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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-11792
MERCANTILE BANCORPORATION INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-0951744
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
P.O. BOX 524 ST. LOUIS, MISSOURI 63166-0524
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 418-2525
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
X
--------- ---------
YES NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, $.01 PAR VALUE, 157,936,081 SHARES OUTSTANDING AS OF THE CLOSE OF
BUSINESS ON APRIL 30, 1999.
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<PAGE>
<PAGE>
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Item 1--Financial Statements
Consolidated Statement of Income (Unaudited)
Three months ended March 31, 1999 and 1998 3
Consolidated Balance Sheet
March 31, 1999 and 1998 (Unaudited), and December 31, 1998 4
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
Three months ended March 31, 1999 and 1998 5
Consolidated Statement of Cash Flows (Unaudited)
Three months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2--Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3--Quantitative and Qualitative Disclosures Regarding Market Risk
There have been no material changes from the information provided in
the December 31, 1998 Form 10-K.
PART II--OTHER INFORMATION
Item 4--Submission of Matters to a Vote of Security Holders 25
Item 6--Exhibits and Reports on Form 8-K 25
Signature 27
Exhibit Index 28
</TABLE>
2
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $431,903 $442,332
Investments in debt and equity securities
Trading 2,579 2,065
Taxable 140,293 135,941
Tax-exempt 5,463 6,111
-------- --------
Total Investments in Debt and Equity Securities 148,335 144,117
Due from banks--interest bearing 3,691 3,093
Federal funds sold and repurchase agreements 3,009 3,638
-------- --------
Total Interest Income 586,938 593,180
INTEREST EXPENSE
Interest bearing deposits 210,757 229,803
Foreign deposits 5,881 7,617
Short-term borrowings 30,857 52,329
Bank notes 133 2,323
Long-term debt and mandatorily redeemable preferred securities 55,081 28,387
-------- --------
Total Interest Expense 302,709 320,459
-------- --------
NET INTEREST INCOME 284,229 272,721
PROVISION FOR POSSIBLE LOAN LOSSES 7,479 8,537
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 276,750 264,184
OTHER INCOME
Trust 29,142 28,128
Service charges 29,640 28,244
Investment banking and brokerage 11,082 11,066
Mortgage banking 6,199 5,943
Gain on sale of mortgage servicing rights -- 23,155
Securitization revenue 5,451 4,523
Securities gains 12,963 4,453
Miscellaneous 31,967 31,439
-------- --------
Total Other Income 126,444 136,951
OTHER EXPENSE
Salaries 101,687 102,631
Employee benefits 21,652 22,547
Net occupancy 17,191 16,184
Equipment 23,689 20,858
Intangible asset amortization 14,323 14,596
Postage and freight 7,604 7,305
Miscellaneous 39,208 36,417
-------- --------
Total Other Expense 225,354 220,538
-------- --------
INCOME BEFORE INCOME TAXES 177,840 180,597
INCOME TAXES 59,803 65,738
-------- --------
NET INCOME $118,037 $114,859
======== ========
PER SHARE DATA
Basic earnings per share $.75 $.76
Diluted earnings per share .74 .75
Dividends declared .34 .31
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
3
<PAGE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1999 DEC. 31 1998
(UNAUDITED) 1998 (UNAUDITED)
----------- ------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,210,972 $ 1,760,636 $ 1,316,663
Due from banks--interest bearing 291,561 367,304 280,676
Federal funds sold and repurchase agreements 366,270 226,730 336,417
Investments in debt and equity securities
Trading 188,069 126,540 125,680
Available-for-sale (Amortized cost
of $9,319,603, $9,185,770 and $8,784,082,
respectively) 9,308,727 9,246,790 8,829,585
Held-to-maturity (Estimated fair
value of $83,512, $99,336 and
$314,356, respectively) 81,906 97,607 307,234
----------- ----------- -----------
Total Investments in Debt and Equity Securities 9,578,702 9,470,937 9,262,499
Loans held-for-sale 176,050 217,941 249,407
Loans and leases, net of unearned income 22,300,949 22,093,317 21,513,860
----------- ----------- -----------
Total Loans and Leases 22,476,999 22,311,258 21,763,267
Reserve for possible loan losses (309,048) (308,890) (293,565)
----------- ----------- -----------
Net Loans and Leases 22,167,951 22,002,368 21,469,702
Bank premises and equipment 533,807 545,559 542,774
Intangible assets 765,560 781,188 823,955
Other assets 663,996 645,455 1,116,631
----------- ----------- -----------
Total Assets $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
LIABILITIES
Deposits
Non-interest bearing $3,901,014 $ 4,453,048 $ 3,834,599
Interest bearing 20,398,177 20,526,576 20,935,126
Foreign 423,206 481,773 463,426
----------- ----------- -----------
Total Deposits 24,722,397 25,461,397 25,233,151
Federal funds purchased and repurchase agreements 2,353,079 2,087,373 2,142,440
Other short-term borrowings 377,296 915,287 1,656,666
Bank notes -- 25,000 25,000
Long-term Federal Home Loan Bank advances 3,475,038 2,790,336 1,447,362
Other long-term debt 781,032 782,998 789,588
Company-obligated mandatorily redeemable preferred
securities of Mercantile Capital Trust I 150,000 150,000 150,000
Other liabilities 618,514 514,031 861,944
----------- ----------- -----------
Total Liabilities 32,477,356 32,726,422 32,306,151
Commitments and contingent liabilities -- -- --
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1999 1998 1998
-------- ------- --------
SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
Preferred stock--no par value
Shares authorized 5,000 5,000 5,000
Shares issued and outstanding -- -- -- -- -- --
Common stock--$.01 par value
Shares authorized 400,000 400,000 200,000
Shares issued 157,916 157,487 153,326 1,578 1,574 1,535
Capital surplus 1,009,106 999,595 1,065,295
Retained earnings 2,099,532 2,035,157 1,840,855
Accumulated other comprehensive income (6,600) 41,160 32,740
Treasury stock, at cost 47 83 1,845 (2,153) (3,731) (97,259)
----------- ----------- -----------
Total Shareholders' Equity 3,101,463 3,073,755 2,843,166
----------- ----------- -----------
Total Liabilities and
Shareholders' Equity $35,578,819 $35,800,177 $35,149,317
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
4
<PAGE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
------ ------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 $1,489 $1,016,844 $1,724,752 $ 25,222 $ (6,005) $2,762,302
Net income 114,859 114,859
Other comprehensive income:
Holding gains on available-for-sale
securities, net of tax of $4,956 9,204 9,204
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $1,559 (2,894) (2,894)
-------- ----------
Other Comprehensive Income Net of Tax 6,310 6,310
----------
Total Comprehensive Income 121,169
Common dividends declared:
Mercantile Bancorporation Inc.--$.31 per
share (41,747) (41,747)
Pooled companies prior to acquisition (5,208) (5,208)
Issuance of common stock in acquisitions of:
HomeCorp, Inc. 9 6,727 13,765 27 20,528
Horizon Bancorp, Inc. 25 10,755 34,434 1,181 357 46,752
Issuance of common stock for:
Employee incentive plans 9 28,628 2,193 30,830
Convertible notes 1 86 87
Purchase of treasury stock (93,804) (93,804)
Pre-merger transactions of pooled companies and
other 2 2,255 2,257
------ ---------- ---------- -------- -------- ----------
BALANCE AT MARCH 31, 1998 $1,535 $1,065,295 $1,840,855 $ 32,740 $(97,259) $2,843,166
====== ========== ========== ======== ======== ==========
BALANCE AT DECEMBER 31, 1998 $1,574 $ 999,595 $2,035,157 $ 41,160 $ (3,731) $3,073,755
Net income 118,037 118,037
Other comprehensive income (loss):
Holding losses on available-for-sale
securities, net of tax benefit of $21,180 (39,334) (39,334)
Less: Reclassification adjustment for
securities gains included in net income
above, net of tax of $4,537 (8,426) (8,426)
-------- ----------
Other Comprehensive Loss Net of Tax
Benefit (47,760) (47,760)
----------
Total Comprehensive Income 70,277
Common dividends declared--$.34 per share (53,662) (53,662)
Issuance of common stock for:
Employee incentive plans 4 9,384 2,863 12,251
Convertible notes 127 127
Purchase of treasury stock (1,285) (1,285)
------ ---------- ---------- ------- -------- ----------
BALANCE AT MARCH 31, 1999 $1,578 $1,009,106 $2,099,532 $ (6,600) $ (2,153) $3,101,463
====== ========== ========== ======== ======== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
5
<PAGE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 118,037 $ 114,859
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for possible loan losses 7,479 8,537
Depreciation and amortization 19,439 18,287
Provision for deferred income taxes (credits) 1,486 (2,305)
Net change in loans held-for-sale 41,891 (146,378)
Net change in trading securities 17,365 13,575
Net change in accrued interest receivable 5,911 14,722
Net change in accrued interest payable 11,465 8,449
Other, net 55,339 (41,856)
---------- -----------
Net Cash Provided (Used) by Operating Activities 278,412 (12,110)
INVESTING ACTIVITIES
Investments in debt and equity securities, other than
trading securities
Purchases (2,188,944) (2,474,948)
Proceeds from maturities 964,683 1,332,649
Proceeds from sales of available-for-sale securities 1,098,838 606,143
Net change in loans and leases (278,974) 243,072
Purchases of loans and leases (141,874) (127,651)
Proceeds from sale of mortgage servicing rights -- 26,330
Proceeds from sales of loans and leases 195,375 205,855
Purchases of premises and equipment (16,645) (20,392)
Proceeds from sales of premises and equipment 8,045 3,830
Proceeds from sales of foreclosed property 11,425 9,975
Net cash and cash equivalents received from (paid for)
acquisitions -- 34,448
Net cash and cash equivalents received from (paid for)
sale of banking offices -- (3,524)
Other, net 5,137 5,588
---------- -----------
Net Cash Used by Investing Activities (342,934) (158,625)
FINANCING ACTIVITIES
Net change in non-interest bearing, savings, interest
bearing demand and money market deposit accounts (563,103) (92,349)
Net change in time certificates of deposit under $100,000 (297,613) (308,440)
Net change in time certificates of deposit $100,000 and
over 189,885 95,093
Net change in other time deposits (9,602) 14,787
Net change in foreign deposits (58,567) (122,013)
Net change in short-term borrowings (296,867) 62,724
Principal payments on bank notes (25,000) (150,000)
Issuance of long-term FHLB advances and other long-term
debt 935,000 851,500
Principal payments on long-term debt (252,035) (5,275)
Cash dividends paid (49,789) (44,580)
Proceeds from issuance of common stock from employee
incentive plans 7,631 10,568
Purchase of treasury stock (1,285) (93,804)
---------- -----------
Net Cash Provided (Used) by Financing Activities (421,345) 218,211
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (485,867) 47,476
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,354,670 1,886,280
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,868,803 $ 1,933,756
========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
6
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
ACCOUNTING POLICIES
The consolidated financial statements include all adjustments which are, in the
opinion of management, necessary for the fair statement of the results of these
periods and are of a normal recurring nature. Certain reclassifications have
been made to the 1998 historical financial statements to conform to the 1999
presentation.
NOTE B
NEW ACCOUNTING STANDARDS
Financial Accounting Standard ("FAS") 133, "Accounting for Derivative
Instruments and Hedging Activities," which was issued in June 1998, establishes
accounting and reporting standards for derivative instruments and hedging
activities. Under FAS 133, derivatives are recognized on the balance sheet at
fair value as an asset or liability. Changes in the fair value of derivatives
will be reported as a component of other comprehensive income or recognized as
earnings through the income statement depending on the nature of the instrument.
FAS 133 is effective for all quarters of fiscal years beginning after June 15,
1999 with earlier adoption permitted. The Corporation has not adopted FAS 133
yet and is currently evaluating FAS 133's effect on its financial position and
results of operations, but it is not expected to have a material impact.
NOTE C
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average shares
outstanding that would have resulted from the exercise of dilutive stock
options, the issuance of share equivalents under other employee incentive plans
and the conversion of the entire balance of outstanding convertible notes. Net
income is increased in the diluted earnings per share computation by interest
expense that would not be incurred on notes if they converted, net of taxes. The
components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT PER SHARE DATA)
FIRST QUARTER
1999 1998
---- ----
<S> <C> <C>
BASIC
Net income $118,037 $114,859
Weighted average common shares outstanding 157,632,844 151,056,828
BASIC EARNINGS PER SHARE $.75 $.76
DILUTED
Net income $118,037 $114,859
Interest on convertible notes, net of taxes 8 12
-------- --------
Diluted Net Income $118,045 $114,871
======== ========
Weighted average common shares outstanding 157,632,844 151,056,828
Employee incentive plans 1,897,044 2,722,594
Convertible notes 71,807 98,140
----------- -----------
Diluted Average Shares Outstanding 159,601,695 153,877,562
=========== ===========
DILUTED EARNINGS PER SHARE $.74 $.75
</TABLE>
7
<PAGE>
<PAGE>
NOTE D
ACQUISITIONS
On July 1, 1998, the Corporation acquired CBT Corporation ("CBT") of Paducah,
Kentucky, and Firstbank of Illinois Co. ("Firstbank"), headquartered in
Springfield, Illinois. The CBT and Firstbank acquisitions were accounted for
under the pooling-of-interests method. Net income, net interest income and basic
earnings per share in 1998 for the Corporation, CBT and Firstbank prior to this
restatement were as follows:
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT
PER SHARE DATA)
SIX MONTHS ENDED
JUNE 30, 1998
----------------
<S> <C>
CORPORATION
Net income $198,902
Net interest income 482,912
Basic earnings per share 1.50
CBT
Net income 7,151
Net interest income 21,038
Basic earnings per share 1.40
FIRSTBANK
Net income 15,953
Net interest income 44,073
Basic earnings per share 1.21
</TABLE>
NOTE E
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF MERCANTILE
CAPITAL TRUST I
Mercantile Capital Trust I is a subsidiary of which the Corporation owns all the
outstanding common securities; its sole assets are the $150,000,000 in
mandatorily redeemable preferred securities, and considered together, the
back-up undertakings constitute a full and unconditional guarantee by Mercantile
Bancorporation Inc. of the trust's obligations under the preferred securities.
NOTE F
PENDING MERGER
On April 30, 1999, a definitive Agreement and Plan of Merger by and between
Mercantile and Firstar Corporation ("Firstar") was signed. Pursuant to the terms
of the Merger Agreement, Mercantile will merge with and into Firstar in a
transaction structured as and intended to be a tax-free reorganization, with
Mercantile shareholders to receive Firstar common stock valued on that day at
approximately $10.6 billion. The parties at the same time also signed stock
option agreements granting each other options to purchase the other's stock,
which options become exercisable upon the occurrence of certain events. Firstar
is a $38 billion-asset bank holding company headquartered in Milwaukee. Under
terms of the agreement, Mercantile shareholders will receive 2.091 shares of
Firstar common stock for each share of Mercantile common stock owned. The
transaction will be accounted for as a pooling-of-interests, and is expected
to close in the fourth quarter of 1999, pending shareholder and regulatory
approvals.
8
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
<TABLE>
- -------------------------------------------------------------------------------------------------
EXHIBIT 1
HIGHLIGHTS
<CAPTION>
FIRST QUARTER
($ IN THOUSANDS EXCEPT PER SHARE DATA) 1999 1998 CHANGE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PER SHARE DATA
Diluted earnings per share $ .74 $ .75 (1.3)%
Basic earnings per share .75 .76 (1.3)
Dividends declared .34 .31 9.7
Book value at March 31 19.65 18.77 4.7
Market price at March 31 47.50 54.81 (13.3)
- -------------------------------------------------------------------------------------------------
OPERATING RESULTS
Taxable-equivalent net interest income $288,169 $276,956 4.0%
Tax-equivalent adjustment 3,940 4,235 (7.0)
Net interest income 284,229 272,721 4.2
Provision for possible loan losses 7,479 8,537 (12.4)
Other income 126,444 136,951 (7.7)
Other expense 225,354 220,538 2.2
Income taxes 59,803 65,738 (9.0)
Net income $118,037 $114,859 2.8
- -------------------------------------------------------------------------------------------------
SELECTED RATIOS AND DATA
Return on assets 1.33% 1.35%
Return on equity 15.20 16.03
Efficiency ratio 54.35 53.28
Other expense to average assets 2.54 2.59
Net interest rate margin 3.61 3.62
Tangible equity to tangible assets 6.71 5.88
Equity to assets 8.72 8.09
Tier I capital to risk-adjusted assets 9.78 9.20
Total capital to risk-adjusted assets 12.33 12.11
Leverage 7.28 6.60
Reserve for possible loan losses to
outstanding loans 1.37 1.35
Reserve for possible loan losses to
non-performing loans 284.80 280.52
Non-performing loans to outstanding loans .48 .48
Banks 7 32
Banking offices 470 516
Full-time equivalent employees 10,441 11,034
- -------------------------------------------------------------------------------------------------
AVERAGE BALANCES
Total assets $35,555,247 $34,038,516 4.5%
Earning assets 32,378,963 31,027,000 4.4
Loans and leases 22,330,334 21,584,431 3.5
Deposits 25,047,723 24,885,651 .7
Shareholders' equity 3,106,499 2,866,071 8.4
- -------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<PAGE>
PERFORMANCE SUMMARY
Net income for Mercantile Bancorporation Inc. ("Corporation" or "Mercantile")
in the first quarter of 1999 was $118,037,000 compared with the $114,859,000
earned in the same period a year ago. Diluted earnings per share was $.74 in
1999 compared with $.75 in the prior year and basic earnings per share was
$.75 compared with $.76 in the first quarter of 1998. Return on average
assets was 1.33% in 1999 compared with 1.35% in 1998, while return on average
equity was 15.20% versus 16.03% last year. Other financial highlights for the
first quarter of 1999 and 1998 are presented on Exhibit 1. There were
significant transactions in both years and their impact on the results of
operations are discussed below.
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------
EXHIBIT 2
ACQUISITIONS
($ IN THOUSANDS)
<CAPTION>
CONSIDERATION
------------------------
GROSS ACCOUNTING
DATE ASSETS DEPOSITS CASH SHARES METHOD
---- ------ -------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
BANK ACQUISITIONS COMPLETED
First Financial
Bancorporation Sept. 28, 1998 $ 558,483 $ 477,573 $12 3,138,823 Pooling<F1>
Financial Services
Corporation of the Midwest Aug. 3, 1998 514,051 414,350 4 2,071,448 Pooling<F1>
CBT Corporation July 1, 1998 1,006,384 695,923 34 5,123,214 Pooling
Firstbank of Illinois Co. July 1, 1998 2,285,146 1,969,600 64 13,352,641 Pooling
HomeCorp, Inc. Mar. 2, 1998 335,137 309,157 14 854,760 Pooling<F1>
Horizon Bancorp, Inc. Feb. 2, 1998 536,507 454,230 2 2,549,970 Pooling<F1>
NONBANK ACQUISITION
COMPLETED
Bruno Stolze & Company,
Inc. Sept. 30, 1998 <F2> <F2> Purchase
<FN>
<F1> The Corporation's historical financial statements were not restated for
the acquisition due to the immateriality of the acquiree's financial
condition and results of operations to those of Mercantile.
<F2> Terms of the transaction not disclosed.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ------------------------------------------------------------------
EXHIBIT 3
CASH BASED EARNINGS
($ IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
FIRST QUARTER
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
Net Income $118,037 $114,859 2.8%
Add Back:
Goodwill amortization 13,790 13,954 (1.2)
Other intangible asset
amortization 533 642 (17.0)
-------- --------
Total Intangible Asset
Amortization 14,323 14,596 (1.9)
Less:
Tax effect (197) (229) (14.0)
-------- --------
CASH BASED NET INCOME $132,163 $129,226 2.3
======== ========
CASH BASED DILUTED EARNINGS
PER SHARE $.83 $.84 (1.2)%
CASH BASED PERFORMANCE RATIOS
Return on tangible assets 1.52% 1.56%
Return on tangible equity 22.66 25.41
Efficiency ratio 50.90 49.76
Other expense to average
tangible assets 2.43 2.48
- --------------------------------------------------------------------
</TABLE>
The Corporation believes it is important to also disclose cash based
earnings and ratios, which excludes intangible asset amortization,
because they are more indicative of cash flows, and thus, the Corporation's
<PAGE>
ability to support growth and pay dividends. In 1999, first quarter cash
based diluted earnings per share was $.83 compared with the $.84 earned
in 1998. See Exhibit 3 for other cash based performance ratios.
Net interest income for the first quarter of 1999 was $284,229,000 compared
with $272,721,000 in the year-earlier period, an increase of 4.2%. The net
interest rate margin increased to 3.61% from 3.56% in the fourth quarter of
1998, yet was down slightly from 3.62% last year. Average earning assets for
1999 of $32.4 billion grew by $1.4 billion or 4.4% from $31.0 billion in the
first quarter of 1998. The growth was primarily in commercial loans and
securities partially offset by the paydown of residential mortgage loans.
Other income was $126,444,000 in the first quarter of 1999, a decrease of
7.7% from a year ago. The first quarter of 1998 was favorably influenced by
a $23,155,000 pre-tax gain on the sale of mortgage servicing rights and
gains of $2,002,000 on the sale of an acquired corporate trust business and
$2,658,000 on the sale of an out-of-market credit card portfolio. Excluding
those gains from 1998 results and securities gains from both years,
non-interest income was up by $8,798,000 or 8.4% from 1998. Fee growth in
all core businesses accounted for the increase. The
10
<PAGE>
<PAGE>
Corporation introduced a program titled "Profit 2000" late in 1998 to
proceed with initiatives to grow fee-based businesses and streamline the
organization.
Non-interest expenses in 1999 were $225,354,000, a modest 2.2% increase
over 1998. The efficiency ratio was 54.35% compared with 53.28% last year,
and the expense to average assets ratio improved to 2.54% compared with
2.59% in the first quarter of 1998. The cash based efficiency ratio was
50.90% compared with 49.76% last year, and the expense to tangible assets
ratio was 2.43% compared with 2.48% in 1998. Most of the growth in operating
expenses was related to investments made in technology and communications.
The provision for possible loan losses for the quarter was $7,479,000
compared with $8,537,000 in 1998. Net charge-offs for 1999 and 1998 were
$7,321,000 and $6,957,000, respectively, and on an annualized basis were
.13% of average loans in both quarters. At March 31, 1999, the reserve for
possible loan losses was $309,048,000, and covered 284.80% of non-performing
loans compared with 335.25% at year-end 1998 and 280.52% last March 31.
The Corporation modified its non-performing loan classifications in the
first quarter of 1999 to make them more consistent with industry practice.
Thesechanges are discussed on page 18 of this report. Non-performing loans
(i.e., non-accrual and renegotiated loans) as of March 31, 1999 were
$108,515,000 or .48% of total loans compared with the year-end 1998
figures of $92,137,000 or .41% and $104,650,000 or .48% at March 31, 1998.
Impaired securities declined to $49,948,000 at March 31, 1999 from
$63,296,000 at December 31, 1998 due to paydowns and selective sales.
Foreclosed assets were $16,123,000 at March 31, 1999 versus $23,166,000
at March 31, 1998 and $13,500,000 at year-end.
Consolidated assets of $35.6 billion were up 1.2% from last March 31. Core
deposits decreased by 2.9% to $22.2 billion, loans were up 3.3% to $22.5
billion, and shareholders' equity of $3.1 billion was 9.1% higher than at
March 31, 1998. All measures of capital adequacy remained adequate. Tier I
capital to risk-adjusted assets was 9.78% while total capital to
risk-adjusted assets at March 31, 1999 was 12.33%. The ratio of tangible
equity to tangible assets was 6.71% at March 31, 1999.
At March 31, 1999, Mercantile's assets were distributed as follows: St.
Louis metropolitan area $18.5 billion, outstate Missouri $4.4 billion,
metropolitan Kansas City $4.2 billion, Iowa and northwestern Illinois $3.6
billion, Arkansas $1.8 billion, outstate Illinois $2.2 billion and western
Kentucky $.9 billion.
On April 30, 1999, a definitive Agreement and Plan of Merger by and between
Mercantile and Firstar Corporation ("Firstar") was signed. Mercantile will
merge with and into Firstar in a transaction intended to be a tax-free
reorganization, with Mercantile shareholders to receive 2.091 shares of
Firstar common stock for each share of Mercantile common stock owned. At the
same time, stock option agreements were signed granting each other options
to purchase the other's stock, which options become exercisable upon the
occurrence of certain events. Firstar, headquartered in Milwaukee, is a $38
billion-asset bank holding company with approximately 720 full-service
banking offices in Ohio, Wisconsin, Kentucky, Illinois, Indiana, Iowa,
Minnesota, Tennessee and Arizona. The transaction is expected to close in
the fourth quarter of 1999, and will be accounted for as a pooling-of-
interests.
The following financial commentary presents a more thorough discussion and
analysis of the results of operations and financial condition of the
Corporation for the first quarter of 1999.
LINE OF BUSINESS RESULTS
The financial performance of Mercantile is monitored by an internal
profitability measurement system that produces line of business results
and key performance measures on a pre-tax basis. Mercantile's three major
business units in 1999 include general commercial and retail banking
("Banking"), private banking and investments, and specialty retail banking
("Mercantile Credit Corp."). Asset/Liability Management ("ALM") includes
the investment portfolio and the treasury function, and is a reportable
business line under Financial Accounting Standard ("FAS") 131, "Disclosures
about Segments of an Enterprise and Related Information". In 1998, the
Corporation presented line of business results with ALM as a part of Banking.
The management of ALM was separated from Banking in January 1999 and first
quarter 1998 results have been restated for this change.
11
<PAGE>
<PAGE>
The reported results reflect the underlying economics of the businesses
which are match-funded for interest rate risk. Expenses for centrally
provided services are allocated based on usage of those services, and
loan loss provision is allocated based on credit quality. The contribution
of Mercantile's major business units to consolidated results for the first
quarter of 1999 with comparable amounts for 1998 is summarized in Exhibit 4.
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 4
LINE OF BUSINESS RESULTS
($ IN MILLIONS)
<CAPTION>
PRIVATE ASSET/ PARENT
MERCANTILE BANKING & LIABILITY COMPANY
BANKING CREDIT CORP. INVESTMENTS MANAGEMENT & OTHER CONSOLIDATED
------- ------------ ----------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER 1999
------------------
OPERATING RESULTS
Taxable-equivalent net interest
income $ 165 $ 75 $ 4 $ 51 $ (7) $ 288
Provision for possible loan
losses 5 2 -- -- -- 7
Other income 45 32 37 12 -- 126
Other expense 126 57 26 -- 16 225
-------- ------ ------ ------ ------ -------
Taxable-equivalent Income
Before Income Taxes $ 79 $ 48 $ 15 $ 63 $ (23) $ 182
======== ====== ====== ====== ====== =======
Percent of Taxable-equivalent
Income Before
Income Taxes 43.4% 26.4% 8.2% 34.6% (12.6)% 100.0%
AVERAGE BALANCES
Loans and leases $ 15,450 $6,925 $ 168 $ -- $ (213) $22,330
Deposits 13,976 8,908 415 1,064 685 25,048
PERFORMANCE RATIOS
Efficiency ratio 60.29% 53.91% 62.43% N/A N/A 54.35%
Net interest rate margin 4.14 4.34 8.42 N/A N/A 3.61
Net charge-offs to average
loans .11 .17 -- N/A N/A .13
-----------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 1998
------------------
OPERATING RESULTS
Taxable-equivalent net interest
income $ 157 $ 76 $ 2 $ 51 $ (9) $ 277
Provision for possible loan
losses 2 5 -- -- 2 9
Other income 35 62 34 5 1 137
Other expense 125 60 23 -- 12 220
-------- ------ ------ ------ ------ -------
Taxable-equivalent Income
Before Income Taxes $ 65 $ 73 $ 13 $ 56 $ (22) $ 185
======== ====== ====== ====== ====== =======
Percent of Taxable-equivalent
Income Before
Income Taxes 35.1% 39.5% 7.0% 30.3% (11.9)% 100.0%
AVERAGE BALANCES
Loans and leases $ 14,403 $7,282 $ 99 $ -- $ (200) $21,584
Deposits 13,600 8,962 289 1,238 797 24,886
PERFORMANCE RATIOS
Efficiency ratio 65.10% 43.47% 63.88% N/A N/A 53.28%
Net interest rate margin 4.10 4.17 8.00 N/A N/A 3.62
Net charge-offs to average
loans .08 .26 -- N/A N/A .13
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Banking includes the Corporation's branch network and deposit gathering
outside the St. Louis and Kansas City metropolitan areas, commercial lending
and non-specialty retail lending. It is the largest business unit, and it
houses most staff department functions. Pre-tax income improved by
$14,000,000 or 21.5% from 1998. Loan growth, increases in net demand
deposits and an expanded net interest rate margin accounted for an
$8,000,000 increase in net interest income. The provision for loan losses
increased by $3,000,000 from 1998 yet was only 13 basis points of average
loans. The first quarter of 1998 included an abnormally low level of net
charge-offs. Fee income improved by $10,000,000 due to growth in cash
management fees, leasing income, service charges and miscellaneous ancillary
sources. Operating expenses were held flat.
Mercantile Credit Corp. includes the retail branch network in the St. Louis
and Kansas City metropolitan areas, residential mortgage origination and
servicing, credit card, indirect lending, insurance activities and consumer
product management. The
12
<PAGE>
<PAGE>
management of St. Louis and Kansas City retail moved to Mercantile Credit
Corp. from Banking in early 1999, and 1998 results were restated for this
transfer. Pre-tax income declined by $25,000,000 from 1998, due to the gains
on sales of mortgage servicing rights and an out-of-market credit card loan
portfolio in 1998. Increased pre-tax profits in the indirect lending and
credit card businesses were offset by declines in mortgage banking and in
the St. Louis and Kansas City retail banking units, caused largely by the
reduction in core deposits from the first quarter of 1998.
Private Banking & Investments was structured to serve the investment
management needs of high net worth individuals. This line of business
includes private banking offices, personal and institutional trust
activities, institutional money management and retail brokerage. Pre-tax
income improved by $2,000,000 or 15.4% due to expanded deposit and loan
bases as well as growth in trust fees and brokerage revenue.
Parent Company and Other includes interest expense on Parent Company debt,
goodwill amortization, consolidation eliminations, provision for loan losses
not allocated to the business units and some general corporate expenses not
allocated to the business units. The pre-tax loss was consistent with 1998.
The ALM unit pre-tax profit improved by $7,000,000 due to a higher level of
securities gains in 1999.
NET INTEREST INCOME
Net interest income for the first quarter of 1999 was $284,229,000, a 4.2%
increase from the $272,721,000 earned last year. The net interest rate
margin was 3.61% compared with 3.62% in 1998. Average earning assets in 1999
grew by $1.4 billion or 4.4% when compared with 1998, and average loans grew
by $745,903,000 or 3.5%. This growth was funded by a $191,720,000 increase
in purchased deposits, a $240,428,000 growth in equity and a $2.3 billion
increase in long-term Federal Home Loan Bank ("FHLB") advances, partially
offset by a $1.2 billion or 30.3% decrease in short-term borrowings.
