<PAGE> 1
As filed with the Securities and Exchange Commission on September 29, 1998
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
PNC BANK CORP.
(Exact name of registrant as specified in charter)
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Pennsylvania 6712 25-1435979
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
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One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-1553
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
Walter E. Gregg, Jr., Esq.
Senior Executive Vice President
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
(412) 762-2281
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
<PAGE> 2
Copies to:
Steven L. Kaplan, Esq. Floyd I. Wittlin, Esq.
Arnold & Porter Richards & O'Neil, LLP
555 12th Street, N.W. 885 Third Avenue
Washington, D.C. 20004-1206 New York, New York 10022
(202) 942-5998 (212) 207-1766
----------------------
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective
date of the Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------------------------------------
Proposed Proposed
Title of each maximum maximum Amount
class of securities Amount to be offering aggregate of regis-
to be registered registered price per offering tration
unit price fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
($5.00 Par Value) 4,000,000 $8.17(1) $32,680,000 $9,640.60
---------
- -------------------------------------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of computing the registration fee.
Computed in accordance with Rule 457(f)(2) under the Securities Act of 1933
on the basis of the book value per share of Hilliard Lyons common stock as
of August 31, 1998 ($32.17),
<PAGE> 3
and reduced by $23.04, the amount of cash to be paid by PNC per share of
Hilliard Lyons common stock pursuant to Rule 457(f)(3), divided by 1.117,
the maximum number of shares of PNC common stock to be exchanged for each
share of Hilliard Lyons common stock in the proposed Merger to which this
Registration Statement relates.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 4
Hilliard-Lyons, Inc.
Hilliard Lyons Center
501 South Fourth Street
Louisville, Kentucky 40202
October __, 1998
Dear Hilliard-Lyons, Inc. Shareholder:
You are cordially invited to attend a Special Meeting of shareholders
of Hilliard-Lyons, Inc. (the "Company") to be held on November __, 1998 at 5:00
p.m., at the Hilliard Lyons Center, 501 South Fourth Street, Louisville,
Kentucky. At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve an Agreement and Plan of Merger, dated as of August 20, 1998
(the "Agreement"), which provides for the merger (the "Merger") of the Company
with and into PNC Bank Corp. ("PNC").
Upon consummation of the Merger, you will receive a combination of
shares of PNC common stock and cash for each share of the Company's common stock
that you own. Together, the PNC common stock and cash will total approximately
$76.79 for each share of the Company's common stock that you own. This amount is
expected to consist of no more than 70% stock and no less than 30% cash. If the
average closing price of PNC common stock for the five trading days preceding
the effective date of the Merger is below $52.00 per share, however, PNC may
reduce the stock consideration below 70% and increase the cash consideration
above 30% of the total consideration so that no more than 3.7 million shares of
PNC common stock will be issued in the Merger. In this event, you will receive
the same total amount of consideration, but more of that consideration may
consist of cash and less of it may consist of PNC common stock. In certain
circumstances, the cash consideration may be reduced, and the stock
consideration may be increased beyond 3.7 million, as necessary to receive an
opinion of counsel regarding the federal income tax consequences of the Merger.
In addition to the consideration described above, you will receive a cash
payment in lieu of any fractional shares of PNC common stock that you otherwise
would be entitled to receive. The closing price of PNC common stock on _______
__, 1998, was $____ per share. The price of PNC common stock may change prior to
and following consummation of the Merger.
The proposed Merger has been approved by the Board of Directors of
each company. Your Board of Directors has determined that the Merger is in the
best interests of the Company and its shareholders and recommends that you vote
for approval of the Agreement. The Merger presents a unique opportunity to
combine the Company's resources and expertise with a company that has a
long-standing commitment to the investment management and brokerage business,
and it will position the Company to capitalize on opportunities for aggressive
growth in existing and new markets. The investment banking firm of Berkshire
Capital Corp. has issued a written opinion to your Board of Directors that the
consideration to be received by the
<PAGE> 5
Company's shareholders pursuant to the Agreement for each share of the Company's
common stock is fair to the Company's shareholders from a financial point of
view.
Consummation of the Merger is subject to certain conditions,
including the approval of the Agreement by the requisite vote of the Company's
shareholders at the Special Meeting and the approval of the Merger by various
regulatory agencies.
Specific information regarding the Special Meeting and the Merger is
contained in the enclosed Notice of Special Meeting and Proxy
Statement/Prospectus. Please read these materials carefully.
It is very important that your shares be represented at the Special
Meeting, whether or not you plan to attend in person. The affirmative vote of
the holders of a majority of the outstanding shares of the Company's common
stock is required to approve the Merger. Therefore, I urge you to execute, date
and return the enclosed proxy appointment card in the enclosed postage paid
envelope as soon as possible to assure that your shares will be voted at the
Special Meeting.
On behalf of the Board of Directors, I thank you for your support and
urge you to vote for approval of the Agreement.
Sincerely,
James W. Stuckert
Chairman and Chief Executive Officer
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<PAGE> 6
Hilliard-Lyons, Inc.
501 South Fourth Street
Hilliard Lyons Center
Louisville, Kentucky 40202
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER ___, 1998
TO THE SHAREHOLDERS OF HILLIARD-LYONS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the
"Special Meeting") of Hilliard- Lyons, Inc., a Kentucky corporation ("Hilliard
Lyons") will be held at the Hilliard Lyons Center, 501 South Fourth Street,
Louisville, Kentucky, on November __, 1998 at 5:00 p.m. local time, for the
following purposes:
1. To consider and vote upon a proposal to approve an Agreement and
Plan of Merger, dated as of August 20, 1998 (the "Agreement") between Hilliard
Lyons and PNC Bank Corp., a Pennsylvania corporation ("PNC"), a copy of which
Agreement is included as Appendix A to the accompanying Proxy
Statement/Prospectus, pursuant to which, among other things, (i) Hilliard Lyons
would be merged with and into PNC (the "Merger"), and (ii) the outstanding
shares (other than dissenting shares) of common stock of Hilliard Lyons, no par
value would be converted into a certain combination of shares of the common
stock of PNC, par value $5.00 per share, and the right to receive cash, together
having an aggregate value for all outstanding shares of $275 million; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors of Hilliard Lyons has fixed October __, 1998 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Special Meeting and at any adjournments or postponements thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. EVEN
IF YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE. ANY
SHAREHOLDER PRESENT AT THE SPECIAL MEETING OR AT ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF MAY REVOKE HIS OR HER PROXY AND VOTE PERSONALLY ON EACH
MATTER BROUGHT BEFORE THE SPECIAL MEETING.
You may be entitled to assert dissenters' rights under Subtitle 13 of
the Kentucky Business Corporation Act in connection with the proposed Merger.
Such dissenters' rights may
<PAGE> 7
give you the opportunity to receive the fair value of your shares of Hilliard
Lyons common stock in cash instead of having your shares converted in the Merger
into a combination of PNC common stock and the right to receive cash. In order
to perfect dissenters' rights, certain procedures under Subtitle 13 of the
Kentucky Business Corporation Act, included as Appendix C to the enclosed Proxy
Statement/Prospectus, must be strictly followed.
By Order of the Board of
Directors,
Kenneth L. Wagner
Senior Vice President and Secretary
Louisville, Kentucky
October __, 1998
IMPORTANT
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE MERGER.
PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID RETURN ENVELOPE.
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<PAGE> 8
TABLE OF CONTENTS
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Page(s)
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INTRODUCTION...........................................................................................
AVAILABLE INFORMATION; DOCUMENTS INCORPORATED
BY REFERENCE.....................................................................................
CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING INFORMATION......................................................................
THE COMPANIES..........................................................................................
SUMMARY................................................................................................
MEETING INFORMATION....................................................................................
Date, Place and Time.............................................................................
Record Date; Voting Rights.......................................................................
Voting and Revocation of Proxies.................................................................
Solicitation of Proxies..........................................................................
PROPOSED MERGER........................................................................................
Background of and Reasons for the Merger; Recommendation
of the Hilliard Lyons Board...............................................................
Terms of the Merger..............................................................................
Surrender of Certificates........................................................................
Opinion of Financial Advisor.....................................................................
Representations and Warranties; Conditions to the Merger; Waiver.................................
Regulatory and Other Approvals...................................................................
Business Pending the Merger......................................................................
Effective Date of the Merger; Termination........................................................
Management and Operations After the Merger.......................................................
Certain U.S. Federal Income Tax Consequences.....................................................
Resale of PNC Common Stock.......................................................................
Dividend Reinvestment and Stock Purchase Plan....................................................
Accounting Treatment.............................................................................
Certain Differences in Rights of Shareholders....................................................
Dissenters' Rights...............................................................................
INFORMATION ABOUT HILLIARD LYONS.......................................................................
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS..............................................................
EXPERTS................................................................................................
LEGAL OPINION..........................................................................................
HILLIARD LYONS CONSOLIDATED FINANCIAL INFORMATION......................................................
APPENDIX A -- AGREEMENT AND PLAN OF MERGER
APPENDIX B -- OPINION OF BERKSHIRE CAPITAL CORP.
APPENDIX C -- SUBTITLE 13 OF THE KENTUCKY BUSINESS CORPORATION ACT
</TABLE>
<PAGE> 9
PROXY STATEMENT
HILLIARD-LYONS, INC.
----------------------
PROSPECTUS
PNC BANK CORP.
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to shareholders of
Hilliard-Lyons, Inc. ("Hilliard Lyons") in connection with the solicitation of
proxies by the Board of Directors of Hilliard Lyons (the "Hilliard Lyons Board")
for their use at Hilliard Lyons' special meeting of shareholders, and any
adjournments or postponements thereof (the "Special Meeting"), to be held at the
time and place set forth in the accompanying Notice of Special Meeting.
The purpose of the Special Meeting is to consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated August 20, 1998 (the
"Agreement") and a copy of which is attached hereto as Appendix A, between
Hilliard Lyons and PNC Bank Corp., a Pennsylvania corporation ("PNC"), pursuant
to which, among other things, Hilliard Lyons will be merged with and into PNC on
and subject to the terms and conditions contained therein (the "Merger"). Upon
the Effective Date (as defined in the Agreement) of the Merger, except as
otherwise provided in the Agreement, the outstanding shares of the common stock
of Hilliard Lyons, no par value (the "Hilliard Lyons Common Stock"), will be
converted into a combination of shares of PNC common stock, par value $5.00 per
share (the "PNC Common Stock"), and the right to receive cash, together having
an aggregate value of $275 million. For a more complete description of the
Agreement and the terms of the Merger, see "PROPOSED MERGER -- Terms of the
Merger."
The total amount of consideration to be received per share of Hilliard
Lyons Common Stock is expected to be approximately $76.79, of which about 70%
will be in the form of PNC Common Stock and about 30% will be in the form of the
right to receive cash. However, if the average closing price of PNC Common Stock
for the five trading days preceding the effective date of the Merger is below
$52.00 per share, PNC may increase the amount of consideration paid in cash and
decrease the amount of consideration paid in PNC Common Stock so that no more
than 3.7 million shares of PNC Common Stock will be issued in connection with
the Merger. In certain circumstances, the cash consideration may be reduced, and
the stock consideration may be increased beyond 3.7 million shares, as necessary
to receive the closing tax opinion described under "PROPOSED MERGER -- Certain
U.S. Federal Income Tax Consequences."
It is anticipated that the mailing of this Proxy Statement/Prospectus,
the Notice of Special Meeting and the accompanying proxy card to the
shareholders of Hilliard Lyons will commence on or about October __, 1998.
- 1 -
<PAGE> 10
This Proxy Statement/Prospectus is also being furnished by PNC as a
prospectus with respect to up to 4 million shares of PNC Common Stock that are
issuable upon consummation of the Merger. PNC Common Stock is listed and traded
on the New York Stock Exchange ("NYSE") under the symbol "PNC." No active market
exists for Hilliard Lyons Common Stock, and it is not traded on any exchange.
The closing price of PNC Common Stock on the NYSE Composite Transactions List on
_____ ___, 1998 (the latest practicable trading day before the printing of this
Proxy Statement/Prospectus) was $___ per share. See "SUMMARY -- Market Prices
and Dividend Data." The market price of PNC Common Stock may change prior to and
following consummation of the Merger.
All information concerning PNC contained in this Proxy
Statement/Prospectus has been furnished by PNC, and all information contained
herein concerning Hilliard Lyons has been furnished by Hilliard Lyons.
THE SHARES OF PNC COMMON STOCK OFFERED HEREBY ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENTAL
AGENCY, AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK
SUBSIDIARY OF PNC.
THE PNC COMMON STOCK TO BE ISSUED IN THE MERGER HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ANY
STATE SECURITIES AUTHORITY OR OTHER GOVERNMENTAL AGENCY, NOR HAS THE COMMISSION,
ANY STATE SECURITIES AUTHORITY OR OTHER GOVERNMENTAL AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS
PROXY STATEMENT/PROSPECTUS IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PNC OR HILLIARD LYONS SINCE THE
DATE OF THIS PROXY STATEMENT/PROSPECTUS.
- 2 -
<PAGE> 11
The date of this Proxy Statement/Prospectus is October __, 1998. This
Proxy Statement/Prospectus does not cover any resales of PNC Common Stock
received by shareholders of Hilliard Lyons upon consummation of the Merger, and
no person is authorized to make use of this Proxy Statement/Prospectus in
connection with any such resale.
ALL SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT/PROSPECTUS
CAREFULLY AND IN ITS ENTIRETY.
AVAILABLE INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE
PNC (Commission File No. 1-9718) is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by PNC can be inspected and copied at the Commission's Public
Reference Room located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices located at 7 World
Trade Center (13th floor), New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Copies of such material can also be obtained upon
payment of prescribed fees by writing to the Commission, Public Reference
Section, Washington, D.C. 20549. The Commission maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission, and the address
of that site is http://www.sec.gov. PNC's web site address is
http://www.pncbank.com.
Reports, proxy statements and other information filed by PNC can also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005,
on which exchange PNC Common Stock and certain series of PNC's preferred stock
are listed.
PNC has filed with the Commission a registration statement (No.
