
individuals mutually agreed to by Acquiror and Seller. With respect to
employees of Seller or any Subsidiary not subject to any other severance
agreement, Acquiror shall pay severance to such employees in accordance with
Acquiror's General Severance Pay Program, as the same may be amended from time
to time.
(d) LIMITATION ON ENFORCEMENT. This Section 5.11 is an agreement
solely between Seller and Acquiror. Nothing in this Section 5.11, whether
express or implied, confers upon any employee of Seller, any Subsidiary or
Acquiror 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 5.11.
5.12. TAX TREATMENT. None of Seller, the Subsidiaries or
Acquiror shall take any action which would disqualify the Merger as a
"reorganization" that would be tax-free to the shareholders of Seller
pursuant to Section 368(a) of the Code.
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5.13. LOAN PARTICIPATIONS. Seller agrees that it will not sell any
loan participation or renew any loan participation without first offering to
sell such loan participation to Acquiror on the same terms as such sale or
renewal.
5.14. AFFILIATE/REPRESENTATION LETTERS. Seller shall use its
best efforts to obtain and deliver to Acquiror prior to the Effective Date
(a) a signed representation letter substantially in the form of Exhibit A
hereto and otherwise satisfactory to Acquiror from each shareholder of Seller
who may reasonably be deemed an "affiliate" of Seller within the meaning of
such term as used in Rule 145 under the 1933 Act and (b) signed
representation letters from all of the shareholders of Seller holding to the
effect that it is each such shareholder's plan and intent to hold (and not to
sell, transfer or otherwise dispose of) at least 50% of the shares of
Acquiror Common Stock received by such shareholder in the Merger; provided,
however, that in the event that the proposed Treasury regulations regarding
the "continuity of interest" test applicable to transactions intending to
qualify as reorganizations within the meaning of Section 368(a) of the Code
are adopted as final regulations in substantially the form in which they were
proposed on December 20, 1996 with an effective date of such regulations on
or prior to the Effective Date, Seller's obligations under Section 5.14(b)
shall terminate.
5.15. UPDATED SCHEDULES. On a date 15 business days prior to the
Effective Date and on the Effective Date, Seller shall modify any Schedule to
this Agreement or add any Schedule or Schedules hereto for the purpose of making
the representations and warranties to which any such Schedule relates true and
correct in all material respects as of such date, whether to correct any
misstatement or omission in any Schedule or to reflect any additional
information obtained by Seller subsequent to the date any Schedule was
previously delivered by Seller to Acquiror. Notwithstanding the foregoing, any
updated Schedule shall not have the effect of making any representation or
warranty contained in this Agreement true and correct in all material respects
for purposes of Section 6.3(a) hereof.
5.16. 280G APPROVAL. Seller shall make no payments that
separately or in the aggregate could or would result in the payment of any
"excess parachute payments" within the meaning of Section 280G of the Code,
unless and until such payments are approved by the shareholders of Seller in
accordance with the provisions of Sections 280G(b)(5)(A)(ii) and 280G(b)(5)(B)
of the Code, and Seller shall use its best efforts to obtain shareholder
approval of any such payments in accordance with such Sections of the Code prior
to the Effective Time.
5.17. AGREEMENT TO PURCHASE CONVERTED SHARES. Commencing
immediately following the Effective Time and from time to time thereafter until
the second anniversary of the Effective Date, upon request, Acquiror shall
purchase from the former shareholders of Seller up to an aggregate of 30% of the
total number of shares of Acquiror Common Stock issued upon conversion of Seller
Common Stock in the Merger (the "Merger Shares"). The purchase price for each
such Merger Share purchased by Acquiror shall be equal to the closing price for
a share of Acquiror Common Stock as quoted on the New York Stock Exchange on the
trading day immediately prior to the day on which such purchase occurs. At any
such time as Acquiror has purchased a number of shares of Acquiror Common Stock
representing 30% of the total number of Merger Shares, Acquiror's obligation to
purchase shares as herein provided shall cease. In addition, Acquiror may, in
its sole and absolute discretion, suspend its obligation to purchase shares in
the event of restrictions imposed by federal securities laws or accounting
requirements for transactions accounted for as a pooling-of-interests.
5.18. PURCHASE OF CERTAIN ASSETS AT BOOK VALUE. Immediately prior
to the Effective Time, Edward J. Zapp shall purchase from Seller the assets
listed on Schedule 5.18 at the book value of such assets as of the last day of
the month preceding the month in which the Effective Date occurs.