<TABLE>
- ---------------------------------------------------------------------
EXHIBIT 5
LOANS AND LEASES
($ IN THOUSANDS)
<CAPTION>
MARCH 31
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
Commercial $ 6,498,961 $ 5,384,406 20.7%
Real estate--commercial 3,757,207 3,613,094 4.0
Real estate--construction 953,492 738,515 29.1
Real estate--residential
mortgage 7,903,388 8,695,992 (9.1)
Real estate--home equity
credit loans 513,766 570,621 (10.0)
Consumer 2,809,111 2,623,562 7.1
Credit card loans managed 441,074 537,077 (17.9)
Securitized credit card
loans (400,000) (400,000) --
----------- -----------
Total Loans and Leases $22,476,999 $21,763,267 3.3
=========== ===========
- ---------------------------------------------------------------------
</TABLE>
Securities are the largest category of earning assets after loans, and
averaged $9.5 billion in the first quarter of 1999, an increase of
$522,599,000 or 5.8% from 1998. The portfolio grew as residential mortgage
loans declined and an upward sloping yield curve provided more profitable
investment opportunities. The held-to-maturity and available-for-sale
portfolio at March 31, 1999 consisted of 68.51% in U.S. and other government
agency securities (including 33.97% in mortgage-related issues), 4.25% in
state and municipal securities, and 27.24% of other miscellaneous securities
(largely privately-issued mortgage backed securities). The comparable
distribution at March 31, 1998 was 65.59%, 31.08%, 5.65% and 28.76%,
respectively. Growth in U.S. treasury and agency securities was partially
offset by declines in state and municipal and privately-issued mortgage
backed securities.
The largest dollar volume of loan growth occurred in the commercial loan
category. When compared with the first quarter of 1998, average commercial
loans grew by $1.1 billion or 21.6%. The expertise of experienced lenders in
certain specialized industries, coupled with a strong regional economy,
accounted for the growth. Agriculture is a segment of the regional economy
that did not contribute to commercial loan growth and agriculture-related
commercial loans declined by 4.0%. An additional factor adding to the
commercial loan growth was Mercantile's portfolio of $185,973,000 in loan
participations purchased in the national markets and held for investment,
compared with $45,650,000 last year. Other than these loans, commercial
lending has a heavy relationship focus. The Corporation does not engage
in commercial lending to emerging markets, including those in Latin
America, Eastern Europe and in the Asia Pacific Region. Average
commercial real estate mortgage and construction loans increased by
$401,103,000 or 9.3%, also reflecting the strength of the regional economy.
13 <PAGE>
<PAGE>
Average residential real estate mortgage loans decreased by $733,981,000 or
8.4%. The interest rate environment since March 31, 1998 encouraged
borrowers to prepay or refinance into conforming fixed-rate loans that
Mercantile generally sells in the market. Average residential mortgage loans
as a percentage of earning assets decreased from 28.17% in the first quarter
of 1998 to 24.73% in 1999. Home equity credit loans also declined on average
by 10.5% due to customer refinancing of those debts.
Average direct consumer loans grew by $1,675,000 or .1%, while indirect
consumer loans were up by $233,185,000 or 16.6%. The larger rate of growth
in indirect lending was partially attributable to the centralization of that
function and the use of risk-based pricing across the Mercantile system.
Mercantile does not engage in significant subprime consumer lending in its
own portfolio.
Average credit card loans were down by 83.3% in 1999. Successful targeted
marketing efforts, aimed at expanding relationships with the current
Mercantile customer base, were offset by the sale of $112,000,000 in
out-of-market credit card loans in the first quarter of 1998 as well as the
third quarter 1998 reclassification of $80,000,000 in loans to investment
securities in compliance with FAS 125 and terms of the credit card
securitization agreement. On a managed portfolio basis, credit card loans
averaged $626,035,000 in the first quarter of 1999 versus $764,616,000 in
1998.
Core deposits remain Mercantile's largest, most reliable and most important
funding source. Core deposits include both interest bearing and non-interest
bearing demand deposits, money market and savings deposits, consumer
certificates of deposit under $100,000 and other time deposits. For the
first quarter of 1999, Mercantile was substantially core funded at 89.46% of
average deposits and 69.20% of earning assets. Average core deposits
decreased by $29,648,000 or .1% in the first quarter of 1999. All core
deposit types increased on average except for certificates of deposit under
$100,000 and other time deposits. Mercantile's average of consumer
certificates to total core deposits declined to 40.22% from 43.84% in 1998.
Changes in average core deposits for the past five quarters are shown in the
Consolidated Quarterly Average Balance Sheet on page 23 of this report.
Average non-interest bearing deposits increased by $304,073,000 or 8.1% from
1998. Cash and due from banks volume is related to non-interest bearing
deposit volume and increased on average by $154,141,000 or 12.1%. Thus "net"
non-interest bearing deposits grew by $149,932,000 or 6.1%. Successful
efforts in managing float and minimizing reserve requirements coupled with
deposit volume growth resulted in the increase in average net non-interest
bearing funds. Part of the growth came from the U.S. government, a
significant cash management customer of Mercantile Bank N.A. that pays for
services rendered via compensating balances. These average balances have
increased from $680,874,000 in the first quarter of 1998 to $765,653,000 in
1999.
Average interest bearing demand, savings and money market accounts increased
by .8%, 6.5%, and 9.3%, respectively, as customers preferred these types of
deposits to retail certificates. Average short-term borrowings declined by
$1.2 billion, to $2.7 billion, in the first quarter of 1999 as short-term
FHLB advances were refunded with comparable longer term investments.
Long-term FHLB advances averaged $3.2 billion in the first quarter of 1999
compared with $875,993,000 in the prior year. During 1998, these borrowings
became a significant funding source for Mercantile due to their attractive
pricing. As of March 31, 1999, there were no borrowings outstanding under
the $3.0 billion bank note program developed in 1998. The remainder of bank
notes issued under the old program matured during the first quarter of 1999.
The factors discussed previously are consistent with Mercantile's overall
corporate policy relative to rate sensitivity and liquidity, which is to
produce the optimal yield and maturity mix consistent with interest rate
expectations and projected liquidity needs. The Consolidated Quarterly
Average Balance Sheet, with rates earned and paid, is summarized by quarter
on page 23.
OTHER INCOME
Non-interest income decreased by 7.7% during the first quarter of 1999 to
$126,444,000 as compared with the year-earlier period. In the first quarter
of 1998, the Corporation recorded gains on the sales of: 1) mortgage
servicing rights of $23,155,000; 2) an acquired corporate trust business of
$2,002,000 and; 3) an acquired out-of-market credit card portfolio for
$2,658,000. If
14
<PAGE>
<PAGE>
these 1998 items as well as securities gains in both years are excluded,
non-interest income grew by 8.4%. Exhibit 6 portrays such transactions and
a summary of all categories of fee income in the first quarter of 1999 and
1998.
<TABLE>
- ----------------------------------------------------------------------------
EXHIBIT 6
OTHER INCOME
($ IN THOUSANDS)
<CAPTION>
FIRST QUARTER
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
Trust $ 29,142 $ 28,128 3.6%
Service charges 29,640 28,244 4.9
Retail brokerage revenue 6,261 4,882 28.2
Other investment banking 4,821 6,184 (22.0)
Mortgage banking 6,199 29,098 --
Credit card fees 3,503 3,525 (.6)
Securitization revenue 5,451 4,523 20.5
Securities gains 12,963 4,453 --
Electronic Federal Tax Payment
System (EFTPS) fees 2,733 2,318 17.9
ATM fees 3,772 3,560 6.0
Income on operating leases 3,520 1,920 83.3
Loan commitment fees<F*> 1,832 1,999 (8.4)
Loan late charges<F*> 2,306 2,223 3.7
Letters of credit fees 1,794 1,535 16.9
Official check fees 2,923 1,614 81.1
Safe deposit box rental 1,651 1,591 3.8
Insurance commissions 1,773 1,819 (2.5)
Debit card income 1,555 1,034 50.4
Miscellaneous 4,605 8,301 (44.5)
-------- --------
Total Other Income 126,444 136,951 (7.7)
Less gains from:
Sale of available-for-sale
securities (12,963) (4,453) --
Sale of mortgage servicing
rights -- (23,155) --
Sale of out-of-market credit
card portfolio -- (2,658) --
Sale of corporate trust -- (2,002) --
-------- --------
Total Other Income After
Gains $113,481 $104,683 8.4
======== ========
<FN>
<F*>Excludes such fees from the Corporation's mortgage banking and
credit card operations, which are included in mortgage banking and
credit card revenue.
- ----------------------------------------------------------------------
</TABLE>
Deposit service charges were the largest source of non-interest income and
totaled $29,640,000 in the first quarter of 1999, which represented an
increase of $1,396,000 or 4.9% over 1998. Growth occurred in both commercial
and retail lines of business. A lower interest rate environment added to
fees collected on commercial accounts.
In 1999, trust fees were $29,142,000 compared with $28,128,000 during the
first quarter of 1998, an increase of 3.6%. There was an increase in personal
trust fees at Mercantile Trust Company N.A., which was partially offset by a
reduced rate of revenue growth at Mississippi Valley Advisors Inc., the
investment management subsidiary of Mercantile. In addition, there were some
reclassifications from trust income in 1998 to miscellaneous fees in 1999
resulting from the integration of Firstbank of Illinois Co. in late 1998,
thereby making the quarterly comparisons difficult. Mississippi Valley
Advisors Inc. manages the 19 Mercantile Mutual Funds. These funds had assets
of $4.4 billion at March 31, 1999 compared with $4.1 billion on March 31,
1998.
In January 1998, the Corporation sold $1.9 billion in loan servicing which
reduced originated mortgage servicing rights by approximately $3,200,000.
This sale was consistent with the Corporation's goals to "right size" the
servicing portfolio as all Mercantile servicing operations were consolidated
in Nevada, Missouri, during mid-1998. The sale also lowered the prepayment
risk associated with the servicing portfolio, and the gain funded the
Corporation's 1998 systems cost to become Year 2000 compliant. Excluding the
gain on sale, mortgage banking income was $6,199,000 in the first quarter of
1999 versus $5,943,000 the prior year, an increase of 4.3%. Mortgages
serviced totaled $11.4 billion at March 31, 1999 compared with $10.9 billion
at March 31, 1998. Total originated and purchased mortgage servicing rights
on the balance sheet at March 31, 1999 were $48,089,000. The associated risk
for impairment was not considered to be material although a lower interest
rate environment could accelerate refinancing activity and cause quicker
amortization, and thus cause possible future impairment in value of those
assets.
<PAGE>
Retail brokerage and other investment banking revenue totaled $11,082,000,
relatively flat compared with $11,066,000 last year. The Bruno Stolze &
Company, Inc. discount brokerage acquisition in late 1998 favorably impacted
1999 revenues and foreign exchange revenue growth remained strong. However,
sales of institutional fixed income securities remain unattractive in this
low rate environment.
Credit card fee income was $3,503,000 for the first quarter of 1999 compared
with $3,525,000 last year. Credit card income primarily represents
interchange fees received on transactions of Mercantile cardholders and
cardholders' miscellaneous fees.
In the fourth quarter of 1998, Mercantile credit cards were reissued under
Missouri law, allowing the Corporation greater
15
<PAGE>
<PAGE>
flexibility in pricing and the opportunity to increase fee revenue in 1999.
Last year's first quarter included the fee income on the out-of-market cards
sold late in the period, so comparative results should be more favorable in
1999 as the year progresses.
Securitization revenue was $5,451,000 in the first quarter of 1999 versus
$4,523,000 in 1998, and represents amounts accruing to Mercantile on the
$400,000,000 in credit card loans securitized in the Mercantile Credit Card
Master Trust during May 1995, as well as amounts recognized under FAS 125
for investor certificate loans that were sold and reclassified to the
investment portfolio. For securitized loans, amounts that would previously
have been reported as interest income, interest expense, credit card fees
and provision for loan losses are instead netted in non-interest income as
securitization revenue. Because credit losses are absorbed against credit
card servicing income over the life of these transactions, such income may
vary depending upon the credit performance of the securitized loans.
Mercantile acts as servicing agent and receives loan servicing fees equal
to 2% per annum of the securitized receivables. As servicing agent,
Mercantile continues to provide customer service to collect past due
accounts and to provide other services typically performed for its
customers. Accordingly, Mercantile's relationship with its credit card
customers is not affected by the securitization. The securitized loans will
start amortizing in November 1999, and credit card loans will be purchased
by Mercantile from the trust for 12 consecutive months.
Significant other revenue growth categories in both years included
Electronic Federal Tax Payment System ("EFTPS"), operating lease income,
both ATM and debit card fees, official check fees and letters of credit
fees. All these businesses are key focuses of the Corporation.
Net securities gains on investment securities totaled $12,963,000 and
$4,453,000 in the first quarter of 1999 and 1998, respectively.
Repositioning of 1998 acquired investment portfolios and more active
portfolio management in the current interest rate environment accounted
for the increased gains in 1999. Additionally, the Corporation
opportunistically disposed of $8,036,000 of impaired investment securities
in the first quarter of 1999 at gains of $1,275,000. The impaired balance
declined to $49,948,000 from $63,296,000 at year-end 1998.
OTHER EXPENSE
Expenses other than interest expense and the provision for possible loan
losses for the first quarter of 1999 totaled $225,354,000, an increase of
$4,816,000 or 2.2% from 1998. The efficiency ratio, defined as operating
expenses as a percentage of taxable-equivalent net interest income and other
income, was 54.35% versus 53.28% last year, and the ratio of other expense
to average assets was 2.54%, five basis points lower than in 1998.
<TABLE>
- --------------------------------------------------------------------
EXHIBIT 7
OTHER EXPENSE
($ IN THOUSANDS)
<CAPTION>
FIRST QUARTER
1999 1998 CHANGE
---- ---- ------
<S> <C> <C> <C>
Salaries $101,687 $102,631 (.9)%
Employee benefits 21,652 22,547 (4.0)
-------- --------
Total Personnel Expense 123,339 125,178 (1.5)
Net occupancy 17,191 16,184 6.2
Equipment 23,689 20,858 13.6
Postage and freight 7,604 7,305 4.1
Marketing/business development 3,306 4,033 (18.0)
Office supplies 4,546 4,353 4.4
Communications 5,634 4,428 27.2
Legal and professional 4,126 3,435 20.1
Credit card 1,227 1,289 (4.8)
FDIC insurance 1,274 1,367 (6.8)
Foreclosed property expense 753 172 --
Miscellaneous 18,342 17,340 5.8
-------- -------- -----
Other Expense Before Intangible
Asset Amortization 211,031 205,942 2.5
Intangible asset amortization 14,323 14,596 (1.9)
-------- --------
Total Other Expense $225,354 $220,538 2.2
======== ========
- --------------------------------------------------------------------
</TABLE>
Salary expense declined by $944,000 or .9% from the first quarter of 1998.
The impact of merit increases was more than offset by lower staff levels
resulting from acquisition synergies, Profit 2000 initiatives, branch
closings and better use of technology. Employee benefit costs declined in
the first quarter of 1999 by 4.0%, to $21,652,000, due to the lower level
of salary expense and attentiveness to this important expense category.
Occupancy and equipment costs increased by 10.4% in the first quarter,
reflecting a consistent program of investing in new technology to improve
customer service and enhance
16
<PAGE>
<PAGE>
employee efficiency. Additionally, with the growth of the Mercantile
leasing business, depreciation of equipment Mercantile leases to
customers increased by $1,332,000 over the first quarter of 1998.
The rent received on this equipment is a component of non-interest income.
Exhibit 7 details the composition of all other operating expenses.
Communications expense totaled $5,634,000 in the first quarter of 1999
compared with $4,428,000 last year, reflecting the costs of technology to
expand both voice and data networking. Marketing and business development
expense declined in 1999 as a corporate-wide image advertising campaign that
began in 1997 wound down last year. During the first quarter of 1998, there
was a reduction in miscellaneous expense of $1,200,000 from a gain realized
on the sale of one non-strategic Mercantile branch office. Intangible asset
amortization was $14,323,000 in the first quarter of 1999 compared with
$14,596,000 in 1998. Mercantile contributed $1,000,000 to its charitable
foundation in the first quarter of 1999 compared with $1,600,000 in 1998.
During 1998, Mercantile recorded acquisition adjustments totaling
$89,192,000 that were originally recorded as an accrued liability.
Of that original liability, $60,368,000 has been utilized at March
31, 1999 and $28,824,000 remains to absorb future cash payments.
Substantially all the merger-related provisions made for acquisitions
prior to 1998 have been exhausted.
During the fourth quarter of 1998, Mercantile recorded a $45,130,000
charge relating to cost management programs and customer service
initiatives. The charge will fund the costs related to 26 branch
closings and severance for approximately 1,400 staff reductions that
will result from further centralization, consolidation of back office
functions, branch closures and a wider span of control. These initiatives
are continuing throughout 1999. Any additional costs that do not
qualify for recognition in the charge are being expensed as incurred,
but are not expected to be material. Total payments through March 31,
1999 were $12,064,000, and the remaining balance of $33,066,000 represents
the liability for the future cash outflows associated with these
specific actions. These scheduled Profit 2000 projects are jointly being
reevaluated by Firstar and Mercantile as to viability and/or timing.
INCOME TAXES
For the quarter ended March 31, 1999, the Corporation recorded income tax
expense of $59,803,000 compared with 1998 expense of $65,738,000. The
effective tax rate was 33.63% in 1999 compared with 36.40% in 1998. The
implementation of various business strategies and receipt of state tax
refunds resulted in lower state and local income taxes in 1999 than in the
first quarter of 1998. This lower effective tax rate is anticipated for the
remainder of 1999.
<PAGE>
RESERVE FOR POSSIBLE LOAN LOSSES
The reserve for possible loan losses was $309,048,000 or 1.37% of loans
outstanding at March 31, 1999, compared with $308,890,000 or 1.38% at year's
end and $293,565,000 or 1.35% at March 31, 1998. The reserve coverage of
non-performing loans was 284.80% compared with 335.25% at year-end and
280.52% last year. Over 35% of the Corporation's current loan portfolio is
invested in residential real estate loans for which the loan loss experience
averaged only .03% for the past three years. If these residential mortgages
and its allocated reserve are excluded, the remaining reserve for possible
loan losses represents 2.03% of loans outstanding at March 31, 1999.
The provision for possible loan losses for the first quarter of 1999 was
$7,479,000 compared with $8,537,000 last year. The annualized ratio of net
charge-offs to average loans was .13% in both quarters, while the
corresponding net charge-off figures were $7,321,000 and $6,957,000,
respectively.
<TABLE>
- --------------------------------------------------------------------
EXHIBIT 8
RESERVE FOR POSSIBLE LOAN LOSSES
($ IN THOUSANDS)
<CAPTION>
FIRST QUARTER
1999 1998
---- ----
<S> <C> <C>
BEGINNING BALANCE $308,890 $284,165
PROVISION 7,479 8,537
Charge-offs (12,742) (12,772)
Recoveries 5,421 5,815
-------- --------
NET CHARGE-OFFS (7,321) (6,957)
Acquired Reserves -- 7,820
-------- --------
ENDING BALANCE $309,048 $293,565
======== ========
LOANS AND LEASES
March 31 balance $22,476,999 $21,763,267
=========== ===========
Average balance $22,330,334 $21,584,431
=========== ===========
RATIOS
Reserve balance
to outstanding
loans 1.37% 1.35%
Reserve balance
to non-performing
loans 284.80 280.52
Net charge-offs
to average loans .13 .13
- ---------------------------------------------------------
</TABLE>
17
<PAGE>
<PAGE>
For the total managed portfolio of credit card loans (including securitized
loans), the ratio of net charge-offs to average loans was 5.27% in 1999
versus 7.35% last year. Net charge-offs on the out-of-territory portfolio
that was sold late in the first quarter of 1998 totaled $2,316,000. By
credit policy, losses are taken on credit card loans after six cycles of
nonpayment, or within 15 days of receipt of personal bankruptcy notice, if
earlier. Due to the 1995 securitization and FAS 125 accounting, very few
credit card outstandings are accounted for as loans as of March 31, 1999.
Over a 12-month period commencing in November 1999, $600,000,000 of loans
in the Mercantile Credit Card Master Trust will return to the Corporation's
balance sheet as loans. Currently $400,000,000 of credit card loans are off
the balance sheet and in the trust as collateral for the debt of the trust.
The other $200,000,000 in loans are also in the trust but are classified as
investor certificates and held on Mercantile's balance sheet in the
investment portfolio.
Mercantile evaluates the reserve for loan losses on a quarterly basis to
ensure the timely charge-off of loans and to determine the adequacy of the
reserve. Management believes the consolidated reserve of 1.37% of loans and
284.80% of non-performing loans as of March 31, 1999 was adequate based on
the risks identified at such date in the portfolio.
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, renegotiated loans,
foreclosed property and investment securities with an impairment in value
that is considered other than temporary. A summary of these assets is
presented in Exhibit 9. Non-performing loans (non-accrual and renegotiated
loans) were $108,515,000 or .48% of total loans at March 31, 1999, compared
with $92,137,000 or .41% at December 31, 1998 and $104,650,000 or .48% at
March 31, 1998. By the Corporation's definition, all non-accrual and
renegotiated commercial-related loans are considered impaired, and totaled
$64,608,000 at March 31, 1999. The average balance of impaired loans was
$59,302,000 in the first quarter of 1999. Foreclosed assets were $16,123,000
at March 31, 1999 compared with $13,500,000 at year's end and $23,166,000
last year.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------
EXHIBIT 9
NON-PERFORMING ASSETS
($ IN THOUSANDS)
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1999 1998 1998
-------- ------- --------
<S> <C> <C> <C>
NON-ACCRUAL LOANS
Commercial $ 35,066 $ 21,799 $ 47,022
Real estate--commercial 24,853 20,935 27,222
Real estate--construction 3,246 3,411 1,922
Real estate--residential
mortgage 29,754 31,355 17,676
Real estate--home equity
credit loans 401 551 454
Consumer 13,752 12,633 7,975
-------- -------- --------
Total Non-accrual Loans 107,072 90,684 102,271
RENEGOTIATED LOANS 1,443 1,453 2,379
-------- -------- --------
TOTAL NON-PERFORMING LOANS 108,515 92,137 104,650
FORECLOSED ASSETS
Foreclosed real estate 12,193 8,983 18,604
Other foreclosed assets 3,930 4,517 4,562
-------- -------- --------
TOTAL FORECLOSED ASSETS 16,123 13,500 23,166
-------- -------- --------
TOTAL NON-PERFORMING LOANS AND
FORECLOSED ASSETS<F1> 124,638 105,637 127,816
Impaired investment securities 49,948 63,296 77,943
-------- -------- --------
TOTAL NON-PERFORMING ASSETS $174,586 $168,933 $205,759
======== ======== ========
PAST-DUE LOANS
(90 DAYS OR MORE)<F2>
Commercial $ 7,486 $ 12,263 $ 6,123
Real estate--commercial 2,332 1,621 922
Real estate--construction 751 -- --
Real estate--residential
mortgage 46,947 48,572 33,648
Real estate--home equity
credit loans 484 503 1,785
Consumer 7,243 7,396 6,140
Credit card 404 672 1,982
-------- -------- --------
Total Past-due Loans $ 65,647 $ 71,027 $ 50,600
======== ======== ========
RATIOS<F2>
Non-performing loans to
outstanding loans .48% .41% .48%
Non-performing loans and
foreclosed assets to
outstanding loans and
foreclosed assets .55 .47 .59
Non-performing assets to total
assets .49 .47 .59
<FN>
<F1> Excludes insured FHA and government guaranteed VA loans that are
contractually past due more than 90 days. Since these loans are fully
insured or guaranteed for the payment of both principal and interest, the
Corporation does not consider these loans to be non-performing assets. The
total of such insured or guaranteed loans was $5,114,000 at March 31,
1999, $7,855,000 at December 31, 1998, and $10,299,000 at March 31, 1998.
<F2> Past-due loans 90 days or more are not included in non-performing asset
totals or ratios.
- -------------------------------------------------------------------------------
</TABLE>
In the first quarter of 1999, the Corporation modified its reporting of
non-accrual residential real estate mortgage loans. The new policy requires
these mortgages to be transferred to non-accrual status at the inception of
foreclosure proceedings or 180 days past due, whichever is first. Until
foreclosure, the loans are reported as past due 90 days or more and still
accruing interest. Under Mercantile's prior accounting policy, residential
mortgages past due 90 days or more were part of non-accrual loans. This
modification in reporting was affected by several factors. As stated
previously, residential mortgage charge-offs as a
18
<PAGE>
<PAGE>
percentage of loans has averaged only .03% for the past three years and the
amount of interest lost on non-performing residential mortgages historically
has been minimal. This change in reporting is also consistent with industry
standards and regulatory reporting requirements. Previously reported
non-accrual and past due 90 days or more loan balances have been restated to
reflect this reporting modification.
Non-accrual loans totaled $107,072,000, an increase of $16,388,000 from
December 31, 1998. The increase was primarily in the asset-based lending
subsidiary and in rural markets. As of March 31, 1999, Mercantile had only
three non-accrual loans with balances in excess of $2,000,000. As
significant, the Corporation held no foreclosed assets with a book value
exceeding $1,000,000.
All loans classified as renegotiated were paying in accordance with their
modified terms at March 31, 1999. Consumer loans are no longer classified as
renegotiated, consistent with industry standards and regulatory reporting.
All periods reported reflect this change. Loans past due 90 days and still
accruing interest consisted largely of credit card loans, consumer loans and
residential real estate mortgage loans.
The Corporation's impaired investment securities represent selected pools of
privately issued mortgage-backed securities, and have declined by $13,348,000
from December 31, 1998, to $49,948,000, due to paydowns and sales. In the
first quarter of 1999, $8,036,000 in impaired securities were sold at gains
of $1,275,000 which is part of securities gains reported in the Consolidated
Statement of Income. The current yield on the net book value of these
impaired securities is 10.93% at March 31, 1999.
CAPITAL RESOURCES
Mercantile maintains a capital base that provides a foundation for
anticipated future asset growth and promotes depositor and investor
confidence. Capital management is a continuous process at Mercantile and is
focused on ensuring that adequate capital is provided for both current needs
and anticipated growth. This strategy has enabled Mercantile to profitably
expand its balance sheet while maintaining capital ratios that exceed
regulatory capital requirements.
At March 31, 1999, shareholders' equity was $3.1 billion, an increase of 9.1%
from March 31, 1998. This increase was primarily derived from retained
earnings, partially offset by an unfavorable FAS 115 adjustment of
$47,760,000 during the first quarter of 1999. As of March 31, 1999, the
balance of the valuation on available-for-sale securities reduced
shareholders' equity by $6,600,000.
The tangible equity to tangible assets ratio increased to 6.71% at March 31,
1999 from 5.88% a year ago. Additionally, all regulatory capital ratios have
improved since last year and significantly exceed regulatory requirements.
Exhibit 10 details significant capital information for March 31, 1999,
December 31, 1998 and March 31, 1998.
<TABLE>
- -------------------------------------------------------------------------------
EXHIBIT 10
RISK-BASED CAPITAL
($ IN THOUSANDS)
<CAPTION>
MARCH 31 DEC. 31 MARCH 31
1999 1998 1998
-------- ------- --------
<S> <C> <C> <C>
Capital
Tier I $ 2,534,036 $ 2,451,449 $ 2,191,262
Total 3,193,141 3,125,488 2,884,005
Risk-adjusted assets 25,905,797 24,907,551 23,823,607
Tier I capital to
risk-adjusted assets 9.78% 9.84% 9.20%
Total capital to
risk-adjusted assets 12.33 12.55 12.11
Leverage 7.28 7.16 6.60
Tangible equity to
tangible assets 6.71 6.55 5.88
Double leverage 119.31 120.75 125.99
- -------------------------------------------------------------------------------
</TABLE>
In the first quarter of 1998, the Corporation repurchased 1,750,000 shares
of its common stock via designated broker-dealers at an average cost of
$53.60 per share. These repurchases occurred through an accelerated stock
repurchase program. The shares were reissued for the 1994 Stock Incentive
Plan and the acquisitions of CBT Corporation and Firstbank of Illinois Co.
Share repurchases through March 31, 1999 followed Mercantile's systematic
reacquisition plan for the 1994 Stock Incentive Plan. At March 31, 1999,
Mercantile had only 47,363 treasury shares, including 28,125 repurchased in
the first quarter of 1999. None were tainted for pooling-of-interests
accounting purposes.
<PAGE>
The Corporation has $53,450,000 of 9.00% mortgage-backed notes that mature
in July 1999. Additionally, Mercantile's $400,000,000 credit card
securitization is scheduled to begin a 12-month amortization period in
November 1999. Excluding FHLB advances, the maturities of remaining
long-term debt are laddered between 2001 and 2007.
19
<PAGE>
<PAGE>
The Parent Company's double leverage ratio, which measures the extent to
which the equity capital of its subsidiaries is supported by Parent Company
debt rather than equity, improved to 119.31% at March 31, 1999 compared with
125.99% last year. Intangible assets, which consisted largely of goodwill,
totaled $765,560,000 at March 31, 1999 compared with $823,955,000 a year
ago.
On February 17, 1999, the Board of Directors declared a quarterly cash
dividend of $.34 per share, an increase of 9.7% over the 1998 quarterly
dividend of $.31 per share. The dividend was paid on April 1, 1999. Book
value per share was $19.65 at March 31, 1999 compared with $18.77 a year
earlier, an increase of 4.7%. Public debt ratings of the Corporation and
Mercantile Bank N.A. are shown in Exhibit 11.
<TABLE>
------------------------------------------------------------------------------------------------------------------------------
EXHIBIT 11
DEBT RATINGS
<CAPTION>
MARCH 31, 1999
--------------------------------------------------------------
FITCH THOMSON STANDARD
MOODY'S IBCA BANKWATCH & POOR'S
------- ----- --------- --------
<S> <C> <C> <C> <C>
MERCANTILE BANCORPORATION INC.
Issuer rating B
Commercial paper F1 TBW-1
6.800% senior notes, due 2001 A2 A- BBB+
7.050% senior notes, due 2004 A2 A- BBB+
7.625% subordinated notes, due 2002 A3 BBB+ BBB
7.300% subordinated notes, due 2007 A3 BBB+ BBB
Floating rate capital trust pass-through securities(SM) a2 BBB-
MERCANTILE BANK N.A.
Bank notes (long-term/short-term) A1/P-1 A/TBW-1 A-/A-2
6.375% subordinated notes, due 2004 A2 A A- BBB+
9.000% mortgage-backed notes, due July 1999 Aaa
Certificates of deposit (long-term/short-term) A1/P-1 A-/A-2
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000
Financial institutions are particularly vulnerable to Year 2000 issues
because of industry reliance on electronic data processing and funds
transfer systems. In 1996, the Corporation initiated a formal and
centralized Year 2000 Program ("Program") with the objective of addressing
all aspects of the Year 2000 issue. All business units of the organization
were brought into the Program through the creation of a Year 2000
Operational Task Force. A Program Manager, who provides monthly Year 2000
status reports to executive management and quarterly reports to the Board
of Directors, was appointed.
The Corporation has substantially completed the assessment, analysis,
remediation and validation phases of its Year 2000 Program and is well into
the execution phase. As part of the Program, a comprehensive Year 2000
Program Plan ("Plan") was developed and implemented in the third quarter of
1997. The Plan addresses both Information Technology ("IT") projects, such
as insuring that data processing and data network applications are Year 2000
compliant, and non-IT projects, such as insuring that all building
facilities and security systems having "embedded technology" will be
operational when Year 2000 arrives. Of the plan projects identified,
approximately 92% have been completed. Most remaining projects are dependent
upon external testing for completion, which is scheduled to be completed by
the end of the second quarter of 1999.