333-____) on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the shares of PNC Common Stock that may be issued
in connection with the Merger (the "Registration Statement"). This Proxy
Statement/Prospectus also constitutes the prospectus of PNC filed as part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement and exhibits thereto. Statements contained in this
Proxy Statement/Prospectus or in any document incorporated by reference in this
Proxy Statement/Prospectus as to the contents of any documents referred to
herein or therein are not necessarily complete, and in each instance reference
is made to the copy of such other documents filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and the exhibits thereto may be
inspected and copied, upon payment of prescribed fees, at the public reference
facilities maintained by the Commission at the addresses set forth above.
- 3 -
<PAGE> 12
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
CERTAIN EXHIBITS TO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR
ORAL REQUEST TO LYNN F. EVANS, DIRECTOR - FINANCIAL REPORTING, PNC BANK CORP.,
ONE PNC PLAZA, 249 FIFTH AVE., PITTSBURGH, PENNSYLVANIA 15222-2707. TELEPHONE
REQUESTS MAY BE DIRECTED TO (412) 762-1553. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER __, 1998.
The following documents filed with the Commission are incorporated
herein by reference: (i) Annual Report on Form 10-K of PNC for the year ended
December 31, 1997, as amended on June 24, 1998; (ii) Quarterly Reports on Form
10-Q of PNC for the quarters ended March 31 and June 30, 1998; (iii) Current
Reports on Form 8-K of PNC dated as of January 15, April 14 and July 16, 1998;
and (iv) the description of PNC Common Stock set forth in response to Item 1 of
the Registration Statement on Form 8-A of PNC filed September 24, 1987 pursuant
to Section 12 of the Exchange Act, and any amendment or report filed for the
purpose of updating such description.
All documents filed by PNC pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Special Meeting shall be deemed to be incorporated herein by reference and
to be a part hereof from the date of the filing. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus (including information included or
incorporated by reference herein) contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and business of each of PNC and Hilliard Lyons.
These forward-looking statements involve certain risks and uncertainties. In
addition to those identified in PNC's filings with the Commission incorporated
herein by reference, the following factors may cause actual results to differ
materially from those contemplated by such forward-looking statements include,
among others, the following possibilities: (i) expected cost savings from the
Merger may not be fully realized or realized within the expected time frame;
(ii) revenues following the Merger may be lower than expected, or operating
costs or customer loss and business disruption following the Merger may be
greater than expected; (iii) competitive pressures may increase significantly;
(iv) costs or difficulties related to the integration of the business of PNC and
Hilliard Lyons may be greater than expected; and (v) changes may occur in the
securities markets.
- 4 -
<PAGE> 13
THE COMPANIES
PNC. PNC is a Pennsylvania corporation registered under the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"). PNC is one of
the largest diversified financial services companies in the United States and
operates eight lines of business: Regional Community Banking, Corporate Banking,
National Consumer Banking, Private Banking, Mortgage Banking, Secured Lending,
Asset Management and Mutual Fund Servicing. Financial products and services are
tailored to specific customer segments and offered nationally and in PNC's
primary geographic markets in Pennsylvania, New Jersey, Delaware, Ohio and
Kentucky. As of June 30, 1998, PNC was ranked, on the basis of total assets, as
the fourteenth largest bank holding company in the United States and the largest
headquartered in Pennsylvania.
From time to time, PNC investigates and holds discussions and
negotiations in connection with possible transactions with other banks and
financial service entities. At the date hereof, PNC has not entered into any
agreements or understandings with respect to any significant transactions of the
type referred to above except for the transactions described herein and in
documents incorporated herein by reference. See "AVAILABLE INFORMATION;
DOCUMENTS INCORPORATED BY REFERENCE." If required under applicable law, or NYSE
policy, any such transactions would be subject to regulatory approval and the
approval of shareholders.
The principal executive offices of PNC are located at One PNC Plaza,
249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Its telephone number is
(412) 762-1553. For additional information concerning the business of PNC and
its financial condition, reference should be made to the PNC documents
incorporated herein by reference. See "AVAILABLE INFORMATION."
HILLIARD LYONS. Hilliard Lyons is a privately owned Kentucky corporation
that is the successor to a partnership established in 1854. Hilliard Lyons
operates principally through J.J.B. Hilliard, W.L. Lyons, Inc. (the "Broker
Subsidiary"), a wholly-owned subsidiary that acts as a full-service regional
brokerage, investment advisor and investment banking firm. Hilliard Lyons and
its subsidiaries have focused their business on delivering brokerage services
and investment management expertise to affluent clients. As of August 31, 1998,
the firm had approximately 1,325 employees serving over 200,000 clients.
The Broker Subsidiary is registered under the Exchange Act and the
Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), is
licensed as a broker-dealer in
- 5 -
<PAGE> 14
every state except Maine, and is a member of the NYSE, the American, Boston and
Chicago Stock Exchanges, the Chicago Board Options Exchange and the National
Association of Securities Dealers, Inc. (the "NASD"). The Broker Subsidiary is
the largest broker-dealer headquartered in Kentucky, with approximately 90
branch offices in Arkansas, Georgia, Illinois, Indiana, Kentucky, Michigan,
Mississippi, Missouri, North Carolina, Ohio, South Carolina, Tennessee and West
Virginia. The significant activities of the Broker Subsidiary and other Hilliard
Lyons subsidiaries include dealing; trading; providing retail brokerage,
investment banking, and insurance agency and brokerage services; marketing and
selling shares of open- and closed-end investment companies; providing private
placements and public offerings of securities; and underwriting equity and
corporate and government debt (including state and local municipal securities).
The Broker Subsidiary also provides investment advisory services to individuals
and their estates and trusts, corporations, charitable and educational
foundations and employee benefit plans. In addition, the Broker Subsidiary
provides administrative services to open- and closed-end investment companies.
Hilliard Lyons also operates Hilliard Lyons Trust Company (the "Trust
Company"), a Kentucky corporation organized in 1983, which had assets under
management as of August 31, 1998 of approximately $2.3 billion. The Trust
Company conducts fiduciary and trust-related business. Hilliard Lyons also
operates various other subsidiaries engaging in, among other things, real estate
and insurance agency activities. For additional information regarding the
business of Hilliard Lyons and its financial condition, see "INFORMATION ABOUT
HILLIARD LYONS" and "HILLIARD LYONS CONSOLIDATED FINANCIAL INFORMATION."
The principal executive offices of Hilliard Lyons are located at
Hilliard Lyons Center, 501 South Fourth Street, Louisville, Kentucky 40202. Its
telephone number is (502) 588-8400.
- 6 -
<PAGE> 15
SUMMARY
This summary is necessarily general and abbreviated and has been
prepared to assist shareholders in their review of this Proxy
Statement/Prospectus. This summary is not intended to be a complete explanation
of the matters covered in this Proxy Statement/Prospectus and is qualified in
all respects by reference to the more detailed information contained elsewhere
in this Proxy Statement/Prospectus, the Appendices hereto and the documents
incorporated herein by reference. Shareholders are urged to read this Proxy
Statement/Prospectus and the Appendices hereto in their entirety.
THE SPECIAL MEETING
The Special Meeting to consider and vote upon the Merger will be held on
November __, 1998 at 5:00 p.m. local time, at the Hilliard Lyons Center, 501
South Fourth Street, Louisville, Kentucky. The Record Date with respect to the
Special Meeting is October __, 1998. Only holders of record of Hilliard Lyons
Common Stock at the close of business on the Record Date will be entitled to
notice of and to vote at such Special Meeting and any adjournments or
postponements thereof. At such date, there were outstanding and entitled to vote
3,581,400 shares of Hilliard Lyons Common Stock.
For additional information with respect to the Special Meeting and the
voting rights of shareholders, see "MEETING INFORMATION."
THE PROPOSED MERGER
In accordance with the terms of the Agreement, on the Effective Date (as
hereinafter defined), Hilliard Lyons will be merged with and into PNC. Also on
the Effective Date, the separate existence of Hilliard Lyons will cease and PNC,
as the surviving entity, will continue unimpaired by the Merger. Except as
described in "PROPOSED MERGER -- Management and Operations After the Merger --
Operations," the subsidiaries of Hilliard Lyons will continue operations after
the Effective Date as subsidiaries of PNC.
On the Effective Date, each outstanding share of Hilliard Lyons Common
Stock (other than shares held by dissenting shareholders) will be converted into
a combination of shares of PNC Common Stock and cash. The total of the aggregate
stock consideration and cash consideration provided in the Merger will be $275
million, or, based on the number of shares of Hilliard Lyons Common Stock issued
and outstanding on August 20, 1998, $76.79 per share. Subject to the possible
adjustment described in the next succeeding paragraph, this amount is expected
to consist of approximately 70% stock and 30% cash. The holder of each share of
Hilliard Lyons Common Stock will receive (i) the number of shares of PNC Common
Stock equal to $192.5 million divided by the product of the Average Closing
Price (as hereinafter defined) and the number of shares of Hilliard Lyons Common
Stock issued and outstanding immediately prior to the Effective Date ("Stock
Consideration"); and (ii) cash in the amount of $82.5 million divided by the
number of shares of Hilliard Lyons Common Stock issued and
- 7 -
<PAGE> 16
outstanding immediately prior to the Effective Date ("Cash Consideration," and
collectively with the Stock Consideration, "Merger Consideration"). The "Average
Closing Price" is defined in the Agreement as the average of the closing prices
per share of PNC Common Stock on the NYSE-Composite Transactions List (as
reported by The Wall Street Journal or other authoritative source) for the five
NYSE trading days immediately prior to the Effective Date.
If the Average Closing Price is below $52.00, PNC may reduce the Stock
Consideration and increase the Cash Consideration (provided the aggregate Merger
Consideration remains $275 million) so that no more than 3.7 million shares of
PNC Common Stock are issued. In certain circumstances, the Cash Consideration
may be reduced, and the Stock Consideration may be increased beyond 3.7 million,
as necessary to receive the closing tax opinion described under "PROPOSED MERGER
- -- Certain U.S. Federal Income Tax Consequences." In addition to the
consideration described above, holders of Hilliard Lyons Common Stock will
receive cash in lieu of any fractional shares of PNC Common Stock to which they
would otherwise be entitled. See "PROPOSED MERGER -- Terms of the Merger."
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Immediately following consummation of the Merger, the Broker Subsidiary
will be a wholly-owned subsidiary of PNC and will retain generally the same
management team that is in place at Hilliard Lyons prior to the Merger. Except
as described in "PROPOSED MERGER -- Management and Operations After the Merger
- -- Operations," the Broker Subsidiary generally will continue to carry on the
business, including but not limited to investment advisory services and
securities underwriting, dealing and brokerage, that it had conducted prior to
the Merger.
On the Effective Date, all employees of Hilliard Lyons or its
subsidiaries will become employees of a PNC subsidiary. In order to induce
certain Hilliard Lyons personnel to remain in the employ of PNC following
consummation of the Merger, the Agreement provides that PNC will establish a
retention pool of funds (the "Retention Pool") that will be used to retain
"Designated Managers" and "Key Brokers" of Hilliard Lyons and its subsidiaries.
The Retention Pool will be funded with approximately $40 million, of which
approximately $29 million will be set aside for Key Brokers and approximately
$11 million for Designated Managers. In connection with the Merger, the Broker
Subsidiary has entered into three-year employment agreements (the "Employment
Agreements") with certain senior executive officers of Hilliard Lyons.
See "PROPOSED MERGER -- Management and Operations After the Merger."
- 8 -
<PAGE> 17
RECOMMENDATION OF THE HILLIARD LYONS BOARD
The Hilliard Lyons Board has approved the Agreement, believes that the
Merger is in the best interests of the Hilliard Lyons shareholders and
recommends that the shareholders vote FOR the Merger. See "PROPOSED MERGER --
Background of and Reasons for the Merger; Recommendation of the Hilliard Lyons
Board."
OPINION OF FINANCIAL ADVISOR
Berkshire Capital Corp. ("Berkshire Capital"), Hilliard Lyons' financial
advisor in connection with the Merger, has rendered its opinion dated the date
of this Proxy Statement/Prospectus, that the Merger Consideration is fair, as of
the date of the opinion, from a financial point of view, to the Hilliard Lyons
shareholders. The summary of such opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion. A copy of the opinion of Berkshire Capital is attached to this
Proxy Statement/Prospectus as Appendix B, and should be read in its entirety
with respect to the procedures followed, assumptions made and other matters
considered. Hilliard Lyons has agreed to pay a fee to Berkshire Capital for its
services in connection with the Merger, a substantial portion of which fee is
contingent upon consummation of the Merger or a similar transaction. See
"PROPOSED MERGER -- Opinion of Financial Advisor."
VOTE REQUIRED
Under applicable Kentucky law and the Articles of Incorporation of
Hilliard Lyons, approval of the Merger will require the affirmative vote of the
holders of a majority of the outstanding shares of Hilliard Lyons Common Stock.
Approval of the Merger by the requisite vote of the holders of Hilliard Lyons
Common Stock is a condition to, and required for, consummation of the Merger.
See "MEETING INFORMATION -- Record Date; Voting Rights." No approval of the
Merger by the holders of the PNC Common Stock is required.
As of the Record Date, directors and executive officers of Hilliard
Lyons and their affiliates had voting power with respect to 745,627 shares of
Hilliard Lyons Common Stock, representing approximately 20.82% of the shares of
Hilliard Lyons Common Stock then outstanding. Each such director or executive
officer has indicated his or her intention to vote for the Merger.
CONDITIONS; AMENDMENT; TERMINATION
Consummation of the Merger is subject to satisfaction of certain
conditions including, but not limited to, approval of the Merger by the
requisite vote of the shareholders of Hilliard Lyons, receipt by the parties of
the opinion described in "PROPOSED MERGER -- Certain U.S. Federal Income Tax
Consequences" below, and the receipt of all regulatory approvals required by law
or deemed necessary by the parties to be obtained prior to the Merger, which
- 9 -
<PAGE> 18
approvals shall be without any condition that, in the reasonable opinion of the
Board of Directors of PNC (the "PNC Board"), materially and adversely affects
the anticipated economic and business benefits to PNC of the Merger.
Except for required shareholder and regulatory approvals, each of the
conditions to consummation of the Merger may be waived at any time by the party
whose further obligation is subject to its occurrence. Moreover, to the extent
permitted under applicable state law, the Agreement may be amended or
supplemented at any time by mutual agreement of the parties in writing and
approved by their respective Boards of Directors. In addition, the Agreement may
be terminated, either before or after shareholder approval, under certain
circumstances. See "PROPOSED MERGER -- Representations and Warranties;
Conditions to the Merger; Waiver"; " -- Effective Date of the Merger;
Termination;" and " -- Certain U.S. Federal Income Tax Consequences."