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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 Time of the following
conditions:
(a) REGULATORY APPROVAL. Regulatory approval for the consummation of
the transactions contemplated hereby shall have been obtained from the FRB
and any other governmental authority from whom approval is required, and
the applicable waiting periods, if any, under all statutory or regulatory
waiting periods shall have lapsed. None of such approvals shall contain
any conditions or restrictions that Acquiror reasonably believes will
materially restrict or limit the business or activities of Acquiror, Seller
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 Acquiror and its subsidiaries, taken
as a whole, on the one hand, or Seller and the Subsidiaries, taken as a
whole, on the other hand.
(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) 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 (i) restraining or
prohibiting the consummation of the transactions contemplated hereby or
obtaining material damages from Seller, any Subsidiary, Acquiror or any of
Acquiror's subsidiaries in connection with the transactions contemplated
hereby, (ii) prohibiting direct or indirect ownership or operation by
Acquiror of all or a material portion of the business or assets of Seller
or any Subsidiary or of Acquiror or any of its subsidiaries, or to
compelling Acquiror or any of its subsidiaries or Seller or any Subsidiary
to dispose of or to hold separately all or a material portion of the
business or assets of Acquiror or any of its subsidiaries or of Seller or
any Subsidiary, as a result of the transactions contemplated hereby, or
(iii) requiring direct or indirect divestiture by Acquiror of any of its
business or assets or of the business or assets of Seller or any
Subsidiary.
(e) NO TERMINATION. No party hereto shall have terminated this
Agreement as permitted herein.
(f) SHAREHOLDER APPROVAL. The Merger shall have been approved by the
requisite vote of the shareholders of Seller, and Seller shall have
obtained the shareholder approval required by Section 5.16.
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6.2. ADDITIONAL CONDITIONS TO OBLIGATION OF SELLER. The obligation of
Seller 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 Acquiror 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 Time as if made at and as of the Effective Time, 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 Acquiror and its subsidiaries, taken as a whole; and
Acquiror 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 Time.
(b) OFFICER'S CERTIFICATE. Acquiror shall have furnished to Seller a
certificate of the Chief Financial Officer of Acquiror, dated as of the
Effective Time, in which such officer shall certify that such officer has
no reason to believe that the conditions set forth in Section 6.2(a) have
not been fulfilled.
(c) ACQUIROR SECRETARY'S CERTIFICATE. Acquiror shall have furnished
to Seller (i) copies of the text of the resolutions by which the corporate
action on the part of Acquiror necessary to approve this Agreement and the
transactions contemplated hereby were taken, (ii) a certificate dated as of
the Effective Time executed on behalf of Acquiror by its corporate
secretary or one of its assistant corporate secretaries certifying to
Seller 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 Time executed on behalf of Acquiror by its corporate secretary or
one of its assistant corporate secretaries certifying the signature and
office of each officer of Acquiror executing this Agreement or any other
agreement, certificate or other instrument executed pursuant hereto.
(d) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no material adverse change in, and no event, occurrence or
development in the business of Acquiror 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 Acquiror and its subsidiaries, taken as a whole.
(e) CHANGE IN CONTROL OF ACQUIROR. Acquiror shall not have merged,
or announced an agreement to merge, into another corporation, or sold all
or substantially all of its assets, or had one person or group acquire, or
had one person or group announce its intent to acquire, directly or
indirectly, beneficial ownership of more than 50% of the outstanding
Acquiror Common Stock.
(f) REGISTRATION STATEMENT; LISTING. The registration statement on
Form S-4 referred to in Section 5.9 shall have been declared and shall
remain effective and no stop order suspending the effectiveness of such
registration statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the SEC, and the shares
of Acquiror Common Stock to be issued pursuant to Section 1.2 hereof shall
have been listed on the NYSE subject to notice of issuance, at the
Effective Time.
(g) TAX OPINION. Seller shall have received an opinion of Fredrikson
& Byron, P.A., dated as of the Effective Time and in form and substance
satisfactory to Seller and
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Acquiror, to the effect that, on the basis of the facts, representations
and assumptions set forth in such opinion which are consistent with the
state of facts existing at the Effective Time, the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code and that accordingly: (i) no gain or loss will
be recognized for federal income tax purposes by Acquiror or Seller as a
result of the consummation of the Merger; (ii) no gain or loss will be
recognized for federal income tax purposes by shareholders of Seller who
exchange their Seller Common Stock solely for Acquiror Common Stock pursuant
to the Merger (except to the extent of any cash received in lieu of
fractional shares); and (iii) the tax basis of the Acquiror Common Stock
received by shareholders of Seller who exchange all of their Seller Common
Stock solely for Acquiror Common Stock in the Merger will be the same as the
tax basis of the Seller Common Stock surrendered in exchange therefor. In
rendering such opinion, such counsel may require and rely upon
representations and covenants of Seller and Acquiror and such other persons
as such counsel deems appropriate.