As part of its Plan, Mercantile identified those systems and business
applications that are "mission-critical," that is, systems and business
applications which, if they failed, would render Mercantile incapable of
performing core business processes. As of March 31, 1999, renovation and
testing of such identified mission-critical applications were 100% complete.
As a financial institution, Mercantile's Year 2000 efforts are subject to
regulation and monitoring by bank and bank holding company regulatory
agencies. These agencies, under the auspices of the Federal Financial
Institutions Examination Council ("FFIEC"), have established specific
guidelines and interim deadlines for achieving Year 2000 compliance.
Mercantile's Program has met all of the deadlines and complied with all
guidelines to date, and fully intends and expects to continue to do so.
20
<PAGE>
<PAGE>
In addition to Year 2000 compatibility of all Mercantile applications,
Mercantile's Year 2000 Program addresses third-party Year 2000 issues.
Mercantile has numerous customers, vendors, service providers,
counterparties and other business relationships with third parties.
Failure of any of these parties to address Year 2000 issues could result
in significant and in some cases material disruptions of business and costs
to Mercantile. Mercantile has undertaken an assessment of all third-party
credit relationships and thus far has completed its evaluation of such
relationships which are considered to be material. Follow-up plans have
been put in place to deal with such relationships that have been identified
as "high risk." In addition, all customers with whom Mercantile exchanges
electronic data have received notification of Year 2000-related date format
impacts. Year 2000 date testing has been completed with approximately 48%
of material third-party relationships. Review of third-party customers and
supplies will be an ongoing process throughout 1999.
Mercantile estimates that its total costs related to Year 2000 remediation
will be approximately $31,000,000. Expenses of the Program in the first
quarter of 1999 declined to $1,751,000 from $3,985,000 in the same period
of 1998. Personnel costs for Mercantile employees and outside consultants
working on the Program, and the cost of setting up testing environments are
the largest components of the total Program cost. Other costs include costs
for communication and training, and for required hardware and software
replacement, upgrade or renovation. Year 2000 expenditures are expensed as
incurred. It is not expected that Year 2000 costs or activities will have a
material adverse impact on operations of the Corporation.
The principal risks associated with the Year 2000 problem can be grouped
into two categories. The first is the risk that Mercantile does not
successfully ready its operations for the next century. The second is the
risk of disruption of Mercantile operations due to operational failures of
third parties. The first category includes those risks that are largely
under Mercantile's control. As set forth above, the Corporation believes
it has made the necessary corrections to its mission-critical systems, and
therefore believes there is little risk of any critical system or asset not
being able to process date-related functions. In the event that Mercantile
has not successfully completed the remediation of its mission-critical
systems, it could be materially adversely affected as a result of disruption
of core business processes.
The second risk category is largely outside of Mercantile's control.
Computer failure of third parties may jeopardize Mercantile operations.
The most serious impact on Mercantile operations from Year 2000 failures
of others would result if basic services such as telecommunications,
electric power and service provided by other financial institutions and
governmental agencies were disrupted. Similarly, operational failures
affecting Mercantile's sources of major funding, larger borrowers and
capital market counterparties could affect the ability of such parties to
continue to provide funding or meet obligations when due. Significant
public disclosure of the state of readiness among basic infrastructure
and other suppliers, funding sources and counterparties has not generally
been available. Although inquiries are underway to assess this potential
risk, Mercantile does not yet have the necessary information to estimate
the likelihood of such significant disruptions. Liquidity planning is
underway and an initial plan to address funding issues is expected to be
completed by June 1999. Review of this plan will be an ongoing process
throughout 1999. There can be no assurance that Year 2000 failures of
third parties will not have a material adverse impact on Mercantile.
Mercantile is developing remediation contingency plans and business
resumption contingency plans specific to Year 2000 issues. Remediation
contingency plans address the actions to be taken if the current approach to
remediating a system is falling behind schedule, or otherwise appears in
jeopardy of failing to deliver a Year 2000 ready system when needed.
Business resumption contingency plans address the actions that would be
taken if core business processes and critical business functions cannot be
carried out in the normal manner upon entering the next century due to
system or supplier failure. Remediation contingency plans with trigger
dates for review and implementation have been developed for mission-
critical applications. The effort to develop business resumption
contingency plans is in progress. The first three phases of this effort,
Organizational Planning Guidelines, Business Impact Analysis and Plan
Development, are complete. The fourth phase, Method for Validation of
Plans, is approximately 80% complete. This phase is due to be completed
by June 30, 1999, as required by FFIEC guidelines. The review of these
plans will be an ongoing process throughout 1999. As stated before,
Mercantile is expected to merge with and into Firstar in the fourth
quarter of 1999. However, conversions to Firstar's systems are not
scheduled until the first quarter of 2000.
21
<PAGE>
<PAGE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED QUARTERLY STATEMENT OF INCOME
($ IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR.
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans and leases $442,332 $445,880 $443,631 $439,392 $431,903
Investments in debt and equity securities 144,117 149,856 146,296 150,417 148,335
Short-term investments 6,731 8,351 7,334 7,781 6,700
-------- -------- -------- -------- --------
Total Interest Income 593,180 604,087 597,261 597,590 586,938
Tax-equivalent adjustment 4,235 4,191 3,906 4,332 3,940
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INTEREST INCOME 597,415 608,278 601,167 601,922 590,878
INTEREST EXPENSE
Deposits 237,420 237,267 231,983 225,046 216,638
Borrowed funds 83,039 91,518 92,199 89,386 86,071
-------- -------- -------- -------- --------
Total Interest Expense 320,459 328,785 324,182 314,432 302,709
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT NET INTEREST INCOME 276,956 279,493 276,985 287,490 288,169
PROVISION FOR POSSIBLE LOAN LOSSES 8,537 7,344 23,871 11,402 7,479
OTHER INCOME
Trust 28,128 28,816 27,442 28,613 29,142
Service charges 28,244 29,073 30,498 31,462 29,640
Investment banking and brokerage 11,066 9,826 9,760 10,485 11,082
Mortgage banking 29,098 8,959 6,149 10,249 6,199
Securities gains 4,453 2,834 2,297 5,851 12,963
Other 35,962 35,243 85,693 41,717 37,418
-------- -------- -------- -------- --------
Total Other Income 136,951 114,751 161,839 128,377 126,444
OTHER EXPENSE
Personnel expense 125,178 121,779 124,155 124,847 123,339
Net occupancy and equipment 37,042 37,270 38,608 39,509 40,880
Other 58,318 65,677 148,389 105,985 61,135
-------- -------- -------- -------- --------
Total Other Expense 220,538 224,726 311,152 270,341 225,354
-------- -------- -------- -------- --------
TAXABLE-EQUIVALENT INCOME BEFORE INCOME TAXES 184,832 162,174 103,801 134,124 181,780
INCOME TAXES
Income taxes 65,738 50,836 36,751 39,639 59,803
Tax-equivalent adjustment 4,235 4,191 3,906 4,332 3,940
-------- -------- -------- -------- --------
Adjusted Income Taxes 69,973 55,027 40,657 43,971 63,743
-------- -------- -------- -------- --------
NET INCOME $114,859 $107,147 $ 63,144 $ 90,153 $118,037
======== ======== ======== ======== ========
PER SHARE DATA
Basic earnings per share $.76 $.71 $.41 $.57 $.75
Diluted earnings per share .75 .69 .41 .57 .74
SIGNIFICANT RATIOS
Return on assets 1.35% 1.23% .74% 1.03% 1.33%
Return on equity 16.03 14.88 8.48 11.66 15.20
</TABLE>
22
<PAGE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET
($ IN MILLIONS)
<CAPTION>
1998
1ST QTR. 2ND QTR. 3RD QTR.
------------------ ------------------ ------------------
VOLUME RATE<F1> VOLUME RATE<F1> VOLUME RATE<F1>
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans and leases, net of unearned income
Commercial $ 5,152 8.48% $ 5,608 8.38% $ 5,566 8.19%
Real estate--commercial 3,585 8.53 3,631 8.47 3,750 8.58
Real estate--construction 729 8.86 726 8.78 742 8.69
Real estate--residential mortgage 8,742 7.66 8,505 7.60 8,203 7.60
Real estate--home equity credit loans 579 9.64 562 9.65 536 9.63
Consumer 2,550 9.15 2,655 9.08 2,763 9.04
Credit card 248 9.30 126 6.76 113 2.51
------- ------- -------
Total Loans and Leases 21,585 8.22 21,813 8.20 21,673 8.21
Investments in debt and equity
securities
Trading 125 6.67 169 6.69 115 6.24
Taxable 8,404 6.47 8,728 6.47 8,560 6.49
Tax-exempt 434 8.38 417 8.47 411 7.94
------- ------- -------
Total Investments in Debt and Equity
Securities 8,963 6.57 9,314 6.56 9,086 6.56
Short-term investments 479 5.62 600 5.51 517 5.55
------- ------- -------
Total Earning Assets 31,027 7.81 31,727 7.69 31,276 7.63
Non-earning assets 3,012 3,214 2,984
------- ------- -------
Total Assets $34,039 $34,941 $34,260
======= ======= =======
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 3,746 $ 4,003 $ 3,801
Interest bearing demand 3,128 1.98 3,136 1.90 3,009 1.82
Money market accounts 3,884 4.11 3,979 4.08 3,960 4.06
Savings 1,647 2.50 1,762 2.62 1,774 2.72
Consumer time certificates under
$100,000 9,836 5.60 9,685 5.57 9,420 5.53
Other time 196 5.93 196 5.50 174 5.20
------- ------- -------
Total Core Deposits 22,437 4.41 22,761 4.36 22,138 4.33
Time certificates $100,000 and over 1,908 5.62 1,928 5.62 1,837 5.65
Foreign 541 5.63 441 5.60 397 5.61
------- ------- -------
Total Purchased Deposits 2,449 5.64 2,369 5.63 2,234 5.65
------- ------- -------
Total Deposits 24,886 4.55 25,130 4.50 24,372 4.47
Short-term borrowings 3,876 5.40 3,570 5.31 2,860 5.32
Bank notes 152 6.13 25 5.82 25 5.85
Long-term debt<F2> 1,823 6.23 2,911 5.87 3,641 5.69
------- ------- -------
Total Acquired Funds 30,737 4.82 31,636 4.77 30,898 4.75
Other liabilities 436 424 383
SHAREHOLDERS' EQUITY 2,866 2,881 2,979
------- ------- -------
Total Liabilities and Shareholders'
Equity $34,039 $34,941 $34,260
======== ======= =======
SIGNIFICANT RATIOS
Net interest rate spread 2.99% 2.92% 2.88%
Net interest rate margin 3.62 3.53 3.51
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
<PAGE>
<TABLE>
MERCANTILE BANCORPORATION INC. AND SUBSIDIARIES
CONSOLIDATED QUARTERLY AVERAGE BALANCE SHEET
($ IN MILLIONS)
<CAPTION>
1998 1999
4TH QTR. 1ST QTR.
------------------ ------------------
VOLUME RATE<F1> VOLUME RATE<F1>
------ -------- ------ --------
<S> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans and leases, net of unearned income
Commercial $ 5,820 7.81% $6,263 7.57%
Real estate--commercial 3,874 8.42 3,767 8.21
Real estate--construction 877 8.37 948 8.11
Real estate--residential mortgage 8,105 7.41 8,008 7.40
Real estate--home equity credit loans 534 9.00 518 8.72
Consumer 2,803 8.97 2,785 8.79
Credit card 32 -- 41 12.77
------- -------
Total Loans and Leases 22,045 8.00 22,330 7.76
Investments in debt and equity
securities
Trading 132 6.21 161 6.45
Taxable 8,825 6.47 8,926 6.29
Tax-exempt 437 7.73 399 8.12
------- -------
Total Investments in Debt and Equity
Securities 9,394 6.52 9,486 6.37
Short-term investments 575 5.30 563 4.76
------- -------
Total Earning Assets 32,014 7.46 32,379 7.40
Non-earning assets 3,023 3,176
------- -------
Total Assets $35,037 $35,555
======= =======
LIABILITIES
Acquired Funds
Deposits
Non-interest bearing $ 4,047 $ 4,050
Interest bearing demand 3,081 1.66 3,153 1.60
Money market accounts 4,141 3.89 4,244 3.82
Savings 1,770 2.49 1,754 2.49
Consumer time certificates under
$100,000 9,363 5.46 9,012 5.29
Other time 173 4.51 194 3.91
------- -------
Total Core Deposits 22,575 4.18 22,407 4.03
Time certificates $100,000 and over 1,901 5.43 2,164 5.27
Foreign 267 5.32 477 4.93
------- -------
Total Purchased Deposits 2,168 5.42 2,641 5.22
------- -------
Total Deposits 24,743 4.31 25,048 4.18
Short-term borrowings 2,886 4.78 2,701 4.57
Bank notes 25 5.60 10 5.47
Long-term debt<F2> 3,796 5.55 4,134 5.33
------- -------
Total Acquired Funds 31,450 4.55 31,893 4.41
Other liabilities 495 556
SHAREHOLDERS' EQUITY 3,092 3,106
------- -------
Total Liabilities and Shareholders'
Equity $35,037 $35,555
======= =======
SIGNIFICANT RATIOS
Net interest rate spread 2.91% 2.99%
Net interest rate margin 3.56 3.61
<FN>
<F1> Taxable-equivalent basis.
<F2> Includes company-obligated mandatorily redeemable preferred securities of
Mercantile Capital Trust I.
</TABLE>
23
<PAGE>
<PAGE>
SPECIAL NOTE
Certain statements in this report that relate to the plans, objectives or
future performance of Mercantile Bancorporation Inc. may be deemed to be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
certain risks and uncertainties. For example, by accepting deposits at fixed
rates, at different times and for different terms, and lending funds at
fixed rates for fixed periods, a bank accepts the risk that the cost of
funds may rise and the use of the funds may be at a fixed rate. Similarly,
the cost of funds may fall, but a bank may have committed by virtue of the
term of a deposit to pay what becomes an above-market rate. Investments may
decline in value in a rising interest rate environment. Because the business
of banking is highly regulated, decisions of governmental authorities, such
as the rate of deposit insurance, can have a major effect on operating
results. Unanticipated events associated with Year 2000 compliance, relating
to work on developments or modifications to the Corporation's computer
systems and software, including work performed by suppliers or vendors or
relating to the failure of third parties upon whom the Corporation relies,
including customers, suppliers, governmental entities and others, to address
their own Year 2000 issues, could affect Mercantile's future financial
condition and operating results. Actual charges associated with completed
acquisitions may prove to be greater than current estimates. In addition,
management's objectives with respect to the Corporation's capital base and
equity levels may not reach the targeted objectives within the targeted
periods due to numerous factors, including those previously mentioned.
All of these uncertainties, as well as others, are present in a banking
operation and shareholders are cautioned that management's view of the
future on which it prices its products, evaluates collateral, sets loan
reserves and estimates costs of operation and regulation may prove to be
other than as anticipated. Actual strategies and results in future periods
may differ materially from those currently expected.
24
<PAGE>
<PAGE>
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of shareholders of Registrant was held on April 21, 1999.
Of 157,625,883 shares issued, outstanding and eligible to be voted at the
meeting, 133,329,084 shares, constituting a quorum, were represented in
person or by proxy at the meeting. One (1) matter was submitted to a vote of
the security-holders at the meeting.
ELECTION OF CLASS II DIRECTORS. The only matter submitted was the election
of four Class II director nominees to the Board of Directors, each to
continue in office until the year 2002. The Restated Articles of
Incorporation of the Registrant allow cumulative voting in all director
elections and all shareholders were accordingly allowed to cumulate their
votes for directors if they so desired. Upon tabulation of the votes cast, it
was determined that all four director nominees had been elected. The voting
results are set forth below:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Dr. Henry Givens 130,848,405 2,428,140
William A. Hall 130,450,877 2,923,164
Cinda A. Hallman 130,662,126 2,665,626
Craig D. Schnuck 130,838,635 2,499,359
</TABLE>
Because Registrant has a staggered Board, the term of office of the
following named Class I and Class III directors, who were not up for
election at the 1999 annual meeting, continued after the meeting:
Class I (to continue in office until 2001)
Harry M. Cornell, Jr. Frank Lyon, Jr.
Harvey Saligman John A. Wright
Class III (to continue in office until 2000)
Richard E. Beumer Alvin J. Siteman
Thomas H. Jacobsen Patrick T. Stokes
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2 Agreement and Plan of Merger by and between Mercantile
Bancorporation Inc. and Firstar Corporation Dated as of April 30,
1999.
27 Financial Data Schedule
99.1 Stock Option Agreement, dated April 30, 1999, between Firstar
Corporation, a Wisconsin corporation ("Issuer"), and Mercantile
Bancorporation Inc., a Missouri corporation ("Grantee").
99.2 Stock Option Agreement, dated April 30, 1999, between Mercantile
Bancorporation Inc., a Missouri corporation ("Issuer"), and
Firstar Corporation, a Wisconsin corporation ("Grantee").
25
<PAGE>
<PAGE>
(b) Reports on Form 8-K:
Registrant filed no Current Reports on Form 8-K during the quarter
ended March 31, 1999. However, a Current Report on Form 8-K was filed on
May 4, 1999. Under Item 5 in that Report, Registrant disclosed that
on April 30, 1999, it had entered into an Agreement and Plan of
Merger with Firstar Corporation ("Firstar"). Pursuant to that
Merger Agreement, as described in the Form 8-K, Registrant is to be
merged into Firstar, with the shareholders of Registrant to receive
2.091 shares of the common stock, par value $0.01 per share of Firstar
for each share of Registrant common stock. The Form 8-K also briefly
described the terms of two Option Agreements between Registrant and
Firstar, pursuant to which Registrant received an option to purchase
approximately 9.9% of Firstar's outstanding common stock and Firstar
received an option to purchase approximately 19.9% of Registrant's
outstanding common stock. The options are exercisable only upon the
occurrence of certain triggering events. Finally, the Form 8-K also
disclosed that Registrant had entered into an amendment of its Rights
Agreement in connection with and immediately prior to entering into the
Merger Agreement and Option Agreements.
Under Item 7 of the Form 8-K, the following documents were filed as
Exhibits thereto:
4.1 Amendment to Rights Agreement dated as of May 20, 1998, by and
between Mercantile Bancorporation Inc. and Harris Trust and
Savings Bank as Rights Agent.
99.1 Press Release issued April 30, 1999.
26
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCANTILE BANCORPORATION INC.
(Registrant)
Date May 14, 1999 /s/ JOHN W. MCCLURE
--------------------------- --------------------------------
John W. McClure
Chief Financial Officer
27 <PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
<C> <S> <C>
2 Agreement and Plan of Merger by and between Mercantile Included herein
Bancorporation Inc. and Firstar Corporation Dated as of
April 30, 1999.
27 Financial Data Schedule Included herein
99.1 Stock Option Agreement, dated April 30, 1999, between Included herein
Firstar Corporation, a Wisconsin corporation ("Issuer"), and
Mercantile Bancorporation Inc., a Missouri corporation
("Grantee").
99.2 Stock Option Agreement, dated April 30, 1999, between Included herein
Mercantile Bancorporation Inc., a Missouri corporation
("Issuer"), and Firstar Corporation, a Wisconsin corporation
("Grantee").
</TABLE>
28
<PAGE>
AGREEMENT AND PLAN OF MERGER
by and between
MERCANTILE BANCORPORATION INC.
and
FIRSTAR CORPORATION
DATED AS OF APRIL 30, 1999
<PAGE>
<PAGE>
<TABLE>
TABLE OF CONTENTS
-----------------
<CAPTION>
Page
----
<S> <C>
AGREEMENT AND PLAN OF MERGER
ARTICLE I
THE MERGER
1.1 The Merger 2
1.2 Effective Time 2
1.3 Effects of the Merger 2
1.4 Conversion of Mercantile Common Stock 2
1.5 Firstar Capital Stock 4
1.6 Options 4
1.7 Certificate of Incorporation 5
1.8 By-Laws 5
1.9 Tax and Accounting Consequences 5
1.10 Board of Directors; Management 5
1.11 Headquarters of Surviving Corporation 6
ARTICLE II
EXCHANGE OF SHARES
2.1 Firstar to Make Shares Available 6
2.2 Exchange of Shares 6
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FIRSTAR
3.1 Corporate Organization 8
3.2 Capitalization 9
3.3 Authority; No Violation 10
3.4 Consents and Approvals 11
3.5 Reports 11
3.6 Financial Statements 12
3.7 Broker's Fees 12
3.8 Absence of Certain Changes or Events 12
3.9 Legal Proceedings 13
3.10 Taxes and Tax Returns 13
3.11 Employee Benefit Plans 14
3.12 SEC Reports 16
3.13 Compliance with Applicable Law 16
-i-
<PAGE>
<PAGE>
3.14 Certain Contracts 17
3.15 Agreements with Regulatory Agencies 17
3.16 Interest Rate Risk Management Instruments 18
3.17 Undisclosed Liabilities 18
3.18 Insurance 18
3.19 Environmental Liability 18
3.20 Charter Provisions; State Takeover Laws; Firstar Rights Agreement 19
3.21 Year 2000 19
3.22 Reorganization; Pooling of Interests 19
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MERCANTILE
4.1 Corporate Organization 20
4.2 Capitalization 20
4.3 Authority; No Violation 21
4.4 Consents and Approvals 22
4.5 Reports 23
4.6 Financial Statements 23
4.7 Broker's Fees 24
4.8 Absence of Certain Changes or Events 24
4.9 Legal Proceedings 24
4.10 Taxes and Tax Returns 25
4.11 Employee Benefit Plans 26
4.12 SEC Reports 27
4.13 Compliance with Applicable Law 28
4.14 Certain Contracts 28
4.15 Agreements with Regulatory Agencies 29
4.16 Interest Rate Risk Management Instruments 29
4.17 Undisclosed Liabilities 29
4.18 Insurance 30
4.19 Environmental Liability 30
4.20 Charter Provisions; State Takeover Laws; Mercantile Rights Agreement 30
4.21 Year 2000 31
4.22 Reorganization; Pooling of Interests 31
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the Effective Time 31
5.2 Forbearances 31
-ii-
<PAGE>
<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters 34
6.2 Access to Information 35
6.3 Shareholders' Approvals 36
6.4 Legal Conditions to Merger 36
6.5 Affiliates; Publication of Combined Financial Results 37
6.6 Stock Exchange Listing 37
6.7 Employee Benefit Plans 37
6.8 Indemnification; Directors' and Officers' Insurance 38
6.9 Additional Agreements 39
6.10 Advice of Changes 39
6.11 Dividends 39
6.12 Exemption from Liability Under Section 16(b) 40
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Merger 40
7.2 Conditions to Obligations of Mercantile 41
7.3 Conditions to Obligations of Firstar 42
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination 43
8.2 Effect of Termination 43
8.3 Amendment 44
8.4 Extension; Waiver 44
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing 45
9.2 Nonsurvival of Representations, Warranties and Agreements 45
9.3 Expenses 45
9.4 Notices 45
9.5 Interpretation 46
9.6 Counterparts 46
9.7 Entire Agreement 46
9.8 Governing Law 46
-iii-
<PAGE>
<PAGE>
9.9 Publicity 46
9.10 Assignment; Third Party Beneficiaries 47
9.11 Certain Agreements of the Surviving Corporation 47
Exhibit A - Mercantile Option Agreement
Exhibit B - Firstar Option Agreement
Exhibit 6.5(a)(1) - Form of Affiliate Letter Addressed to Firstar
Exhibit 6.5(a)(2) - Form of Affiliate Letter Addressed to Mercantile
</TABLE>
-iv-
<PAGE>
<PAGE>
<TABLE>
INDEX OF DEFINED TERMS
<CAPTION>
Section Page No.
------- --------
<S> <C> <C>
Agreement Recitals 1
BHC Act 3.1(a) 8
CERCLA 3.19 17
Certificate 1.4(b) 3
Closing 9.1 41
Closing Date 9.1 41
Code 1.6(b) 4
Confidentiality Agreement 6.2(b) 33
Derivative Instruments 3.16 16
Dissenting Shares 1.4(d) 3
DPC Shares 1.4(a) 2
DRIP Suspension Date 4.2(a) 19
Effective Time 1.2 2
ERISA 3.11(a) 13
Exchange Act 3.6 11
Exchange Agent 2.1 5
Exchange Fund 2.1 5
Exchange Ratio 1.4(a) 2
Federal Reserve Board 3.4 10
Firstar Recitals 1
Firstar 10-K 3.6 11
Firstar Articles 1.7 4
Firstar Benefit Plans 3.11(a) 13
Firstar Capital Stock 3.2(a) 8
Firstar Common Stock 1.4(a) 2
Firstar Contract 3.14(a) 16
Firstar Disclosure Schedule 3 7
Firstar DRIP 3.2(a) 8
Firstar ERISA Affiliate 3.11(a) 13
Firstar Option Agreement Recitals 1
Firstar Preferred Stock 3.2(a) 8
Firstar Regulatory Agreement 3.15 16
Firstar Reports 3.12(a) 15
Firstar Rights 3.2(a) 8
Firstar Rights Agreement 1.4(a) 3
Firstar Shareholder Rights 1.4(a) 3
Firstar Stock Plans 3.2(a) 8
GAAP 1.9 5
Governmental Entity 3.4 10
Indemnified Parties 6.8(a) 35
-v-
<PAGE>
<PAGE>
<CAPTION>
Section Page No.
------- --------
<S> <C> <C>
IRS 3.10(a) 12
Joint Proxy Statement 3.4 10
Liens 3.2(b) 9
Material Adverse Effect 3.1(a) 8
MBCL 1.1(a) 1
Merger Recitals 1
Merger Consideration 1.1(b) 2
Missouri Articles 1.2 2
Missouri Secretary 1.2 2
Mercantile Recitals 1
Mercantile 10-K 4.6 21
Mercantile Articles 4.1(a) 18
Mercantile Benefit Plans 4.11(a) 24
Mercantile Capital Stock 4.2(a) 19
Mercantile Common Stock 1.4(a) 2
Mercantile Contract 4.14(a) 26
Mercantile Disclosure Schedule 4 18
Mercantile Employees 6.7(a) 35
Mercantile DRIP 4.2(a) 19
Mercantile ERISA Affiliate 4.11(a) 24
Mercantile Insiders 6.12 37
Mercantile Option Agreement Recitals 1
Mercantile Preferred Stock 4.2(a) 19
Mercantile Regulatory Agreement 4.15 27
Mercantile Reports 4.12(a) 25
Mercantile Rights 4.2(a) 19
Mercantile Rights Agreement 1.4(a) 3
Mercantile Shareholder Rights 1.4(a) 3
Mercantile Stock Plans 4.2(a) 19
New Benefit Plans 6.7(a) 35
Non-Subsidiary Affiliate 3.2(b) 9
NYSE 2.2(e) 7
OCC 3.5 10
Option Agreements Recitals 1
Regulatory Agencies 3.5 10
Requisite Regulatory Approvals 7.1(c) 37
S-4 3.4 10
SEC 3.4 10
Section 16 Information 6.12 37
Securities Act 3.12(a) 15
SRO 3.4 10
State Approvals 3.4 10
State Regulator 3.5 10
-vi-
<PAGE>
<PAGE>
<CAPTION>
Section Page No.
------- --------
<S> <C> <C>
Subsidiary 3.1(a) 8
Surviving Corporation Recitals 1
Tax 3.10(b) 13
Taxes 3.10(b) 13
Trust Account Shares 1.4(a) 2
WBCL 1.1(a) 1
Wisconsin Articles 1.2 2
Wisconsin Department 1.2 2
Year 2000 Issues 3.21 18
</TABLE>
-vii-
<PAGE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 30, 1999 (this
"Agreement"), by and between FIRSTAR CORPORATION, a Wisconsin
corporation ("Firstar"), and MERCANTILE BANCORPORATION INC., a Missouri
corporation ("Mercantile").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Boards of Directors of each of Firstar and Mercantile
have determined that it is in the best interests of their respective
companies and their shareholders to consummate the strategic business
combination transaction provided for herein in which Mercantile will,
subject to the terms and conditions set forth herein, merge with and
into Firstar (the "Merger"), so that Firstar is the surviving
corporation (hereinafter sometimes referred to in such capacity as the
"Surviving Corporation") in the Merger; and
WHEREAS, as a condition to, and immediately after, the execution
of this Agreement, and as a condition to the execution of the Firstar
Option Agreement, Mercantile and Firstar are entering into a stock
option agreement with Mercantile as issuer, and Firstar as grantee, of
the stock option contemplated thereby (the "Mercantile Option
Agreement") in the form attached hereto as Exhibit A; and
WHEREAS, as a condition to, and immediately after, the execution
of this Agreement, and as a condition to the execution of the Mercantile
Option Agreement, Mercantile and Firstar are entering into a Firstar
stock option agreement with Firstar as issuer, and Mercantile as
grantee, of the stock option contemplated thereby (the "Firstar Option
Agreement"; and together with the Mercantile Option Agreement, the
"Option Agreements") in the form attached hereto as Exhibit B; and
WHEREAS, the parties desire to make certain representations,
warranties and agreements in connection with the Merger and also to
prescribe certain conditions to the Merger.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and
intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. (a) Subject to the terms and conditions of
this Agreement, in accordance with Business Corporation Law of the State
of Wisconsin (the "WBCL") and the General and Business Corporation Law
of the State of Missouri (the "MBCL"), at the Effective Time, Mercantile
shall merge with and into Firstar. Firstar shall be the Surviving
Corporation in the Merger, and shall continue its corporate existence
under the laws of the State of
<PAGE>
<PAGE>
Wisconsin. Upon consummation of the Merger, the separate corporate
existence of Mercantile shall terminate.
(b) Firstar and Mercantile may, upon mutual agreement, at
any time change the method of effecting the combination of Mercantile
and Firstar (including without limitation the provisions of this Article
I) if and to the extent they deem such change to be desirable, including
without limitation to provide for a merger of either party with a
wholly-owned subsidiary of the other; provided, however, that no
-------- -------
such change shall (A) alter or change the amount of consideration to be
provided to holders of Mercantile Common Stock as provided for in this
Agreement (the "Merger Consideration"), (B) adversely affect the tax
treatment of shareholders as a result of receiving the Merger
Consideration or (C) materially impede or delay consummation of the
transactions contemplated by this Agreement.
1.2 Effective Time. The Merger shall become effective as set
forth in articles of merger (the "Wisconsin Articles") that shall be
filed with the Wisconsin Department of Financial Institutions (the
"Wisconsin Department"), and in the articles of merger (the "Missouri
Articles") that shall be filed with the Secretary of State of the State
of Missouri (the "Missouri Secretary"), in each case on the Closing
Date. The term "Effective Time" shall be the date and time when the
Merger becomes effective, as set forth in the Wisconsin Articles and the
Missouri Articles.
1.3 Effects of the Merger. At and after the Effective Time, the
Merger shall have the effects set forth in the WBCL and the MBCL.