REGULATORY AND OTHER APPROVALS
Consummation of the Merger is conditioned on the receipt by PNC and
Hilliard Lyons of all necessary approvals by governmental regulatory agencies.
The Merger is subject to approval by the Board of Governors of the Federal
Reserve System (the "Federal Reserve") under Section 4 of the Bank Holding
Company Act and the Federal Reserve's implementing regulation thereunder,
Regulation Y. Furthermore, under the Investment Company Act of 1940, as amended
(the "Investment Company Act") and the Investment Advisers Act, certain consents
and approvals from third parties must be obtained, although the receipt of
certain of such consents and approvals are not conditions precedent to
consummation of the Merger. In addition, various other approvals and consents
are required to be obtained from state and federal agencies and self-regulatory
organizations, including without limitation the NYSE and the NASD, in connection
with the Merger. It is expected that the regulatory approvals described herein
will be obtained in time to allow for consummation of the Merger on or about
November 30, 1998, but there is no assurance that such regulatory approvals will
be obtained so as to permit consummation of the Merger, or that such approvals
will not impose conditions that would materially and adversely affect the
anticipated economic and business benefits to PNC of the Merger and therefore
permit PNC to abandon the Merger. See "PROPOSED MERGER -- Representations and
Warranties; Conditions to the Merger; Waiver" and " -- Regulatory and Other
Approvals."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
PNC and Hilliard Lyons have received a legal opinion with respect to
the anticipated material U.S. federal income tax consequences of the Merger to a
nondissenting holder of Hilliard Lyons Common Stock, to the effect that the
holder will recognize gain equal to the lesser of (i) the amount of gain
realized (i.e., the excess of the sum of the amount of cash and the fair market
value of PNC Common Stock received over the holder's adjusted tax basis in the
surrendered shares) and (ii) the amount of cash received (exclusive of any cash
received in lieu of a fractional share of PNC Common Stock). Such gain generally
will be capital gain.
- 10 -
<PAGE> 19
Receipt of cash in lieu of a fractional share of PNC Common Stock will generally
result in recognition of capital gain or loss measured by the difference between
the amount of such cash and the portion of the holder's adjusted tax basis in
the surrendered shares of Hilliard Lyons Common Stock allocable to such
fractional share. Certain exceptions or other considerations may apply. Each
holder of Hilliard Lyons Common Stock is urged to consult his or her tax advisor
with respect to the U.S. federal income tax and other tax consequences of the
Merger and to read in full the more detailed description of the anticipated
material U.S. federal income tax consequences under "PROPOSED MERGER -- Certain
U.S. Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger is intended to be accounted for as a purchase transaction
under generally accepted accounting principles for accounting and financial
reporting purposes. See "PROPOSED MERGER -- Accounting Treatment."
DISSENTERS' RIGHTS
Holders of Hilliard Lyons Common Stock will be entitled to statutory
dissenters' rights under Kentucky law in connection with the Merger. Under the
Kentucky Business Corporation Act, as amended (the "Kentucky Business
Corporation Act"), holders of Hilliard Lyons Common Stock who do not vote in
favor of the Agreement and who comply with certain notice requirements and other
procedures will have the right to dissent and to be paid cash for the "fair
value" of their shares. Such "fair value" as determined using procedures
provided for by Kentucky law may be more or less than the consideration to be
received by other shareholders of Hilliard Lyons under the terms of the
Agreement. The procedures required to be followed by dissenting shareholders are
explained elsewhere in this Proxy Statement/Prospectus, and are set forth in
full in the text of Subtitle 13 of the Kentucky Business Corporation Act,
attached to this Proxy Statement/Prospectus as Appendix C. Failure to follow
these procedures strictly may result in the loss of dissenters' rights.
Dissenting shareholders who receive cash for their shares of Hilliard Lyons
Common Stock will recognize gain or loss, as the case may be, for U.S. federal
income tax purposes. See "PROPOSED MERGER -- Dissenters' Rights" and " --
Certain U.S. Federal Income Tax Consequences."
EFFECTIVE DATE OF THE MERGER
The Effective Date shall be the date and time as set forth in the
articles of merger to be delivered to and filed with the Kentucky Secretary of
State and the Pennsylvania Department of State in accordance with Kentucky and
Pennsylvania law, respectively. PNC and Hilliard Lyons each anticipate that the
Effective Date will occur and the Merger will be consummated by November 30,
1998. However, consummation of the Merger could be delayed and there can be no
assurances as to if or when the Merger will be consummated. See "PROPOSED MERGER
- -- Effective Date of the Merger; Termination."
- 11 -
<PAGE> 20
HILLIARD LYONS STOCK CERTIFICATES
If the Merger is approved and consummated, PNC's stock transfer agent
will send each Hilliard Lyons shareholder instructions on how to obtain the
Stock Consideration and Cash Consideration to which he or she is entitled. See
"PROPOSED MERGER -- Surrender of Certificates."
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
On the Effective Date, shareholders of Hilliard Lyons (other than
dissenting shareholders) will automatically become shareholders of PNC and their
rights as shareholders of PNC will be governed by PNC's Articles of
Incorporation and By-Laws, and by Pennsylvania law. The rights of Hilliard Lyons
shareholders currently are governed by Hilliard Lyons' Articles of Incorporation
and By-Laws, and by applicable Kentucky Law. The rights of shareholders of PNC
are different in certain respects from the rights of shareholders of Hilliard
Lyons. See "PROPOSED MERGER -- Certain Differences in Rights of Shareholders."
MARKET PRICES AND DIVIDEND DATA
PNC Common Stock is listed and traded on the NYSE under the symbol
"PNC." No active trading market exists for Hilliard Lyons Common Stock.
The table below sets forth the high and low closing prices for PNC
Common Stock on the NYSE Composite Transactions List for the quarterly periods
indicated. The table also shows cash dividends declared per share of PNC Common
Stock for the same periods. No assurance can be given that equivalent dividends
will be paid in the future. The amount of future dividends payable by PNC will
depend upon the earnings and financial condition of PNC and other factors,
including, but not limited to, applicable governmental regulations and policies.
<TABLE>
<CAPTION>
PNC Common
Stock
High Low Cash Dividend
Declared
<S> <C> <C> <C>
1998 Quarter
First $61.625 $49.500 $0.39
Second $66.750 $53.813 $0.39
Third
1997 Quarter
First $45.000 $36.500 $0.37
Second $44.750 $37.375 $0.37
</TABLE>
- 12 -
<PAGE> 21
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Third $49.750 $41.125 $0.37
Fourth $58.750 $42.875 $0.39
1996 Quarter
First $32.625 $28.375 $0.35
Second $31.500 $28.375 $0.35
Third $33.875 $27.500 $0.35
Fourth $39.750 $33.125 $0.37
</TABLE>
Hilliard Lyons is a privately-held company and as such, its Common Stock
is not listed or traded on any securities exchange. Hilliard Lyons has an
employee Stock Purchase Plan (the "Plan") for its eligible employees and
officers. The aggregate number of shares available for purchase under the plan
each year is determined by the Hilliard Lyons Board. The Hilliard Lyons Articles
of Incorporation impose certain restrictions on the sale of Hilliard Lyons
Common Stock by shareholders. The purchase price of the shares each year is
their adjusted book value (as defined by the Plan) as of November 30 of the
previous year. The following table shows the aggregate purchases and sales,
adjusted book value and dividends paid for the past three fiscal years.
<TABLE>
<CAPTION>
Fiscal Year
Ended Shares Shares Adjusted Dividends
November 30 Issued Redeemed Book Value Paid
<S> <C> <C> <C> <C>
1997 133,600 156,100 $29.03 $0.22
1996 154,300 325,200 $25.38 $0.20
1995 135,100 136,800 $21.69 $0.05
</TABLE>
The information presented in the following table reflects the closing
share price of PNC Common Stock on August 20, 1998, the last trading day
preceding public announcement of the Merger, and on October __, 1998 (the latest
practicable trading day before the printing of this Proxy Statement/Prospectus),
on the NYSE Composite Transactions list, and the per share price of Hilliard
Lyons Common Stock on the same dates. The Hilliard Lyons Equivalent is derived
by multiplying the price per share of PNC Common Stock on those dates by the
applicable common stock exchange ratio and adding the amount of Cash
Consideration to be received per share of Hilliard Lyons Common Stock.
<TABLE>
<CAPTION>
PNC Hilliard Lyons Hilliard Lyons
Common Stock Common Stock Equivalent
<S> <C> <C> <C>
Market value per share as of:
August 20, 1998 $48.9375 * $76.79
______ __, 1998 $_________ * $76.79
</TABLE>
*There is no public market for the stock, as described immediately above.
- 13 -
<PAGE> 22
No assurance can be given as to what the market price of PNC Common
Stock will be if and when the Merger is consummated. Hilliard Lyons shareholders
are advised to obtain current market quotations for PNC Common Stock.
COMPARATIVE PER SHARE DATA
The following table presents, at the dates and for the periods
indicated, (i) historical consolidated per share data for PNC Common Stock and
(ii) historical and equivalent historical per share data for Hilliard Lyons
Common Stock. The PNC data presented is with respect to its fiscal year ended
December 31, 1997 and the six-month period ended June 30, 1998. The Hilliard
Lyons data presented is with respect to its fiscal year ended November 30, 1997
and the six-month period ended May 31, 1998.
The equivalent per share data for Hilliard Lyons Common Stock were
computed by multiplying the historical data for PNC Common Stock by the number
of shares of PNC Common Stock into which each share of Hilliard Lyons will be
converted in the Merger; for purposes of this table it was assumed that the
Average Closing Price was the same as the closing price of PNC Common Stock on
August 20, 1998, or $48.9375, and that PNC elected to exercise its option to
reduce the Stock Consideration and increase the Cash Consideration to the
fullest extent permitted under the Agreement. Under these assumptions, each
share of Hilliard Lyons Common Stock would be converted into 1.033 shares of PNC
Common Stock.
In addition to Stock Consideration, Hilliard Lyons shareholders also
will receive Cash Consideration in the Merger. Under the assumptions utilized in
preparing this table, the amount of Cash Consideration would be $26.23 per share
of Hilliard Lyons Common Stock. The actual amount of Stock Consideration and
Cash Consideration will be determined at the Effective Date as described under
"PROPOSED MERGER - Terms of the Merger."
Pro forma financial information giving effect to the Merger is not
presented herein since Hilliard Lyons would not constitute a "significant
subsidiary" of PNC as such term is defined in the Commission's rules. The
information is based upon and should be read in conjunction with the historical
financial statements of PNC incorporated by reference in this Proxy
Statement/Prospectus and the historical financial statements of Hilliard Lyons
appearing elsewhere herein.
- 14 -
<PAGE> 23
<TABLE>
<CAPTION>
Hilliard Lyons
Per Common Share PNC Historical Historical Equivalent+
- ---------------- -------------- ---------- ----------
<S> <C> <C> <C>
Book value:
December 31, 1997* $ 16.87 $ 29.03 $ 17.43
June 30, 1998** 17.64 31.55 18.22
Cash Dividends Declared:
Year Ended December 31, 1997* 1.50 0.22 1.55
Six Months Ended June 30, 1998** 0.78 -- 0.81
Diluted Earnings
Year Ended December 31, 1997* 3.28 3.15 3.39
Six Months Ended June 30, 1998** 1.77 2.50 1.83
</TABLE>
*November 30, 1997 Year End for Hilliard Lyons
**May 31, 1998 Six Month Period for Hilliard Lyons
+Does not include the impact of the Cash Consideration.
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain unaudited historical consolidated
financial data ("selected financial data") for PNC and Hilliard Lyons. Certain
of the historical selected consolidated financial data for the five years in the
period ended December 31, 1997 are derived from the audited consolidated
financial statements of PNC. Certain of the historical selected financial data
for the five years in the period ended November 30, 1997 are derived from the
audited consolidated financial statements of Hilliard Lyons. The selected
financial data for the six month periods ended June 30, 1998 and 1997 for PNC,
and for the nine month periods ended August 31, 1998 and 1997 for Hilliard
Lyons, are derived from unaudited consolidated interim financial statements and
are not necessarily indicative of the results for the remainder of the year or
any future period. In both PNC's and Hilliard Lyons' management's opinion, their
respective consolidated interim financial statements reflect all adjustments,
which are of a normal recurring nature, necessary for a fair statement of the
results for the interim periods presented. This summary should be read in
connection with the financial statements and other financial information
included in documents incorporated herein by reference or presented elsewhere
herein. See "AVAILABLE INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE" and
"HILLIARD LYONS CONSOLIDATED FINANCIAL INFORMATION."