6.3. ADDITIONAL CONDITIONS TO OBLIGATION OF ACQUIROR. The obligation
of Acquiror 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 Seller 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 Time as if made at and as of the Effective
Time, except (i) 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 Seller and the
Subsidiaries, taken as a whole, (ii) for the representations and warranties
set forth in Section 3.5(b) which shall be true and correct in all materials
respects as of the date of this Agreement, and the lists provided pursuant
to Section 5.2 shall be true and correct in all material respects as of the
respective dates of each such list and (iii) for the representations and
warranties set forth in the first sentence of Section 3.16 which may be
updated for facts arising after the date hereof and which shall be true and
correct as of the date of such update; and Seller shall in all material
respects have performed each obligation and agreement and complied with
each covenant to be performed and complied with by them hereunder at or
prior to the Effective Time.
(b) OFFICERS' CERTIFICATE OF SELLER. Seller shall have furnished to
Acquiror a certificate of the Chief Executive Officer and the Chief
Financial Officer of Seller, dated as of the Effective Time, 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) SELLER SECRETARY'S CERTIFICATE. Seller shall have furnished to
Acquiror (i) copies of the text of the resolutions by which the corporate
action on the part of Seller necessary to approve this Agreement and the
transactions contemplated hereby were taken, (ii) a certificate dated as of
the Effective Time executed on behalf of Seller by its corporate secretary
or one of its assistant corporate secretaries certifying to Acquiror 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 Time
executed on behalf of Seller 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.
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(d) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there
shall have been no material adverse change in, and no event, occurrence or
development in the business of Seller 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 Seller and the Subsidiaries, taken as a whole; provided, however, that a
material adverse change or a material adverse effect shall not be deemed to
include the impact of (a) changes in banking and similar laws of general
applicability or interpretations thereof by courts or governmental
authorities and (b) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to banks and their holding
companies generally.
(e) SELLER COMMON STOCK. As of the Effective Time, all issued and
outstanding shares of Seller Common Stock will be free and clear of any
lien, pledge, security interest, encumbrance or charge of any kind,
including any lien, pledge, security interest, encumbrance or charge set
forth on Schedule 3.3.
(f) AFFILIATE/REPRESENTATION LETTERS. Seller shall have delivered to
Acquiror the letters required to be delivered pursuant to Section 5.14.
(g) FINAL BALANCE SHEET. Seller shall have delivered to Acquiror the
Final Balance Sheet as provided in Section 1.3.
(h) TAX OPINION. Acquiror shall have received an opinion of Dorsey &
Whitney LLP, dated as of the Effective Time and in form and substance
satisfactory to Seller and Acquiror, to the effect that, on the basis of
the facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the Effective Time, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that accordingly: (i)
no gain or loss will be recognized for federal income tax purposes by
Acquiror or Seller as a result of the consummation of the Merger; (ii) no
gain or loss will be recognized for federal income tax purposes by
shareholders of Seller who exchange their Seller Common Stock solely for
Acquiror Common Stock pursuant to the Merger (except to the extent of any
cash received in lieu of fractional shares); and (iii) the tax basis of the
Acquiror Common Stock received by shareholders of Seller who exchange all
of their Seller Common Stock solely for Acquiror Common Stock in the Merger
will be the same as the tax basis of the Seller Common Stock surrendered in
exchange therefor. In rendering such opinion, such counsel may require and
rely upon representations and covenants of Seller and Acquiror and such
other persons as such counsel deems appropriate.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1. TERMINATION. This Agreement may be terminated prior to the
Effective Time:
(a) by mutual consent of Acquiror and Seller;
(b) by either Acquiror or Seller, 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 Acquiror or Seller if the Effective Time is not on or
before February 28, 1998 (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); or
Any party desiring to terminate this Agreement shall give written
notice of such termination and the reasons therefor to the other parties.
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) as may be otherwise provided in law or in equity,
(b) for the obligations of the parties under Article 8, and (c) that the
covenants contained in Sections 5.4, 5.7(b), (c) and (d) hereof shall survive
such termination.