1.4 Conversion of Mercantile Common Stock. At the Effective
Time, by virtue of the Merger and without any action on the part of
Mercantile, Firstar or the holder of any of the following securities:
(a) Subject to Section 2.2(e), each share of the common stock,
par value $0.01 per share, of Mercantile (together with the Mercantile
Shareholder Right attached thereto, the "Mercantile Common Stock")
issued and outstanding immediately prior to the Effective Time, except
for Dissenting Shares (as defined herein) and shares of Mercantile
Common Stock owned, directly or indirectly, by Mercantile or Firstar or
any of their respective wholly-owned Subsidiaries (other than (A) shares
of Mercantile Common Stock held, directly or indirectly, in trust
accounts, managed accounts and the like, or otherwise held in a
fiduciary capacity, that are beneficially owned by third parties (any
such shares, whether held directly or indirectly by Mercantile or
Firstar, as the case may be, being referred to herein as "Trust Account
Shares") and (B) any shares of Mercantile Common Stock held by
Mercantile or Firstar or any of their respective Subsidiaries in respect
of a debt previously contracted (any such shares of Mercantile Common
Stock, and shares of Firstar Common Stock that are similarly held,
whether held directly or indirectly by Mercantile or Firstar, being
referred to herein as "DPC Shares")) shall be converted into the right
to receive 2.091 shares (the "Exchange Ratio") of the common stock, par
value $0.01 per share, of Firstar (together with the Firstar Shareholder
Rights attached thereto, the "Firstar Common Stock"), together with the
same number of Firstar Shareholder Rights attached thereto.
-2-
<PAGE>
<PAGE>
As used herein, (i) "Mercantile Shareholder Rights" shall mean the
preferred share purchase rights issued to the holders of Mercantile
Common Stock pursuant to the Rights Agreement, dated as of May 20, 1998
(as such may be amended, supplemented, restated or replaced from time to
time), between Mercantile and Harris Trust and Savings Bank (the
"Mercantile Rights Agreement"), and (ii) "Firstar Shareholder Rights"
shall mean the preferred share purchase rights issued to the holders
Firstar Common Stock pursuant to the Rights Agreement, dated as of
November 20, 1998 (as such may be amended, supplemented, restated or
replaced from time to time), between Firstar and Firstar Bank Milwaukee,
N.A. (the "Firstar Rights Agreement").
(b) All of the shares of Mercantile Common Stock converted into
the right to receive Firstar Common Stock pursuant to this Article I
shall no longer be outstanding and shall automatically be cancelled and
shall cease to exist as of the Effective Time, and each certificate
previously representing any such shares of Mercantile Common Stock (each
a "Certificate") shall thereafter represent only the right to receive
(i) a certificate representing the number of whole shares of Firstar
Common Stock and (ii) cash in lieu of fractional shares into which the
shares of Mercantile Common Stock represented by such Certificate have
been converted pursuant to this Section 1.4 and Section 2.2(e).
Certificates previously representing shares of Mercantile Common Stock
shall be exchanged for certificates representing whole shares of Firstar
Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in
accordance with Section 2.2, without any interest thereon. If, prior to
the Effective Time and as permitted by this Agreement, the outstanding
shares of Firstar Common Stock or Mercantile Common Stock shall have
been increased, decreased, changed into or exchanged for a different
number or kind of shares or securities as a result of a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split, or other similar change in capitalization, an appropriate
and proportionate adjustment shall be made to the Exchange Ratio.
(c) At the Effective Time, all shares of Mercantile Common Stock
that are owned, directly or indirectly, by Mercantile or Firstar or any
of their respective wholly-owned Subsidiaries (other than Trust Account
Shares and DPC Shares) shall be cancelled and shall cease to exist and
no capital stock of Firstar or other consideration shall be delivered in
exchange therefor. All shares of Firstar Common Stock that are owned by
Mercantile or any of its wholly-owned Subsidiaries (other than Trust
Account Shares and DPC Shares) shall as of the Effective Time become
authorized but unissued shares of Firstar Common Stock.
(d) Notwithstanding anything in this Agreement to the contrary,
shares of Mercantile Common Stock that are outstanding immediately prior
to the Effective Time and with respect to which dissenters' rights shall
have been properly demanded in accordance with Section 455 of the MBCL
("Dissenting Shares") shall not be converted into the right to receive,
or be exchangeable for, Firstar Common Stock or cash in lieu of
fractional shares but, instead, the holders thereof shall be entitled to
payment of the appraised value of such Dissenting Shares in accordance
with the provisions of Section 455 of the MBCL; provided, however,
-------- -------
that (i) if any holder of Dissenting Shares shall subsequently deliver a
written withdrawal of such holder's demand for appraisal of such shares,
or (ii) if any holder fails to establish such holder's entitlement to
dis-
-3-
<PAGE>
<PAGE>
senters' rights as provided in Section 455 of the MBCL, such holder or
holders (as the case may be) shall forfeit the right to appraisal of
such shares of Mercantile Common Stock and each of such shares shall
thereupon be deemed to have been converted into the right to receive,
and to have become exchangeable for, as of the Effective Time, Firstar
Common Stock and/or cash in lieu of fractional shares, without any
interest thereon, as provided in Section 1.4(a) and Article II hereof.
1.5 Firstar Capital Stock. Except as otherwise provided in
Section 1.4(c), at and after the Effective Time, each share of Firstar
capital stock (including Firstar Common Stock) issued and outstanding
immediately prior to the Closing Date shall remain an issued and
outstanding share of capital stock of the Surviving Corporation and
shall not be affected by the Merger.
1.6 Options. (a) At the Effective Time, each option granted by
Mercantile to purchase shares of Mercantile Common Stock that is
outstanding and unexercised immediately prior thereto shall cease to
represent a right to acquire shares of Mercantile Common Stock and shall
be converted automatically into an option to purchase shares of Firstar
Common Stock in an amount and at an exercise price determined as
provided below (and otherwise subject to the terms of the Mercantile
Stock Plans and the agreements evidencing grants thereunder):
(i) The number of shares of Firstar Common Stock to be
subject to the new option shall be equal to the product of the
number of shares of Mercantile Common Stock subject to the
original option and the Exchange Ratio, provided that any
--------
fractional shares of Firstar Common Stock resulting from such
multiplication shall be rounded to the nearest whole share; and
(ii) The exercise price per share of Firstar Common Stock
under the new option shall be equal to the exercise price per
share of Mercantile Common Stock under the original option divided
by the Exchange Ratio, provided that such exercise price shall
--------
be rounded to the nearest whole cent.
(b) The adjustment provided herein with respect to any options
that are "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) shall be and is
intended to be effected in a manner that is consistent with Section
424(a) of the Code. The duration and other terms of the new option shall
be the same as the original option, except that all references to
Mercantile shall be deemed to be references to Firstar.
1.7 Certificate of Incorporation. Subject to the terms and
conditions of this Agreement, at the Effective Time, the Articles of
Incorporation of Firstar, as the same may be amended as permitted hereby
at the Effective Time (the "Firstar Articles"), shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable law, except that the first sentence of
Section 1 of Article III thereof shall state in its entirety:
-4-
<PAGE>
<PAGE>
(1) The number of shares which the Corporation shall have
authority to issue is 1,610,000,000, divided into the
following classes:
(a) 1,600,000,000 shares of the par value of $.01
each, designated as "Common Stock"; and
(b) 10,000,000 shares of the par value of $1.00
each, designated as "Preferred Stock".
1.8 By-Laws. Subject to the terms and conditions of this
Agreement, at the Effective Time, the By-Laws of Firstar shall be the
By-Laws of the Surviving Corporation until thereafter amended in
accordance with applicable law.
1.9 Tax and Accounting Consequences. It is intended that the
Merger shall constitute a "reorganization" within the meaning of Section
368(a) of the Code, that this Agreement shall constitute a "plan of
reorganization" for the purposes of Sections 354 and 361 of the Code and
that the Merger shall be accounted for as a "pooling of interests" under
generally accepted accounting principles ("GAAP").
1.10 Board of Directors; Management. The directors and officers
of Firstar immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation, each to hold office
in accordance with the Articles of Incorporation of the Surviving
Corporation until their respective successors are duly elected or
appointed and qualified.
1.11 Headquarters of Surviving Corporation. From and after the
Effective Time, the location of the headquarters and principal executive
offices of the Surviving Corporation shall be that of the headquarters
and principal executive offices of Firstar as of the date of this
Agreement.
ARTICLE II
EXCHANGE OF SHARES
2.1 Firstar to Make Shares Available. At or prior to the
Effective Time, Firstar shall deposit, or shall cause to be deposited,
with Firstar Bank Milwaukee, N.A., or another bank or trust company
reasonably acceptable to each of Mercantile and Firstar (the "Exchange
Agent"), for the benefit of the holders of Certificates, for exchange in
accordance with this Article II, certificates representing the shares of
Firstar Common Stock, and cash in lieu of any fractional shares (such
cash and certificates for shares of Firstar Common Stock, together with
any dividends or distributions with respect thereto, being hereinafter
referred to as the "Exchange Fund"), to be issued pursuant to Section
1.4 and paid pursuant to Section 2.2(a) in exchange for outstanding
shares of Mercantile Common Stock.
2.2 Exchange of Shares. (a) As soon as practicable after the
Effective Time, and in no event later than five business days
thereafter, the Exchange Agent shall mail to each holder of record of
one or more Certificates a letter of transmittal (which shall specify
that
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delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing the shares of
Firstar Common Stock and any cash in lieu of fractional shares into
which the shares of Mercantile Common Stock represented by such
Certificate or Certificates shall have been converted pursuant to this
Agreement. Upon proper surrender of a Certificate or Certificates for
exchange and cancellation to the Exchange Agent, together with such
properly completed letter of transmittal, duly executed, the holder of
such Certificate or Certificates shall be entitled to receive in
exchange therefor, as applicable, (i) a certificate representing that
number of whole shares of Firstar Common Stock to which such holder of
Mercantile Common Stock shall have become entitled pursuant to the
provisions of Article I and (ii) a check representing the amount of any
cash in lieu of fractional shares that such holder has the right to
receive in respect of the Certificate or Certificates surrendered
pursuant to the provisions of this Article II, and the Certificate or
Certificates so surrendered shall forthwith be cancelled. No interest
will be paid or accrued on any cash in lieu of fractional shares or on
any unpaid dividends and distributions payable to holders of
Certificates.
(b) No dividends or other distributions declared with respect to
Firstar Common Stock shall be paid to the holder of any unsurrendered
Certificate until the holder thereof shall surrender such Certificate in
accordance with this Article II. After the surrender of a Certificate in
accordance with this Article II, the record holder thereof shall be
entitled to receive any such dividends or other distributions, without
any interest thereon, that theretofore had become payable with respect
to shares of Firstar Common Stock represented by such Certificate.
(c) If any certificate representing shares of Firstar Common
Stock is to be issued in a name other than that in which the Certificate
or Certificates surrendered in exchange therefor is or are registered,
it shall be a condition of the issuance thereof that the Certificate or
Certificates so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form
for transfer, and that the person requesting such exchange shall pay to
the Exchange Agent in advance any transfer or other taxes required by
reason of the issuance of a certificate representing shares of Firstar
Common Stock in any name other than that of the registered holder of the
Certificate or Certificates surrendered, or required for any other
reason, or shall establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
(d) After the Effective Time, there shall be no transfers on the
stock transfer books of Mercantile of the shares of Mercantile Common
Stock that were issued and outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented
for transfer to the Exchange Agent, they shall be cancelled and
exchanged for certificates representing shares of Firstar Common Stock
as provided in this Article II.
(e) Notwithstanding anything to the contrary contained herein,
no certificates or scrip representing fractional shares of Firstar
Common Stock shall be issued upon the surrender for exchange of
Certificates, no dividend or distribution with respect to Firstar Common
Stock shall be payable on or with respect to any fractional share, and
such fractional share
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interests shall not entitle the owner thereof to vote or to any other
rights of a shareholder of Firstar. In lieu of the issuance of any such
fractional share, Firstar shall pay to each former shareholder of
Mercantile who otherwise would be entitled to receive such fractional
share an amount in cash determined by multiplying (i) the closing-sale
price of Firstar Common Stock on the New York Stock Exchange, Inc. (the
"NYSE") as reported by The Wall Street Journal for the trading day
-----------------------
immediately preceding the date of the Effective Time by (ii) the
fraction of a share (rounded to the nearest thousandth when expressed in
decimal form) of Firstar Common Stock to which such holder would
otherwise be entitled to receive pursuant to Section 1.4.
(f) Any portion of the Exchange Fund that remains unclaimed by
the shareholders of Mercantile for 12 months after the Effective Time
shall be paid to Firstar. Any former shareholders of Mercantile who have
not theretofore complied with this Article II shall thereafter look only
to Firstar for payment of the shares of Firstar Common Stock, cash in
lieu of any fractional shares and any unpaid dividends and distributions
on the Firstar Common Stock deliverable in respect of each share of
Mercantile Common Stock, as the case may be, such shareholder holds as
determined pursuant to this Agreement, in each case, without any
interest thereon. Notwithstanding the foregoing, none of Mercantile,
Firstar, the Exchange Agent or any other person shall be liable to any
former holder of shares of Mercantile Common Stock for any amount
delivered in good faith to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(g) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if
reasonably required by Firstar, the posting by such person of a bond in
such amount as Firstar may determine is reasonably necessary as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will issue in exchange for such
lost, stolen or destroyed Certificate the shares of Firstar Common Stock
and any cash in lieu of fractional shares deliverable in respect thereof
pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FIRSTAR
Except as disclosed in the Firstar disclosure schedule delivered
to Mercantile concurrently herewith (the "Firstar Disclosure Schedule")
Firstar hereby represents and warrants to Mercantile as follows:
3.1 Corporate Organization. (a) Firstar is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Wisconsin. Firstar has the corporate power and authority to own
or lease all of its properties and assets and to carry on its business
as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified would
not, either individually or in the
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aggregate, have a Material Adverse Effect on Firstar. As used in this
Agreement, the term "Material Adverse Effect" means, with respect to
Mercantile, Firstar or the Surviving Corporation, as the case may be, a
material adverse effect on (i) the business, operations, results of
operations or financial condition of such party and its Subsidiaries
taken as a whole or (ii) the ability of such party to timely consummate
the transactions contemplated hereby. As used in this Agreement, the
word "Subsidiary", when used with respect to any party, means any bank,
corporation, partnership, limited liability company, or other
organization, whether incorporated or unincorporated, that is
consolidated with such party for financial reporting purposes. Firstar
is duly registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHC Act").
(b) Each Firstar Subsidiary (i) is duly organized and validly
existing under the laws of its jurisdiction of organization, (ii) is
duly qualified to do business and in good standing in all jurisdictions
(whether federal, state, local or foreign) where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and in which the failure to be so qualified would have a
Material Adverse Effect on Firstar and (iii) has all requisite corporate
power and authority to own or lease its properties and assets and to
carry on its business as now conducted.
3.2 Capitalization. (a) The authorized capital stock of
Firstar consists of (i) 800,000,000 shares of Firstar Common Stock, of
which, as of March 31, 1999, 661,214,244 shares were issued and
outstanding and 2,887,734 shares were held in treasury, (ii) 10,000,000
shares of preferred stock, par value $1.00 per share (the "Firstar
Preferred Stock" and, together with the Firstar Common Stock, the
"Firstar Capital Stock"), of which, as of the date hereof, no shares are
issued and outstanding. All of the issued and outstanding shares of
Firstar Common Stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. As of the date of
this Agreement, except pursuant to the terms of (i) the Firstar Option
Agreement, (ii) options and stock issued pursuant to employee and
director stock plans of Firstar in effect as of the date hereof (the
"Firstar Stock Plans") and (iii) the Firstar Rights Agreement, Firstar
does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character
calling for the purchase or issuance of any shares of Firstar Capital
Stock or any other equity securities of Firstar or any securities
representing the right to purchase or otherwise receive any shares of
Firstar Capital Stock (collectively, including the items contemplated by
clauses (i) through (iii) of this sentence, the "Firstar Rights"). As of
March 31, 1999, no shares of Firstar Capital Stock were reserved for
issuance, except for 65,460,211 shares of Firstar Common Stock reserved
for issuance upon exercise of the Firstar Option Agreement, no shares of
Firstar Common Stock reserved for issuance in connection with the
Firstar Dividend Reinvestment Plan (the "Firstar DRIP"), 25,897,722
shares of Firstar Common Stock reserved for issuance upon the exercise
of stock options pursuant to the Firstar Stock Plans and 2,300,000
shares of Series A Junior Participating Preferred Stock reserved for
issuance in connection with the Firstar Rights Agreement. Since March
31, 1999, Firstar has not issued any shares of its capital stock or any
securities convertible into or exercisable for any shares of its capital
stock, other than as would be permitted by Section 5.2 hereof and
pursuant to the Firstar Option Agreement.
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(b) Firstar owns, directly or indirectly, all of the issued and
outstanding shares of capital stock or other equity ownership interests
of each of the Firstar Subsidiaries, free and clear of any liens,
pledges, charges, encumbrances and security interests whatsoever
("Liens"), and all of such shares or equity ownership interests are duly
authorized and validly issued and are fully paid, nonassessable (subject
to 12 U.S.C. Section 55) and free of preemptive rights, with no personal
liability attaching to the ownership thereof. No Firstar Subsidiary has
or is bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or
issuance of any shares of capital stock or any other equity security of
such Subsidiary or any securities representing the right to purchase or
otherwise receive any shares of capital stock or any other equity
security of such Subsidiary. Section 3.2(b) of the Firstar Disclosure
Schedule sets forth a list of the material investments of Firstar in
corporations, joint ventures, partnerships, limited liability companies
and other entities other than its Subsidiaries (each, a "Non-Subsidiary
Affiliate").
3.3 Authority; No Violation. (a) Firstar has full corporate
power and authority to execute and deliver this Agreement and each of
the Option Agreements and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the
Option Agreements and the consummation of the transactions contemplated
hereby and thereby have been duly and validly approved by the Board of
Directors of Firstar. The Board of Directors of Firstar has directed
that this Agreement and the transactions contemplated hereby be
submitted to Firstar's shareholders for approval at a meeting of such
shareholders and, except for the approval of this Agreement and the
transactions contemplated hereby by the affirmative vote of the holders
of a majority of the outstanding shares of Firstar Common Stock entitled
to vote thereon, no corporate proceedings on the part of Firstar are
necessary to approve this Agreement and the Option Agreements and to
consummate the transactions contemplated hereby and thereby. This
Agreement and each of the Option Agreements have been duly and validly
executed and delivered by Firstar and (assuming due authorization,
execution and delivery by Mercantile) constitute valid and binding
obligations of Firstar, enforceable against Firstar 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).
(b) Neither the execution and delivery of this Agreement and the
Option Agreements by Firstar nor the consummation by Firstar of the
transactions contemplated hereby or thereby, nor compliance by Firstar
with any of the terms or provisions hereof or thereof, will (i) violate
any provision of the Firstar Articles or By-Laws or (ii) assuming that
the consents and approvals referred to in Section 3.4 are duly obtained,
(x) violate any statute, code, ordinance, rule, regulation, judgment,
order, writ, decree or injunction applicable to Firstar, any of its
Subsidiaries or Non-Subsidiary Affiliates or any of their respective
properties or assets or (y) violate, conflict with, result in a breach
of any provision of or the loss of any benefit under, constitute a
default (or an event that, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required
by, or result in the creation of any Lien upon any of the respective
properties or assets of Firstar, any of its Subsidiaries or Non-
Subsidiary Affiliates under, any of the terms, conditions or provisions
of any note, bond, mortgage, inden-
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ture, deed of trust, license, lease, agreement or other instrument or
obligation to which Firstar, any of its Subsidiaries or its Non-
Subsidiary Affiliates is a party, or by which they or any of their
respective properties or assets may be bound or affected, except (in the
case of clause (y) above) for such violations, conflicts, breaches or
defaults that, either individually or in the aggregate, will not have a
Material Adverse Effect on Firstar.
3.4 Consents and Approvals. Except for (i) the filing of
applications and notices, as applicable, with the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") under the BHC
Act and the Federal Reserve Act, as amended, and approval of such
applications and notices, (ii) the filing of any required applications
or notices with any state or foreign agencies and approval of such
applications and notices (the "State Approvals"), (iii) the filing with
the Securities and Exchange Commission (the "SEC") of a joint proxy
statement in definitive form relating to the meetings of Mercantile's
and Firstar's shareholders to be held in connection with this Agreement
and the transactions contemplated hereby (the "Joint Proxy Statement"),
and of the registration statement on Form S-4 (the "S-4") in which the
Joint Proxy Statement will be included as a prospectus, (iv) the filing
of the Wisconsin Articles with the Wisconsin Department pursuant to the
WBCL, (v) the filing of the Missouri Articles with the Missouri
Secretary pursuant to the MBCL, (vi) any consents, authorizations,
approvals, filings or exemptions in connection with compliance with the
applicable provisions of federal and state securities laws relating to
the regulation of broker-dealers, investment advisers or transfer
agents, and federal commodities laws relating to the regulation of
futures commission merchants and the rules and regulations thereunder
and of any applicable industry self-regulatory organization ("SRO"), and
the rules of the NYSE, or that are required under consumer finance,
mortgage banking and other similar laws and (vii) such filings and
approvals as are required to be made or obtained under the securities or
"Blue Sky" laws of various states in connection with the issuance of the
shares of Firstar Common Stock pursuant to this Agreement, no consents
or approvals of or filings or registrations with any court,
administrative agency or commission or other governmental authority or
instrumentality (each a "Governmental Entity") are necessary in
connection with (A) the execution and delivery by Firstar of this
Agreement and the Option Agreements and (B) the consummation by Firstar
of the transactions contemplated hereby and thereby.
3.5 Reports. Firstar and each of its Subsidiaries have timely
filed all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that they were
required to file since January 1, 1997 with (i) the Federal Reserve
Board, (ii) the Federal Deposit Insurance Corporation, (iii) any state
regulatory authority (each a "State Regulator"), (iv) the Office of the
Comptroller of the Currency (the "OCC"), (v) the SEC and (vi) any SRO
(collectively "Regulatory Agencies"), and all other reports and
statements required to be filed by them since January 1, 1997,
including, without limitation, any report or statement required to be
filed pursuant to the laws, rules or regulations of the United States,
any state, or any Regulatory Agency, and have paid all fees and
assessments due and payable in connection therewith, except where the
failure to file such report, registration or statement or to pay such
fees and assessments, either individually or in the aggregate, will not
have a Material Adverse Effect on Firstar. Except for normal
examinations conducted by a Regulatory Agency in the ordinary course of
the business of Firstar and its Subsidiaries, no
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Regulatory Agency has initiated any proceeding or, to the best knowledge
of Firstar, investigation into the business or operations of Firstar or
any of its Subsidiaries since January 1, 1997, except where such
proceedings or investigation will not, either individually or in the
aggregate, have a Material Adverse Effect on Firstar. There is no
unresolved violation, criticism, or exception by any Regulatory Agency
with respect to any report or statement relating to any examinations of
Firstar or any of its Subsidiaries that, in the reasonable judgment of
Firstar, will, either individually or in the aggregate, have a Material
Adverse Effect on Firstar.
3.6 Financial Statements. The consolidated balance sheets of
Firstar and its Subsidiaries as of December 31, for the fiscal years
1997 and 1998, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the fiscal years 1996
through 1998, inclusive, are reported in Firstar's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 (the "Firstar 10-K")
filed with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and are accompanied by the audit report of Arthur
Andersen LLP, independent public accountants with respect to Firstar.
The December 31, 1998 consolidated balance sheet of Firstar (including
the related notes, where applicable) fairly presents in all material
respects the consolidated financial position of Firstar and its
Subsidiaries as of the date thereof, and the other financial statements
referred to in this Section 3.6 (including the related notes, where
applicable) fairly present in all material respects the results of the
consolidated operations and changes in shareholders' equity and
consolidated financial position of Firstar and its Subsidiaries for the
respective fiscal periods or as of the respective dates therein set
forth; each of such statements (including the related notes, where
applicable) complies in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC
with respect thereto; and each of such statements (including the related
notes, where applicable) has been prepared in all material respects in
accordance with GAAP consistently applied during the periods involved,
except, in each case, as indicated in such statements or in the notes
thereto. The books and records of Firstar and its Subsidiaries have
been, and are being, maintained in all material respects in accordance
with GAAP and any other applicable legal and accounting requirements and
reflect only actual transactions.
3.7 Broker's Fees. Except for Credit Suisse First Boston
Corporation, none of Firstar nor any Firstar Subsidiary nor any of their
respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's
fees in connection with the Merger or related transactions contemplated
by this Agreement or the Option Agreements.
3.8 Absence of Certain Changes or Events. (a) Except as
publicly disclosed in Firstar Reports filed prior to the date hereof,
since December 31, 1998, no event or events have occurred that have had,
either individually or in the aggregate, a Material Adverse Effect on
Firstar.
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(b) Except as publicly disclosed in Firstar Reports filed prior
to the date hereof, since December 31, 1998, Firstar and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinary course.
(c) Since December 31, 1998, neither Firstar nor any of its
Subsidiaries has suffered any strike, work stoppage, slowdown, or other
labor disturbance that will, either individually or in the aggregate,
have a Material Adverse Effect on Firstar.
3.9 Legal Proceedings. (a) Neither Firstar nor any of its
Subsidiaries is a party to any, and there are no pending or, to the best
of Firstar's knowledge, threatened, legal, administrative, arbitral or
other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Firstar or any of its Subsidiaries
or challenging the validity or propriety of the transactions
contemplated by this Agreement or the Firstar Option Agreement as to
which, in any such case, there is a reasonable probability of an adverse
determination and that, if adversely determined, will, either
individually or in the aggregate, have a Material Adverse Effect on
Firstar.
(b) There is no injunction, order, judgment, decree, or
regulatory restriction (other than those that apply to similarly
situated bank holding companies or banks) imposed upon Firstar, any of
its Subsidiaries or the assets of Firstar or any of its Subsidiaries
that has had, or will have, either individually or in the aggregate, a
Material Adverse Effect on Firstar or the Surviving Corporation.
3.10 Taxes and Tax Returns. (a) Each of Firstar and its
Subsidiaries has duly filed all federal, state, foreign and local
information returns and tax returns required to be filed by it on or
prior to the date hereof (all such returns being accurate and complete
in all material respects) and has duly paid or made provisions for the
payment of all Taxes and other governmental charges that have been
incurred or are due or claimed to be due from it by federal, state,
foreign or local taxing authorities on or prior to the date of this
Agreement (including, without limitation, if and to the extent
applicable, those due in respect of its properties, income, business,
capital stock, deposits, franchises, licenses, sales and payrolls) other
than (i) Taxes or other charges that are not yet delinquent or are being
contested in good faith and have not been finally determined, or (ii)
information returns, tax returns, Taxes or other governmental charges as
to which the failure to file, pay or make provision for will not, either
individually or in the aggregate, have a Material Adverse Effect on
Firstar. The federal and material state income tax returns of Firstar
and its Subsidiaries have been examined by the Internal Revenue Service
(the "IRS") or the relevant state taxing authorities, as the case may
be, for all years to and including 1993 and any liability with respect
thereto has been satisfied or any liability with respect to deficiencies
asserted as a result of such examination has been reserved against in
accordance with GAAP. To the best of Firstar's knowledge, there are no
material disputes pending, or claims asserted for, Taxes or assessments
upon Firstar or any of its Subsidiaries for which Firstar has not
established reserves in accordance with GAAP. In addition, (A) proper
and accurate amounts have been withheld by Firstar and its Subsidiaries
from their employees for all prior periods in compliance in all material
respects with the tax withholding provisions of applicable federal,
state and local laws, except where failure to do
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so will not, either individually or in the aggregate, have a Material
Adverse Effect on Firstar, (B) federal, state, and local returns that
are accurate and complete in all material respects have been filed by
Firstar and its Subsidiaries for all periods for which returns were due
with respect to income tax withholding, Social Security and unemployment
taxes, except where failure to do so will not, either individually or in
the aggregate, have a Material Adverse Effect on Firstar, (C) the
amounts shown on such federal, state or local returns to be due and
payable have been paid in full or provision therefor has been included
by Firstar in its consolidated financial statements in accordance with
GAAP, except where failure to do so will not, either individually or in
the aggregate, have a Material Adverse Effect on Firstar and (D) there
are no Tax liens upon any property or assets of Firstar or its
Subsidiaries except liens for current Taxes not yet due or liens that
will not, either individually or in the aggregate, have a Material
Adverse Effect on Firstar. Neither Firstar nor any of its Subsidiaries
has been required to include in income any adjustment pursuant to
Section 481 of the Code by reason of a voluntary change in accounting
method initiated by Firstar or any of its Subsidiaries, and the IRS has
not initiated or proposed in writing any such adjustment or change in
accounting method, in either case that has had or will have, either
individually or in the aggregate, a Material Adverse Effect on Firstar.
Except as set forth in the financial statements described in Section 3.6
(including the related notes, where applicable), neither Firstar nor any
of its Subsidiaries has entered into a transaction that is being
accounted for as an installment obligation under Section 453 of the
Code, that will have, either individually or in the aggregate, a
Material Adverse Effect on Firstar.
(b) As used in this Agreement, the term "Tax" or "Taxes" means
all federal, state, local, and foreign income, excise, gross receipts,
gross income, ad valorem, profits, gains, property, capital, sales,
-- -------
transfer, use, payroll, employment, severance, withholding, duties,
intangibles, franchise, backup withholding, and other taxes, charges,
levies or like assessments together with all penalties and additions to
tax and interest thereon.
(c) No deduction has been disallowed under Section 162(m) of the
Code for employee remuneration of any amount paid or payable by Firstar
or any Subsidiary of Firstar under any contract, plan, program,
arrangement or understanding.
3.11 Employee Benefit Plans. (a) The Firstar Disclosure
Schedule sets forth a true and complete list of each material employee
or director benefit, employment or compensation plan, arrangement or
agreement that is maintained, or contributed to, as of the date of this
Agreement (the "Firstar Benefit Plans") by Firstar, any of its
Subsidiaries or by any trade or business, whether or not incorporated (a
"Firstar ERISA Affiliate"), all of which together with Firstar would be
deemed a "single employer" within the meaning of Section 4001 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
(b) Firstar has heretofore made available to Mercantile true and
complete copies of each of the Firstar Benefit Plans and certain related
documents, including, but not limited to, (i) the actuarial report for
such Firstar Benefit Plan (if applicable) for each of the last two years
and (ii) the most recent determination letter from the IRS (if
applicable) for such Firstar Benefit Plan.
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(c) (i) Each of the Firstar Benefit Plans has been operated and
administered in all material respects in compliance with applicable
laws, including, but not limited to, ERISA and the Code, (ii) each of
the Firstar Benefit Plans intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified, and, to the knowledge of
Firstar, there are no existing circumstances or any events that have
occurred that will adversely affect the qualified status of any such
Firstar Benefit Plan, (iii) with respect to each Firstar Benefit Plan
that is subject to Title IV of ERISA, the present value of accrued
benefits under such Firstar Benefit Plan, based upon the actuarial
assumptions used for funding purposes in the most recent actuarial
report prepared by such Firstar Benefit Plan's actuary with respect to
such Firstar Benefit Plan, did not, as of its latest valuation date,
exceed the then-current value of the assets of such Firstar Benefit Plan
allocable to such accrued benefits, (iv) no Firstar Benefit Plan
provides benefits, including, without limitation, death or medical
benefits (whether or not insured), with respect to current or former
employees or directors of Firstar or its Subsidiaries beyond their
retirement or other termination of service, other than (A) coverage
mandated by applicable law, (B) death benefits or retirement benefits
under any "employee pension plan" (as such term is defined in Section
3(2) of ERISA), (C) deferred compensation benefits accrued as
liabilities on the books of Firstar or its Subsidiaries or (D) benefits
the full cost of which is borne by the current or former employee or
director (or his or her beneficiary), (v) no material liability under
Title IV of ERISA has been incurred by Firstar, its Subsidiaries or any
Firstar ERISA Affiliate that has not been satisfied in full, and no
condition exists that presents a material risk to Firstar, its
Subsidiaries or any Firstar ERISA Affiliate of incurring a material
liability thereunder, (vi) no Firstar Benefit Plan is a "multiemployer
pension plan" (as such term is defined in Section 3(37) of ERISA), (vii)
all contributions or other amounts payable by Firstar or its
Subsidiaries as of the Effective Time with respect to each Firstar
Benefit Plan in respect of current or prior plan years have been paid or
accrued in accordance with GAAP and Section 412 of the Code, (viii) none
of Firstar, its Subsidiaries or any other person, including any
fiduciary, has engaged in a transaction in connection with which
Firstar, its Subsidiaries or any Firstar Benefit Plan will be subject to
either a material civil penalty assessed pursuant to Section 409 or
502(i) of ERISA or a material tax imposed pursuant to Section 4975 or
4976 of the Code, and (ix) to the best knowledge of Firstar there are no
pending, threatened or anticipated claims (other than routine claims for
benefits) by, on behalf of or against any of the Firstar Benefit Plans
or any trusts related thereto that will have, either individually or in
the aggregate, a Material Adverse Effect on Firstar.