- 15 -
<PAGE> 24
PNC
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
-------------------------------------- ---------------------------------------------------
Dollars in millions,
except per share data
1998 1997 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 2,605 $ 2,499 $ 5,051 $ 4,938 $ 5,149 $ 4,724 $ 4,023
Interest expense 1,337 1,256 2,556 2,494 3,007 2,232 1,683
- --------------------------------------------------------------------------------------------------------------------------
Net interest income 1,268 1,243 2,495 2,444 2,142 2,492 2,340
Provision for credit 65 25 70 6 84 350
losses
Noninterest income 1,150 877 1,808 1,395 960 1,039 1,136
Noninterest expense 1,522 1,294 2,615 2,312 2,469 2,238 1,985
- --------------------------------------------------------------------------------------------------------------------------
Income before income
taxes and cumulative
effect of changes in 831 801 1,618 1,527 627 1,209 1,141
accounting principles
Income taxes 281 276 566 535 219 318 262
- --------------------------------------------------------------------------------------------------------------------------
Income before 550 525 1,052 992 408 891 879
cumulative effect of
changes in accounting
principles
Cumulative effect of -- -- (7) 20
changes in accounting
principles, net of tax
benefits of $5 in 1994
and $5 in 1993
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 550 $ 525 $ 1,052 $ 992 $ 408 $ 884 $ 899
- --------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Book value $ 17.64 $ 16.51 $ 16.87 $ 17.13 $ 16.87 $ 16.59 $ 15.61
Cash dividends declared .78 .74 1.50 1.42 1.40 1.31 1.175
Earnings
Basic before
cumulative effect of $ 1.80 $ 1.63 $ 3.33 $ 2.91 $ 1.20 $ 2.58 $ 2.59
changes in accounting
principles
Cumulative effect of -- -- (.02) .06
changes in accounting
principles
- --------------------------------------------------------------------------------------------------------------------------
Basic $ 1.80 $ 1.63 $ 3.33 $ 2.91 $ 1.20 $ 2.56 $ 2.65
- --------------------------------------------------------------------------------------------------------------------------
Diluted before $ 1.77 $ 1.61 $ 3.28 $ 2.88 $ 1.19 $ 2.54 $ 2.54
cumulative effect of
changes in accounting
principles
Cumulative effect of -- -- (.02) .06
changes in accounting
principles
- --------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.77 $ 1.61 $ 3.28 $ 2.88 $ 1.19 $ 2.52 $ 2.60
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET
HIGHLIGHTS
(At December 31)
Total assets $ 75,873 $ 71,973 $ 75,120 $ 73,260 $ 73,404 $ 77,461 $ 76,012
Securities 7,540 8,396 8,522 11,917 15,839 23,670 25,496
</TABLE>
- 16 -
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned 56,237 53,497 54,245 51,798 48,653 44,043 42,113
income
Deposits 47,096 45,216 47,649 45,676 46,899 45,818 44,703
Borrowed funds 20,488 19,066 19,622 19,604 19,063 24,320 22,308
Shareholders' equity 5,633 5,384 5,384 5,869 5,768 5,727 5,404
SELECTED RATIOS
Return on
Average common
shareholders'
equity 21.26% 19.84% 20.01% 17.18% 7.05% 16.09% 18.55%
Average assets 1.52 1.50 1.49 1.40 .54 1.19 1.40
Average common 7.03 7.43 7.31 8.11 7.64 7.34 7.52
shareholders' equity
to average assets
Dividend payout 43.34 45.79 45.39 48.89 94.76 37.42 30.79
Efficency (excludes 61.48 59.81 59.36 59.64 78.42 62.69 56.28
distributions on
capital securities)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Hilliard Lyons
<TABLE>
<CAPTION>
Dollars in thousands, except per (Unaudited)
share data Nine Months Ended
August 31, Year Ended November 30,
----------------------- ------------------------------------------------------------------
REVENUES 1998 1997 1997 1996 1995 1994 1993
------------------------ ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commissions $ 69,569 $ 50,500 $ 70,831 $ 58,555 $ 47,330 $ 41,922 $ 48,083
Principal transactions 16,216 20,802 28,284 24,745 22,762 21,959 19,503
Investment banking 11,242 4,911 8,230 10,097 8,638 11,901 18,091
Investment management 19,552 14,739 20,072 16,592 13,860 13,215 13,191
Interest and dividends 13,105 9,308 12,879 10,491 9,845 7,019 5,582
Insurance products 13,234 11,050 15,308 12,058 9,087 7,014 6,691
Gain on sale of building 3,442 -- -- -- -- -- --
Other 5,797 3,712 4,448 4,704 4,028 5,530 4,742
------------------------ ------------------------------------------------------------------
152,157 115,022 160,052 137,242 115,550 108,560 115,883
------------------------ ------------------------------------------------------------------
EXPENSES
Employee compensation and
benefits 84,767 65,984 89,760 79,695 66,256 62,851 68,834
Clearing and floor
commissions 1,680 1,681 2,222 2,049 2,213 1,970 2,080
Payroll and other taxes 5,668 4,376 5,613 4,856 4,704 4,108 3,713
Promotion and development 3,638 2,890 4,005 3,514 3,138 3,030 3,073
Occupancy and equipment
rental 10,304 8,727 11,826 8,735 8,113 7,268 6,774
Communications 10,569 8,081 10,670 9,141 7,829 6,983 6,204
Interest 4,988 2,896 3,906 3,371 3,166 2,217 1,889
Other 10,634 7,888 13,325 5,274 4,110 3,733 4,427
------------------------ ------------------------------------------------------------------
132,248 102,523 141,327 116,635 99,529 92,160 96,994
------------------------ ------------------------------------------------------------------
Income before taxes 19,909 12,499 18,725 20,607 16,021 16,400 18,889
Income taxes 7,724 4,785 7,092 7,866 6,268 6,055 7,063
------------------------ ------------------------------------------------------------------
Net Income $ 12,185 $ 7,714 $ 11,633 $ 12,741 $ 9,753 $ 10,345 $ 11,826
======================== ==================================================================
Net Income per share * $ 3.40 $ 2.07 $ 3.15 $ 3.37 $ 2.58 $ 2.72 $ 3.13
Cash dividends per share * $ 0.00 + $ 0.00+ $ 0.22 $ 0.20 $ 0.05 $ 0.04 $ 0.04
</TABLE>
- 17 -
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares 3,584,782 3,727,330 3,697,995 3,775,260 3,782,901 3,805,458 3,775,774
outstanding
Total Assets $ 316,024 $ 227,298 $ 249,788 $ 202,825 $ 179,583 $ 158,596 $ 156,174
Average assets $ 296,650 $ 222,720 $ 226,910 $ 192,080 $ 169,090 $ 155,690 $ 148,720
Total Liabilities $ 204,736 $ 131,471 $ 150,399 $ 110,788 $ 100,040 $ 88,919 $ 96,939
Total Shareholders EquitY $ 111,288 $ 95,827 $ 99,389 $ 92,037 $ 79,543 $ 69,677 $ 59,235
Average shareholders'
equity $ 106,570 $ 95,210 $ 96,110 $ 86,130 $ 74,280 $ 65,170 $ 53,590
Adjusted book value per
share $ 32.17 $ 27.94 $ 29.03 $ 25.38 $ 21.69 $ 19.02 $ 16.25
SELECTED RATIOS
Return on:
Average shareholders' equity 15.25% 10.80% 12.10% 14.79% 13.13% 15.87% 22.07%
Average assets 5.48% 4.62% 5.13% 6.63% 5.77% 6.64% 7.95%
Average shareholders' equity to 35.92% 42.75% 42.36% 44.84% 43.93% 41.86% 36.03%
average assets
</TABLE>
* Amounts adjusted to reflect the 2-for-1 stock split effective September
1995.
+ Hilliard Lyons historically has declared an annual cash dividend in
November. No dividend has been declared with respect to fiscal year 1998.
The Agreement permits Hilliard Lyons to dividend adjusted post-June 30, 1998
earnings immediately prior to the Closing Date.
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<PAGE> 27
MEETING INFORMATION
DATE, PLACE AND TIME
The Special Meeting will be held at 5:00 p.m. local time on November
__, 1998 at the Hilliard Lyons Center, 501 South Fourth Street, Louisville,
Kentucky.
RECORD DATE; VOTING RIGHTS
The close of business on October __, 1998 has been fixed as the
Record Date for purposes of determining shareholders entitled to notice of, and
to vote at, the Special Meeting. The holders of each of the 3,581,400 shares of
Hilliard Lyons Common Stock outstanding on the Record Date will be entitled to
one vote for each share held of record upon each matter properly submitted at
the Special Meeting. The affirmative vote of the holders of a majority of the
outstanding shares of Hilliard Lyons Common Stock is required to approve the
Merger under Kentucky law.
Hilliard Lyons intends to count shares of Hilliard Lyons Common Stock
present in person at the Special Meeting but not voting, and shares of Hilliard
Lyons Common Stock for which it has received proxies but with respect to which
holders of shares have abstained on any matter, as present at the Special
Meeting for purposes of determining the presence or absence of a quorum for the
transaction of business. Because Kentucky law requires that the majority of the
outstanding shares of Hilliard Lyons Common Stock vote in favor of the Merger in
order for the Merger to be approved, nonvoting shares and abstentions will have
the effect of votes against the Merger.
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<PAGE> 28
VOTING AND REVOCATION OF PROXIES
Shares of Hilliard Lyons Common Stock represented by a proxy properly
signed and returned at or prior to the Special Meeting and not subsequently
revoked prior to the vote will be voted at the Special Meeting in accordance
with the instructions thereon. If a proxy is signed and returned without
indicating any voting instructions, the shares of Hilliard Lyons Common Stock
represented by such proxy will be voted FOR approval of the Merger. Shares with
respect to which the proxies have been marked as abstentions will be counted as
shares present for determining whether a quorum is present.
Any shareholder giving a proxy may revoke it at any time before it is
exercised. In order to revoke a proxy, the shareholder must either give written
notice of such revocation to the Secretary of Hilliard Lyons or to the Secretary
of the Special Meeting, as appropriate, or vote the shares of Hilliard Lyons
Common Stock subject to the proxy by a later dated proxy or by written ballot at
the Special Meeting. The presence at the Special Meeting of any shareholder who
has given a proxy will not, in and of itself, revoke the proxy. Any shareholder
of record attending the Special Meeting may vote in person whether or not a
proxy has been previously given. The death or incapacity of the shareholder
appointing a proxy will not affect the right of Hilliard Lyons to accept the
proxy's authority unless notice of the death or incapacity is received by the
Secretary of Hilliard Lyons before the proxy exercises his authority under the
appointment.
The Hilliard Lyons Board is not aware of any other business to be
acted upon at the Special Meeting other than as described herein. It is not
anticipated that other matters will be brought before the Special Meeting. If,
however, other matters are duly brought before the Special Meeting, or any
adjournments or postponements thereof, the persons appointed as proxies will
have discretion to vote or act thereon according to their best judgment. The
persons named as proxies by a shareholder may propose and vote for one or more
adjournments or postponements of the Special Meeting to permit another
solicitation of proxies in favor of the Merger; provided, however, that no proxy
which is voted against the Merger will be voted in favor of any such adjournment
or postponement.
SOLICITATION OF PROXIES
PNC and Hilliard Lyons will each bear and pay 50% of the printing and
mailing costs and filing fees associated with this Proxy Statement/Prospectus,
and Hilliard Lyons will bear all other costs, if any, of soliciting proxies. In
addition to the use of the mails, proxies may be solicited personally or by
telephone or facsimile by directors, officers and other employees of Hilliard
Lyons, who will not be specially compensated for such solicitation activities.
Hilliard Lyons does not presently intend to utilize the services of a proxy
solicitation firm in connection with the solicitation of proxies in connection
with the Special Meeting.
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<PAGE> 29
PROPOSED MERGER
This section of the Proxy Statement/Prospectus describes material
aspects of the Merger. The following description does not purport to be complete
and is qualified in its entirety by reference to the Agreement, which is
attached as Appendix A to this Proxy Statement/Prospectus and is incorporated
herein by reference. All shareholders are urged to read the Agreement carefully
and in its entirety.
BACKGROUND OF AND REASONS FOR THE MERGER; RECOMMENDATION OF THE HILLIARD LYONS
BOARD
BACKGROUND
Hilliard Lyons' strategy and intention had historically been to remain
an independent financial services firm. The Hilliard Lyons Board had become
aware, however, of recent regulatory and competitive changes in the securities
industry that may have an impact on Hilliard Lyons' ability, as an independent
regional brokerage firm, to compete effectively. By combining with larger
financial institutions, regional brokerage firms gain access to additional
capital and markets. Since 1997, a number of privately and publicly held
brokerage firms, some of which operate in the same geographic markets as
Hilliard Lyons, have been acquired by large financial institutions. The Hilliard
Lyons Board sought to investigate all possible alternatives to ensure that
Hilliard Lyons could effectively compete with firms that, by virtue of merger,
had become larger and better capitalized than when they were not affiliated with
a larger financial institution. Further, since 1972 Hilliard Lyons has been an
employee-owned closely held corporation whose stock is bought and sold at
adjusted book value. The Hilliard Lyons Board concluded that, in light of the
multiples over book value for which brokerage firms have been acquired or at
which publicly held brokerage firms trade, adjusted book value was no longer an
accurate valuation method for the transfer of its stock. A strategic merger, as
distinct from an initial public offering or other alternative courses of action,
was considered by the Hilliard Lyons Board as the best means by which to address
strategic and valuation challenges.
In March 1998, in light of these competitive and internal valuation
issues, the Hilliard Lyons Board decided to explore the possibility of merger
with a strategic partner that would preserve the culture and values of Hilliard
Lyons to the greatest extent possible and permit the Hilliard Lyons shareholders
to realize the value of their shares of Hilliard Lyons stock. To assist in that
process, in April 1998 Hilliard Lyons retained Berkshire Capital, an investment
banking firm located in New York City. In May 1998, Berkshire Capital contacted
a number of financial institutions, including PNC, offering to provide them with
descriptive materials regarding Hilliard Lyons upon their execution of a
confidentiality agreement. PNC executed a confidentiality agreement on May 22,
1998.
PNC is one the nation's largest diversified financial services
companies, providing a broad range of services including consumer and commercial
banking, asset management,
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<PAGE> 30
treasury management, secured lending, mortgage banking, private banking, capital
markets and mutual fund servicing. In recent years, PNC has made substantial
investments in growing its investment advisory, mutual fund, investment product
distribution and capital markets capabilities to enhance its capabilities to
meet the sophisticated investment needs of affluent customers. As a result of
the Federal Reserve's removal in 1996 and 1997 of a number of regulatory
barriers to ownership and operation of full service securities firms by bank
holding companies and the trend of consolidation between banking and securities
firms, PNC has been interested in acquiring a full service brokerage, investment
advisory and investment banking business. PNC chose to pursue a business
combination with Hilliard Lyons based on, among other factors, Hilliard Lyons'
depth of management, retail distribution capabilities, technology resources,
breadth of services and general philosophy of customer service. PNC saw the
Kentucky-based Hilliard Lyons as providing opportunities to expand the retail
distribution of capital markets products and to enhance its brokerage services
and investment management activities with respect to affluent clients. Another
attractive facet of a PNC/Hillard Lyons business combination was a shared
philosophy of commitment to client service and employee satisfaction.
On June 22, 1998, representatives of Hilliard Lyons, PNC and Berkshire
Capital met in Cincinnati, Ohio for an introductory meeting. Similar meetings
were held with seven other interested parties during June and July of 1998. The
parties with which Hilliard Lyons met were thereafter invited to submit
nonbinding merger/acquisition proposals. Six proposals were received and
reviewed by the Hilliard Lyons Board. After reviewing those proposals, Hilliard
Lyons decided to continue substantive discussions with PNC to pursue a possible
combination. Additional meetings with PNC were held the week of July 6 and PNC
conducted due diligence between July 13 and July 16. The Hilliard Lyons Board
pursued the PNC proposal because the consideration offered by PNC had the
potential to deliver the greatest value to the shareholders, and because the
Hilliard Lyons Board considered the other terms of the PNC proposal superior for
the reasons described below.