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 Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto or (b) waive compliance with any of the
agreements of any other parties 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
THE DEPOSIT
8.1. OPTION DEPOSIT AND ESCROW DEPOSIT. Prior to the date hereof, and
in consideration for certain covenants and agreements set forth in a letter
agreement heretofore entered into by and among the parties hereto setting forth
the general provisions of this Agreement, Acquiror has deposited $500,000 (the
"Option Deposit") in an escrow account. Upon execution of this Agreement and in
consideration of the covenants and agreements of Seller herein, Acquiror shall
deposit in an escrow account with First Trust National Association (the "Escrow
Agent") for the benefit of Seller, and pursuant to the escrow agreement attached
hereto as Exhibit B, the sum of $1,000,000 (the "Escrow Deposit") plus the
Option Deposit (together, the "Deposit"). Interest on the applicable portion of
Deposit shall be paid to the party to be paid such portion of the Deposit
pursuant to Section 8.2 or 8.3, hereof, as applicable. Any fees of the escrow
agent shall be paid by the party receiving the interest on the Escrow Deposit.
8.2. RELEASE OF DEPOSIT TO SELLER. If the Effective Time is delayed
beyond February 28, 1998 or if the Merger shall not have been consummated for
any reason on or prior to such date (unless the failure to consummate the Merger
by such date shall be due to the action or failure to act of Seller in breach of
Seller's obligations under this Agreement), other than the termination of this
Agreement pursuant to Section 7.1(b) due to a failure to satisfy the conditions
of Sections 6.1(f), 6.2(g), 6.3(a) or (g) hereof, the Escrow Agent shall pay the
Deposit, together with interest thereon, to Seller on the earlier of such
termination or such date. If this Agreement is terminated pursuant to
Section 7.1(b), due to a failure to satisfy the conditions of Sections 6.1(f),
6.2(g), 6.3(a) or (g) hereof, the Escrow Agent shall pay the Option Deposit,
together with interest thereon, to the Seller on such termination.
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<PAGE>
8.3. REFUND OF DEPOSIT TO ACQUIROR. If the Effective Time is on or
before February 28, 1998, the Deposit shall be refunded to Acquiror. If this
Agreement is terminated at any time pursuant to Section 7.1(b) due to a failure
to satisfy the conditions of Sections 6.1(f), 6.2(g), 6.3(a) or (g), or if the
Merger shall not have been consummated due to the action or failure to act of
Seller in breach of Seller's obligations under this Agreement, the Escrow
Deposit shall be refunded to Acquiror.
ARTICLE 9
GENERAL PROVISIONS
9.1. PUBLIC STATEMENTS. Neither Seller nor the Acquiror shall make
any public announcement or statement with respect to the Merger, this Agreement
or any related transactions without the approval of the other parties; provided,
however, that Acquiror may, upon reasonable notice to and prior consultation
with Seller, make any public announcement or statement that it believes is
required by federal securities laws.
9.2. 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 Acquiror:
U.S. Bancorp
Mail Station - MPFP3007
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Lee R. Mitau
Fax: (612) 973-4333
with a copy to:
Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Elizabeth C. Hinck
Fax: (612) 340-8738
if to Seller:
Zappco, Inc.
1015 St. Germain St. West
P.O. Box 531
St. Cloud, Minnesota 56302-0531
Attention: Edward J. Zapp
Fax: (320) 259-8440
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<PAGE>
with a copy to:
Fredrikson & Byron, P. A.
1100 International Centre
900 Second Avenue South
Suite 1100
Minneapolis, Minnesota 55402-3397
Attention: John Kost
Fax: (612) 347-7077
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 electronically acknowledged, if faxed or telecopied; and
the next day after being delivered to an overnight delivery service.
9.3. INTERPRETATION. When a reference is made in this Agreement to
subsidiaries of Acquiror, the word "subsidiary" means any "majority-owned
subsidiary" (as defined in Rule 12b-2 under the 1934 Act) of Acquiror, as the
context requires; provided, however, that neither Seller nor any Subsidiary
shall at any time be considered a subsidiary of Acquiror 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.
9.4. 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.
9.5. 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 the parties
hereto any rights or remedies hereunder (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; and (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.
9.6. INVESTIGATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS. No
investigation made by or on behalf of the parties hereto or the results of any
such investigation shall constitute a waiver of any representation, warranty or
covenant of any other party.
9.7. NO SURVIVAL OF REPRESENTATIONS. The representations, warranties
and covenants made by Seller and Acquiror in this Agreement or in any instrument
delivered pursuant to this Agreement shall terminate on, and shall have no
further force or effect after, the Effective Time, except for those covenants
contained herein or therein which by their terms apply in whole or in part after
the Effective Time.
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9.8. SCHEDULES. The Schedules referred to in this Agreement shall be
delivered as of the date hereof under cover of a letter from the President of
Seller.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed on the date first written above by their respective duly elected and
authorized officers.