(d) Neither the execution and delivery of this Agreement nor the
shareholder approval or consummation of the transactions contemplated
hereby will (either alone or in conjunction with any other event)
(i) result (either alone or upon the occurrence of any additional acts
or events) in any payment (including, without limitation, severance,
unemployment compensation, "excess parachute payment" (within the
meaning of Section 280G of the Code), forgiveness of indebtedness or
otherwise) becoming due to any director or any employee of Firstar or
any of its affiliates from Firstar or any of its affiliates under any
Firstar Benefit Plan or otherwise, (ii) increase or affect the
calculation of the amount of any benefits otherwise payable under any
Firstar Benefit Plan or (iii) result in any acceleration of the time of
payment or vesting of any such benefits.
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3.12 SEC Reports. No (a) final registration statement,
prospectus, report, schedule and definitive proxy statement filed since
January 1, 1997 by Firstar with the SEC pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), or the Exchange Act (the
"Firstar Reports") and prior to the date hereof or (b) communication
mailed by Firstar to its shareholders since January 1, 1997 and prior to
the date hereof, as of the date thereof, contained any untrue statement
of a material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein, in
light of the circumstances in which they were made, not misleading,
except that information as of a later date (but before the date hereof)
shall be deemed to modify information as of an earlier date. Since
January 1, 1997, as of their respective dates, all Firstar Reports filed
under the Securities Act and the Exchange Act complied in all material
respects with the published rules and regulations of the SEC with
respect thereto.
3.13 Compliance with Applicable Law. (a) Firstar and each of
its Subsidiaries hold all material licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective
businesses under and pursuant to each, and have complied in all material
respects with and are not in default in any material respect under any,
applicable law, statute, order, rule, regulation, policy and/or
guideline of any Governmental Entity relating to Firstar or any of its
Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default will not,
either individually or in the aggregate, have a Material Adverse Effect
on Firstar.
(b) Except as will not have, either individually or in the
aggregate, a Material Adverse Effect on Firstar, Firstar and each
Firstar Subsidiary have properly administered all accounts for which it
acts as a fiduciary, including 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, applicable state and federal law and regulation and
common law. None of Firstar, any Firstar Subsidiary, or any director,
officer or employee of Firstar or of any Firstar Subsidiary, has
committed any breach of trust with respect to any such fiduciary account
that will have a Material Adverse Effect on Firstar, 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.
3.14 Certain Contracts. (a) Neither Firstar nor any of its
Subsidiaries is a party to or bound by any contract, arrangement,
commitment or understanding (whether written or oral) (i) with respect
to the employment of any directors, officers or employees, other than in
the ordinary course of business consistent with past practice, (ii) that
is a "material contract" (as such term is defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this
Agreement that has not been filed or incorporated by reference in the
Firstar Reports, (iii) that materially restricts the conduct of any line
of business by Firstar or upon consummation of the Merger will
materially restrict the ability of the Surviving Corporation to engage
in any line of business in which a bank holding company may lawfully
engage or (iv) with or to a labor union or guild (including any
collective bargaining agreement). Firstar has previously made available
to Mercantile true and correct copies of all employment and deferred
compensation agreements that are in writing and to which Firstar is a
party. Each
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contract, arrangement, commitment or understanding of the type described
in this Section 3.14(a) and in Section 3.11(a), whether or not set forth
in the Firstar Disclosure Schedule, is referred to herein as a "Firstar
Contract", and neither Firstar nor any of its Subsidiaries knows of, or
has received notice of, any violation of the above by any of the other
parties thereto that, either individually or in the aggregate, will have
a Material Adverse Effect on Firstar.
(b) (i) Each Firstar Contract is valid and binding on Firstar
or any of its Subsidiaries, as applicable, and in full force and effect,
(ii) Firstar and each of its Subsidiaries has in all material respects
performed all obligations required to be performed by it to date under
each Firstar Contract, except where such noncompliance, either
individually or in the aggregate, will not have a Material Adverse
Effect on Firstar, and (iii) no event or condition exists that
constitutes or, after notice or lapse of time or both, will constitute,
a material default on the part of Firstar or any of its Subsidiaries
under any such Firstar Contract, except where such default, either
individually or in the aggregate, will not have a Material Adverse
Effect on Firstar.
3.15 Agreements with Regulatory Agencies. Neither Firstar nor
any of its Subsidiaries is subject to any cease-and-desist or other
order issued by, or is a party to any written agreement, consent
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 has been since January 1, 1997, a recipient of any
supervisory letter from, or since January 1, 1997, has adopted any board
resolutions at the request of any Regulatory Agency or other
Governmental Entity that currently restricts in any material respect the
conduct of its business or that in any material manner relates to its
capital adequacy, its credit policies, its management or its business
(each, whether or not set forth in the Firstar Disclosure Schedule, a
"Firstar Regulatory Agreement"), nor has Firstar or any of its
Subsidiaries been advised since January 1, 1997, by any Regulatory
Agency or other Governmental Entity that it is considering issuing or
requesting any such Regulatory Agreement.
3.16 Interest Rate Risk Management Instruments. All derivative
instruments, as such term is used in Statement of Financial Accounting
Standards No. 133 (including, without limitation, interest rate swaps,
caps, floors and option agreements and other interest rate risk
management arrangements) ("Derivative Instruments"), to which Firstar or
any of its Subsidiaries is a party, whether entered into for the account
of Firstar or for the account of a customer of Firstar or one of its
Subsidiaries, were entered into in the ordinary course of business and,
to Firstar's knowledge, in accordance with prudent banking practice and
applicable rules, regulations and policies of any Regulatory Authority
and with counterparties believed to be financially responsible at the
time and are legal, valid and binding obligations of Firstar or one of
its Subsidiaries 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.
Firstar and each of its Subsidiaries have duly performed in all material
respects all of their material obligations thereunder to the extent that
such obligations to perform have accrued; and, to Firstar's knowledge,
there are no material breaches, violations or defaults or allegations or
assertions of such by any party thereunder.
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3.17 Undisclosed Liabilities. Except for those liabilities that
are fully reflected or reserved against on the consolidated balance
sheet of Firstar included in the Firstar December 31, 1998 Form 10-K and
for liabilities incurred in the ordinary course of business consistent
with past practice, since December 31, 1998, neither Firstar nor any of
its Subsidiaries has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or
to become due) that, either individually or in the aggregate, has had or
will have a Material Adverse Effect on Firstar.
3.18 Insurance. Firstar and its Subsidiaries have in effect
insurance coverage with reputable insurers or are self-insured, that in
respect of amounts, premiums, types and risks insured, constitutes
reasonably adequate coverage against all risks customarily insured
against by bank holding companies and their subsidiaries comparable in
size and operations to Firstar and its Subsidiaries.
3.19 Environmental Liability. There are no legal,
administrative, arbitral or other proceedings, claims, actions, causes
of action, private environmental investigations or remediation
activities or governmental investigations of any nature seeking to
impose, or that could reasonably result in the imposition, on Firstar of
any liability or obligation arising under common law or under any local,
state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), pending
or threatened against Firstar, which liability or obligation will,
either individually or in the aggregate, have a Material Adverse Effect
on Firstar. To the knowledge of Firstar, there is no reasonable basis
for any such proceeding, claim, action or governmental investigation
that would impose any liability or obligation that will, individually or
in the aggregate, have a Material Adverse Effect on Firstar. Firstar is
not subject to any agreement, order, judgment, decree, letter or
memorandum by or with any Governmental Entity, regulatory agency or
third party imposing any liability or obligation with respect to the
foregoing that will have, either individually or in the aggregate, a
Material Adverse Effect on Firstar.
3.20 Charter Provisions; State Takeover Laws; Firstar Rights
Agreement. (a) The provisions of Section 1131 of the WBCL are not
applicable to this Agreement, the Firstar Option Agreement or the
transactions contemplated hereby or thereby. The Board of Directors of
Firstar has approved the transactions contemplated by this Agreement and
the Firstar Option Agreement for purposes of Article V of the Firstar
Articles and Section 1141 of the WBCL such that the provisions of such
Article V and such Section 1141 will not apply to this Agreement or
Firstar Option Agreement or any of the transactions contemplated hereby
or thereby.
(b) Firstar has taken all action, if any, necessary or
appropriate so that the entering into of this Agreement and the Firstar
Option Agreement, and the consummation of the transactions contemplated
hereby and thereby, do not and will not result in the ability of any
person to exercise any Firstar Shareholder Rights under the Firstar
Rights Agreement or enable or require the Firstar Shareholder Rights to
separate from the shares of Firstar Common Stock to which they are
attached or to be triggered or become exercisable. No "Distribution
Date" or "Shares Acquisition Date" (as such terms are defined in the
Firstar Rights Plan) has occurred.
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3.21 Year 2000. None of Firstar or any of the Firstar
Subsidiaries has received, or reasonably expects to receive, a "Year
2000 Deficiency Notification Letter" (as such term is employed in the
Federal Reserve Board's Supervision and Regulation Letter No.
SR 98-3(SUP), dated March 4, 1998). Firstar has made available to
Mercantile a complete and accurate copy of Firstar's plan, including an
estimate of the anticipated associated costs, for addressing the issues
("Year 2000 Issues") set forth in the interagency statements of the
Federal Financial Institutions Examination Council addressed to the
boards of directors and chief executive officers of all federally
supervised financial institutions regarding Year 2000 safety and soundness
for insured depository institutions. Between the date of this Agreement
and the Effective Time, Firstar shall use reasonable best efforts to
implement such plan. Firstar and its Subsidiaries has complied in all
material respects with the "Interagency Guidelines Establishing Year
2000 Standards for Safety and Soundness" issued pursuant to section 39
of the Federal Deposit Insurance Act and effective October 15, 1998.
3.22 Reorganization; Pooling of Interests. As of the date of
this Agreement, Firstar has no reason to believe that the Merger will
not qualify as a "reorganization" within the meaning of Section 368(a)
of the Code and as a "pooling of interests" for accounting purposes.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF MERCANTILE
Except as disclosed in the Mercantile disclosure schedule
delivered to Firstar concurrently herewith (the "Mercantile Disclosure
Schedule") Mercantile hereby represents and warrants to Firstar as
follows:
4.1 Corporate Organization. (a) Mercantile is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Missouri. Mercantile has the corporate power and authority
to own or lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or qualified
to do business in each jurisdiction in which the nature of the business
conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification
necessary, except where the failure to be so licensed or qualified would
not, either individually or in the aggregate, have a Material Adverse
Effect on Mercantile. Mercantile is duly registered as a bank holding
company under the BHC Act. True and complete copies of the Articles of
Incorporation of Mercantile (the "Mercantile Articles") and By-Laws of
Mercantile, as in effect as of the date of this Agreement, have
previously been made available by Mercantile to Firstar.
(b) Each Mercantile Subsidiary (i) is duly organized and validly
existing under the laws of its jurisdiction of organization, (ii) is
duly qualified to do business and in good standing in all jurisdictions
(whether Federal, state, local or foreign) where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and in which the failure
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to be so qualified would have a Material Adverse Effect on Mercantile,
and (iii) has all requisite corporate power and authority to own or
lease its properties and assets and to carry on its business as now
conducted.
4.2 Capitalization. (a) The authorized capital stock of
Mercantile consists of 400,000,000 shares of Mercantile Common Stock, of
which, as of March 31, 1999, 157,868,547 shares were issued and
outstanding, and 5,000,000 shares of preferred stock, no par value
("Mercantile Preferred Stock" and, together with the Mercantile Common
Stock, the "Mercantile Capital Stock"), of which none is issued and
outstanding as of the date hereof. As of March 31, 1999, 47,363 shares
of Mercantile Common Stock were held in Mercantile's treasury. As of the
date hereof, no shares of Mercantile Common Stock or Mercantile
Preferred Stock were reserved for issuance, except for (i) the shares of
Mercantile Common Stock issuable pursuant to the Mercantile Option
Agreement, (ii) 11,074,528 shares reserved for issuance pursuant to
employee and director stock plans of Mercantile in effect as of the date
hereof (the "Mercantile Stock Plans"), (iii) 2,000,000 shares reserved
for issuance pursuant to the Mercantile Shareholder Investment Plan (the
"Mercantile DRIP") and (iv) 2,000,000 shares of Series B Junior
Participating Preferred Stock reserved for issuance pursuant to the
Mercantile Rights Agreement. All of the issued and outstanding shares of
Mercantile Capital Stock have been duly authorized and validly issued
and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof. As of the date of
this Agreement, except for the Mercantile Option Agreement, the
Mercantile Stock Plans and as contemplated by the Mercantile Rights
Agreement, Mercantile does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of
any character calling for the purchase or issuance of any shares of
Mercantile Capital Stock or any other equity securities of Mercantile or
any securities representing the right to purchase or otherwise receive
any shares of Mercantile Capital Stock (collectively, "Mercantile
Rights"). Since March 31, 1999, Mercantile has not issued any shares of
its capital stock or any securities convertible into or exercisable for
any shares of its capital stock, other than as permitted by Section
5.2(b) and pursuant to (A) the exercise of employee stock options
granted prior to such date, (B) the Mercantile DRIP and (C) pursuant to
the Mercantile Option Agreement. Mercantile shall terminate or suspend
the Mercantile DRIP prior to the next record date to be declared
following the date hereof with respect to the quarterly dividend payable
on shares of Mercantile Common Stock (currently anticipated to be on or
about June 10, 1999) such that no shares of Mercantile Capital Stock
shall thereafter be issued or become issuable pursuant thereto (the date
of such termination or suspension, the "DRIP Suspension Date").
Mercantile has previously provided Firstar with a list of the option
holders, the date of each option to purchase Mercantile Common Stock
granted, the number of shares subject to each such option, the
expiration date of each such option and the price at which each such
option may be exercised under an applicable Mercantile Stock Plan.
(b) Mercantile owns, directly or indirectly, all of the issued
and outstanding shares of capital stock or other equity ownership
interests of each of the Mercantile Subsidiaries, free and clear of any
Liens, and all of such shares or equity ownership interests are duly
authorized and validly issued and are fully paid, nonassessable (subject
to 12 U.S.C. Section 55) and free of preemptive rights, with no personal
liability attaching to the ownership thereof. No Mercantile
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Subsidiary has or is bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of capital stock or any other
equity security of such Subsidiary or any securities representing the
right to purchase or otherwise receive any shares of capital stock or
any other equity security of such Subsidiary. Section 4.2(b) of the
Mercantile Disclosure Schedule sets forth a list of the material
investments of Mercantile in Non-Subsidiary Affiliates.
4.3 Authority; No Violation. (a) Mercantile has full corporate
power and authority to execute and deliver this Agreement and each of
the Option Agreements and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and
each of the Option Agreements and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by
the Board of Directors of Mercantile. The Board of Directors of
Mercantile has directed that this Agreement and the transactions
contemplated hereby be submitted to Mercantile's shareholders for
adoption at a meeting of such shareholders and, except for the adoption
of this Agreement by the affirmative vote of the holders of two-thirds
of the outstanding shares of Mercantile Common Stock entitled to vote
thereon, no other corporate proceedings on the part of Mercantile are
necessary to approve this Agreement and the Option Agreements and to
consummate the transactions contemplated hereby and thereby. This
Agreement and each of the Option Agreements have been duly and validly
executed and delivered by Mercantile and (assuming due authorization,
execution and delivery by Firstar) constitute valid and binding
obligations of Mercantile, enforceable against Mercantile 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).
(b) Neither the execution and delivery of this Agreement or the
Option Agreements by Mercantile, nor the consummation by Mercantile of
the transactions contemplated hereby or thereby, nor compliance by
Mercantile with any of the terms or provisions hereof or thereof, will
(i) violate any provision of the Mercantile Articles or By-Laws, or (ii)
assuming that the consents and approvals referred to in Section 4.4 are
duly obtained, (x) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to
Mercantile, any of its Subsidiaries or Non-Subsidiary Affiliates or any
of their respective properties or assets or (y) violate, conflict with,
result in a breach of any provision of or the loss of any benefit under,
constitute a default (or an event that, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or
a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any Lien upon any of the
respective properties or assets of Mercantile, any of its Subsidiaries
or its Non-Subsidiary Affiliates under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which
Mercantile, any of its Subsidiaries or Non-Subsidiary Affiliates is a
party, or by which they or any of their respective properties or assets
may be bound or affected, except (in the case of clause (y) above) for
such violations, conflicts, breaches or defaults that either
individually or in the aggregate will not have a Material Adverse Effect
on Mercantile.
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4.4 Consents and Approvals. Except for (i) the filing of
applications and notices, as applicable, with the Federal Reserve Board
under the BHC Act and the Federal Reserve Act, as amended, and approval
of such applications and notices, (ii) the State Approvals, (iii) the
filing with the SEC of the Joint Proxy Statement and the S-4, (iv) the
filing of the Wisconsin Articles with the Wisconsin Department pursuant
to the WBCL, (v) the filing of the Missouri Articles with the Missouri
Secretary pursuant to the MBCL, (vi) any consents, authorizations,
approvals, filings or exemptions in connection with compliance with the
applicable provisions of federal and state securities laws relating to
the regulation of broker-dealers, investment advisers or transfer
agents, and federal commodities laws relating to the regulation of
futures commission merchants and the rules and regulations thereunder
and of any applicable SRO, and the rules of the NYSE, or that are
required under consumer finance, mortgage banking and other similar laws
and (vii) such filings and approvals as are required to be made or
obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of shares of Firstar Capital Stock pursuant
to this Agreement, no consents or approvals of or filings or
registrations with any Governmental Entity are necessary in connection
with (A) the execution and delivery by Mercantile of this Agreement and
the Option Agreements and (B) the consummation by Mercantile of the
transactions contemplated hereby or thereby.
4.5 Reports. Mercantile and each of its Subsidiaries have
timely filed all reports, registrations and statements, together with
any amendments required to be made with respect thereto, that they were
required to file since January 1, 1997 with the Regulatory Agencies, and
all other reports and statements required to be filed by them since
January 1, 1997, including, without limitation, any report or statement
required to be filed pursuant to the laws, rules or regulations of the
United States, any state, or any Regulatory Agency, and have paid all
fees and assessments due and payable in connection therewith, except
where the failure to file such report, registration or statement or to
pay such fees and assessments, either individually or in the aggregate,
will not have a Material Adverse Effect on Mercantile. Except for normal
examinations conducted by a Regulatory Agency in the ordinary course of
the business of Mercantile and its Subsidiaries, no Regulatory Agency
has initiated any proceeding or, to the best knowledge of Mercantile,
investigation into the business or operations of Mercantile or any of
its Subsidiaries since January 1, 1997, except where such proceedings or
investigation will not have, either individually or in the aggregate, a
Material Adverse Effect on Mercantile. There is no unresolved violation,
criticism, or exception by any Regulatory Agency with respect to any
report or statement relating to any examinations of Mercantile or any of
its Subsidiaries that, in the reasonable judgment of Mercantile, will
have, either individually or in the aggregate, a Material Adverse Effect
on Mercantile.
4.6 Financial Statements. Mercantile has previously made
available to Firstar copies of the consolidated balance sheets of
Mercantile and its Subsidiaries as of December 31, for the fiscal years
1997 and 1998, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the fiscal years 1996
through 1998, inclusive, as reported in Mercantile's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 filed with the SEC
under the Exchange Act (the "Mercantile 10-K"), in each case accompanied
by the audit report of KPMG LLP, independent public accountants with
respect to Mercantile. The December 31, 1998 consolidated balance sheet
of Mercantile (including the
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related notes, where applicable) fairly presents in all material
respects the consolidated financial position of Mercantile and its
Subsidiaries as of the date thereof, and the other financial statements
referred to in this Section 4.6 (including the related notes, where
applicable) fairly present in all material respects the results of the
consolidated operations and changes in shareholders' equity and
consolidated financial position of Mercantile and its Subsidiaries for
the respective fiscal periods or as of the respective dates therein set
forth; each of such statements (including the related notes, where
applicable) complies in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC
with respect thereto; and each of such statements (including the related
notes, where applicable) has been prepared in all material respects in
accordance with GAAP consistently applied during the periods involved,
except, in each case, as indicated in such statements or in the notes
thereto. The books and records of Mercantile and its Subsidiaries have
been, and are being, maintained in all material respects in accordance
with GAAP and any other applicable legal and accounting requirements and
reflect only actual transactions.
4.7 Broker's Fees. Except for Donaldson, Lufkin & Jenrette and
Morgan Stanley & Co. Incorporated, none of Mercantile nor any Mercantile
Subsidiary nor any of their respective officers or directors has
employed any broker or finder or incurred any liability for any broker's
fees, commissions or finder's fees in connection with the Merger or
related transactions contemplated by this Agreement or the Option
Agreements.
4.8 Absence of Certain Changes or Events. (a) Except as
publicly disclosed in Mercantile Reports filed prior to the date hereof,
since December 31, 1998, no event or events have occurred that has had,
individually or in the aggregate, a Material Adverse Effect on
Mercantile.
(b) Except as publicly disclosed in Mercantile Reports filed
prior to the date hereof, since December 31, 1998, Mercantile and its
Subsidiaries have carried on their respective businesses in all material
respects in the ordinary course.
(c) Since December 31, 1998, neither Mercantile nor any of its
Subsidiaries has (i) except for such actions as are in the ordinary
course of business or except as required by applicable law, (A)
increased the wages, salaries, compensation, pension, or other fringe
benefits or perquisites payable to any executive officer, employee, or
director from the amount thereof in effect as of December 31, 1998, or
(B) granted any severance or termination pay, entered into any contract
to make or grant any severance or termination pay, or paid any bonuses,
that in the aggregate exceed 5% of Mercantile's 1998 salary and employee
benefit expenses (other than customary year-end bonuses for fiscal 1998
and, if applicable, 1999) or (ii) suffered any strike, work stoppage,
slowdown, or other labor disturbance that will have, either individually
or in the aggregate, a Material Adverse Effect on Mercantile.
4.9 Legal Proceedings. (a) Neither Mercantile nor any of its
Subsidiaries is a party to any, and there are no pending or, to the best
of Mercantile's knowledge, threatened, legal, administrative, arbitral
or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Mercantile or any of its
Subsidiaries or challenging
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the validity or propriety of the transactions contemplated by this
Agreement or the Mercantile Option Agreement as to which, in any such
case, there is a reasonable probability of an adverse determination and
that, if adversely determined, will have, either individually or in the
aggregate, a Material Adverse Effect on Mercantile.
(b) There is no injunction, order, judgment, decree, or
regulatory restriction (other than those that apply to similarly
situated bank holding companies or banks) imposed upon Mercantile, any
of its Subsidiaries or the assets of Mercantile or any of its
Subsidiaries that has had or will have, either individually or in the
aggregate, a Material Adverse Effect on Mercantile or the Surviving
Corporation.
4.10 Taxes and Tax Returns. (a) Each of Mercantile and its
Subsidiaries has duly filed all federal, state, foreign and local
information returns and tax returns required to be filed by it on or
prior to the date hereof (all such returns being accurate and complete
in all material respects) and has duly paid or made provisions for the
payment of all Taxes and other governmental charges that have been
incurred or are due or claimed to be due from it by federal, state,
foreign or local taxing authorities on or prior to the date of this
Agreement (including, without limitation, if and to the extent
applicable, those due in respect of its properties, income, business,
capital stock, deposits, franchises, licenses, sales and payrolls) other
than (i) Taxes or other charges that are not yet delinquent or are being
contested in good faith and have not been finally determined, or (ii)
information returns, tax returns, Taxes or other governmental charges as
to which the failure to file, pay or make provision for will not have,
either individually or in the aggregate, a Material Adverse Effect on
Mercantile. The federal and material state income tax returns of
Mercantile and its Subsidiaries have been examined by the IRS or the
relevant state taxing authorities, as the case may be, through 1994 and
any liability with respect thereto has been satisfied or any liability
with respect to deficiencies asserted as a result of such examination
has been reserved against in accordance with GAAP. To the best of
Mercantile's knowledge, there are no material disputes pending, or
claims asserted for, Taxes or assessments upon Mercantile or any of its
Subsidiaries for which Mercantile has not established reserves in
accordance with GAAP. In addition, (A) proper and accurate amounts have
been withheld by Mercantile and its Subsidiaries from their employees
for all prior periods in compliance in all material respects with the
tax withholding provisions of applicable federal, state and local laws,
except where failure to do so will not, either individually or in the
aggregate, have a Material Adverse Effect on Mercantile, (B) federal,
state and local returns that are accurate and complete in all material
respects have been filed by Mercantile and its Subsidiaries for all
periods for which returns were due with respect to income tax
withholding, Social Security and unemployment taxes, except where
failure to do so will not, either individually or in the aggregate, have
a Material Adverse Effect on Mercantile, (C) the amounts shown on such
federal, state or local returns to be due and payable have been paid in
full or provision therefor has been included by Mercantile in its
consolidated financial statements in accordance with GAAP, except where
failure to do so will not, individually or in the aggregate, have a
Material Adverse Effect on Mercantile and (D) there are no Tax liens
upon any property or assets of Mercantile or its Subsidiaries except
liens for current Taxes not yet due or liens that will not have, either
individually or in the aggregate, a Material Adverse Effect on
Mercantile. Neither Mercantile nor any of its Subsidiaries has been
required to in-
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clude in income any adjustment pursuant to Section 481 of the Code by
reason of a voluntary change in accounting method initiated by
Mercantile or any of its Subsidiaries, and the IRS has not initiated or
proposed in writing any such adjustment or change in accounting method,
in either case, that has had or will have, either individually or in the
aggregate, a Material Adverse Effect on Mercantile. Except as set forth
in the financial statements described in Section 4.6 (including the
related notes, where applicable), neither Mercantile nor any of its
Subsidiaries has entered into a transaction that is being accounted for
as an installment obligation under Section 453 of the Code, that will
have, either individually or in the aggregate, a Material Adverse Effect
on Mercantile.
(b) No deduction has been disallowed under Section 162(m) of the
Code for employee remuneration of any amount paid or payable by
Mercantile or any Subsidiary of Mercantile under any contract, plan,
program, arrangement or understanding.
4.11 Employee Benefit Plans. (a) The Mercantile Disclosure
Schedule sets forth a true and complete list of each material employee
benefit, employment or compensation plan, arrangement or agreement that
is maintained, or contributed to, as of the date of this Agreement (the
"Mercantile Benefit Plans") by Mercantile, any of its Subsidiaries or by
any trade or business, whether or not incorporated (a "Mercantile ERISA
Affiliate"), all of which together with Mercantile would be deemed a
"single employer" within the meaning of Section 4001 of ERISA.
(b) Mercantile has heretofore made available to Firstar true and
complete copies of each of the Mercantile Benefit Plans and certain
related documents, including, but not limited to, (i) the actuarial
report for such Mercantile Benefit Plan (if applicable) for the plan
year ended December 31, 1998, and (ii) the most recent determination
letter from the IRS (if applicable) for such Mercantile Benefit Plan.
(c) (i) Each of the Mercantile Benefit Plans has been operated
and administered in all material respects in compliance with applicable
laws, including, but not limited to, ERISA and the Code, (ii) each of
the Mercantile Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified, and, to the
knowledge of Mercantile, there are no existing circumstances or any
events that have occurred that will adversely affect the qualified
status of any such Mercantile Benefit Plan, (iii) with respect to each
Mercantile Benefit Plan that is subject to Title IV of ERISA, the
present value of accrued benefits under such Mercantile Benefit Plan,
based upon the actuarial assumptions used for funding purposes in the
most recent actuarial report prepared by such Mercantile Benefit Plan's
actuary with respect to such Mercantile Benefit Plan, did not, as of its
latest valuation date, exceed the then current value of the assets of
such Mercantile Benefit Plan allocable to such accrued benefits, (iv) no
Mercantile Benefit Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured), with
respect to current or former employees or directors of Mercantile or its
Subsidiaries beyond their retirement or other termination of service,
other than (A) coverage mandated by applicable law, (B) death benefits
or retirement benefits under any "employee pension plan" (as such term
is defined in Section 3(2) of ERISA), (C) deferred compensation benefits
accrued as liabilities on the books of Mercantile or its Subsidiaries or
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(D) benefits the full cost of which is borne by the current or former
employee or director (or his beneficiary), (v) no material liability
under Title IV of ERISA has been incurred by Mercantile, its
Subsidiaries or any Mercantile ERISA Affiliate that has not been
satisfied in full, and no condition exists that presents a material risk
to Mercantile, its Subsidiaries or any Mercantile ERISA Affiliate of
incurring a material liability thereunder, (vi) no Mercantile Benefit
Plan is a "multiemployer pension plan" (as such term is defined in
Section 3(37) of ERISA), (vii) all contributions or other amounts
payable by Mercantile or its Subsidiaries as of the Effective Time with
respect to each Mercantile Benefit Plan in respect of current or prior
plan years have been paid or accrued in accordance with GAAP and Section
412 of the Code, (viii) none of Mercantile, its Subsidiaries or any
other person, including any fiduciary, has engaged in a transaction in
connection with which Mercantile, its Subsidiaries or any Mercantile
Benefit Plan will be subject to either a material civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a material tax imposed
pursuant to Section 4975 or 4976 of the Code, and (ix) to the best
knowledge of Mercantile there are no pending, threatened or anticipated
claims (other than routine claims for benefits) by, on behalf of or
against any of the Mercantile Benefit Plans or any trusts related
thereto that will have, either individually or in the aggregate, a
Material Adverse Effect on Mercantile.
(d) Neither the execution and delivery of this Agreement nor the
shareholder approval or consummation of the transactions contemplated
hereby will (either alone or in conjunction with any other event)
(i) result (either alone or upon the occurrence of any additional acts
or events) in any payment (including, without limitation, severance,
unemployment compensation, "excess parachute payment" (within the
meaning of Section 280G of the Code), forgiveness of indebtedness or
otherwise) becoming due to any director or any employee of Mercantile or
any of its affiliates from Mercantile or any of its affiliates under any
Mercantile Benefit Plan or otherwise, (ii) increase or affect the
calculation of the amount of any benefits otherwise payable under any
Mercantile Benefit Plan or (iii) result in any acceleration of the time
of payment or vesting of any such benefits.