On August 12, 1998, the Hilliard Lyons Board voted to proceed with a
merger with PNC on the economic terms stated in PNC's proposal of June 29,
subject to negotiation of a satisfactory agreement and plan of merger.
Negotiations were held in New York City at the offices of Arnold & Porter,
counsel to PNC, during the week of August 16, at which both counsel and
principals of each of PNC and Hilliard Lyons were present. Detailed information
describing the definitive Agreement was presented at the Hilliard Lyons Board
meetings held on August 19 and 20. At the August 20, 1998 Hilliard Lyons Board
meeting, the Hilliard Lyons Directors present during the vote (one director was
absent at the time of the vote) voted unanimously to approve the execution of
the Agreement between Hilliard Lyons and PNC.
REASONS FOR THE MERGER
In reaching its decision to approve the Agreement, the Hilliard Lyons
Board consulted with Hilliard Lyons management and with financial and legal
advisors, and considered a variety of factors, including the following principal
factors:
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<PAGE> 31
THE COMPLEMENTARY NATURE OF HILLIARD LYONS AND PNC'S BUSINESS AND
CULTURES. The Hilliard Lyons Board believes that Hilliard Lyons and PNC share
common fundamental values and a strong commitment to placing the client's needs
first. PNC has demonstrated a commitment to developing its financial services
products through investments in mutual fund and investment advisory and
management companies. Additionally, PNC is a well-known and respected provider
of trust and fiduciary services. The Hilliard Lyons Board believes that PNC is
committed to the expansion of brokerage and investment products and services to
consumers throughout the U.S. The Hilliard Lyons Board also believes that PNC
offers a strong base of clients and services against which Hilliard Lyons can
leverage its brand value, sales culture and efficient operating platform into
geographic markets where PNC operates but Hilliard Lyons currently does not.
This affords Hilliard Lyons the opportunity of gaining prompt name recognition
in geographic areas such as the mid-Atlantic states where it is not currently
known.
Hilliard Lyons will also have the opportunity to gain access to PNC's
financial product offerings for its existing client base. Similarly, Hilliard
Lyons will be able to offer its products and services across PNC's large
customer base. It is anticipated that the merger will serve to enhance both
Hilliard Lyons' capital markets capabilities and its retail sales efforts.
SHAREHOLDER CONSIDERATION. The Hilliard Lyons Board carefully evaluated
the consideration that Hilliard Lyons' shareholders will receive in the Merger.
The presentation Berkshire Capital made to the Hilliard Lyons Board on August
20, 1998 included, among other things, Berkshire Capital's opinion that the
Merger Consideration is fair to Hilliard Lyons shareholders from a financial
point of view. The Hilliard Lyons Board took into account the fact that the
Agreement contains few conditions precedent to consummation of the Merger, which
enhances the certainty that the Merger will be completed. The Hilliard Lyons
Board carefully considered the Agreement's specific provisions for converting
and exchanging Hilliard Lyons common stock for the Stock Consideration and Cash
Consideration. The Hilliard Lyons Board assessed the advantages of the fixed
price of the Merger Consideration and the currently tax-free nature of the stock
portion of the Merger Consideration. The Hilliard Lyons Board also took into
account the fact that Hilliard Lyons will be able to dividend adjusted earnings
post June 30, 1998 until the consummation of the Merger. The Hilliard Lyons
Board also considered what it believes to be PNC's favorable prospects and the
liquidity of the trading market for PNC Common Stock.
AGREEMENT AND PLAN OF MERGER. Hilliard Lyons' financial and legal
advisors fully discussed with the Hilliard Lyons Board the terms and conditions
of the Agreement, including the amount and form of consideration, the parties'
representations, warranties, covenants and agreements, and the conditions to the
respective obligations set forth in the Agreement.
HILLIARD LYONS' FUTURE AS AN INDEPENDENT FIRM. The Hilliard Lyons Board
carefully considered the advantages and disadvantages of Hilliard Lyons'
remaining independent in the current competitive environment. The Hilliard Lyons
Board believes that
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<PAGE> 32
rapidly increasing consolidation in the financial services industry will create
pressures on profits and will result in strong competition for market share and
quality talent. Independent firms will likely have difficulty competing against
well-capitalized competitors such as commercial banks that generally have much
larger market capitalizations than independent brokerage firms. The Hilliard
Lyons Board also considered the potential negative effects that uncertainty over
Hilliard Lyons' future growth as an independent firm might have on the Hilliard
Lyons organization as a whole. Any of these factors could potentially result in
lower returns for Hilliard Lyons' shareholders.
RESPECT FOR HILLIARD LYONS' SECURITIES EXPERTISE. The Hilliard Lyons
Board considered PNC to be a partner that would respect the securities expertise
and dedication of Hilliard Lyons' approximately 1,325 employees and the
importance of ensuring that the best interests of clients be served. Like
Hilliard Lyons, PNC appreciates the unique nature of client relationships in the
securities industry. The Hilliard Lyons Board believes that the merger will
allow Hilliard Lyons to maintain and enhance the level of service it provides to
its brokers and clients.
CONTINUED OPERATIONS IN LOUISVILLE AND RETENTION OF KEY EMPLOYEES.
After the Merger, the Broker Subsidiary will continue to provide brokerage
services from its Louisville headquarters, maintaining the same name by which it
has been known since 1972 - J.J.B. Hilliard, W.L. Lyons, Inc. The Hilliard Lyons
management structure will continue, with James W. Stuckert, James M. Rogers,
James R. Allen, and E. Neal Cory in key leadership positions, as each such
manager has entered into an employment agreement with the Broker Subsidiary. See
" -- Management and Operations After the Merger."
The foregoing discussion of the information and factors considered by
the Hilliard Lyons Board is not intended to be exhaustive but includes all
material factors considered by the Hilliard Lyons Board. In reaching its
determination to approve and recommend the Merger, the Hilliard Lyons Board did
not assign any relative or specific weights to the foregoing factors, and
individual directors may have given differing weights to different factors.
After deliberating with respect to the Merger and the other transactions
contemplated by the Agreement, considering, among other things, the matters
discussed above and the opinion of Berkshire Capital referred to above, the
Hilliard Lyons Board approved and adopted the Agreement and the Merger
contemplated thereby as being in the best interests of Hilliard Lyons and its
shareholders.
BASED ON THE FOREGOING, THE HILLIARD LYONS BOARD CONCLUDED THAT THE
PROPOSED MERGER WOULD BE IN THE BEST INTERESTS OF HILLIARD LYONS' SHAREHOLDERS.
ACCORDINGLY, THE HILLIARD LYONS BOARD VOTED TO RECOMMEND THAT THE HILLIARD LYONS
SHAREHOLDERS VOTE "FOR" THE MERGER.
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<PAGE> 33
RECOMMENDATION OF THE HILLIARD LYONS BOARD
THE HILLIARD LYONS BOARD BELIEVES THAT THE MERGER IS FAIR TO, AND IN
THE BEST INTERESTS OF, HILLIARD LYONS AND THE HILLIARD LYONS SHAREHOLDERS.
ACCORDINGLY, THE HILLIARD LYONS BOARD HAS APPROVED AND ADOPTED THE AGREEMENT AND
RECOMMENDS THAT THE HILLIARD LYONS SHAREHOLDERS VOTE "FOR" THE APPROVAL AND
ADOPTION OF THE AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER.
For information regarding certain interests of directors and
executive officers of Hilliard Lyons in the Merger, see "PROPOSED MERGER --
Management and Operations after the Merger -- Management" and " -- Employees."
TERMS OF THE MERGER
On the Effective Date, Hilliard Lyons will be merged with and into
PNC and the separate existence of Hilliard Lyons will cease. PNC, as the
surviving entity, will continue its corporate existence. Also on the Effective
Date, except as otherwise provided in the Agreement and as described below, each
outstanding share of Hilliard Lyons Common Stock will be converted into a
combination of PNC Common Stock and cash as described below. The sum of the
aggregate Stock Consideration and Cash Consideration provided in the Merger will
be $275 million, or, based on the number of shares of Hilliard Lyons Common
Stock issued and outstanding at the time of the signing of the Agreement, $76.79
per share of Hilliard Lyons Common Stock.
In the Merger, each share of Hilliard Lyons Common Stock held by a
nondissenting shareholder will be converted into (i) the number of shares of PNC
Common Stock equal to $192.5 million divided by the product of the Average
Closing Price and the number of shares of Hilliard Lyons Common Stock issued and
outstanding immediately prior to the Effective Date; and (ii) the right to
receive cash in the amount of $82.5 million divided by the number of shares of
Hilliard Lyons Common Stock issued and outstanding immediately prior to the
Effective Date. However, if the Average Closing Price is below $52.00, PNC may
reduce the Stock Consideration and increase the Cash Consideration (provided the
aggregate Merger Consideration remains $275 million) so that no more than 3.7
million shares of PNC Common Stock are issued. In certain circumstances, the
Cash Consideration may be reduced, and the Stock Consideration may be increased
beyond 3.7 million shares of PNC Common Stock, as necessary to receive the
closing tax opinion described under " -- Certain U.S. Federal Income Tax
Consequences." The range of possible adjustments to the relative proportion of
Stock Consideration and Cash Consideration is shown in the following table.
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<PAGE> 34
THE MERGER CONSIDERATION: RANGE OF ALLOCATION BETWEEN
STOCK CONSIDERATION AND CASH CONSIDERATION
<TABLE>
<CAPTION>
AVERAGE NUMBER OF PNC VALUE OF PNC NUMBER OF VALUE OF PNC CASH IN CASH PER HL TOTAL MERGER
CLOSING SHARES ISSUED IN SHARES ISSUED PNC SHARES AGGREGATE SHARE CONSIDERATION
PRICE AGGREGATE (2) IN AGGREGATE SHARES ISSUED PER (2)(3) (PERCENTAGE PER HL
(2) ISSUED HL SHARE THAT CASH SHARE
PER HL (PERCENTAGE COMPRISES OF
SHARE THAT PNC TOTAL
(1)(2) SHARES CONSIDERATION
COMPRISE OF PER HL SHARE)
TOTAL (2)(3)
CONSIDERATION PER HL
SHARE) (2)
<S> <C> <C> <C> <C> <C> <C> <C>
$60 3,208,333 $192,500,000 0.896 $53.75 (70%) $82,500,000 $23.04 (30%) $76.79
$56 3,437,500 $192,500,000 0.960 $53.75 (70%) $82,500,000 $23.04 (30%) $76.79
$52 3,700,000 $192,500,000 1.033 $53.75 (70%) $82,500,000 $23.04 (30%) $76.79
$48 3,700,000 $177,600,000 1.033 $49.59 (65%) $97,400,000 $27.20 (35%) $76.79
$44 3,700,000 $162,800,000 1.033 $45.46 (59%) $112,200,000 $31.33 (41%) $76.79
$40 3,700,000 $148,000,000 1.033 $41.32 (54%) $127,000,000 $35.46 (46%) $76.79
$36 3,700,000 $133,200,000 1.033 $37.19 (48%) $141,800,000 $39.59 (52%) $76.79
</TABLE>
(1) Assumes that the number of issued and outstanding shares of Hilliard Lyons
Common Stock is 3,581,400.
(2) Assumes that in the event the Average Closing Price is below $52.00, (i)
PNC elects to exercise its option to increase the Cash Consideration and
reduce the Stock Consideration to the fullest extent permitted under the
Agreement, and (ii) it is not necessary to reduce the Cash Consideration
and increase the Stock Consideration in order to receive the closing tax
opinion described in " -- Certain U.S. Federal Income Tax Consequences."
Rather than electing to increase the Cash Consideration and reduce the
Stock Consideration, PNC may issue more shares of PNC Common Stock so that
the Merger Consideration consists of up to 70% Stock Consideration and not
less than 30% Cash Consideration even though the Average Closing Price is
below $52.00.
(3) Excludes all effects of cash in lieu of fractional shares and cash paid to
dissenting shareholders, if any, pursuant to Kentucky law.
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<PAGE> 35
Additionally, each holder of Hilliard Lyons Common Stock will receive
cash in lieu of any fractional share of PNC Common Stock that such shareholder
otherwise would receive. Any such cash payment shall be in an amount equal to
such fraction multiplied by the Average Closing Price.
In the event that prior to the Effective Date the outstanding shares
of PNC Common Stock shall have been increased, decreased or changed into or
exchanged for a different number or kind of shares or securities by
reorganization, recapitalization, reclassification, stock dividend, stock split
or other like changes in PNC's capitalization, all without PNC receiving
adequate consideration therefor, then an appropriate and proportionate
adjustment shall be made in the number and kind of shares of PNC Common Stock to
be thereafter delivered pursuant to the Agreement.
SURRENDER OF CERTIFICATES
As soon as practicable after the Effective Date, the stock transfer
agent of PNC (currently, The Chase Manhattan Bank), acting in the capacity of
exchange agent (the "Exchange Agent"), will mail to all holders of Hilliard
Lyons Common Stock a letter of transmittal, together with instructions for the
exchange of their Hilliard Lyons Common Stock certificates for (i) certificates
representing the number of shares of PNC Common Stock into which such shares of
Hilliard Lyons Common Stock have been converted, and (ii) a check in the amount
equal to the sum of (x) the total Cash Consideration to which such holder is
entitled, and (y) any cash to which such holder is entitled in lieu of
fractional shares of PNC Common Stock. Until so exchanged, each certificate
representing Hilliard Lyons Common Stock outstanding immediately prior to the
Effective Date shall be deemed for all purposes to evidence ownership of the
number of shares of PNC Common Stock into which such shares have been converted;
provided, however, that no dividends or other distributions declared after the
Effective Date with respect to PNC Common Stock shall be paid to the holder of
any unsurrendered certificate until the holder surrenders that certificate. No
interest will be paid on any Cash Consideration or cash in lieu of fractional
shares to which a holder of Hilliard Lyons Common Stock is entitled. HILLIARD
LYONS SHAREHOLDERS SHOULD NOT REQUEST HILLIARD LYONS TO SEND THEIR CERTIFICATES
TO THE EXCHANGE AGENT UNTIL THEY RECEIVE FURTHER INSTRUCTIONS.