U.S. BANCORP
By /s/ Richard A. Zona
-----------------------------
Richard A. Zona
Vice Chairman
ZAPPCO, INC.
By /s/ Edward J. Zapp
-----------------------------
Edward J. Zapp
President, Chairman and CEO
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EXHIBIT A
, 199
- ------------ --
U.S. Bancorp
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Ladies and Gentlemen:
1. I have been advised that I might be considered to be an
"affiliate," as that term is defined for purposes of paragraphs (c) and (d)
of Rule 145 ("Rule 145") promulgated by the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Securities Act"), of Zappco, Inc., a Minnesota corporation ("Zappco").
2. Pursuant to an Agreement and Plan of Merger dated September
12, 1997 (the "Agreement"), by and between U.S. Bancorp, a Delaware
corporation ("USBC"), and Zappco, it is contemplated that Zappco will merge
with and into USBC and that all of the outstanding common stock, par value
$1.00 per share, of Zappco ("Zappco Common Stock") will be converted into
common stock, par value $1.25 per share, of USBC ("USBC Common Stock"), as
set forth in the Agreement (the "Merger"). In connection with the Merger, I
will receive my pro rata portion of the shares of USBC Common Stock upon
distribution of the USBC Common Stock to the holders of Zappco Common Stock.
3. I hereby agree as follows:
a. I will not offer to sell, transfer or otherwise dispose
of any of the shares of USBC Common Stock distributed to me pursuant to the
Merger (the "Stock"), except (i) in compliance with the applicable provisions
of Rule 145, (ii) in a transaction that is otherwise exempt from the
registration requirements of the Securities Act, or (iii) in an offering
registered under the Securities Act.
4. I consent to the endorsement of the Stock issued to me
pursuant to the Merger with a restrictive legend which will read
substantially as follows:
"The shares represented by this certificate were
issued in a transaction to which Rule 145 promulgated under
the Securities Act of 1933, as amended (the "Act"), applies,
and may be sold or otherwise transferred only in compliance
with the limitations of such Rule 145, or upon receipt by
U.S. Bancorp of an opinion of counsel reasonably
satisfactory to it that some other exemption from
registration under the Act is available, or pursuant to a
registration statement under the Act."
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<PAGE>
U.S. Bancorp
, 199
- ------------ --
Page 2
USBC's transfer agent shall be given an appropriate stop transfer
order and shall not be required to register any attempted transfer of the
shares of the Stock, unless the transfer has been effected in compliance with
the terms of this letter agreement, it being understood that USBC will
promptly process all transfer requests effected in compliance with the terms
of this letter agreement.
5. It is understood and agreed that this letter agreement shall
terminate and be of no further force and effect and the legend set forth in
paragraph 4 above shall be removed by delivery of substitute certificates
without such legend, and the related stop transfer restrictions shall be
lifted forthwith, if (i) any such shares of Stock shall have been registered
under the Securities Act for sale, transfer or other disposition by me or on
my behalf and are sold, transferred or otherwise disposed of, or (ii) any
such shares of Stock are sold in accordance with the provisions of paragraphs
(c), (e), (f) and (g) of Rule 144 promulgated under the Securities Act, or
(iii) I am not at the time an affiliate of USBC and have been the beneficial
owner of the Stock for at least one year (or such other period as may be
prescribed by the Securities Act and the rules and regulations promulgated
thereunder) and USBC has filed with the Commission all of the reports it is
required to file under the Securities Exchange Act of 1934, as amended,
during the preceding 12 months, or (iv) I am not and have not been for at
least three months an affiliate of USBC and have been the beneficial owner of
the Stock for at least two years (or such other period as may be prescribed
by the Securities Act and the rules and regulations promulgated thereunder),
or (v) USBC shall have received a letter from the staff of the Commission, or
an opinion of counsel reasonably acceptable to USBC, to the effect that the
stock transfer restrictions and the legend are not required.
6. I have carefully read this letter agreement and the Agreement
and have discussed their requirements and other applicable limitations upon
my ability to offer to sell, transfer or otherwise dispose of shares of the
Stock, to the extent I felt necessary, with my counsel or counsel for Zappco.
Sincerely,
----------------------------------------
[Name]
Agreed and accepted this
---
day of , 199 , by
------------ --
U.S. BANCORP
By
----------------------------
Its
-------------------------
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EXHIBIT B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made and entered into this 12th day of
September, 1997, by and among U.S. Bancorp ("USBC"), Zappco, Inc. ("Zappco")
and First Trust National Association (the "Escrow Agent").