4.12 SEC Reports. Mercantile has previously made available to
Firstar an accurate and complete copy of each (a) final registration
statement, prospectus, report, schedule and definitive proxy statement
filed since January 1, 1997 by Mercantile with the SEC pursuant to the
Securities Act or the Exchange Act (the "Mercantile Reports") and prior
to the date hereof and (b) communication mailed by Mercantile to its
shareholders since January 1, 1997 and prior to the date hereof, and no
such Mercantile Report or communication, as of the date thereof,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances in which they
were made, not misleading, except that information as of a later date
(but before the date hereof) shall be deemed to modify information as of
an earlier date. Since January 1, 1997, as of their respective dates,
all Mercantile Reports filed under the Securities Act and the Exchange
Act complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
4.13 Compliance with Applicable Law. (a) Mercantile and each of
its Subsidiaries hold all material licenses, franchises, permits and
authorizations necessary for the lawful con-
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duct of their respective businesses under and pursuant to each, and have
complied in all material respects with and are not in default in any
material respect under any, applicable law, statute, order, rule,
regulation, policy and/or guideline of any Governmental Entity relating
to Mercantile or any of its Subsidiaries, except where the failure to
hold such license, franchise, permit or authorization or such
noncompliance or default will not, either individually or in the
aggregate, have a Material Adverse Effect on Mercantile.
(b) Except as will not have, either individually or in the
aggregate, a Material Adverse Effect on Mercantile, Mercantile and each
Mercantile Subsidiary have properly administered all accounts for which
it acts as a fiduciary, including 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, applicable state and federal law and regulation and
common law. None of Mercantile, any Mercantile Subsidiary, or any
director, officer or employee of Mercantile or of any Mercantile
Subsidiary, has committed any breach of trust with respect to any such
fiduciary account that will have a Material Adverse Effect on
Mercantile, 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.
4.14 Certain Contracts. (a) Neither Mercantile nor any of its
Subsidiaries is a party to or bound by any contract, arrangement,
commitment or understanding (whether written or oral) (i) with respect
to the employment of any directors, officers or employees other than in
the ordinary course of business consistent with past practice, (ii) that
is a "material contract" (as such term is defined in Item 601(b)(10) of
Regulation S-K of the SEC) to be performed after the date of this
Agreement that has not been filed or incorporated by reference in the
Mercantile Reports, (iii) that materially restricts the conduct of any
line of business by Mercantile or upon consummation of the Merger will
materially restrict the ability of the Surviving Corporation to engage
in any line of business in which a bank holding company may lawfully
engage or (iv) with or to a labor union or guild (including any
collective bargaining agreement). Mercantile has previously made
available to Firstar true and correct copies of all employment and
deferred compensation agreements that are in writing and to which
Mercantile is a party. Each contract, arrangement, commitment or
understanding of the type described in this Section 4.14(a) and in
Section 4.11(a), whether or not set forth in the Mercantile Disclosure
Schedule, is referred to herein as a "Mercantile Contract", and neither
Mercantile nor any of its Subsidiaries knows of, or has received notice
of, any violation of the above by any of the other parties thereto that
will have, individually or in the aggregate, a Material Adverse Effect
on Mercantile.
(b) (i) Each Mercantile Contract is valid and binding on
Mercantile or any of its Subsidiaries, as applicable, and in full force
and effect, (ii) Mercantile and each of its Subsidiaries has in all
material respects performed all obligations required to be performed by
it to date under each Mercantile Contract, except where such
noncompliance, either individually or in the aggregate, will not have a
Material Adverse Effect on Mercantile, and (iii) no event or condition
exists that constitutes or, after notice or lapse of time or both, will
constitute, a material default on the part of Mercantile or any of its
Subsidiaries under any such Mercantile
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Contract, except where such default, either individually or in the
aggregate, will not have a Material Adverse Effect on Mercantile.
4.15 Agreements with Regulatory Agencies. Neither Mercantile nor
any of its Subsidiaries is subject to any cease-and-desist or other
order issued by, or is a party to any written agreement, consent
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 has been since January 1, 1997, a recipient of any
supervisory letter from, or since January 1, 1997, has adopted any board
resolutions at the request of any Regulatory Agency or other
Governmental Entity that currently restricts in any material respect the
conduct of its business or that in any material manner relates to its
capital adequacy, its credit policies, its management or its business
(each, whether or not set forth in the Mercantile Disclosure Schedule, a
"Mercantile Regulatory Agreement"), nor has Mercantile or any of its
Subsidiaries been advised since January 1, 1997, by any Regulatory
Agency or other Governmental Entity that it is considering issuing or
requesting any such Regulatory Agreement.
4.16 Interest Rate Risk Management Instruments. All Derivative
Instruments to which Mercantile or any of its Subsidiaries is a party,
whether entered into for the account of Mercantile or for the account of
a customer of Mercantile or one of its Subsidiaries, were entered into
in the ordinary course of business and, to Mercantile's knowledge, in
accordance with prudent banking practice and applicable rules,
regulations and policies of any Regulatory Authority and with
counterparties believed to be financially responsible at the time and
are legal, valid and binding obligations of Mercantile or one of its
Subsidiaries 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.
Mercantile and each of its Subsidiaries have duly performed in all
material respects all of their material obligations thereunder to the
extent that such obligations to perform have accrued; and to
Mercantile's knowledge, there are no material breaches, violations or
defaults or allegations or assertions of such by any party thereunder.
4.17 Undisclosed Liabilities. Except for those liabilities that
are fully reflected or reserved against on the consolidated balance
sheet of Mercantile included in the Mercantile December 31, 1998 Form
10-K and for liabilities incurred in the ordinary course of business
consistent with past practice, since December 31, 1998, neither
Mercantile nor any of its Subsidiaries has incurred any liability of any
nature whatsoever (whether absolute, accrued, contingent or otherwise
and whether due or to become due) that, either individually or in the
aggregate, has had or will have a Material Adverse Effect on Mercantile.
4.18 Insurance. Mercantile and its Subsidiaries have in effect
insurance coverage with reputable insurers or are self-insured, that in
respect of amounts, premiums, types and risks insured, constitutes
reasonably adequate coverage against all risks customarily insured
against by bank holding companies and their subsidiaries comparable in
size and operations to Mercantile and its Subsidiaries.
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4.19 Environmental Liability. There are no legal,
administrative, arbitral or other proceedings, claims, actions, causes
of action, private environmental investigations or remediation
activities or governmental investigations of any nature seeking to
impose, or that reasonably could result in the imposition, on Mercantile
of any liability or obligation arising under common law or under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, CERCLA, pending or threatened against
Mercantile, which liability or obligation will have, either individually
or in the aggregate, a Material Adverse Effect on Mercantile. To the
knowledge of Mercantile, there is no reasonable basis for any such
proceeding, claim, action or governmental investigation that would
impose any liability or obligation that will have, either individually
or in the aggregate, a Material Adverse Effect on Mercantile. Mercantile
is not subject to any agreement, order, judgment, decree, letter or
memorandum by or with any Governmental Entity, regulatory agency or
third party imposing any liability or obligation with respect to the
foregoing that will have, either individually or in the aggregate, a
Material Adverse Effect on Mercantile.
4.20 Charter Provisions; State Takeover Laws; Mercantile Rights
Agreement. (a) The Board of Directors of Mercantile has approved the
transactions contemplated by this Agreement and the Mercantile Option
Agreement for purposes of Article 13, Section B of the Mercantile
Articles and Sections 459.2 and 459.3 of the MBCL such that the
provisions of Article 13, Section A of the Mercantile Articles or such
sections of the MBCL will not apply to this Agreement or the Mercantile
Option Agreement or any of the transactions contemplated hereby or
thereby.
(b) Mercantile has taken all action, if any, necessary or
appropriate so that the entering into of this Agreement and the
Mercantile Stock Option Agreement, and the consummation of the
transactions contemplated hereby and thereby, do not and will not result
in the ability of any person to exercise any Mercantile Shareholder
Rights under the Mercantile Rights Agreement or enable or require the
Mercantile Shareholder Rights to separate from the shares of Mercantile
Common Stock to which they are attached or to be triggered or become
exercisable. No "Distribution Date" or "Stock Acquisition Date" (as such
terms are defined in the Mercantile Rights Plan) has occurred.
4.21 Year 2000. None of Mercantile or any of the Mercantile
Subsidiaries has received, or reasonably expects to receive, a Year 2000
Deficiency Notification Letter. Mercantile has made available to Firstar
a complete and accurate copy of Mercantile's plan, including an estimate
of the anticipated associated costs, for addressing Year 2000 Issues.
Between the date of this Agreement and the Effective Time, Mercantile
shall use reasonable best efforts to implement such plan and any
revisions thereto that may be reasonably requested by Firstar.
Mercantile and its Subsidiaries has complied in all material respects
with the "Interagency Guidelines Establishing Year 2000 Standards for
Safety and Soundness" issued pursuant to section 39 of the Federal
Deposit Insurance Act and effective October 15, 1998.
4.22 Reorganization; Pooling of Interests. As of the date of this
Agreement, Mercantile has no reason to believe that the Merger will not
qualify as a "reorganization" within
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the meaning of Section 368(a) of the Code and, subject to Section 6.4,
as a "pooling of interests" for accounting purposes.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Conduct of Businesses Prior to the Effective Time. During
the period from the date of this Agreement to the Effective Time, except
as expressly contemplated or permitted by this Agreement (including the
Firstar Disclosure Schedule and the Mercantile Disclosure Schedule) or
the Option Agreements, each of Mercantile and Firstar shall, and shall
cause each of their respective Subsidiaries to, (a) conduct its business
in the ordinary course, (b) use reasonable best efforts to maintain and
preserve intact its business organization, employees and advantageous
business relationships and retain the services of its key officers and
key employees and (c) take no action that would adversely affect or
delay the ability of either Mercantile or Firstar to obtain any
necessary approvals of any Regulatory Agency or other Governmental
Entity required for the transactions contemplated hereby or to perform
its covenants and agreements under this Agreement or the Option
Agreements or to consummate the transactions contemplated hereby or
thereby.
5.2 Forbearances. During the period from the date of this
Agreement to the Effective Time, except as set forth in the Mercantile
Disclosure Schedule or the Firstar Disclosure Schedule, as the case may
be, and, except as expressly contemplated or permitted by this Agreement
or the Option Agreements or as otherwise indicated in this Section 5.2,
neither Mercantile nor Firstar shall, and neither Mercantile nor Firstar
shall permit any of their respective Subsidiaries to, without the prior
written consent of the other party to this Agreement:
(a) In the case of Mercantile, other than in the ordinary
course of business, incur any indebtedness for borrowed money
(other than short-term indebtedness incurred to refinance short-
term indebtedness (it being understood that for purposes of this
Section 5.2(a) "short-term" shall mean maturities of six months or
less) and indebtedness of Mercantile or any of its Subsidiaries to
Mercantile or any of its wholly-owned Subsidiaries), assume,
guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual,
corporation or other entity, or make any loan or advance (it being
understood and agreed that incurrence of indebtedness in the
ordinary course of business shall include, without limitation, the
creation of deposit liabilities, purchases of Federal funds, sales
of certificates of deposit and entering into repurchase
agreements);
(b) (i) in the case of Mercantile, adjust, split, combine or
reclassify any capital stock;
(ii) make, declare or pay any dividend, or make any other
distribution on, or directly or indirectly redeem, purchase
or otherwise acquire, any shares of its capital stock or any
securities or obligations convertible (whether currently
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convertible or convertible only after the passage of time or
the occurrence of certain events) into or exchangeable for
any shares of its capital stock (except (A) in the case of
Firstar, for regular quarterly cash dividends at a rate not
in excess of $0.30 per share of Firstar Common Stock, (B) in
the case of Mercantile, for regular quarterly cash dividends
on Mercantile Common Stock at a rate not in excess of $0.34
per share of Mercantile Common Stock and (C) dividends paid
by any of the Subsidiaries of each of Mercantile and Firstar
to Mercantile or Firstar or any of their Subsidiaries,
respectively, and dividends paid in the ordinary course of
business consistent with past practice by any Subsidiaries
(whether or not wholly owned) of each of Mercantile and
Firstar);
(iii) in the case of Mercantile, grant any stock
appreciation rights or grant any individual, corporation or
other entity any right to acquire any shares of its capital
stock, other than pursuant to the Mercantile Rights
Agreement as in effect as of the date hereof;
(iv) in the case of Mercantile, issue any additional
shares of capital stock except pursuant to (A) the exercise
of stock options outstanding as of the date hereof, (B) the
Mercantile Option Agreement (C) the Mercantile Rights
Agreement or (D) the Mercantile DRIP in the ordinary course
of business prior to the DRIP Suspension Date; or
(c) in the case of Mercantile, sell, transfer, mortgage,
encumber or otherwise dispose of any material part of its business or
any of its material properties or assets to any individual, corporation
or other entity other than a Subsidiary, or cancel, release or assign
any indebtedness to any such person or any claims held by any such
person, except in the ordinary course of business or pursuant to
contracts or agreements in force at the date of this Agreement;
(d) in the case of Mercantile, except for transactions in the
ordinary course of business or pursuant to contracts or agreements in
force at the date of or permitted by this Agreement, make any material
investment (either by purchase of stock or securities, contributions to
capital, property transfers, or purchase of any property or assets) in
any other individual, corporation or other entity other than a
Subsidiary thereof;
(e) in the case of Mercantile, except for transactions in the
ordinary course of business, terminate, or waive any material provision
of, any Mercantile Contract or make any change in any instrument or
agreement governing the terms of any of its securities, or material
lease or contract, other than normal renewals of contracts and leases
without material adverse changes of terms;
(f) in the case of Mercantile, increase in any manner the
compensation or fringe benefits of any of its employees or pay any
pension or retirement allowance not required by any existing plan or
agreement to any such employees or become a party to, amend or commit
itself to any pension, retirement, profit-sharing or welfare benefit
plan or agreement (or any individual agreements evidencing grants or
awards thereunder) or employment agreement with
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or for the benefit of any employee other than in the ordinary course of
business, or accelerate the vesting of, or the lapsing of restrictions
with respect to, any stock options or other stock-based compensation;
(g) solicit or encourage from any third party or enter into any
negotiations, discussions or agreement in respect of, or authorize any
individual, corporation or other entity to solicit or encourage from any
third party or enter into any negotiations, discussions or agreement in
respect of, or provide or cause to be provided any confidential
information in connection with, any inquiries or proposals relating to
the disposition of all or substantially all of its business or assets,
or the acquisition of its voting securities, or the merger or
consolidation of it or any of its Subsidiaries with any corporation or
other entity, other than as provided by this Agreement (and it has
discontinued any such negotiations or discussions initiated prior to the
date hereof and shall promptly notify the other party hereto of all of
the relevant details relating to all inquiries and proposals that it may
receive from and after the date hereof through and excluding the
Effective Time relating to any of such matters);
(h) in the case of Mercantile, settle any material claim, action
or proceeding involving money damages, except in the ordinary course of
business;
(i) knowingly take any action that would prevent or impede the
Merger from qualifying (i) for "pooling of interests" accounting
treatment or (ii) as a reorganization within the meaning of Section
368(a) of the Code; provided, however, that nothing contained herein
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shall limit the ability of Mercantile or Firstar to exercise its rights
under the Firstar Option Agreement or the Mercantile Option Agreement,
as the case may be;
(j) amend its certificate of incorporation or its bylaws;
(k) in the case of Mercantile, other than in prior consultation
with Firstar, restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or
the manner in which the portfolio is classified or reported;
(l) take any action that is intended or expected to result in
any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to
the Effective Time, or in any of the conditions to the Merger set forth
in Article VII not being satisfied or in a violation of any provision of
this Agreement, except, in every case, as may be required by applicable
law;
(m) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP or
regulatory guidelines; or
(n) agree to take, make any commitment to take, or adopt any
resolutions of its board of directors in support of, any of the actions
prohibited to it by this Section 5.2.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters. (a) Mercantile and Firstar shall
promptly prepare and file with the SEC the Joint Proxy Statement and
Firstar shall promptly prepare and file with the SEC the S-4, in which
the Joint Proxy Statement will be included as a prospectus. Each of
Mercantile and Firstar shall use their reasonable best efforts to have
the S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and Mercantile and Firstar shall
thereafter mail or deliver the Joint Proxy Statement to their respective
shareholders. Firstar shall also use its reasonable best efforts to
obtain all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this
Agreement, and Mercantile shall furnish all information concerning
Mercantile and the holders of Mercantile Common Stock as may be
reasonably requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use
their reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and
filings, to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and Governmental
Entities that are necessary or advisable to consummate the transactions
contemplated by this Agreement (including, without limitation, the
Merger) and the Option Agreements, and to comply with the terms and
conditions of all such permits, consents, approvals and authorizations
of all such Governmental Entities. Mercantile and Firstar shall have the
right to review in advance, and, to the extent practicable, each will
consult the other on, in each case subject to applicable laws relating
to the exchange of information, all the information relating to Firstar
or Mercantile, as the case may be, and any of their respective
Subsidiaries, that appears in any filing made with, or written materials
submitted to, any third party or any Governmental Entity in connection
with the transactions contemplated by this Agreement. In exercising the
foregoing rights of review and consultation, each of the parties hereto
shall act reasonably and as promptly as practicable. The parties hereto
agree that they will consult with each other with respect to the
obtaining of all permits, consents, approvals and authorizations of all
third parties and Governmental Entities necessary or advisable to
consummate the transactions contemplated by this Agreement and the
Option Agreements and each party will keep the other apprised of the
status of matters relating to completion of the transactions
contemplated herein.
(c) Mercantile and Firstar shall, upon request, furnish each
other with all information concerning themselves, their Subsidiaries,
directors, officers and shareholders and such other matters as may be
reasonably necessary or advisable in connection with the Joint Proxy
Statement, the S-4 or any other statement, filing, notice or application
made by or on behalf of Mercantile, Firstar or any of their respective
Subsidiaries to any Governmental Entity in connection with the Merger
and the other transactions contemplated by this Agreement.
(d) Mercantile and Firstar shall promptly advise each other upon
receiving any communication from any Governmental Entity whose consent
or approval is required for con-
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summation of the transactions contemplated by this Agreement or the
Option Agreements that causes such party to believe that there is a
reasonable likelihood that any Requisite Regulatory Approval will not be
obtained or that the receipt of any such approval will be materially
delayed.
6.2 Access to Information. (a) Upon reasonable notice and
subject to applicable laws relating to the exchange of information, each
of Mercantile and Firstar, for the purposes of verifying the
representations and warranties of the other and preparing for the Merger
and the other matters contemplated by this Agreement, shall, and shall
cause each of their respective Subsidiaries to, afford to the officers,
employees, accountants, counsel and other representatives of the other
party, access, during normal business hours during the period prior to
the Effective Time, to all its properties, books, contracts, commitments
and records and, during such period, each of Mercantile and Firstar
shall, and shall cause their respective Subsidiaries to, make available
to the other party (i) a copy of each report, schedule, registration
statement and other document filed or received by it during such period
pursuant to the requirements of federal securities laws or federal or
state banking laws (other than reports or documents that Mercantile or
Firstar, as the case may be, is not permitted to disclose under
applicable law) and (ii) all other information concerning its business,
properties and personnel as such party may reasonably request. Neither
Mercantile nor Firstar nor any of their respective Subsidiaries shall be
required to provide such access or to disclose such information where
such access or disclosure would violate or prejudice the rights of
Mercantile's or Firstar's, as the case may be, customers, jeopardize the
attorney-client privilege of the institution in possession or control of
such information or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior
to the date of this Agreement. The parties hereto will make appropriate
substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) Each of Mercantile and Firstar shall hold all information
furnished by or on behalf of the other party or any of such party's
Subsidiaries or representatives pursuant to Section 6.2(a) in confidence
to the extent required by, and in accordance with, the provisions of
confidentiality agreements, dated April 21, 1999 and April 23, 1999, in
each case between Mercantile and Firstar (together, the "Confidentiality
Agreement").
(c) No investigation by either of the parties or their
respective representatives shall affect the representations and
warranties of the other set forth herein.
6.3 Shareholders' Approvals. Each of Mercantile and Firstar
shall call a meeting of its shareholders to be held as soon as
reasonably practicable for the purpose of voting upon the requisite
shareholder approvals required in connection with this Agreement and the
transactions contemplated hereby, and each shall use its reasonable best
efforts to cause such meetings to occur as soon as reasonably
practicable and on the same date. The Boards of Directors of each of
Firstar and Mercantile shall use its reasonable best efforts to obtain
from such shareholders the vote in favor of the approval of this
Agreement required by the WBCL and, as applicable, the rules of the
NYSE, in the case of Firstar, or by the MBCL, in the case of Mercantile,
to consummate the transactions contemplated hereby.
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6.4 Legal Conditions to Merger. Each of Mercantile and Firstar
shall, and shall cause its Subsidiaries to, use their reasonable best
efforts (a) to take, or cause to be taken, all actions necessary, proper
or advisable to comply promptly with all legal requirements that may be
imposed on such party or its Subsidiaries with respect to the Merger
and, subject to the conditions set forth in Article VII hereof, to
consummate the transactions contemplated by this Agreement, and (b) to
obtain (and to cooperate with the other party to obtain) any material
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other third party that is required to be
obtained by Firstar or Mercantile or any of their respective
Subsidiaries in connection with the Merger and the other transactions
contemplated by this Agreement. Without limiting the foregoing and
notwithstanding any other provision hereof to the contrary, Mercantile
shall promptly take (or has taken prior to the date hereof) any and all
action with respect to any Mercantile Benefit Plan (including any
Mercantile Stock Plan) and any award agreement thereunder (including, if
necessary, appropriately amending such Plan) to the extent such action
is reasonably necessary in order for the Merger to qualify for "pooling
of interests" accounting treatment.
6.5 Affiliates; Publication of Combined Financial Results. (a)
Each of Mercantile and Firstar shall use its reasonable best efforts to
cause each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act, in the
case of Mercantile only, and for purposes of qualifying the Merger for
"pooling of interests" accounting treatment) of such party to deliver to
the other party hereto, as soon as practicable after the date of this
Agreement, and prior to the date of the shareholders' meetings called by
Mercantile and Firstar to approve this Agreement, a written agreement,
in the form of Exhibit 6.5(a)(1) or (2), as applicable, hereto,
providing that such person will not sell, pledge, transfer or otherwise
dispose of any shares of Mercantile Common Stock or Firstar Common Stock
held by such "affiliate" and, in the case of the "affiliates" of
Mercantile, the shares of Firstar Common Stock to be received by such
"affiliate" in the Merger.
(b) The Surviving Corporation shall use its best efforts to
publish as promptly as reasonably practical, but in no event later than
90 days after the end of the first month after the Effective Time in
which there are at least 30 days of post-Merger combined operations
(which month may be the month in which the Effective Time occurs),
combined sales and net income figures as contemplated by and in
accordance with the terms of SEC Accounting Series Release No. 135.
6.6 Stock Exchange Listing. Firstar shall cause the shares of
Firstar Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to
the Effective Time.
6.7 Employee Benefit Plans. (a) From and after the Effective
Time, unless otherwise mutually determined, the Firstar Benefit Plans
and Mercantile Benefit Plans in effect as of the date of this Agreement
shall remain in effect with respect to employees of Firstar or
Mercantile (or their Subsidiaries), respectively, covered by such plans
at the Effective Time until such time as the Surviving Corporation
shall, subject to applicable law, the terms of this Agreement and the
terms of such plans, adopt new benefit plans with respect to employees
of
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the Surviving Corporation and its Subsidiaries (the "New Benefit
Plans"). Prior to the Closing Date, Firstar and Mercantile shall
cooperate in reviewing, evaluating and analyzing the Mercantile Benefit
Plans and Firstar Benefit Plans with a view towards developing
appropriate New Benefit Plans for the employees covered thereby. From
and after the Effective Time, Firstar will, or will cause the Surviving
Corporation to, recognize the prior service with Mercantile or its
subsidiaries of each employee of Mercantile or any of its subsidiaries
as of the Effective Time (the "Mercantile Employees") in connection with
all Firstar employee benefit plans in which such Mercantile Employees
are eligible to participate following the Effective Time, for purposes
of eligibility, vesting and levels of benefits (but not for purposes of
benefit accruals under any defined benefit pension plan). From and after
the Effective Time, Firstar will, or will cause the Surviving
Corporation to, (i) cause any pre-existing conditions or limitations and
eligibility waiting periods under any group health plans of Firstar to
be waived with respect to the Mercantile Employees and their eligible
dependents and (ii) give each Mercantile Employee credit for the plan
year in which the Effective Time occurs towards applicable deductibles
and annual out-of-pocket limits for expenses incurred prior to the
Effective Time.
(b) The foregoing notwithstanding, the Surviving Corporation
agrees to honor in accordance with their terms all benefits vested as of
the Effective Time under the Mercantile Benefit Plans provided that such
Mercantile Benefit Plans are maintained and administered after the date
hereof not in violation of Section 5.2(f) of this Agreement.
(c) Nothing in this Section 6.7 shall be interpreted as
preventing the Surviving Corporation from amending, modifying or
terminating any Mercantile Benefit Plans, Firstar Benefit Plans, or
other contracts, arrangements, commitments or understandings, in
accordance with their terms and applicable law.
6.8 Indemnification; Directors' and Officers' Insurance. (a)
In the event of any threatened or actual claim, action, suit, proceeding
or investigation, whether civil, criminal or administrative, including,
without limitation, any such claim, action, suit, proceeding or
investigation in which any individual who is now, or has been at any
time prior to the date of this Agreement, or who becomes prior to the
Effective Time, a director or officer or employee of Mercantile or any
of its Subsidiaries, including any entity specified in the Mercantile
Disclosure Schedule (the "Indemnified Parties"), is, or is threatened to
be, made a party based in whole or in part on, or arising in whole or in
part out of, or pertaining to (i) the fact that he or she is or was a
director, officer or employee of Mercantile or any of its Subsidiaries
or any entity specified in the Mercantile Disclosure Schedule or any of
their respective predecessors or (ii) this Agreement, the Option
Agreements or any of the transactions contemplated hereby or thereby,
whether in any case asserted or arising before or after the Effective
Time, the parties hereto agree to cooperate and use their best efforts
to defend against and respond thereto. It is understood and agreed that
after the Effective Time, Firstar shall indemnify and hold harmless, as
and to the fullest extent permitted by law, each such Indemnified Party
against any losses, claims, damages, liabilities, costs, expenses
(including reasonable attorney's fees and expenses in advance of the
final disposition of any claim, suit, proceeding or investigation to
each Indemnified Party to the fullest extent permitted by law upon
receipt of any undertak-
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ing required by applicable law), judgments, fines and amounts paid in
settlement in connection with any such threatened or actual claim,
action, suit, proceeding or investigation.
(b) Firstar shall use its reasonable best efforts to cause the
individuals serving as officers and directors of Mercantile, its
Subsidiaries or any entity specified in the Mercantile Disclosure
Schedule immediately prior to the Effective Time to be covered for a
period of six years from the Effective Time (or the period of the
applicable statute of limitations, if longer) by the directors' and
officers' liability insurance policy maintained by Mercantile
(provided that Firstar may substitute therefor policies of at least
--------
the same coverage and amounts containing terms and conditions that are
not less advantageous than such policy) with respect to acts or
omissions occurring prior to the Effective Time that were committed by
such officers and directors in their capacity as such.
(c) In the event Firstar or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors
and assigns of Firstar assume the obligations set forth in this Section
6.8.
(d) The provisions of this Section 6.8 shall survive the
Effective Time and are intended to be for the benefit of, and shall be
enforceable by, each Indemnified Party and his or her heirs and
representatives.
6.9 Additional Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to carry out
the purposes of this Agreement (including, without limitation, any
merger between a Subsidiary of Firstar, on the one hand, and a
Subsidiary of Mercantile, on the other hand) or to vest the Surviving
Corporation with full title to all properties, assets, rights,
approvals, immunities and franchises of any of the parties to the
Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such
necessary action as may be reasonably requested by, and at the sole
expense of, Firstar.
6.10 Advice of Changes. Mercantile and Firstar shall each
promptly advise the other party of any change or event (i) having a
Material Adverse Effect on it or (ii) that it believes would or would be
reasonably likely to cause or constitute a material breach of any of its
representations, warranties or covenants contained herein.
6.11 Dividends. After the date of this Agreement, each of
Mercantile and Firstar shall coordinate with the other the declaration
of any dividends in respect of Mercantile Common Stock and Firstar
Common Stock and the record dates and payment dates relating thereto, it
being the intention of the parties hereto that holders of Mercantile
Common Stock shall not receive two dividends, or fail to receive one
dividend, for any quarter with respect to their shares of Mercantile
Common Stock and any shares of Firstar Common Stock any such holder
receives in exchange therefor in the Merger.
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6.12 Exemption from Liability Under Section 16(b). Assuming that
Mercantile delivers to Firstar the Section 16 Information in a timely
fashion prior to the Effective Time, the Board of Directors of Firstar,
or a committee of Non-Employee Directors thereof (as such term is
defined for purposes of Rule 16b-3(d) under the Exchange Act), shall
reasonably promptly thereafter and in any event prior to the Effective
Time adopt a resolution providing that the receipt by the Mercantile
Insiders of Firstar Common Stock in exchange for shares of Mercantile
Common Stock, and of options to purchase shares of Firstar Common Stock
upon conversion of options to purchase shares of Mercantile Common
Stock, in each case pursuant to the transactions contemplated hereby and
to the extent such securities are listed in the Section 16 Information,
are intended to be exempt from liability pursuant to Section 16(b) under
the Exchange Act such that any such receipt shall be so exempt. "Section
16 Information" shall mean information accurate in all respects
regarding the Mercantile Insiders, the number of shares of Mercantile
Common Stock held by each such Mercantile Insider and expected to be
exchanged for Firstar Common Stock in the Merger, and the number and
description of the options to purchase shares of Mercantile Common Stock
held by each such Mercantile Insider and expected to be converted into
options to purchase shares of Firstar Common Stock in connection with
the Merger. "Mercantile Insiders" shall mean those officers and
directors of Mercantile who are subject to the reporting requirements of
Section 16(a) of the Exchange Act and who are listed in the Section 16
Information.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of the parties to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Shareholder Approval. This Agreement and the
transactions contemplated hereby shall have been approved by the
respective requisite affirmative votes of the holders of Firstar
Common Stock and Mercantile Common Stock entitled to vote thereon.
(b) NYSE Listing. The shares of Firstar Common Stock that
shall be issued to the shareholders of Mercantile upon
consummation of the Merger shall have been authorized for listing
on the NYSE, subject to official notice of issuance.
(c) Other Approvals. All regulatory approvals required to
consummate the transactions contemplated hereby shall have been
obtained and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired
(all such approvals and the expiration of all such waiting periods
being referred to herein as the "Requisite Regulatory Approvals").
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(d) S-4. The S-4 shall have become effective under the
Securities Act and no stop order suspending the effectiveness of
the S-4 shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality. No order,
injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing
the consummation of the Merger or any of the other transactions
contemplated by this Agreement shall be in effect. No statute,
rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any Governmental
Entity that prohibits, materially restricts or makes illegal
consummation of the Merger.
(f) Federal Tax Opinion. The parties hereto shall each
have received the opinion of Wachtell, Lipton, Rosen & Katz, in
form and substance reasonably satisfactory to Mercantile and
Firstar, dated the Closing Date, substantially to the effect that,
on the basis of facts, representations and assumptions set forth
in each such opinion that are consistent with the state of facts
existing at the Effective Time:
(i) The Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code, and
Mercantile and Firstar will each be a party to the
reorganization within the meaning of Section 368(b) of the
Code;
(ii) No gain or loss will be recognized by Mercantile
or Firstar as a result of the Merger; and
(iii) No gain or loss will be recognized by
shareholders of Mercantile who exchange all of their
Mercantile Common Stock solely for Firstar Common Stock
pursuant to the Merger (except with respect to cash received
in lieu of a fractional share interest in Firstar Common
Stock).