OPINION OF FINANCIAL ADVISOR
Hilliard Lyons retained Berkshire Capital to act as its financial
advisor in connection with the Merger and to render an opinion to the Hilliard
Lyons Board as to the fairness of the Merger Consideration, from a financial
point of view, to the holders of Hilliard Lyons Common Stock. Berkshire Capital
is a nationally recognized investment banking firm regularly engaged in the
valuation of financial services businesses and their securities in connection
with mergers and acquisitions, competitive biddings and valuations for estate,
corporate and other purposes, and acting as financial advisor in connection with
other forms of strategic transactions. The Hilliard Lyons Board selected
Berkshire Capital to serve as its financial advisor in connection with the
Merger on the basis of such expertise of the firm.
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<PAGE> 36
The full text of Berkshire Capital's written opinion which sets forth
certain assumptions made, matters considered and limitations on review
undertaken is attached as APPENDIX B to this Proxy Statement/Prospectus, is
incorporated herein by reference and should be read in its entirety in
connection with this Proxy Statement/Prospectus. The summary of the opinion of
Berkshire Capital set forth in this Proxy Statement/Prospectus is qualified in
its entirety by reference to the opinion. Berkshire Capital's opinion is
directed only to the fairness of the Merger Consideration, from a financial
point of view, to the holders of Hilliard Lyons Common Stock. Berkshire
Capital's opinion was provided to the Hilliard Lyons Board to assist it in
connection with its consideration of the Merger and does not constitute a
recommendation to any shareholder of Hilliard Lyons as to how such shareholder
should vote on the Agreement.
In arriving at its opinion, Berkshire Capital reviewed certain publicly
available business and financial information relating to Hilliard Lyons and PNC
and certain other information provided to it, including the following: (i)
certain internal financial reports provided by the management of Hilliard Lyons;
(ii) PNC's Annual Reports to Stockholders, Annual Reports on Form 10-K and
related financial information for the three years ended December 31, 1997; (iii)
PNC's Quarterly Reports on Form 10-Q and related financial information for the
periods ended June 30, 1998 and March 31, 1998; (iv) certain publicly available
information with respect to historical market prices and trading activities for
PNC Common Stock and for certain publicly traded financial institutions which
Berkshire Capital deemed relevant; (v) certain publicly available information
with respect to securities firms and the financial terms of certain other
mergers and acquisitions which Berkshire Capital deemed relevant; (vi) the
Agreement; (vii) other financial information concerning the businesses and
operations of Hilliard Lyons, including certain audited financial information
and certain financial analyses and forecasts for Hilliard Lyons prepared by
senior management; and (viii) such financial studies, analyses, inquiries and
other matters as Berkshire Capital deemed necessary. In addition, Berkshire
Capital discussed the business and prospects of Hilliard Lyons and PNC with
members of senior management of each company.
In connection with its review, Berkshire Capital relied upon and
assumed the accuracy and completeness of all of the foregoing information
provided to it or publicly available, including the representations and
warranties of Hilliard Lyons and PNC included in the Agreement, and Berkshire
Capital has not assumed any responsibility for independent verification of such
information. Berkshire Capital relied upon the management of Hilliard Lyons as
to the reasonableness and achieveability of its financial and operational
forecasts and projections, and the assumptions and bases therefor, provided to
Berkshire Capital, and assumed that such forecasts and projections reflect the
best currently available estimates and judgments of such management and that
such forecasts and projections will be realized in the amounts and in the time
periods currently estimated by such management. Berkshire Capital also assumed,
without independent verification, that the aggregate reserves for loan losses,
litigation and other contingencies for Hilliard Lyons and PNC are adequate to
cover such
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<PAGE> 37
losses. Berkshire Capital did not review any individual credit files of PNC or
make an independent evaluation or appraisal of the assets or liabilities of
Hilliard Lyons or PNC.
In connection with rendering its opinion, Berkshire Capital performed a
variety of financial analyses. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Moreover, the evaluation of the
fairness of the Merger Consideration, from a financial point of view, to holders
of Hilliard Lyons Common Stock was to some extent a subjective one based on the
experience and judgment of Berkshire Capital and not merely the result of
mathematical analysis of financial data. Accordingly, notwithstanding the
separate factors summarized below, Berkshire Capital believes that its analyses
must be considered as a whole and that selecting portions of its analyses and of
the factors considered by it, without considering all analyses and factors,
could create an incomplete view of the evaluation process underlying its
opinion. The ranges of valuations resulting from any particular analysis
described below should not be taken to be Berkshire Capital's view of the actual
value of Hilliard Lyons or PNC.
In performing its analyses, Berkshire Capital made numerous assumptions
with respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of Hilliard Lyons or PNC. The
analyses performed by Berkshire Capital are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable than
that suggested by such analyses. Additionally, analyses relating to the values
of businesses do not purport to be appraisals or to reflect the prices at which
businesses actually may be sold. In rendering its opinion, Berkshire Capital
assumed that, in the course of obtaining the necessary regulatory approvals for
the Merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger, on a pro forma basis, to PNC.
Berkshire Capital's opinion is just one of the many factors taken into
consideration by the Hilliard Lyons Board in determining to approve the
Agreement. Berkshire Capital's opinion does not address the relative merits of
the Merger as compared to any alternative business strategies that might exist
for Hilliard Lyons, nor does it address the effect of any other business
combination in which Hilliard Lyons might engage.
The following is a summary of the analyses performed by Berkshire
Capital in connection with its opinion delivered to the Hilliard Lyons Board on
August 20, 1998. Berkshire Capital employed three different valuation
methodologies to determine the value of each of (i) Hilliard Lyons in its
entirety, (ii) the Investment Management Segment of Hilliard Lyons and (iii) the
Non-Investment Management Segment of Hilliard Lyons. The valuation methodologies
were (i) comparison of publicly traded securities and investment management
firms, (ii) comparable acquisitions of securities and investment management
firms and (iii) discounted cash flows. The following three paragraphs provide
additional detail regarding the
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<PAGE> 38
publicly traded securities firms and comparable acquisition transactions
utilized in Berkshire Capital's valuation of Hilliard Lyons in its entirety.
COMPARISON OF PUBLICLY TRADED SECURITIES FIRMS. Berkshire Capital
compared the financial performance of Hilliard Lyons to that of a certain group
of securities firms (the "Group") by comparing the multiples of book value,
total revenues, pre-tax income and earnings of the Group's members to the stock
prices of the Group's members. This Group included A.G. Edwards, Inc.; Legg
Mason, Inc.; Raymond James Financial, Inc.; EVEREN Capital Corporation; Morgan
Keegan, Inc.; Dain Rauscher Corporation; Freedom Securities Corporation; The
Advest Group, Inc.; and Interstate/Johnson Lane, Inc.
Berkshire Capital compared selected financial and market statistics and
ratios using financial data for the latest twelve months ended June 30, 1998 for
Hilliard Lyons and the Group and market data as of September 14, 1998 for the
Group. This analysis showed (i) the Group had mean and median ratios of price to
latest twelve months revenues of 0.93x and 0.77x respectively, compared to 1.44x
in the proposed Merger, (ii) the Group had mean and median ratios of price to
latest twelve months pre-tax earnings of 7.0x and 6.7x respectively, compared to
10.31x in the proposed Merger, (iii) the Group had mean and median ratios of
price to latest twelve months earnings of 12.0x and 11.2x respectively, compared
to 16.8x in the proposed Merger, (iv) the Group had mean and median ratios of
price to book value of 1.82x and 1.79x respectively, compared to 2.49x in the
proposed Merger; (v) the Group had mean and median return on average equity
ratios of 18.2% and 17.5% respectively, compared to 15.6% of Hilliard Lyons; and
(vi) the Group had mean and median latest twelve months pre-tax
earnings/revenues ratios of 13.5% and 12.1% respectively, compared to 14.0% of
Hilliard Lyons.
COMPARABLE ACQUISITIONS. Berkshire Capital performed an analysis of
consideration paid in nine acquisitions of brokerage firms completed in 1997 and
1998 (the "Selected Transactions"). Using this calculation, multiples of book
value, total revenues and pre-tax income in the Selected Transactions were
compared to the multiples and premiums implied by the consideration offered by
PNC in the Merger. The Selected Transactions included the following
transactions: Scott & Stringfellow Financial, Inc./BB&T Corporation; McDonald &
Company Investments, Inc./KeyCorp.; Principal Financial Securities Inc./EVEREN
Capital Corp.; Ohio Company/Fifth Third Bancorp.; Wheat First Securities/First
Union; Piper Jaffray Companies, Inc./U.S. Bancorp; Roney & Co./First Chicago NBD
Corp.; Oppenheimer Holdings, Inc./CIBC Wood Gundy Securities Corp.; Alex. Brown
Incorporated/Bankers Trust Corporation.
Berkshire Capital compared the transaction value as a multiple of (i)
latest twelve months revenues; (ii) latest twelve months earnings; and (iii)
book value, for the proposed Merger to the mean and median ratios for the
Selected Transactions. This analysis showed that (i) the transaction
value/revenues paid in the proposed Merger was 1.44x compared to a mean of 1.11x
and a median of 1.22x for the Selected Transactions; (ii) the transaction
value/earnings paid in the proposed Merger was 16.8x compared to a mean of 16.2x
and a
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median of 16.9x for the Selected Transactions and (iii) the transaction
value/book value paid in the proposed Merger was 2.49x compared to a mean of
2.75x and a median of 2.73x for the Selected Transactions. Given the importance
of Hilliard Lyons' senior management and sales force to its core revenue
streams, Berkshire Capital also examined the Merger's value plus the present
value of the proposed retention payments (the "Aggregate Transaction Value") to
a selected group of Hilliard Lyons' management and financial consultants. This
analysis showed that (i) the Aggregate Transaction Value/revenues paid in the
proposed Merger was 1.59x compared to a mean of 1.25x and a median of 1.18x for
the Selected Transactions; (ii) the Aggregate Transaction Value/earnings paid in
the proposed Merger was 18.5x compared to a mean of 17.7x and a median of 19.1x
for the Selected Transactions; and (iii) the Transaction Value/book value paid
in the proposed Merger was 2.75x compared to a mean of 2.93x and a median of
3.07x for the Selected Transactions.
No company or transaction used as a comparison in the above analyses is
identical to Hilliard Lyons, PNC or the Merger. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading and/or
transaction value of the companies used for comparison in the above analyses.
DISCOUNTED CASH FLOW. Using a blend of the discounted dividends
analyses, the capital asset pricing model and the Fisher model, Berkshire
Capital estimated the discounted present value of the future stream of dividends
that the Group could produce over the next five years, under various
circumstances, assuming the Group performed in accordance with the earnings
forecasts of management.
Berkshire Capital performed discounted cash flow analyses assuming five
year compound annual revenue growth rates ranging from 8% to 10% and discount
rates ranging from 15% to 17%. This analysis showed a range of value of Hilliard
Lyons Common Stock of $70.03 to $81.93 per share. Berkshire Capital noted that
the discounted cash flow analysis was included because it is a widely used
valuation methodology, but noted that the results of such methodology are highly
dependent upon numerous assumptions that must be made, including earnings growth
rates, terminal values and discount rates.
Berkshire Capital's opinion is dated as of the date of this Proxy
Statement/Prospectus, and is based solely upon the information available to
Berkshire Capital and the economic, market and other circumstances as they
existed as of such date. Events occurring after that date could materially
affect the assumptions and conclusions contained in Berkshire Capital's opinion.
Berkshire Capital has not undertaken to reaffirm or revise its opinion or
otherwise comment on any events occurring after that date.
Hilliard Lyons and Berkshire Capital have entered into a letter
agreement relating to the services to be provided by Berkshire Capital in
connection with the Merger. Hilliard Lyons has agreed to pay Berkshire Capital
fees as follows: (i) a cash fee of $80,000, which
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was paid during the course of Berkshire Capital's assignment; (ii) an additional
cash fee of $250,000, which was paid upon execution of the Agreement; and (iii)
an additional cash fee equal to $3,050,000 payable upon closing of the Merger.
In such letter, Hilliard Lyons also agreed to reimburse Berkshire Capital for
its reasonable and necessary out-of-pocket expenses and to indemnify Berkshire
Capital against certain liabilities, including liabilities under the federal
securities laws.
REPRESENTATIONS AND WARRANTIES; CONDITIONS TO THE MERGER; WAIVER
The Agreement contains representations and warranties by Hilliard Lyons
regarding, among other things, (i) its capitalization; (ii) the ownership and
capitalization of its subsidiaries; (iii) its organization, standing and
authority; (iv) the lack of engagement in certain activities; (v) authority to
enter into the Agreement and the effectiveness of the Agreement; (vi) the filing
of certain documents with regulatory authorities; (vii) financial statements;
(viii) the absence of any material adverse change; (ix) the absence of
undisclosed liabilities; (x) good title to real and personal property; (xi) tax
matters; (xii) employee benefit plans; (xiii) certain contracts; (xiv) the lack
of material legal proceedings; (xv) compliance with laws; (xvi) labor matters;
(xvii) retention of financial advisors; (xviii) insurance; (xix) title to
intellectual property; (xx) environmental liability; (xxi) fiduciary activities;
(xxii) compliance with certain securities laws; (xxiii) derivatives; (xxiv)
accounting controls; (xxv) year 2000 issues; (xxvi) the ability to obtain
necessary regulatory approvals; and (xxvii) the accuracy of the Registration
Statement. These representations and warranties will not survive the Effective
Date.
The Agreement contains representations and warranties by PNC
regarding, among other things, (i) its capitalization; (ii) its organization,
standing and authority; (iii) its authority to enter into the Agreement and the
effectiveness of the Agreement; (iv) compliance with certain securities and
banking laws; (v) financial statements; (vi) the absence of undisclosed
liabilities; (vii) the lack of material legal proceedings; (viii) compliance
with certain laws; (ix) retention of financial advisors; (x) the accuracy of the
Registration Statement; (xi) year 2000 issues; (xii) compliance with certain
Federal Reserve capital requirements; and (xii) the ability to obtain necessary
regulatory approvals. These representations and warranties will not survive the
Effective Date.