Reference is made to that certain Agreement and Plan of Merger
dated the date hereof (the "Merger Agreement") by and between USBC and
Zappco. The Merger Agreement provides that USBC shall deposit in an escrow
account with the Escrow Agent for the benefit of Zappco an aggregate of
$1,500,000 (the "Escrow Funds"), of which $500,000 has previously been
deposited in a demand deposit account (Account No. 173100380612) (the
"Existing Escrow Account") with U.S. Bank National Association (d/b/a First
Bank National Association) and upon the execution of this Escrow Agreement
will be transferred to an escrow account (the "New Escrow Account") with the
Escrow Agent. Such Escrow Funds are to be held in escrow pursuant to the
terms of the Merger Agreement. The parties hereto desire that the Escrow
Agent hold, invest and distribute the Escrow Funds, together with interest
accrued thereon, all in the manner set forth in this Escrow Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, the
mutual covenants of the parties contained herein and in the Merger Agreement,
and of other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged by each of the parties, it is agreed as follows:
1. DEFINITIONS. Capitalized terms used and not defined herein
shall have the meaning given them in the Merger Agreement.
2. APPOINTMENT OF ESCROW AGENT. USBC and Zappco hereby appoint
and designate the Escrow Agent as the escrow agent for the purposes set forth
in this Escrow Agreement, and the Escrow Agent hereby accepts such
appointment under the terms and conditions set forth herein. This Escrow
Agreement shall supersede any prior written or oral agreement of the parties
with respect to the funds held in the Existing Escrow Account.
3. ESCROW DEPOSIT AND INVESTMENT. Prior to the execution of this
Escrow Agreement, USBC has deposited $500,000 of the Escrow Funds in the
Existing Escrow Account. Contemporaneous with the execution and delivery of
this Escrow Agreement, such funds in the Existing Escrow Account have been
transferred to the New Escrow Account and USBC has delivered $1,000,000 (the
"Second Escrow Deposit") to the Escrow Agent for deposit in the New Escrow
Account, which brings the aggregate amount deposited in the New Escrow
Account to $1,500,000 (excluding earnings on deposits to date). The Escrow
Agent agrees to hold and invest such Escrow Funds, together with interest
accrued thereon, in the manner set forth in Schedule A to this Escrow
Agreement, until such funds, and the interest accrued thereon, are released
in accordance with the provisions of Section 4 hereof. The Escrow Agent
shall change such investments procedures upon written instructions signed by
USBC and Zappco. The Escrow Agent shall have the right to liquidate any
investments held in order to provide funds necessary to make required
payments under this Escrow Agreement. The Escrow Agent shall not be liable
for any loss incurred at such liquidation which is due to fluctuations in
market rates or penalties incurred because of early redemption.
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<PAGE>
4. RELEASE OF ESCROW FUNDS. The Escrow Funds, and the interest
accrued thereon, shall be released in accordance with written instructions
signed by USBC and Zappco delivered to the Escrow Agent. USBC and Zappco
agree that Article 8 of the Merger Agreement shall govern the manner in which
the Escrow Funds shall be released by the Escrow Agent and that their written
instructions to the Escrow Agent shall be in accordance with such Article 8.
5. FEES OF ESCROW AGENT. The Escrow Agent shall be entitled to a
fee for its services in the amount set forth on Schedule B to this Escrow
Agreement. Such fee shall be paid by USBC upon invoice from the Escrow Agent.
If the Second Escrow Deposit is released to Zappco upon written request from
USBC and Zappco, then the Escrow Agent shall deduct the entire fee from the
interest and income earned from the investment and reinvestment of the Escrow
Funds and shall reimburse USBC for its payment of the fee of the Escrow
Agent.
6. DUTY AND LIABILITY OF ESCROW AGENT. The sole duty of the
Escrow Agent shall be to receive, hold and distribute the Escrow Funds as
provided in this Escrow Agreement. The Escrow Agent shall incur no liability
with respect to any action taken by it in reliance upon or in response to any
joint notice, direction, instruction or consent of the parties which may be
given under the terms of this Escrow Agreement, nor for any action or
omission of the Escrow Agent hereunder, except for its own willful
misconduct. The duties and responsibilities of the Escrow Agent shall be
limited to those expressly set forth in this Escrow Agreement, and the Escrow
Agent shall not be subject to nor bound by the terms of any other agreement
between the parties.