In rendering such opinions, counsel may require and rely
upon representations contained in certificates of officers of
Mercantile, Firstar and others.
(g) Pooling of Interests. Mercantile and Firstar shall
each have received a letter from their respective independent
accountants addressed to Firstar or Mercantile, as the case may
be, to the effect that the Merger will qualify for "pooling of
interests" accounting treatment.
7.2 Conditions to Obligations of Mercantile. The obligation of
Mercantile to effect the Merger is also subject to the satisfaction, or
waiver by Mercantile, at or prior to the Effective Time, of the
following conditions:
(a) Representations and Warranties. The representations
and warranties of Firstar set forth in this Agreement shall be
true and correct in all material respects as of the date of this
Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as
though made on and as of the
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Closing Date; provided, however, that for purposes of this
-------- -------
paragraph, such representations and warranties (other than the
representations set forth in Sections 3.2(a), 3.8(a) or 3.17)
shall be deemed to be true and correct unless the failure or
failures of such representations and warranties to be so true and
correct, either individually or in the aggregate, and without
giving effect to any qualification as to materiality or Material
Adverse Effect set forth in such representations or warranties,
has had or will have a Material Adverse Effect on Firstar or the
Surviving Corporation. Mercantile shall have received a
certificate signed on behalf of Firstar by the Chief Executive
Officer and the Chief Financial Officer of Firstar to the
foregoing effect.
(b) Performance of Obligations of Firstar. Firstar shall
have performed in all material respects all obligations required
to be performed by it under this Agreement at or prior to the
Closing Date, and Mercantile shall have received a certificate
signed on behalf of Firstar by the Chief Executive Officer and the
Chief Financial Officer of Firstar to such effect.
7.3 Conditions to Obligations of Firstar. The obligation of
Firstar to effect the Merger is also subject to the satisfaction or
waiver by Firstar at or prior to the Effective Time of the following
conditions:
(a) Representations and Warranties. The representations
and warranties of Mercantile set forth in this Agreement shall be
true and correct in all material respects as of the date of this
Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as
though made on and as of the Closing Date, provided, however,
-------- -------
that for purposes of this paragraph, such representations and
warranties (other than the representations set forth in Section
4.2(a), 4.8(a) or 4.17) shall be deemed to be true and correct
unless the failure or failures of such representations and
warranties to be so true and correct, either individually or in
the aggregate, and without giving effect to any qualification as
to materiality set forth in such representations or warranties,
has had or will have a Material Adverse Effect on Mercantile.
Firstar shall have received a certificate signed on behalf of
Mercantile by the Chief Executive Officer and the Chief Financial
Officer of Mercantile to the foregoing effect.
(b) Performance of Obligations of Mercantile. Mercantile
shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to
the Closing Date, and Firstar shall have received a certificate
signed on behalf of Mercantile by the Chief Executive Officer and
the Chief Financial Officer of Mercantile to such effect.
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ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the shareholders of
Mercantile or Firstar:
(a) by mutual consent of Mercantile and Firstar in a
written instrument, if the Board of Directors of each so
determines by a vote of a majority of the members of its entire
Board;
(b) by either the Board of Directors of Mercantile or the
Board of Directors of Firstar if (i) any Governmental Entity that
must grant a Requisite Regulatory Approval has denied approval of
the Merger and such denial has become final and nonappealable or
any Governmental Entity of competent jurisdiction shall have
issued a final nonappealable order permanently enjoining or
otherwise prohibiting the consummation of the transactions
contemplated by this Agreement or (ii) any shareholder approval
required by Section 7.1(a) is not obtained at shareholder meetings
duly convened pursuant to Section 6.3 or at any postponement or
adjournment thereof;
(c) by either the Board of Directors of Mercantile or the
Board of Directors of Firstar if the Merger shall not have been
consummated on or before the first anniversary of the date of this
Agreement, unless the failure of the Closing to occur by such date
shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of
such party set forth herein; or
(d) by either the Board of Directors of Mercantile or the
Board of Directors of Firstar (provided that the terminating
--------
party is not then in breach of any representation, warranty,
covenant or other agreement contained herein) if there shall have
been a breach of any of the covenants or agreements or any of the
representations or warranties set forth in this Agreement on the
part of Firstar, in the case of a termination by Mercantile, or
Mercantile, in the case of a termination by Firstar, which breach,
either individually or in the aggregate, would constitute, if
occurring or continuing on the Closing Date, the failure of the
conditions set forth in Section 7.2 or 7.3, as the case may be,
and that is not cured within 45 days following written notice to
the party committing such breach or by its nature or timing cannot
be cured prior to the Closing Date.
8.2 Effect of Termination. In the event of termination of this
Agreement by either Mercantile or Firstar as provided in Section 8.1,
this Agreement shall forthwith become void and have no effect, and none
of Mercantile, Firstar, any of their respective Subsidiaries or any of
the officers or directors of any of them shall have any liability of any
nature whatsoever hereunder, or in connection with the transactions
contemplated hereby, except that (i) Sections 6.2(b), 8.2, 9.2 and 9.3
shall survive any termination of this Agreement, and (ii)
notwithstanding anything to the contrary contained in this Agreement,
neither Mercantile nor Firstar
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shall be relieved or released from any liabilities or damages arising
out of its willful breach of any provision of this Agreement.
8.3 Amendment. Subject to compliance with applicable law and
Section 1.1(b), this Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at
any time before or after approval of the matters presented in connection
with Merger by the shareholders of Mercantile and Firstar; provided,
--------
however, that after any approval of the transactions contemplated by
- -------
this Agreement by the respective shareholders of Mercantile or Firstar,
there may not be, without further approval of such shareholders, any
amendment of this Agreement that changes the amount or the form of the
consideration to be delivered hereunder to the holders of Mercantile
Common Stock, other than as contemplated by this Agreement. This
Agreement may not be amended except by an instrument in writing signed
on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective
Board of Directors, may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant
hereto and (c) waive compliance with any of the agreements or conditions
contained herein; provided, however, that after any approval of the
-------- -------
transactions contemplated by this Agreement by the respective
shareholders of Mercantile or Firstar, there may not be, without further
approval of such shareholders, any extension or waiver of this Agreement
or any portion thereof that reduces the amount or changes the form of
the consideration to be delivered to the holders of Mercantile Common
Stock hereunder, other than as contemplated by this Agreement. Any
agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on
behalf of such party, but such extension or waiver or failure to insist
on strict compliance with an obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to,
any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") will take place at
10:00 a.m. on a date and at a place to be specified by the parties,
which shall be no later than five business days after the satisfaction
or waiver (subject to applicable law) of the latest to occur of the
conditions set forth in Article VII hereof, unless extended by mutual
agreement of the parties (the "Closing Date").
9.2 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties, covenants and agreements in
this Agreement or in any instrument delivered pursuant to this Agreement
(other than the Option Agreements and the Confidentiality Agreement,
which shall terminate in accordance with the terms thereof) shall survive
the Effective
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Time, except for Section 6.8 and for those other covenants and
agreements contained herein and therein that by their terms apply in
whole or in part after the Effective Time.
9.3 Expenses. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such expense, provided, however, that
-------- -------
the costs and expenses of printing and mailing the Joint Proxy
Statement, and all filing and other fees paid to the SEC in connection
with the Merger, shall be borne equally by Mercantile and Firstar.
9.4 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (with confirmation), mailed by registered or certified mail
(return receipt requested) or delivered by an express courier (with
confirmation) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Mercantile, to:
Mercantile Bancorporation Inc.
P.O. Box 524
St. Louis, Missouri 63166-0524
Attention: Jon W. Bilstrom
General Counsel and Secretary
Telecopier: (314) 418-1386
and
(b) if to Firstar, to:
Firstar Corporation
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Jennie P. Carlson
Senior Vice President, General Counsel and
Secretary
Telecopier:
9.5 Interpretation. When a reference is made in this Agreement
to Sections, Exhibits or Schedules, such reference shall be to a Section
of or Exhibit or Schedule to this Agreement unless otherwise indicated.
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include",
"includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". No provision of
this Agreement shall be construed to require Firstar, Mercantile or any
of their respective Subsidiaries or affiliates to take or fail to take
any action, including, without limitation, the disclosure or non-
disclosure by either party of any information to its shareholders, that
would (or its failure to take would) reasonably be expected to violate
any applicable statue, law, legal duty, rule or regulation.
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9.6 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed
by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
9.7 Entire Agreement. This Agreement (including the documents
and the instruments referred to herein) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof other
than the Option Agreements and the Confidentiality Agreement.
9.8 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of New York, without
regard to any applicable conflicts of law principles.
9.9 Publicity. Except as otherwise required by applicable law
or the rules of the NYSE, neither Mercantile or Firstar shall, or shall
permit any of its Subsidiaries to, issue or cause the publication of any
press release or other public announcement with respect to, or otherwise
make any public statement concerning, the transactions contemplated by
this Agreement without the consent of Firstar, in the case of a proposed
announcement or statement by Mercantile, or Mercantile, in the case of a
proposed announcement or statement by Firstar, which consent shall not
be unreasonably withheld.
9.10 Assignment; Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations shall be
assigned by any of the parties hereto (whether by operation of law or
otherwise) without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their
respective successors and assigns. Except as otherwise specifically
provided in Section 6.8, this Agreement (including the documents and
instruments referred to herein) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
9.11 Certain Agreements of the Surviving Corporation. Pursuant
to Section 458 of the MBCL, and effective at the Effective Time, the
Surviving Corporation agrees that (i) it will promptly pay to the
holders of Dissenting Shares the amount, if any, to which they shall be
entitled under the provisions of the MBCL with respect to the rights of
dissenting shareholders, and (ii) it may be served with process in
Missouri, and hereby irrevocably appoints the Missouri Secretary as its
agent to accept service of process, in any proceeding based upon any
cause of action against Mercantile arising in Missouri prior to the
issuance of the Missouri Articles by the Missouri Secretary, and in any
proceeding for the enforcement of rights of a holder of Dissenting
Shares as such against the Surviving Corporation.
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IN WITNESS WHEREOF, Mercantile and Firstar have caused this
Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
FIRSTAR CORPORATION
By: /s/ JERRY A. GRUNDHOFER
---------------------------------------
Jerry A. Grundhofer
President and Chief
Executive Officer
MERCANTILE BANCORPORATION INC.
By: /s/ THOMAS H. JACOBSEN
---------------------------------------
Thomas H. Jacobsen
Chairman of the Board, President and Chief
Executive Officer
[Agreement and Plan of Merger]
-44-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,210,972
<INT-BEARING-DEPOSITS> 291,561
<FED-FUNDS-SOLD> 366,270
<TRADING-ASSETS> 188,069
<INVESTMENTS-HELD-FOR-SALE> 9,308,727
<INVESTMENTS-CARRYING> 81,906
<INVESTMENTS-MARKET> 83,512
<LOANS> 22,476,999
<ALLOWANCE> 309,048
<TOTAL-ASSETS> 35,578,819
<DEPOSITS> 24,722,397
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0
0
<COMMON> 1,578
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<INTEREST-TOTAL> 586,938
<INTEREST-DEPOSIT> 216,638
<INTEREST-EXPENSE> 302,709
<INTEREST-INCOME-NET> 284,229
<LOAN-LOSSES> 7,479
<SECURITIES-GAINS> 12,963
<EXPENSE-OTHER> 225,354
<INCOME-PRETAX> 177,840
<INCOME-PRE-EXTRAORDINARY> 118,037
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.75
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<LOANS-NON> 107,072
<LOANS-PAST> 65,647
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<LOANS-PROBLEM> 0<F1>
<ALLOWANCE-OPEN> 308,890
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<F1>Only reported at fiscal year-end date.
</TABLE>
<PAGE>
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated April 30, 1999, between
Firstar Corporation, a Wisconsin corporation ("Issuer"), and Mercantile
Bancorporation Inc., a Missouri corporation ("Grantee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement"), which
agreement has been executed by the parties hereto immediately prior to
this Stock Option Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the
Merger Agreement and in consideration therefor and for Grantee's
entering into the Mercantile Option Agreement, Issuer has agreed to
grant Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to 65,460,210 fully paid and nonassessable shares of Issuer's
common stock, par value $0.01 per share ("Common Stock"), at a price of
$31.56 per share (the "Option Price"); provided, however, that in no
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event shall the number of shares of Common Stock for which this Option
is exercisable exceed 9.9% of the Issuer's issued and outstanding shares
of Common Stock without giving effect to any shares subject to or issued
pursuant to the Option. The number of shares of Common Stock that may be
received upon the exercise of the Option and the Option Price are
subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common
Stock are either (i) issued or otherwise become outstanding after the
date of this Agreement (other than pursuant to this Agreement) or (ii)
redeemed, repurchased, retired or otherwise cease to be outstanding
after the date of the Agreement, the number of shares of Common Stock
subject to the Option shall be increased or decreased, as appropriate,
so that, after such issuance, such number equals 9.9% of the number of
shares of Common Stock then issued and outstanding without giving effect
to any shares subject or issued pursuant to the Option. Nothing
contained in this
<PAGE>
<PAGE>
Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise
the Option, in whole or part, and from time to time, if, but only if,
both an Initial Triggering Event (as hereinafter defined) and a
Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined), provided that the Holder shall have sent the written notice
--------
of such exercise (as provided in subsection (e) of this Section 2)
within 90 days following such Subsequent Triggering Event. Each of the
following shall be an "Exercise Termination Event": (i) the Effective
Time (as defined in the Merger Agreement) of the Merger; (ii)
termination of the Merger Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of an Initial
Triggering Event, except a termination by Grantee pursuant to Section
8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise
to such right of termination is non-volitional); or (iii) the passage of
12 months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional) (provided that if an Initial Triggering
--------
Event continues or occurs beyond such termination and prior to the
passage of such 12-month period, the Exercise Termination Event shall be
12 months from the expiration of the Last Triggering Event but in no
event more than 18 months after such termination). The "Last Triggering
Event" shall mean the last Initial Triggering Event to expire. The term
"Holder" shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of
the following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an
"Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in
an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the rules and regulations thereunder) other than Grantee or
any of its Subsidiaries (each a "Grantee Subsidiary") or the Board
of Directors of Issuer shall have recommended that the
shareholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "Acquisition
Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated
by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other
acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of
the voting power of Issuer, or (z) any substantially similar
transaction; provided, however, that in no event shall any
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merger, consolidation, purchase or similar transaction involving
only the Issuer and one or
2
<PAGE>
<PAGE>
more of its Subsidiaries or involving only any two or more of such
Subsidiaries, provided that any such transaction is not entered
--------
into in violation of the terms of the Merger Agreement, be deemed
to be an Acquisition Transaction;
(ii) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to
authorize, recommend or propose, to engage in an Acquisition
Transaction with any person other than Grantee or a Grantee
Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest
to withdraw or modify, in any manner adverse to Grantee, its
recommendation that the shareholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation
of engaging in an Acquisition Transaction;
(iii) Any person other than Grantee, any Grantee
Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity
in the ordinary course of its business shall have acquired
beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the
rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
shareholders by public announcement or written communication that
is or becomes the subject of public disclosure to engage in an
Acquisition Transaction;
(v) After an overture is made by a third party to
Issuer or its shareholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation
contained in the Merger Agreement and such breach (x) would
entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as hereinafter
defined); or
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, or other
federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in
an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean
either of the following events or transactions occurring after the date
hereof:
(i) The acquisition by any person of beneficial
ownership of 20% or more of the then-outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in paragraph (i) of subsection (b) of this Section 2,
except that the percentage referred to in clause (y) shall be 20%.
3
<PAGE>
<PAGE>
(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event or Subsequent Triggering
Event of which it has notice (together, a "Triggering Event"), it being
understood that the giving of such notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the date
of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise
and (ii) a place and date not earlier than three business days nor later
than 60 business days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if prior notification to
--------
or approval of the Federal Reserve Board or any other regulatory agency
is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or
periods shall have passed. Any exercise of the Option shall be deemed to
occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer, provided that failure or refusal of Issuer to
--------
designate such a bank account shall not preclude the Holder from
exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock purchased
by the Holder and, if the Option should be exercised in part only, a new
Option evidencing the rights of the Holder thereof to purchase the
balance of the shares purchasable hereunder, and the Holder shall
deliver to Issuer a copy of this Agreement and a letter agreeing that
the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate
is subject to certain provisions of an agreement between the
registered holder hereof and Issuer and to resale
restrictions arising under the Securities Act of 1933, as
amended. A copy of such agreement is on file at the
principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a
written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the Holder shall have delivered
to
4
<PAGE>
<PAGE>
Issuer a copy of a letter from the staff of the SEC, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the 1933 Act;
(ii) the reference to the provisions of this Agreement in the above
legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do
not require the retention of such reference; and (iii) the legend shall
be removed in its entirety if the conditions in the preceding clauses
(i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed, subject to the
receipt of applicable regulatory approvals, to be the holder of record
of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
2 in the name of the Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii)
promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state banking law, prior
approval of or notice to the Federal Reserve Board or to any state
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or
such state regulatory authority as they may require) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take
all action provided herein to protect the rights of the Holder against
dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same
terms and subject to the same conditions as are set forth herein, in the
aggregate the same number of shares of Com-
5
<PAGE>
<PAGE>
mon Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any Stock Option Agreements and related Options for
which this Agreement (and the Option granted hereby) may be exchanged.
Upon receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement,
if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer,
whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares
of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common
Stock purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time as provided in this
Section 5. In the event of any change in, or distributions in respect
of, the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares, distributions on or in respect of the Common Stock, or the like,
the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such
manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full
satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within 90 days of such Subsequent
Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep
current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and
shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the
sale or other disposition of this Option and any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares")
in accordance with any plan of disposition requested by Grantee. Issuer
will use its reasonable best efforts to cause such registration
statement first to become effective and then to remain effective for
such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Grantee
shall have the right to demand two such registrations. The foregoing
notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is
in registration with respect to an underwritten public offering of
shares of Common Stock, and if in the good faith judgment of the
managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering the inclusion of the
Holder's Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of
Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; and provided, however, that
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after any such required reduction the number of Option
6
<PAGE>
<PAGE>
Shares to be included in such offering for the account of the Holder
shall constitute at least 25% of the total number of shares to be sold
by the Holder and Issuer in the aggregate; and provided further,
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however, that if such reduction occurs, then the Issuer shall file a
- -------
registration statement for the balance as promptly as practical and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such
Holder in connection with such registration, Issuer shall become a party
to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in
secondary offering underwriting agreements for the Issuer. Upon
receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of
the persons entitled to receive such copies. Notwithstanding anything to
the contrary contained herein, in no event shall Issuer be obligated to
effect more than two registrations pursuant to this Section 6 by reason
of the fact that there shall be more than one Grantee as a result of any
assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a
Repurchase Event (as hereinafter defined), (i) following a request of
the Holder, delivered prior to an Exercise Termination Event, Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A)
the Market/Offer Price (as hereinafter defined) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then
be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence
(or such later period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner
shall designate at a price (the "Option Share Repurchase Price") equal
to the Market/Offer Price multiplied by the number of Option Shares so
designated. The term "Market/Offer Price" shall mean the highest of (i)
the price per share of Common Stock at which a tender offer or exchange
offer therefor has been made, (ii) the price per share of Common Stock
to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date the Holder gives notice
of the required repurchase of this Option or the Owner gives notice of
the required repurchase of Option Shares, as the case may be, or (iv) in
the event of a sale of all or a substantial portion of Issuer's assets,
the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or
the Owner, as the case may be, and reasonably acceptable to the Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at
the time of such sale. In determining the Market/Offer Price, the value
of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by the Holder or Owner, as
the case may be, and reasonably acceptable to the Issuer.
(b) The Holder and the Owner, as the case may be, may exercise
its right to require Issuer to repurchase the Option and any Option
Shares pursuant to this Section 7 by surrendering for such purpose to
Issuer, at its principal office, a copy of this Agreement or
7
<PAGE>
<PAGE>
certificates for Option Shares, as applicable, accompanied by a written
notice or notices stating that the Holder or the Owner, as the case may
be, elects to require Issuer to repurchase this Option and/or the Option
Shares in accordance with the provisions of this Section 7. Within the
latter to occur of (x) five business days after the surrender of the
Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall
deliver or cause to be delivered to the Holder the Option Repurchase
Price and/or to the Owner the Option Share Repurchase Price therefor or
the portion thereof, if any, that Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under
applicable law or regulation from repurchasing the Option and/or the
Option Shares in full, Issuer shall immediately so notify the Holder
and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the
portion of the Option Repurchase Price and the Option Share Repurchase
Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after
-------- -------
delivery of a notice of repurchase pursuant to paragraph (b) of this
Section 7 is prohibited under applicable law or regulation from
delivering to the Holder and/or the Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required
notices, in each case as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate,
that portion of the Option Repurchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of
shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a
certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event
shall be deemed to have occurred (i) upon the consummation of any
merger, consolidation or similar transaction involving Issuer or any
purchase, lease or other acquisition of all or a substantial portion of
the assets of Issuer, other than any such transaction which would not
constitute an Acquisition Transaction pursuant to the provisos to
Section 2(b)(i) hereof or (ii) upon the acquisition by any person of
beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, provided that no such event shall constitute a
--------
Repurchase Event unless a Subsequent Triggering Event shall have
occurred prior to an Exercise Termination Event. The parties hereto
agree that Issuer's obligations to repurchase the Option or Option
Shares under this Section 7 shall not terminate upon the occurrence of
an Exercise Termination Event unless no
8
<PAGE>
<PAGE>
Subsequent Triggering Event shall have occurred prior to the occurrence
of an Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (i) to consolidate with or
merge into any person, other than Grantee or one of its Subsidiaries,
and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other person or
cash or any other property or the then outstanding shares of Common
Stock shall after such merger represent less than 50% of the outstanding
voting shares and voting share equivalents of the merged company, or
(iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction
shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the continuing
or surviving corporation of a consolidation or merger with Issuer
(if other than Issuer), (B) Issuer in a merger in which Issuer is
the continuing or surviving person, and (C) the transferee of all
or substantially all of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock
issued by the issuer of the Substitute Option upon exercise of the
Substitute Option.
(iii) "Assigned Value" shall mean the Market/Offer Price, as
defined in Section 7.
(iv) "Average Price" shall mean the average closing price
of a share of the Substitute Common Stock for the one year
immediately preceding the consolidation, merger or sale in
question, but in no event higher than the closing price of the
shares of Substitute Common Stock on the day preceding such
consolidation, merger or sale; provided that if Issuer is the
--------
issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of common stock issued by the
person merging into Issuer or by any company that controls or is
controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot,
--------
for legal reasons, be the same as the Option, such terms shall be as
similar as possible and in no event less advantageous to the Holder. The
issuer of the Substitute Option shall also enter into an agreement with
the then Holder or
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Holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such
number of shares of Substitute Common Stock as is equal to the Assigned
Value multiplied by the number of shares of Common Stock for which the
Option is then exercisable, divided by the Average Price. The exercise
price of the Substitute Option per share of Substitute Common Stock
shall then be equal to the Option Price multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock for
which the Option is then exercisable and the denominator of which shall
be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing
paragraphs, shall the Substitute Option be exercisable for more than
9.9% of the shares of Substitute Common Stock outstanding prior to
exercise of the Substitute Option. In the event that the Substitute
Option would be exercisable for more than 9.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by the Holder or the Owner, as the case
may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described
in subsection (a) of this Section 8 unless the Acquiring Corporation and
any person that controls the Acquiring Corporation assume in writing all
the obligations of Issuer hereunder.
9. (a) At the request of the holder of the Substitute
Option (the "Substitute Option Holder"), the Substitute Option Issuer
shall repurchase the Substitute Option from the Substitute Option Holder
at a price (the "Substitute Option Repurchase Price") equal to the
amount by which (i) the Highest Closing Price (as hereinafter defined)
exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute
Option may then be exercised, and at the request of the owner (the
"Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price")
equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall
mean the highest closing price for shares of Substitute Common Stock
within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the
required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share
Owner, as the case may be, may exercise its respective right to require
the Substitute Option Issuer to repur-
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chase the Substitute Option and the Substitute Shares pursuant to this
Section 9 by surrendering for such purpose to the Substitute Option
Issuer, at its principal office, the agreement for such Substitute
Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or
the Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9.
As promptly as practicable, and in any event within five business days
after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to
be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute
Share Repurchase Price therefor or, in either case, the portion thereof
which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the
Substitute Option and/or the Substitute Shares in part or in full, the
Substitute Option Issuer following a request for repurchase pursuant to
this Section 9 shall immediately so notify the Substitute Option Holder
and/or the Substitute Share Owner and thereafter deliver or cause to be
delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute
Share Repurchase Price, respectively, which it is no longer prohibited
from delivering, within five business days after the date on which the
Substitute Option Issuer is no longer so prohibited; provided, however,
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that if the Substitute Option Issuer is at any time after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
the Substitute Option Repurchase Price and the Substitute Share Repurchase
Price, respectively, in full (and the Substitute Option Issuer shall use
its best efforts to obtain all required regulatory and legal approvals,
in each case as promptly as practicable, in order to accomplish such
repurchase), the Substitute Option Holder or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon,
in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or the
Substitute Share Repurchase Price that the Substitute Option Issuer is not
prohibited from delivering; and (ii) deliver, as appropriate, either (A)
to the Substitute Option Holder, a new Substitute Option evidencing the
right of the Substitute Option Holder to purchase that number of shares
of the Substitute Common Stock obtained by multiplying the number of shares
of the Substitute Common Stock for which the surrendered Substitute Option
was exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Substitute Option Repurchase Price
less the portion thereof theretofore delivered to the Substitute Option
Holder and the denominator of which is the Substitute Option Repurchase
Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Common Shares it is then so prohibited from repurchasing.
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10. The 90-day, or 6-month periods for exercise of certain
rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to the
extent necessary to obtain all regulatory approvals for the exercise of
such rights, for the expiration of all statutory waiting periods; (ii)
to the extent necessary to avoid liability under Section 16(b) of the
1934 Act by reason of such exercise; and (iii) during any period in
which Grantee is precluded from exercising such rights due to an
injunction or other legal restriction, plus in each case such additional
period as is reasonably necessary for the exercise of such rights
promptly following the obtaining of such approvals or the expiration of
such periods.
11. Issuer hereby represents and warrants to Grantee as
follows:
(a) Issuer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Issuer and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from
the date hereof through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the
Option, that number of shares of Common Stock equal to the maximum
number of shares of Common Stock at any time and from time to time
issuable hereunder, and all such shares, upon issuance pursuant hereto,
will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all claims, liens, encumbrance and
security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required
redeeming all of the Firstar Shareholder Rights or amending or
terminating the Firstar Rights Agreement) so that the entering into of
this Option Agreement, the acquisition of shares of Common Stock
hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Firstar
Rights Agreement or enable or require the Rights to be exercised,
distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or
consents referred to herein, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common
Stock or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to
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the public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of
the other party, except that in the event a Subsequent Triggering Event
shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part
its rights and obligations hereunder within 90 days following such
Subsequent Triggering Event (or such later period as provided in Section
10); provided, however, that until the date 15 days following the
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date on which the Federal Reserve Board approves an application by
Grantee under the BHCA to acquire the shares of Common Stock subject to
the Option, Grantee may not assign its rights under the Option except in
(i) a widely dispersed public distribution, (ii) a private placement in
which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g.,
----
a broker or investment banker) for the purpose of conducting a widely
dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts
to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement, including without
limitation making application to list the shares of Common Stock
issuable hereunder on the New York Stock Exchange upon official notice
of issuance and applying to the Federal Reserve Board under the BHCA for
approval to acquire the shares issuable hereunder, but Grantee shall not
be obligated to apply to state banking authorities for approval to
acquire the shares of Common Stock issuable hereunder until such time,
if ever, as it deems appropriate to do so.
15. (a) Grantee in its sole discretion may, at any time
during which Issuer would be required to repurchase the Option or any
Option Shares pursuant to Section 7, surrender the Option (together with
any Option Shares issued to and then owned by the Holder) to Issuer in
exchange for a cash payment equal to the Surrender Price (as hereinafter
defined); provided, however, that Grantee may not exercise its
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rights pursuant to this Section 15 if Issuer has previously repurchased
the Option (or any portion thereof) or any Option Shares pursuant to
Section 7. The "Surrender Price" shall be equal to (i) $250,000,000,
plus (ii) if applicable, the aggregate purchase price previously paid
pursuant hereto by Grantee with respect to any Option Shares, minus
(iii) if applicable, the excess of (A) the net cash, if any, received by
Grantee pursuant to the arm's-length sale of Option Shares (or any other
securities into which such Option Shares were converted or exchanged) to
any party not affiliated with Grantee, over (B) the purchase price paid
by Grantee with respect to such Option Shares.
(b) Grantee may exercise its right to surrender the Option
and any Option Shares pursuant to this Section 15 by surrendering for
such purchase to Issuer, at its principal office, a copy of this
Agreement, together with certificates for Option Shares, if any,
accompanied by a written notice stating (i) that Grantee elects to
surrender the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender
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Price. Within two business days after the surrender of the Option and
the Option Shares, if applicable, Issuer shall deliver or cause to be
delivered to Grantee the Surrender Price.
(c) To the extent that the Issuer is prohibited under
applicable law or regulation from paying the Surrender Price to Grantee
in full, Issuer shall immediately so notify Grantee and thereafter
deliver, or cause to be delivered, from time to time, to Grantee, that
portion of the Surrender Price that Issuer is not or no longer
prohibited from paying, within two business days after the date on which
Issuer is no longer so prohibited; provided, however, that if Issuer
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at any time after delivery of a notice of Surrender pursuant to Section
15(b) is prohibited under applicable law or regulation from paying to
Grantee the Surrender Price in full, (i) Issuer shall (A) use its best
efforts to obtain all required regulatory and legal approvals and to
file any required notices as promptly as practicable in order to make
such payments, (B) within two business days of the submission or receipt
of any documents relating to any such regulatory and legal approvals,
provide Grantee with copies of the same, and (C) keep Grantee advised of
both the status of any such request for regulatory and legal approvals
and any discussions with any relevant regulatory or other third party
reasonably related to the same, and (ii) Grantee may revoke such notice
of surrender by delivery of a notice of revocation, the Exercise
Termination Event shall be extended to a date six months from the date
on which the Exercise Termination Event would have occurred if not for
the provisions of this Section 15(c) (during which period Grantee may
exercise any of its rights hereunder, including any and all rights
pursuant to this Section 15).
(d) Grantee shall have rights substantially identical to
those set forth in paragraphs (a), (b) and (c) of this Section 15 with
respect to the Substitute Option and the Substitute Option Issuer during
any period in which the Substitute Option Issuer would be required to
repurchase the Substitute Option pursuant to Section 9.
16. The parties hereto acknowledge that damages would be
an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other equitable
relief.
17. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for
any reason such court or regulatory agency determines that the Holder is
not permitted to acquire, or Issuer or Substitute Option Issuer, as the
case may be, is not permitted to repurchase pursuant to Section 7 or
Section 9, as the case may be, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay
the full Surrender Price, it is the express intention of Issuer (which
shall be binding on the Substitute Option Issuer) to allow the Holder to
acquire or to require Issuer or the Substitute Option Issuer, as the
case may be, to repurchase such lesser number of shares, or to pay such
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<PAGE>
portion of the Surrender Price, as may be permissible, without any
amendment or modification hereof.
18. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested)
at the respective addresses of the parties set forth in the Merger
Agreement.
19. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, regardless of the
laws that might otherwise govern under applicable principles of
conflicts of laws thereof (except to the extent that mandatory
provisions of federal law apply).
20. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.
21. Except as otherwise expressly provided herein, each of
the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
22. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement
between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in
this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors
except as assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided
herein.
23. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized,
all as of the date first above written.
FIRSTAR CORPORATION
By: /s/ JERRY A. GRUNDHOFER
----------------------------------------
Jerry A. Grundhofer
President and Chief
Executive Officer
MERCANTILE BANCORPORATION INC.
By: /s/ THOMAS H. JACOBSEN
----------------------------------------
Thomas H. Jacobsen
Chairman of the Board, President and
Chief Executive Officer
[Firstar Stock Option]
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THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO
CERTAIN PROVISIONS CONTAINED HEREIN AND TO
RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated April 30, 1999, between
Mercantile Bancorporation Inc., a Missouri corporation ("Issuer"), and
Firstar Corporation, a Wisconsin corporation ("Grantee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Grantee and Issuer have entered into an Agreement
and Plan of Merger of even date herewith (the "Merger Agreement"), which
agreement has been executed by the parties hereto immediately prior to
this Stock Option Agreement (this "Agreement"); and
WHEREAS, as a condition to Grantee's entering into the
Merger Agreement and in consideration therefor and for Grantee's
entering into the Firstar Option Agreement, Issuer has agreed to grant
Grantee the Option (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein and in the Merger
Agreement, the parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms
hereof, up to 31,415,840 fully paid and nonassessable shares of Issuer's
common stock, par value $0.01 per Share ("Common Stock"), at a price of
$51.25 per share (the "Option Price"); provided, however, that in no
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event shall the number of shares of Common Stock for which this Option
is exercisable exceed 19.9% of the Issuer's issued and outstanding
shares of Common Stock without giving effect to any shares subject to or
issued pursuant to the Option. The number of shares of Common Stock that
may be received upon the exercise of the Option and the Option Price are
subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common
Stock are either (i) issued or otherwise become outstanding after the
date of this Agreement (other than pursuant to this Agreement) or (ii)
redeemed, repurchased, retired or otherwise cease to be outstanding
after the date of the Agreement, the number of shares of Common Stock
subject to the Option shall be increased or decreased, as appropriate,
so that, after such issuance, such number equals 19.9% of the number of
shares of Common Stock then issued and outstanding without giving effect
to any shares subject or issued pursuant to the Option. Nothing
contained in this
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<PAGE>
Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise
the Option, in whole or part, and from time to time, if, but only if,
both an Initial Triggering Event (as hereinafter defined) and a
Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined), provided that the Holder shall have sent the written notice
--------
of such exercise (as provided in subsection (e) of this Section 2)
within 90 days following such Subsequent Triggering Event. Each of the
following shall be an "Exercise Termination Event": (i) the Effective
Time (as defined in the Merger Agreement) of the Merger; (ii)
termination of the Merger Agreement in accordance with the provisions
thereof if such termination occurs prior to the occurrence of an Initial
Triggering Event, except a termination by Grantee pursuant to Section
8.1(d) of the Merger Agreement (unless the breach by Issuer giving rise
to such right of termination is non-volitional); or (iii) the passage of
12 months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a
termination by Grantee pursuant to Section 8.1(d) of the Merger
Agreement (unless the breach by Issuer giving rise to such right of
termination is non-volitional) (provided that if an Initial Triggering
--------
Event continues or occurs beyond such termination and prior to the
passage of such 12-month period, the Exercise Termination Event shall be
12 months from the expiration of the Last Triggering Event but in no
event more than 18 months after such termination). The "Last Triggering
Event" shall mean the last Initial Triggering Event to expire. The term
"Holder" shall mean the holder or holders of the Option.
(b) The term "Initial Triggering Event" shall mean any of
the following events or transactions occurring after the date hereof:
(i) Issuer or any of its Subsidiaries (each an
"Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in
an Acquisition Transaction (as hereinafter defined) with any
person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and the rules and regulations thereunder) other than Grantee or
any of its Subsidiaries (each a "Grantee Subsidiary") or the Board
of Directors of Issuer shall have recommended that the
shareholders of Issuer approve or accept any Acquisition
Transaction. For purposes of this Agreement, "Acquisition
Transaction" shall mean (w) a merger or consolidation, or any
similar transaction, involving Issuer or any Significant
Subsidiary (as defined in Rule 1-02 of Regulation S-X promulgated
by the Securities and Exchange Commission (the "SEC")) of Issuer,
(x) a purchase, lease or other acquisition or assumption of all or
a substantial portion of the assets or deposits of Issuer or any
Significant Subsidiary of Issuer, (y) a purchase or other
acquisition (including by way of merger, consolidation, share
exchange or otherwise) of securities representing 10% or more of
the voting power of Issuer, or (z) any substantially similar
transaction; provided, however, that in no event shall any
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merger, consolidation, purchase or similar transaction involving
only the Issuer and one or
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more of its Subsidiaries or involving only any two or more of such
Subsidiaries, provided that any such transaction is not entered into
--------
in violation of the terms of the Merger Agreement, be deemed to be an
Acquisition Transaction;
(ii) Issuer or any Issuer Subsidiary, without having
received Grantee's prior written consent, shall have authorized,
recommended, proposed or publicly announced its intention to
authorize, recommend or propose, to engage in an Acquisition
Transaction with any person other than Grantee or a Grantee
Subsidiary, or the Board of Directors of Issuer shall have
publicly withdrawn or modified, or publicly announced its interest
to withdraw or modify, in any manner adverse to Grantee, its
recommendation that the shareholders of Issuer approve the
transactions contemplated by the Merger Agreement in anticipation
of engaging in an Acquisition Transaction;
(iii) Any person other than Grantee, any Grantee
Subsidiary or any Issuer Subsidiary acting in a fiduciary capacity
in the ordinary course of its business shall have acquired
beneficial ownership or the right to acquire beneficial ownership
of 10% or more of the outstanding shares of Common Stock (the term
"beneficial ownership" for purposes of this Agreement having the
meaning assigned thereto in Section 13(d) of the 1934 Act, and the
rules and regulations thereunder);
(iv) Any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its
shareholders by public announcement or written communication that
is or becomes the subject of public disclosure to engage in an
Acquisition Transaction;
(v) After an overture is made by a third party to
Issuer or its shareholders to engage in an Acquisition
Transaction, Issuer shall have breached any covenant or obligation
contained in the Merger Agreement and such breach (x) would
entitle Grantee to terminate the Merger Agreement and (y) shall
not have been cured prior to the Notice Date (as hereinafter
defined); or
(vi) Any person other than Grantee or any Grantee
Subsidiary, other than in connection with a transaction to which
Grantee has given its prior written consent, shall have filed an
application or notice with the Federal Reserve Board, or other
federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to engage in
an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean
either of the following events or transactions occurring after the date
hereof:
(i) The acquisition by any person of beneficial
ownership of 20% or more of the then-outstanding Common Stock; or
(ii) The occurrence of the Initial Triggering Event
described in paragraph (i) of subsection (b) of this Section 2,
except that the percentage referred to in clause (y) shall be 20%.
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(d) Issuer shall notify Grantee promptly in writing of the
occurrence of any Initial Triggering Event and/or Subsequent Triggering
Event of which it has notice (together, a "Triggering Event"), it being
understood that the giving of such notice by Issuer shall not be a
condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to
exercise the Option, it shall send to Issuer a written notice (the date
of which being herein referred to as the "Notice Date") specifying (i)
the total number of shares it will purchase pursuant to such exercise
and (ii) a place and date not earlier than three business days nor later
than 60 business days from the Notice Date for the closing of such
purchase (the "Closing Date"); provided that if prior notification to
--------
or approval of the Federal Reserve Board or any other regulatory agency
is required in connection with such purchase, the Holder shall promptly
file the required notice or application for approval and shall
expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on
which any required notification periods have expired or been terminated
or such approvals have been obtained and any requisite waiting period or
periods shall have passed. Any exercise of the Option shall be deemed to
occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this
Section 2, the Holder shall pay to Issuer the aggregate purchase price
for the shares of Common Stock purchased pursuant to the exercise of the
Option in immediately available funds by wire transfer to a bank account
designated by Issuer, provided that failure or refusal of Issuer to
--------
designate such a bank account shall not preclude the Holder from
exercising the Option.
(g) At such closing, simultaneously with the delivery of
immediately available funds as provided in subsection (f) of this
Section 2, Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock purchased
by the Holder and, if the Option should be exercised in part only, a new
Option evidencing the rights of the Holder thereof to purchase the
balance of the shares purchasable hereunder, and the Holder shall
deliver to Issuer a copy of this Agreement and a letter agreeing that
the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(h) Certificates for Common Stock delivered at a closing
hereunder may be endorsed with a restrictive legend that shall read
substantially as follows:
"The transfer of the shares represented by this certificate
is subject to certain provisions of an agreement between the
registered holder hereof and Issuer and to resale
restrictions arising under the Securities Act of 1933, as
amended. A copy of such agreement is on file at the
principal office of Issuer and will be provided to the
holder hereof without charge upon receipt by Issuer of a
written request therefor."
It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "1933 Act"),
in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the Holder shall have delivered
to
4
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Issuer a copy of a letter from the staff of the SEC, or an opinion of
counsel, in form and substance reasonably satisfactory to Issuer, to the
effect that such legend is not required for purposes of the 1933 Act;
(ii) the reference to the provisions of this Agreement in the above
legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do
not require the retention of such reference; and (iii) the legend shall
be removed in its entirety if the conditions in the preceding clauses
(i) and (ii) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law.
(i) Upon the giving by the Holder to Issuer of the written
notice of exercise of the Option provided for under subsection (e) of
this Section 2 and the tender of the applicable purchase price in
immediately available funds, the Holder shall be deemed, subject to the
receipt of applicable regulatory approvals, to be the holder of record
of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be
closed or that certificates representing such shares of Common Stock
shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section
2 in the name of the Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving
effect to all other options, warrants, convertible securities and other
rights to purchase Common Stock; (ii) that it will not, by charter
amendment or through reorganization, consolidation, merger, dissolution
or sale of assets, or by any other voluntary act, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by Issuer; (iii)
promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and
waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state banking law, prior
approval of or notice to the Federal Reserve Board or to any state
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or
such state regulatory authority as they may require) in order to permit
the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take
all action provided herein to protect the rights of the Holder against
dilution.
4. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon
presentation and surrender of this Agreement at the principal office of
Issuer, for other Agreements providing for Options of different
denominations entitling the holder thereof to purchase, on the same
terms and subject to the same conditions as are set forth herein, in the
aggregate the same number of shares of Com-
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mon Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any Stock Option Agreements and related Options for
which this Agreement (and the Option granted hereby) may be exchanged.
Upon receipt by Issuer of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Agreement, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Agreement,
if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of Issuer,
whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares
of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common
Stock purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time as provided in this
Section 5. In the event of any change in, or distributions in respect
of, the Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares, distributions on or in respect of the Common Stock, or the like,
the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such
manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full
satisfaction of the Issuer's obligations hereunder.
6. Upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within 90 days of such Subsequent
Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares
of Common Stock issued pursuant hereto), promptly prepare, file and keep
current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and
shall use its reasonable best efforts to cause such registration
statement to become effective and remain current in order to permit the
sale or other disposition of this Option and any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares")
in accordance with any plan of disposition requested by Grantee. Issuer
will use its reasonable best efforts to cause such registration
statement first to become effective and then to remain effective for
such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Grantee
shall have the right to demand two such registrations. The foregoing
notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is
in registration with respect to an underwritten public offering of
shares of Common Stock, and if in the good faith judgment of the
managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering the inclusion of the
Holder's Option or Option Shares would interfere with the successful
marketing of the shares of Common Stock offered by Issuer, the number of
Option Shares otherwise to be covered in the registration statement
contemplated hereby may be reduced; and provided, however, that
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after any such required reduction the number of Option
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Shares to be included in such offering for the account of the Holder
shall constitute at least 25% of the total number of shares to be sold
by the Holder and Issuer in the aggregate; and provided further,
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however, that if such reduction occurs, then the Issuer shall file a
- -------
registration statement for the balance as promptly as practical and no
reduction shall thereafter occur. Each such Holder shall provide all
information reasonably requested by Issuer for inclusion in any
registration statement to be filed hereunder. If requested by any such
Holder in connection with such registration, Issuer shall become a party
to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in
secondary offering underwriting agreements for the Issuer. Upon
receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by
promptly mailing the same, postage prepaid, to the address of record of
the persons entitled to receive such copies. Notwithstanding anything to
the contrary contained herein, in no event shall Issuer be obligated to
effect more than two registrations pursuant to this Section 6 by reason
of the fact that there shall be more than one Grantee as a result of any
assignment or division of this Agreement.
7. (a) Immediately prior to the occurrence of a
Repurchase Event (as hereinafter defined), (i) following a request of
the Holder, delivered prior to an Exercise Termination Event, Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a
price (the "Option Repurchase Price") equal to the amount by which (A)
the Market/Offer Price (as hereinafter defined) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then
be exercised and (ii) at the request of the owner of Option Shares from
time to time (the "Owner"), delivered within 90 days of such occurrence
(or such later period as provided in Section 10), Issuer shall
repurchase such number of the Option Shares from the Owner as the Owner
shall designate at a price (the "Option Share Repurchase Price") equal
to the Market/Offer Price multiplied by the number of Option Shares so
designated. The term "Market/Offer Price" shall mean the highest of (i)
the price per share of Common Stock at which a tender offer or exchange
offer therefor has been made, (ii) the price per share of Common Stock
to be paid by any third party pursuant to an agreement with Issuer,
(iii) the highest closing price for shares of Common Stock within the
six-month period immediately preceding the date the Holder gives notice
of the required repurchase of this Option or the Owner gives notice of
the required repurchase of Option Shares, as the case may be, or (iv) in
the event of a sale of all or a substantial portion of Issuer's assets,
the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or
the Owner, as the case may be, and reasonably acceptable to the Issuer,
divided by the number of shares of Common Stock of Issuer outstanding at
the time of such sale. In determining the Market/Offer Price, the value
of consideration other than cash shall be determined by a nationally
recognized investment banking firm selected by the Holder or Owner, as
the case may be, and reasonably acceptable to the Issuer.
(b) The Holder and the Owner, as the case may be, may
exercise its right to require Issuer to repurchase the Option and any
Option Shares pursuant to this Section 7 by surrendering for such
purpose to Issuer, at its principal office, a copy of this Agreement or
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certificates for Option Shares, as applicable, accompanied by a written
notice or notices stating that the Holder or the Owner, as the case may
be, elects to require Issuer to repurchase this Option and/or the Option
Shares in accordance with the provisions of this Section 7. Within the
latter to occur of (x) five business days after the surrender of the
Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto and (y) the time that is
immediately prior to the occurrence of a Repurchase Event, Issuer shall
deliver or cause to be delivered to the Holder the Option Repurchase
Price and/or to the Owner the Option Share Repurchase Price therefor or
the portion thereof, if any, that Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under
applicable law or regulation from repurchasing the Option and/or the
Option Shares in full, Issuer shall immediately so notify the Holder
and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the
portion of the Option Repurchase Price and the Option Share Repurchase
Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after
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delivery of a notice of repurchase pursuant to paragraph (b) of this
Section 7 is prohibited under applicable law or regulation from
delivering to the Holder and/or the Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in
full (and Issuer hereby undertakes to use its best efforts to obtain all
required regulatory and legal approvals and to file any required
notices, in each case as promptly as practicable in order to accomplish
such repurchase), the Holder or Owner may revoke its notice of
repurchase of the Option or the Option Shares either in whole or to the
extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate,
that portion of the Option Repurchase Price or the Option Share
Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new Stock Option
Agreement evidencing the right of the Holder to purchase that number of
shares of Common Stock obtained by multiplying the number of shares of
Common Stock for which the surrendered Stock Option Agreement was
exercisable at the time of delivery of the notice of repurchase by a
fraction, the numerator of which is the Option Repurchase Price less the
portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a
certificate for the Option Shares it is then so prohibited from
repurchasing.
(d) For purposes of this Section 7, a Repurchase Event
shall be deemed to have occurred (i) upon the consummation of any
merger, consolidation or similar transaction involving Issuer or any
purchase, lease or other acquisition of all or a substantial portion of
the assets of Issuer, other than any such transaction which would not
constitute an Acquisition Transaction pursuant to the provisos to
Section 2(b)(i) hereof or (ii) upon the acquisition by any person of
beneficial ownership of 50% or more of the then outstanding shares of
Common Stock, provided that no such event shall constitute a
--------
Repurchase Event unless a Subsequent Triggering Event shall have
occurred prior to an Exercise Termination Event. The parties hereto
agree that Issuer's obligations to repurchase the Option or Option
Shares under this Section 7 shall not terminate upon the occurrence of
an Exercise Termination Event unless no
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Subsequent Triggering Event shall have occurred prior to the occurrence
of an Exercise Termination Event.
8. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (i) to consolidate with or
merge into any person, other than Grantee or one of its Subsidiaries,
and shall not be the continuing or surviving corporation of such
consolidation or merger, (ii) to permit any person, other than Grantee
or one of its Subsidiaries, to merge into Issuer and Issuer shall be the
continuing or surviving corporation, but, in connection with such
merger, the then outstanding shares of Common Stock shall be changed
into or exchanged for stock or other securities of any other person or
cash or any other property or the then outstanding shares of Common
Stock shall after such merger represent less than 50% of the outstanding
voting shares and voting share equivalents of the merged company, or
(iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its Subsidiaries,
then, and in each such case, the agreement governing such transaction
shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions
set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of the Holder, of either (x) the
Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the
continuing or surviving corporation of a consolidation or
merger with Issuer (if other than Issuer), (B) Issuer in a
merger in which Issuer is the continuing or surviving
person, and (C) the transferee of all or substantially all
of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common
stock issued by the issuer of the Substitute Option upon
exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the Market/Offer
Price, as defined in Section 7.
(iv) "Average Price" shall mean the average closing
price of a share of the Substitute Common Stock for the one
year immediately preceding the consolidation, merger or sale
in question, but in no event higher than the closing price
of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided
--------
that if Issuer is the issuer of the Substitute Option, the
Average Price shall be computed with respect to a share of
common stock issued by the person merging into Issuer or by
any company that controls or is controlled by such person,
as the Holder may elect.
(c) The Substitute Option shall have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot,
--------
for legal reasons, be the same as the Option, such terms shall be as
similar as possible and in no event less advantageous to the Holder. The
issuer of the Substitute Option shall also enter into an agreement with
the then Holder or
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Holders of the Substitute Option in substantially the same form as this
Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such
number of shares of Substitute Common Stock as is equal to the Assigned
Value multiplied by the number of shares of Common Stock for which the
Option is then exercisable, divided by the Average Price. The exercise
price of the Substitute Option per share of Substitute Common Stock
shall then be equal to the Option Price multiplied by a fraction, the
numerator of which shall be the number of shares of Common Stock for
which the Option is then exercisable and the denominator of which shall
be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing
paragraphs, shall the Substitute Option be exercisable for more than
19.9% of the shares of Substitute Common Stock outstanding prior to
exercise of the Substitute Option. In the event that the Substitute
Option would be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option
Issuer") shall make a cash payment to Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the
limitation in this clause (e) over (ii) the value of the Substitute
Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized
investment banking firm selected by the Holder or the Owner, as the case
may be, and reasonably acceptable to the Acquiring Corporation.
(f) Issuer shall not enter into any transaction described
in subsection (a) of this Section 8 unless the Acquiring Corporation and
any person that controls the Acquiring Corporation assume in writing all
the obligations of Issuer hereunder.
9. (a) At the request of the holder of the Substitute
Option (the "Substitute Option Holder"), the Substitute Option Issuer
shall repurchase the Substitute Option from the Substitute Option Holder
at a price (the "Substitute Option Repurchase Price") equal to the
amount by which (i) the Highest Closing Price (as hereinafter defined)
exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute
Option may then be exercised, and at the request of the owner (the
"Substitute Share Owner") of shares of Substitute Common Stock (the
"Substitute Shares"), the Substitute Option Issuer shall repurchase the
Substitute Shares at a price (the "Substitute Share Repurchase Price")
equal to the Highest Closing Price multiplied by the number of
Substitute Shares so designated. The term "Highest Closing Price" shall
mean the highest closing price for shares of Substitute Common Stock
within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the
required repurchase of the Substitute Shares, as applicable.
(b) The Substitute Option Holder and the Substitute Share
Owner, as the case may be, may exercise its respective right to require
the Substitute Option Issuer to repur-
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chase the Substitute Option and the Substitute Shares pursuant to this
Section 9 by surrendering for such purpose to the Substitute Option
Issuer, at its principal office, the agreement for such Substitute
Option (or, in the absence of such an agreement, a copy of this
Agreement) and certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or
the Substitute Share Owner, as the case may be, elects to require the
Substitute Option Issuer to repurchase the Substitute Option and/or the
Substitute Shares in accordance with the provisions of this Section 9.
As promptly as practicable, and in any event within five business days
after the surrender of the Substitute Option and/or certificates
representing Substitute Shares and the receipt of such notice or notices
relating thereto, the Substitute Option Issuer shall deliver or cause to
be delivered to the Substitute Option Holder the Substitute Option
Repurchase Price and/or to the Substitute Share Owner the Substitute
Share Repurchase Price therefor or, in either case, the portion thereof
which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is
prohibited under applicable law or regulation from repurchasing the
Substitute Option and/or the Substitute Shares in part or in full, the
Substitute Option Issuer following a request for repurchase pursuant to
this Section 9 shall immediately so notify the Substitute Option Holder
and/or the Substitute Share Owner and thereafter deliver or cause to be
delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute
Share Repurchase Price, respectively, which it is no longer prohibited
from delivering, within five business days after the date on which the
Substitute Option Issuer is no longer so prohibited; provided, however,
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that if the Substitute Option Issuer is at any time after delivery of
a notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation from delivering to the
Substitute Option Holder and/or the Substitute Share Owner, as appropriate,
the Substitute Option Repurchase Price and the Substitute Share Repurchase
Price, respectively, in full (and the Substitute Option Issuer shall use
its best efforts to obtain all required regulatory and legal approvals,
in each case as promptly as practicable, in order to accomplish such
repurchase), the Substitute Option Holder or Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon,
in the latter case, the Substitute Option Issuer shall promptly (i)
deliver to the Substitute Option Holder or Substitute Share Owner, as
appropriate, that portion of the Substitute Option Repurchase Price or
the Substitute Share Repurchase Price that the Substitute Option Issuer
is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Substitute Option Holder, a new Substitute Option
evidencing the right of the Substitute Option Holder to purchase that
number of shares of the Substitute Common Stock obtained by multiplying
the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of
the notice of repurchase by a fraction, the numerator of which is the
Substitute Option Repurchase Price less the portion thereof theretofore
delivered to the Substitute Option Holder and the denominator of which
is the Substitute Option Repurchase Price, or (B) to the Substitute Share
Owner, a certificate for the Substitute Common Shares it is then so
prohibited from repurchasing.
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10. The 90-day or 6-month periods for exercise of certain
rights under Sections 2, 6, 7, 13 and 15 shall be extended: (i) to
the extent necessary to obtain all regulatory approvals for the
exercise of such rights, and for the expiration of all statutory waiting
periods; (ii) to the extent necessary to avoid liability under Section
16(b) of the 1934 Act by reason of such exercise and (iii) during any
period in which Grantee is precluded from exercising such rights due to
an injunction or other legal restriction, plus in each case such
additional period as is reasonably necessary for the exercise of such
rights promptly following the obtaining of such approvals or the
expiration of such periods.
11. Issuer hereby represents and warrants to Grantee as
follows:
(a) Issuer has full corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by the Board of Directors of Issuer and no other
corporate proceedings on the part of Issuer are necessary to authorize
this Agreement or to consummate the transactions so contemplated. This
Agreement has been duly and validly executed and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to
authorize and reserve and to permit it to issue, and at all times from
the date hereof through the termination of this Agreement in accordance
with its terms will have reserved for issuance upon the exercise of the
Option, that number of shares of Common Stock equal to the maximum
number of shares of Common Stock at any time and from time to time
issuable hereunder, and all such shares, upon issuance pursuant hereto,
will be duly authorized, validly issued, fully paid, nonassessable, and
will be delivered free and clear of all claims, liens, encumbrance and
security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including if required
redeeming all of the Mercantile Shareholder Rights or amending or
terminating the Mercantile Rights Agreement) so that the entering into
of this Option Agreement, the acquisition of shares of Common Stock
hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Mercantile
Rights Agreement or enable or require the Rights to be exercised,
distributed or triggered.
12. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals or
consents referred to herein, to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common
Stock or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to
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the public distribution thereof and will not be transferred or otherwise
disposed of except in a transaction registered or exempt from
registration under the Securities Act.
13. Neither of the parties hereto may assign any of its
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of
the other party, except that in the event a Subsequent Triggering Event
shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part
its rights and obligations hereunder within 90 days following such
Subsequent Triggering Event (or such later period as provided in Section
10); provided, however, that until the date 15 days following the
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date on which the Federal Reserve Board approves an application by
Grantee under the BHCA to acquire the shares of Common Stock subject to
the Option, Grantee may not assign its rights under the Option except in
(i) a widely dispersed public distribution, (ii) a private placement in
which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g.,
----
a broker or investment banker) for the purpose of conducting a widely
dispersed public distribution on Grantee's behalf, or (iv) any other
manner approved by the Federal Reserve Board.
14. Each of Grantee and Issuer will use its best efforts
to make all filings with, and to obtain consents of, all third parties
and governmental authorities necessary to the consummation of the
transactions contemplated by this Agreement, including without
limitation making application to list the shares of Common Stock
issuable hereunder on the New York Stock Exchange upon official notice
of issuance and applying to the Federal Reserve Board under the BHCA for
approval to acquire the shares issuable hereunder, but Grantee shall not
be obligated to apply to state banking authorities for approval to
acquire the shares of Common Stock issuable hereunder until such time,
if ever, as it deems appropriate to do so.
15. (a) Grantee may in its sole discretion, at any time
during which Issuer would be required to repurchase the Option or any
Option Shares pursuant to Section 7, surrender the Option (together with
any Option Shares issued to and then owned by the Holder) to Issuer in
exchange for a cash payment equal to the Surrender Price (as hereinafter
defined); provided, however, the Grantee may not exercise its rights
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pursuant to this Section 15 if Issuer has previously repurchased the
Option (or any portion thereof) or any Option Shares pursuant to Section
7. The "Surrender Price" shall be equal to (i) $250,000,000, plus (ii)
if applicable, the aggregate purchase price previously paid pursuant
hereto by Grantee with respect to any Option Shares, minus (iii) if
applicable, the excess of (A) the net cash, if any, received by Grantee
pursuant to the arm's-length sale of Option Shares (or any other
securities into which such Option Shares were converted or exchanged) to
any party not affiliated with Grantee, over (B) the purchase price paid
by Grantee with respect to such Option Shares.
(b) Grantee may exercise its right to surrender the Option
and any Option Shares pursuant to this Section 15 by surrendering for
such purpose to Issuer, at its principal office, a copy of this
Agreement, together with certificates for Option Shares, if any,
accompanied by a written notice stating (i) that Grantee elects to
surrender the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender
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Price. Within two business days after the surrender of the Option and
the Option Shares, if applicable, Issuer shall deliver or cause to be
delivered to Grantee the Surrender Price.
(c) To the extent that the Issuer is prohibited under
applicable law or regulation from paying the Surrender Price to Grantee
in full, Issuer shall immediately so notify Grantee and thereafter
deliver, or cause to be delivered, from time to time, to Grantee, that
portion of the Surrender Price that Issuer is not or no longer
prohibited from paying, within two business days after the date on which
Issuer is no longer so prohibited; provided, however, that if Issuer
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at any time after delivery of a notice of surrender pursuant to Section
15(b) is prohibited under applicable law or regulation from paying to
Grantee the Surrender Price in full, (i) Issuer shall (A) use its best
efforts to obtain all required regulatory and legal approvals and to
file any required notices as promptly as practicable in order to make
such payments, (B) within two business days of the submission or receipt
of any documents relating to any such regulatory and legal approvals,
provide Grantee with copies of the same, and (C) keep Grantee advised of
both the status of any such request for regulatory and legal approvals
and any discussions with any relevant regulatory or other third party
reasonably related to the same, and (ii) Grantee may revoke such notice
or surrender by delivery of a notice of revocation to Issuer and, upon
delivery of such notice of revocation, the Exercise Termination Event
shall be extended to a date six months from the date on which the
Exercise Termination Event would have occurred if not for the provisions
of this Section 15(c) (during which period Grantee may exercise any of
its rights hereunder, including any and all rights pursuant to this
Section 15).
(d) Grantee shall have rights substantially identical to
those set forth in paragraphs (a), (b) and (c) of this Section 15 with
respect to the Substitute Option and the Substitute Option Issuer during
any period in which the Substitute Option Issuer would be required to
repurchase the Substitute Option pursuant to Section 9.
16. The parties hereto acknowledge that damages would be
an inadequate remedy for a breach of this Agreement by either party
hereto and that the obligations of the parties hereto shall be
enforceable by either party hereto through injunctive or other equitable
relief.
17. If any term, provision, covenant or restriction
contained in this Agreement is held by a court or a federal or state
regulatory agency of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions and covenants and
restrictions contained in this Agreement shall remain in full force and
effect, and shall in no way be affected, impaired or invalidated. If for
any reason such court or regulatory agency determines that the Holder is
not permitted to acquire, or Issuer or Substitute Option Issuer, as the
case may be, is not permitted to repurchase pursuant to Section 7 or
Section 9, as the case may be, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
5 hereof), or Issuer or Substitute Option Issuer is not permitted to pay
the full amount of the Surrender Price pursuant to Section 15, it is the
express intention of Issuer (which shall be binding on the Substitute
Option Issuer) to allow the Holder to acquire or to require Issuer or
Substitute Option Issuer to repurchase such lesser number of shares, or
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to require Issuer or Substitute Option Issuer to pay such portion of the
Surrender Price, as may be permissible, without any amendment or
modification hereof.
18. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when
delivered in person, by cable, telegram, telecopy or telex, or by
registered or certified mail (postage prepaid, return receipt requested)
at the respective addresses of the parties set forth in the Merger
Agreement.
19. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, regardless of the
laws that might otherwise govern under applicable principles of
conflicts of laws thereof (except to the extent that mandatory
provisions of federal law apply).
20. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all
of which shall constitute one and the same agreement.
21. Except as otherwise expressly provided herein, each of
the parties hereto shall bear and pay all costs and expenses incurred by
it or on its behalf in connection with the transactions contemplated
hereunder, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
22. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement
between the parties with respect to the transactions contemplated
hereunder and supersedes all prior arrangements or understandings with
respect thereof, written or oral. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in
this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors
except as assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided
herein.
23. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement
to be executed on its behalf by its officers thereunto duly authorized,
all as of the date first above written.
MERCANTILE BANCORPORATION INC.
By: /s/ THOMAS H. JACOBSEN
----------------------------------
Thomas H. Jacobsen
Chairman of the Board, President
and Chief Executive Officer
FIRSTAR CORPORATION
By: /s/ JERRY A. GRUNDHOFER
----------------------------------
Jerry A. Grundhofer
President and Chief
Executive Officer
[Mercantile Stock Option]