The respective obligations of PNC and Hilliard Lyons to consummate
the Merger are subject to the fulfillment, on or prior to the Effective Date, of
the following conditions: (i) the taking of all corporate action necessary to
authorize the execution, delivery and performance of the Agreement; (ii) receipt
of all requisite regulatory approvals, the expiration of all waiting periods and
the satisfaction of all pre-consummation conditions for any such approval,
without any condition which, in the reasonable opinion of the PNC Board,
materially and adversely affects the anticipated economic and business benefits
to PNC of the Merger (see " -- Regulatory and Other Approvals"); (iii) that at
least 75% of the members of the board of directors of each Hilliard Lyons
investment company which has approved a new investment advisory contract are not
"interested persons" within the meaning of the Investment Company Act and have
been elected in accordance with the Investment Company Act; (iv) receipt of
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consents as required by certain of Hilliard Lyons' contracts; (v) the
effectiveness of the Registration Statement and the absence of any "stop order"
proceeding related thereto; (vi) the consent or waiver of certain parties who
have entered into agreements with Hilliard Lyons; (vii) the absence of any
order, decree or injunction enjoining or prohibiting the consummation of the
Merger; (viii) approval of the listing of the shares of PNC Common Stock to be
issued for listing on the NYSE; and (ix) the receipt by both parties of the
closing tax opinion described under " -- Certain U.S. Federal Income Tax
Consequences." The obligations of Hilliard Lyons and PNC to effect the Merger
also are subject to additional customary closing conditions.
Except with respect to any required shareholder or regulatory
approval, all of the conditions to consummation of the Merger may be waived at
any time by the party whose further obligations to effect the Merger are
conditioned thereupon. Moreover, to the extent permitted under applicable state
law, the Agreement may be amended or supplemented at any time by written
agreement of the parties approved by their respective boards of directors and/or
officers authorized thereby.
The Merger will be consummated at a closing at the executive offices
of PNC on the first business day following satisfaction of the conditions
described above, or on such later date within 30 days thereafter as may be
specified by PNC (the "Closing Date").
REGULATORY AND OTHER APPROVALS
Consummation of the Merger is conditioned on the receipt by PNC and
Hilliard Lyons of all necessary approvals by governmental regulatory agencies
and certain approvals and consents of third parties. It is anticipated that the
regulatory and other approvals described herein will be obtained in time to
allow for consummation of the Merger on or about November 30, 1998, but there is
no assurance that such regulatory approvals will be obtained so as to permit
consummation of the Merger or that such approvals will not impose conditions
that would materially and adversely affect the anticipated economic and business
benefits to PNC of the Merger and therefore cause PNC to abandon the Merger.
Under Section 4 of the Bank Holding Company Act and Regulation Y, the
Federal Reserve's implementing regulation thereunder, PNC is obligated to
provide the Federal Reserve with written notice before acquiring ownership or
control of the shares of a company, such as Hilliard Lyons, that is engaged in
nonbanking activities. Such notice filed under Section 4 is deemed approved by
the Federal Reserve 60 days after the filing unless the Federal Reserve issues
an order disapproving the transaction or extends the time for consideration.
Among the statutory criteria which the Federal Reserve considers in connection
with such notice is whether performance of the nonbanking activity by a bank
holding company or subsidiary thereof can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition, or
gains in efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices. In addition, because a transaction such
as the Merger involves the acquisition of a nonbanking firm by a bank holding
company, Regulation Y requires that
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additional information be included in the notice, including evidence that the
proposed activity is so closely related to banking or managing or controlling
banks as to be a proper incident thereto, or, if the Federal Reserve previously
determined by order that the activity is permissible for a bank holding company
to conduct, a commitment to comply with all the conditions and limitations
established by the Federal Reserve governing the activity. Further, because a
transaction such as the Merger involves a bank holding company subsidiary that
will be engaged in certain securities underwriting and dealing activities, the
Federal Reserve requires that additional information, including information on
revenues derived from such securities activities, be provided in the notice in
order to determine whether, following consummation of the transaction, the
subsidiary will be in compliance with Section 20 of the Glass-Steagall Act.
Under the Federal Reserve's application of Section 20 of the Glass-Steagall Act,
no more than 25% of the gross revenues of the subsidiary may be derived from
underwriting or dealing in securities that member banks may not underwrite or
deal in. On September 24, 1998, PNC filed a notice with the Federal Reserve
seeking approval of the Merger.
Hilliard Lyons and certain of its subsidiaries are associated with
two mutual funds registered with the Commission pursuant to the Investment
Company Act: the Hilliard Lyons Government Fund, Inc. and the Hilliard Lyons
Growth Fund, Inc. Hilliard Lyons or certain of its subsidiaries have been
retained by these mutual funds as their investment advisors and principal
underwriter/distributor. Under Section 15 of the Investment Company Act, the
consummation of the Merger will be deemed to effect an assignment of the
investment advisory contracts held by Hilliard Lyons or its subsidiaries. Such
advisory contracts terminate automatically upon assignment under the Investment
Company Act. New advisory contracts must be approved by the board of trustees
and shareholders of each mutual fund. Under the Agreement, Hilliard Lyons is
obligated to use all commercially reasonable efforts to obtain all necessary
consents and approvals in order that new investment advisory contracts may be
duly approved on substantially the same terms as the corresponding existing
contracts. In addition, it is a condition to PNC's obligation to effect the
Merger that the board of trustees of each mutual fund shall have approved, and
shall have recommended that the shareholders of such mutual fund approve, new
investment advisory contracts in substantially the form of existing contracts.
Hilliard Lyons or its subsidiaries also act as investment advisors to certain
clients that are not investment companies or pooled investment vehicles.
Hilliard Lyons has agreed to seek consents from such clients using a "negative
consent" letter process permitted under applicable law, and it is a condition to
PNC's obligation to effect the Merger that such consents shall have been
obtained with respect to clients accounting for at least 75% of annualized fees
from clients that are not investment companies or pooled investment vehicles.
Furthermore, certain self-regulatory organizations of which Hilliard
Lyons or its subsidiaries are members, including without limitation the NASD and
the NYSE, may require notices, approvals or consents before the Merger may be
consummated.
Certain subsidiaries of Hilliard Lyons are engaged in insurance
agency activities in several states. Notices of the change in control of
Hilliard Lyons may be required to be filed in certain states where Hilliard
Lyons insurance agencies are licensed. A notice must also be filed
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with the Delaware State Banking Commission regarding the planned acquisition of
certain of these insurance agencies by PNC Bank, Delaware, an indirect
wholly-owned banking subsidiary of PNC. The Trust Company, also a subsidiary of
Hilliard Lyons, will be transferred to PNC pursuant to the Merger. Notice of the
change of control of the Trust Company was filed with the Department of
Financial Institutions of Kentucky on September 25, 1998.
There can be no assurance that the various state and federal
regulatory authorities, investment advisory clients, and self-regulatory
organizations will approve the Merger and related transactions as described
above, and if approved, there can be no assurance as to the date of such
approval or the absence of litigation challenging the approvals. Further, there
can be no assurance that such approvals will not impose conditions that the PNC
Board reasonably determines materially and adversely affect the anticipated
economic and business benefits to PNC of the Merger, in which event PNC would
have the right not to proceed with the Merger. See "PROPOSED MERGER --
Representations and Warranties; Conditions to the Merger; Waiver" and " --
Effective Date of the Merger; Termination."
PNC and Hilliard Lyons are not aware of any other governmental
approvals or actions that are required for consummation of the Merger except as
described above. Should any such approval or action be required, it is presently
contemplated that such approval or action would be sought. There can be no
assurance that any such approval or action, if needed, could be obtained, would
not delay consummation of the Merger and would not be conditioned in a manner
that would cause PNC to abandon the Merger.
To the extent that the foregoing information describes statutes and
regulations, it is qualified in its entirety by reference to the particular
statutes and the regulations promulgated under such statutes.
BUSINESS PENDING THE MERGER
Under the terms of the Agreement, Hilliard Lyons and its subsidiaries
generally are required to use commercially reasonable efforts to preserve their
properties, business and relationships with customers, employees and others and
to carry on their respective business in the usual, regular and ordinary course
in substantially the same manner as conducted prior to the execution of the
Agreement. Between the date of the Agreement and the Closing Date, Hilliard
Lyons may not without PNC's consent, among other things, make distributions or
pay dividends (except immediately prior to the Closing Date, with respect to
post-June 30, 1998 earnings, subject to certain adjustments); issue, deliver,
sell, dispose of, pledge or otherwise encumber any equity interests in Hilliard
Lyons or its subsidiaries; issue any warrants or similar rights; amend its
Articles of Incorporation or By-Laws; engage in any merger or consolidation;
liquidate, sell, or dispose of any material assets or make any capital
expenditure exceeding $20,000; or solicit or encourage inquiries or proposals
with respect to the acquisition, purchase or transfer of Hilliard Lyons' assets.
Hilliard Lyons also has agreed to cause each of its subsidiaries not to take any
of the foregoing actions.
Hilliard Lyons also has agreed that, if so requested by PNC, it will
take all necessary action to facilitate the merger of Hilliard Lyons'
subsidiaries with subsidiaries of PNC, or
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reorganization of the ownership of the Hilliard Lyons subsidiaries by PNC and
its subsidiaries, on or after the Effective Date. However, in no event will the
Closing Date be delayed in order to facilitate any such merger, nor will
Hilliard Lyons be required to take any action that could adversely affect the
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
EFFECTIVE DATE OF THE MERGER; TERMINATION
The Effective Date shall be the date and time as set forth in the
articles of merger to be delivered and filed with the Kentucky Secretary of
State and the Pennsylvania Department of State in accordance with Kentucky and
Pennsylvania law, respectively, on the Closing Date.
PNC and Hilliard Lyons each anticipate that the Merger will be
consummated by November 30, 1998. However, consummation of the Merger could be
delayed as a result of delays in obtaining the necessary governmental and
regulatory approvals or if any other condition to consummation of the Merger is
not satisfied. There can be no assurances as to if or when such approvals will
be obtained or that the Merger will be consummated.
The Agreement may be terminated at any time on or prior to the
Closing Date as follows: (i) by Hilliard Lyons, if PNC has materially breached,
or by PNC, if Hilliard Lyons has materially breached, any covenant or agreement,
or certain representations and warranties, and the breaching party has not cured
such breach within 30 days of written notice thereof; (ii) by either party if
the requisite approval by the Hilliard Lyons shareholders is not obtained at the
Special Meeting (see "MEETING INFORMATION -- Voting Rights"); (iii) by either
party if certain regulatory approvals contemplated by the Agreement have not
been received and the time period for appeals and requests for reconsideration
have run (see " -- Regulatory and Other Approvals"); or (iv) by either party if
the Closing Date has not occurred by May 31, 1999. The Agreement also may be
terminated at any time by the mutual written consent of the parties. In the
event of termination, the Agreement shall become void and have no effect, except
that certain provisions thereof relating to expenses and confidentiality of
information exchanged between the parties shall survive any such termination and
any termination resulting from a material breach of a covenant or agreement in
the Agreement shall not relieve any breaching party from liability for any
uncured willful breach of any such covenant or agreement giving rise to such
termination.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
BOARD OF DIRECTORS. The PNC Board after the Merger will be composed
of the same directors who served on the PNC Board prior to the Merger. For
information on the current directors of the PNC Board, see "AVAILABLE
INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE."
MANAGEMENT. The management of PNC after the Merger will be composed
of the same individuals who served as managers of PNC prior to the Merger. The
management of the
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Broker Subsidiary (which will, immediately after the Merger, be a wholly-owned
subsidiary of PNC) will generally consist of the same individuals who served as
managers of the Broker Subsidiary prior to the Merger. The Broker Subsidiary has
entered into employment agreements (the "Employment Agreements") with Messrs.
James W. Stuckert, James M. Rogers, James R. Allen and E. Neal Cory, II (the
"Key Managers"), who currently serve Hilliard Lyons as, respectively, Chairman,
Chief Executive Officer and Director; Chief Operating Officer, Executive Vice
President and Director; Executive Vice President, Branch and Marketing
Administration and Director; and Executive Vice President, Investment Management
Group.
The Employment Agreements are for a term of three years and provide
that each Key Manager will serve the Broker Subsidiary in not less than the same
position, with a title of at least equivalent status, and performing at least
equivalent duties, as before the Merger. The Employment Agreements provide that
each Key Manager will receive a base salary and certain fringe benefits, and
confirm that each Key Manager will also participate in the Broker Subsidiary's
senior management incentive compensation plan and in the Retention Pool
described below. See " -- Employees." Each Key Manager agrees, during a period
specified in the Employment Agreement, (i) not to disclose confidential business
or technical information or trade secrets of the Broker Subsidiary or any
affiliate of the Broker Subsidiary; (ii) not to solicit, for personal benefit or
the benefit of another, current or prospective clients of the Broker Subsidiary;
(iii) not to hire the Broker Subsidiary's employees or interfere with their
relationship with the Broker Subsidiary; (iv) not to compete with the Broker
Subsidiary; (v) to return certain property of the Broker Subsidiary at the
conclusion of employment; and (vi) not to disparage the Broker Subsidiary. The
Broker Subsidiary may terminate each Key Manager's employment upon his
disability or for cause, or without cause if thirty days notice is given. A Key
Manager may terminate his employment at any time upon thirty days notice.
The Employment Agreements provide that if (i) the Broker Subsidiary
terminates a Key Manager's employment for reasons other than disability or
cause, or (ii) a Key Manager terminates his employment for good reason, then the
Key Manager shall be entitled to his base salary and certain enumerated benefits
for a period of one year from the date of termination. Those events that would
give a Key Manager good reason to resign and entitle him to receive such
severance compensation are (i) a significant reduction or adverse change in the
nature or scope of the Key Manager's authority, duties, status or position, (ii)
involuntary relocation, or (iii) a material reduction in salary or benefits.