7. ASSIGNMENT; BINDING EFFECT. This Escrow Agreement shall
extend to, shall inure to the benefit of and shall be binding upon all of the
parties hereto and upon all of their respective successors and permitted
assigns. This Escrow Agreement shall not be assignable or transferable, in
whole or in part, by any of the parties hereto except upon the express prior
written consent of all of the other parties hereto, and nothing contained in
this Escrow Agreement is intended to confer upon any person, other than the
parties hereto and their respective successors and permitted assigns, any
rights, remedies or obligations under, or by reason of, this Escrow Agreement.
8. NOTICES. All notices and other communications hereunder shall
be in writing and shall be sufficiently given if made by hand delivery, by
facsimile, 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 USBC:
U.S. Bancorp
Mail Station - MPFP3007
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: Lee R. Mitau
Fax: (612) 973-4333
with a copy to:
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Dorsey & Whitney LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Elizabeth C. Hinck
Fax: (612) 340-8738
if to Zappco:
Zappco Inc.
1015 St. Germain St. West
P.O. Box 531
St. Cloud, Minnesota 56302-0531
Attention: Edward J. Zapp
Fax: (320) 259-8440
with a copy to:
Fredrikson & Byron, P.A.
1100 International Center
900 Second Avenue South
Suite 1100
Minneapolis, Minnesota 55402-3397
Attention: John G. Kost
Fax: (612) 347-7077
if to the Escrow Agent:
First Trust National Association
First Trust Center - SPFT0210
180 East Fifth Street
St. Paul, Minnesota 55101
Attention: Thomas M. Gronlund
Fax: (612) 244-0712
9. TERMINATION. This Escrow Agreement is deemed terminated upon
the release of the entire amount of the Escrow Funds in accordance with
Section 7 and 8 of the Merger Agreement.
10. AMENDMENT. This Escrow Agreement may be amended only by a
written instrument signed by all of the parties.
11. GOVERNING LAW. This Escrow Agreement 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.
12. COUNTERPARTS. This Escrow Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of
which shall constitute but one agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement on the day and year first above written.
U.S. BANCORP
By
---------------------------
Its
--------------------------
ZAPPCO, INC.
By
---------------------------
Its
--------------------------
FIRST TRUST NATIONAL ASSOCIATION
By
---------------------------
Its
--------------------------
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APPENDIX B
[Dain Bosworth Letterhead/Logo]
September 12, 1997
Board of Directors
Zappco, Inc.
1015 West St. Germain
St. Cloud, MN 56301
Members of the Board:
You have requested our opinion, as of the date hereof, as to the fairness,
from a financial point of view, to the holders of the common stock of Zappco,
Inc. (the "Company") of the consideration to be received by such holders in
connection with an Agreement and Plan of Reorganization (the "Merger
Agreement"), dated on or about September 12, 1997, by and among U.S. Bancorp
("USB") and the Company. The Merger Agreement provides for, among other
things, the merger of the Company with and into USB (the "Merger") pursuant
to which the holders of the common stock of Zappco will receive such number
of shares of USB common stock as determined by dividing the amount of
approximately $69,899,000, plus additional retained earnings from August 31,
1997 to the closing of the Merger (the "Effective Time"), by the average
closing price of USB's common stock for the ten trading days preceding the
Effective Time. A portion of the USB shares received by the holders of
Zappco common stock will be restricted as to transferability for a period of
two years following the Effective Time.
Dain Bosworth Incorporated ("Dain Bosworth"), as part of its investment
banking business, is continually engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate,
corporate, and other purposes. In the ordinary course of business Dain
Bosworth has published research reports and made recommendations regarding
the equity securities of USB, as well as other companies in the commercial
banking industry. Additionally, Dain Bosworth has traded debt and equity
securities of USB as well as the securities of other publicly traded
companies in the commercial banking industry, and periodically may have
positions in such securities. Dain Bosworth has in the past served as a
managing underwriter for public offerings of USB equity and debt securities,
and has also acted as agent in the private placement of USB debt securities.
Dain Bosworth has been engaged by the Company to render this fairness opinion
and we will receive a fee for rendering such opinion. We also will be
indemnified against certain liabilities that may arise from activities
related to our engagement.
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Board of Directors
Zappco, Inc.
Page 2
In connection with this opinion, we have, among other things, reviewed
certain publicly available information regarding the Company and USB. In
addition, we have reviewed certain confidential financial, operating and
other information supplied to us by the Company. We visited the corporate
offices of the Company and made inquiries of management regarding the past
and current business operations, financial condition, and future prospects of
the Company. We have reviewed drafts of the Merger Agreement and drafts of
selected other documents related to the Merger. In addition, we have held
discussions with the senior management of the Company and USB to understand
their respective reasons for completing the Merger.
We have also considered certain publicly-available financial and stock market
data on USB. We compared this information to similar information for certain
publicly traded companies in the business similar to the Company and USB, and
we also considered, to the extent publicly available, the terms of selected
relevant mergers and acquisitions, analyzed the general economic outlook for
companies in the commercial banking industry, and performed other studies and
analyses as we considered appropriate.
In conduction our review and in rendering our opinion, we have assumed and
relied upon the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of such information. It is
understood that we were retained by the Board of Directors of the Company,
and that the Board of Directors has not looked to us for independent
verification with respect to the financial and other information provided to
us or publicly available, including the projections provided to us relating
to the Company. We have further relied upon the assurances of management of
the Company that they are not aware of any facts that would make the
information supplied to us by the Company inaccurate or misleading.
Our opinion as expressed herein is limited to the fairness to common
shareholders of the Company, from a financial point of view, of the
consideration to be received by such shareholders in connection with the
Merger, and does not address the Company's underlying business decision to
proceed with the Merger. We were not asked to solicit, and did not solicit,
proposals from other parties regarding a merger or acquisition of the
Company. We did not make an independent appraisal of the assets or
liabilities of the Company or USB, and we do not express an opinion regarding
the liquidation value or solvency of either company or the regulatory
compliance of USB. Also, we are not expressing any opinion herein as to the
prices at which the stock of USB will trade in the future. Our opinion is
based solely on information available to us on or before the date hereof,
and reflects general market, economic, financial, monetary, and other conditions
as of such date.
This opinion does not constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote at the shareholders' meeting to
be held in connection with the Merger. Also, our opinion may not be reproduced,
quoted, published, or referred to in any manner, nor be used for any other
purposes, without our prior written consent.
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<PAGE>
Board of Directors
Zappco, Inc.
Page 3
Based upon the foregoing, and other matters that we considered relevant, it
is our opinion that, as of the date hereof, the consideration to be received
by the common shareholders of the Company pursuant to the terms of the Merger
is fair to such shareholders from a financial point of view.
Very truly yours,
/s/ DAIN BOSWORTH INCORPORATED
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APPENDIX C
SECTIONS 302A.471 AND 302A.473 OF
THE MINNESOTA BUSINESS CORPORATION ACT--
DISSENTERS' APPRAISAL RIGHTS
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation
may dissent from, and obtain payment for the fair value of the shareholder's
shares in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an existing
or new class or series with similar or different voting rights; except that
an amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBD. 2. BENEFICIAL OWNERS.
(a) A shareholder shall not assert dissenters' rights as to less than all
of the shares registered in the name of the shareholder, unless the shareholder
dissents with respect to all the shares that are
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beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on
whose behalf the shareholder dissents. In that event, the rights of the
dissenter shall be determined as if the shares as to which the shareholder
has dissented and the other shares were registered in the names of different
shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3 RIGHTS NOT TO APPLY.
(a) Unless the articles, the bylaws, or a resolution approved by the board
otherwise provide, the right to obtain payment under this section does not apply
to a shareholder of the surviving corporation in a merger, if the shares of the
shareholder are not entitled to be voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS.
(a) For purposes of this section, the terms defined in this subdivision
have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1 or
the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective
date of the corporate action referred to in section 302A.471, subdivision 1, up
to and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting
at which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by
the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
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SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all shareholders who
have complied with subdivision 3 and to all shareholders entitled to dissent if
no shareholder vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder,
or the beneficial owner on whose behalf the shareholder dissents, acquired
the shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES.
(a) After the corporate action takes effect, or after the corporation
receives a valid demand for payment, whichever is later, the corporation shall
remit to each dissenting shareholder who has complied with subdivisions 3 and 4
the amount the corporation estimates to be the fair value of the shares, plus
interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares
and a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates
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and cancel all transfer restrictions. However, the corporation may again
give notice under subdivision 4 and require deposit or restrict transfer at a
later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding
on all shareholders, wherever located. A dissenter is entitled to judgment in
cash for the amount by which the fair value of the shares as determined by the
court, plus interest, exceeds the amount, if any, remitted under subdivision 5,
but shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES.
(a) The court shall determine the costs and expenses of a proceeding under
subdivision 7, including the reasonable expenses and compensation of any
appraisers appointed by the court, and shall assess those costs and expenses
against the corporation, except that the court may assess part or all of those
costs and expenses against a dissenter whose action in demanding payment under
subdivision 6 is found to be arbitrary, vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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