OPERATIONS. Immediately following consummation of the Merger, the
Broker Subsidiary will be a wholly-owned subsidiary of PNC and will generally
retain the same management team that is in place at the Broker Subsidiary prior
to the Merger. Except as described below, the Broker Subsidiary generally will
continue to carry on the business, including but not limited to investment
advisory services and securities underwriting, dealing and brokerage, that it
had conducted prior to the Merger. Within two years of consummation of the
merger, PNC plans to divest, cease, or transfer certain activities, including
real estate and barge investment activities, conducted by various special
purpose subsidiaries of Hilliard
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Lyons, consistent with applicable banking laws. As required by Federal Reserve
interpretations under the Glass-Steagall Act, at or prior to the consummation of
the Merger, the Broker Subsidiary will cease acting as principal
underwriter/distributor to the Hilliard Lyons Growth Fund, Inc. and Hilliard
Lyons Government Fund, Inc., although it is expected that the Broker Subsidiary
will continue to act as a retailer of shares of the funds. Certain activities
currently conducted by Hilliard Lyons subsidiaries, including annuities and
insurance sales activities, will in the future be conducted by state-licensed
insurance agency subsidiaries of PNC Bank, Delaware, consistent with applicable
banking, securities, and insurance laws.
EMPLOYEES. On the Effective Date, all employees of Hilliard Lyons or
its subsidiaries will become employees of PNC subsidiaries. In order to induce
certain personnel to remain in the employ of PNC following consummation of the
Merger, PNC will establish the Retention Pool consisting of funds which will be
used to retain Designated Managers and Key Brokers of Hilliard Lyons and
subsidiaries thereof. This Retention Pool will be in the amount of approximately
$40 million, of which approximately $29 million will be set aside for Key
Brokers and approximately $11 million for Designated Managers. Each Key Broker
will receive payments ratably on the first, second and third anniversaries of
the Closing Date, provided that he or she remains employed by PNC or a PNC
subsidiary. Each Designated Manager will receive one-fifteenth of his or her
total share on the first, second, and third anniversaries of the Closing Date,
and two-fifths on each of the fourth and fifth anniversaries so long as he or
she remains employed by PNC or a subsidiary of PNC. The Agreement contains
detailed provisions governing what happens to amounts payable under the
Retention Pool upon a Key Broker's or Designated Manager's death, disability,
termination with or without cause, or resignation with or without good reason.
The participation of certain employees of Hilliard Lyons and its
subsidiaries in the Retention Pool means that some executive officers and
directors of Hilliard Lyons have interests in the Merger that are in addition to
their interests as shareholders of Hilliard Lyons generally. All current
executive officers and directors of Hilliard Lyons, as a group, are eligible for
approximately $8.1 million of the total Retention Pool. James W. Stuckert, James
M. Rogers, James R. Allen and E. Neal Cory, II, have also each entered into an
employment agreement with the Broker Subsidiary effective as of the Merger. The
employment agreements, each having a term of three years, do not materially
change the terms of such employees' current employment; rather, under the terms
of such agreements, each person shall maintain his current salary and benefits.
If any such person's employment were terminated without cause or any such person
terminated his employment for good reason, however, the Broker Subsidiary would
be required to provide such person one year's salary and certain benefits.
EMPLOYEE BENEFITS. The Broker Subsidiary plans to retain existing
Hilliard Lyons employee benefit plans. Under the Agreement, if Hilliard Lyons'
401(k) plan is terminated, employees of Hilliard Lyons will be eligible to
participate in a 401(k) plan of PNC on substantially the same terms and
conditions as those applying to other participants in such PNC plan. For
purposes of eligibility, PNC will recognize service to a subsidiary, affiliate
or
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predecessor of Hilliard Lyons to the same extent as such service was recognized
by Hilliard Lyons prior to the Merger.
INDEMNIFICATION AND INSURANCE. The Agreement provides that PNC will,
or will cause a PNC subsidiary to, indemnify, defend and hold harmless the
present and former officers, directors, employees and agents of Hilliard Lyons
or its subsidiaries, against all losses, expenses, claims, damages or
liabilities arising out of actions or omissions occurring prior to the Effective
Date which were committed by such officers, directors, employees or agents.
However, such indemnification shall be provided only to the extent that such
persons were entitled to indemnification under the Kentucky Business Corporation
Act and Hilliard Lyons' Articles of Incorporation and By-Laws (or, in the case
of an officer, director, employee or agent of a Hilliard Lyons subsidiary, the
applicable state statute, charter document, and bylaws pertaining to that
subsidiary) as in effect on the date of the Agreement.
Under the Kentucky Business Corporation Act, a corporation must
indemnify a director or officer who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which he was a party because he
is or was the director of the corporation against reasonable expenses incurred
by him in connection with the proceeding. In addition, the Kentucky Business
Corporation Act authorizes a corporation to indemnify a director if (i) he
conducted himself in good faith, (ii) he reasonably believed that his conduct
was in the best interests of the corporation (in the case of conduct in his
official capacity), or was at least not opposed to its best interests (in other
cases), and (iii) in the case of any criminal proceeding, he had no reasonable
cause to believe his conduct was unlawful. The Articles of Incorporation of
Hilliard Lyons provide that Hilliard Lyons shall indemnify directors, officer
and employees to the fullest extent permitted by the Kentucky Business
Corporation Act. By virtue of the Agreement, therefore, PNC will be obligated to
provide indemnification for liabilities arising prior to the Effective Date to
the maximum extent allowed by Kentucky law.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Arnold & Porter,
special tax counsel to PNC, with respect to certain anticipated material U.S.
federal income tax consequences of the Merger to a holder of Hilliard Lyons
Common Stock. Arnold & Porter has not independently verified any factual matters
relating to the Merger. This discussion is based on laws, regulations, rulings
and judicial decisions as they exist on the date of the filing of this Proxy
Statement/Prospectus. These authorities are all subject to change and such
change may be made with retroactive effect. Arnold & Porter cannot give any
assurance that, after any such change, its opinion would not be different, and
does not undertake any responsibility to update or supplement its opinion.
This discussion is not a complete description of the U.S. federal
income tax consequences of the Merger and may not apply to a holder subject to
special treatment under the Code, such as a holder that is a financial
institution, an insurance company, a dealer in securities or foreign currencies,
a trader in securities, a tax-exempt organization or a person
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who acquired shares of Hilliard Lyons Common Stock pursuant to the exercise of
an employee stock option or otherwise as compensation. In addition, this
discussion applies only to a holder of Hilliard Lyons Common Stock holding such
stock as a capital asset and who is a U.S. person (as defined in Section
7701(a)(30) of the Code) (a "Holder"). No ruling will be requested from the
Internal Revenue Service (the "Service") regarding the tax consequences of the
Merger. Moreover, this discussion is not binding on the Service and would not
prevent the Service from challenging the U.S. federal income tax treatment of
the Merger. In addition, this discussion does not address the state, local or
foreign tax consequences of the Merger.
BECAUSE OF THE COMPLEXITIES OF THE TAX LAWS IN GENERAL, AND THE
COMPLEXITIES OF THE TAX CONSEQUENCES ASSOCIATED WITH THE RECEIPT OF CASH IN THE
MERGER IN PARTICULAR, EACH HOLDER OF HILLIARD LYONS COMMON STOCK IS URGED TO
CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES OF THE MERGER.
Consummation of the Merger is conditioned upon the receipt by PNC and
Hilliard Lyons of an opinion of Arnold & Porter, special tax counsel to the PNC,
dated as of the Closing Date, on the basis of facts, representations and
assumptions set forth or referred to in such opinion, substantially to the
effect that (i) the Merger should be treated for U.S. federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and (ii) the gain, if any, realized by the holders of Hilliard Lyons Common
Stock as a result of the Merger, should be recognized by each such holder, but
in an amount not in excess of the amount of cash received. Although the
condition that such opinion be delivered can be waived, the parties do not
intend to waive this condition. If, however, this condition is waived by both
parties, Hilliard Lyons will resolicit approval of its shareholders with respect
to the Merger. The opinion will not be binding on the Service and would not
prevent the Service from challenging the U.S. federal income tax treatment of
the Merger. See "PROPOSED MERGER -- Representations and Warranties; Conditions
to the Merger; Waiver."
The facts, representations and assumptions upon which Arnold & Porter
has relied and will rely in rendering its opinions have been and will be
provided by PNC, Hilliard Lyons and any other persons or entities, as necessary,
and Arnold & Porter has assumed and will assume that such facts, representations
and assumptions will be consistent with the state of facts existing at the
Effective Date. Arnold & Porter's opinions are not binding on the Service and do
not prevent the Service from challenging the U.S. federal income tax treatment
of the Merger.
CONSEQUENCES TO HOLDERS. A Holder that exchanges all of the shares of
Hilliard Lyons Common Stock actually owned by such Holder for the Merger
Consideration will generally recognize gain, but not loss, with respect to the
Hilliard Lyons Common Stock surrendered in an amount equal to the lesser of (i)
the amount of gain realized (i.e., the excess
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of the sum of the amount of cash and the fair market value of PNC Common Stock
received over the Holder's adjusted tax basis in the surrendered shares), and
(ii) the amount of cash received (excluding, for this purpose, cash received in
lieu of a fractional share of PNC Common Stock, the treatment of which is
discussed below). For this purpose, gain or loss must be calculated separately
for each identifiable block of shares surrendered in the exchange, and a loss
realized on one block of shares may not be used to offset a gain realized on
another block of shares. Any recognized gain will generally be long-term capital
gain if the Holder's holding period with respect to the Hilliard Lyons Common
Stock is more than one year. See " -- Treatment of Long-Term Capital Gain."
In most cases, any gain recognized by a Holder as a result of the
Merger will be capital gain. However, in certain circumstances, part or all of
the cash received by a Holder in the Merger may be deemed to be a dividend and
treated as ordinary income to the Holder. This determination is made under
Sections 302 and 356(a) of the Code and regulations thereunder, and it generally
depends on whether, and to what extent, the receipt of cash reduces the Holder's
deemed percentage stock ownership of PNC. For purposes of this determination,
the Holder is treated as if he first exchanged all of his shares of Hilliard
Lyons Common Stock solely for PNC Common Stock and as if PNC then immediately
redeemed a portion of such PNC Common Stock for the cash the Holder actually
received. The gain recognized in the exchange followed by the deemed redemption
will be treated as capital gain if the deemed redemption (i) is substantially
disproportionate with respect to the Holder or (ii) is not essentially
equivalent to a dividend. Each Holder should consult with his tax advisor to
determine the potential applicability of these rules in the Holder's particular
circumstances.
The aggregate tax basis of PNC Common Stock received by a Holder who
exchanges shares of Hilliard Lyons Common Stock for a combination of PNC Common
Stock and cash pursuant to the Merger will be the same as the aggregate adjusted
tax basis of the shares of Hilliard Lyons Common Stock surrendered therefor,
decreased by the total amount of cash received and increased by the amount of
recognized gain (whether capital gain or ordinary income). The holding period of
such PNC Common Stock will include the holding period of the shares of Hilliard
Lyons Common Stock surrendered therefor.
CASH RECEIVED IN LIEU OF A FRACTIONAL SHARE. Cash received by a Holder
in lieu of a fractional share of PNC Common Stock will be treated as received
and exchanged for such fractional share, and gain or loss will be recognized,
measured by the difference between the amount of cash received and the portion
of the adjusted tax basis of the shares of Hilliard Lyons Common Stock allocable
to such fractional interest. Such gain or loss generally should be long-term
capital gain or loss if the holding period for such shares of Hilliard Lyons
Common Stock was more than one year. See " -- Treatment of Long-Term Capital
Gain." If, however, the cash received has the effect of the distribution of a
dividend with respect to the Holder, part or all of the cash received may be
treated as a dividend.
DISSENTING SHAREHOLDERS. In general, any Dissenting Shareholder who
perfects his or her right to be paid the fair value of his or her shares of
Hilliard Lyons Common Stock in cash
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will recognize taxable gain or loss for U.S. federal income tax purposes upon
receipt of such cash. The amount of gain or loss will equal (i) the amount of
cash so received minus (ii) the Holder's adjusted tax basis in the surrendered
shares of Hilliard Lyons Common Stock. Such gain or loss will generally be
long-term capital gain or loss if the Holder's holding period with respect to
the stock is more than one year. See " -- Treatment of Long-Term Capital Gain."
TREATMENT OF LONG-TERM CAPITAL GAIN. Federal income tax rates on
long-term capital gain received by an individual vary based on the individual's
taxable income. Holders should contact their tax advisors for information on the
tax rate applicable to them in their particular circumstances.
BACKUP WITHHOLDING. Unless an exemption applies under the applicable
law and regulations, the Exchange Agent will be required to withhold 31% of cash
payments to which a Hilliard Lyons shareholder or other payee is entitled
pursuant to the Merger unless the shareholder or other payee provides his
taxpayer identification number (social security number or employee
identification number) and certifies that such number is correct. Each
shareholder and, if applicable, each other payee should complete and sign the
substitute Form W-9 included with the transmittal letter that will be mailed by
the Exchange Agent, so as to provide the information and certification necessary
to avoid backup withholding, unless an applicable exemption exists and is
established in a manner satisfactory to the Exchange Agent.
RESALE OF PNC COMMON STOCK
The shares of PNC Common Stock issuable to shareholders of Hilliard
Lyons pursuant to the Merger as described under " -- Terms of the Merger" have
been registered under the Securities Act pursuant to the Registration Statement.
It is anticipated, and it is a condition to each of the parties' obligations to
effect the Merger, that such shares will be approved for listing, subject to
official notice of issuance, on the NYSE. Such shares may be traded freely by
those shareholders not deemed to be "affiliates" of Hilliard Lyons under Rule
145 promulgated under the Securities Act ("Rule 145"). The term "affiliate" will
generally include each person who controls, is controlled by or is under common
control with, or is a member of a group that controls, is controlled by or is
under common control with Hilliard Lyons at the time of the Special Meeting, and
could be deemed to include all executive officers and directors of Hilliard
Lyons.
Rule 145 will restrict the resale of PNC Common Stock received in the
Merger and beneficially owned by those shareholders who are deemed to be
affiliates of Hilliard Lyons and certain of their family members and related
interests. Such affiliates, provided they are not affiliates of PNC at or
following the Effective Date, may publicly resell PNC Common Stock received by
them in the Merger subject to certain limitations, principally as to, among
other things, the number of shares sold and the manner of sale, during the one
year following the Effective Date. After the one-year period, such affiliates
may resell their shares without restriction so long as there is adequate current
public information with respect to PNC as
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required by Rule 145. Affiliates also would be permitted to resell PNC Common
Stock received in the Merger pursuant to an effective registration statement
under the Securities Act or an available exemption from the Securities Act
registration requirements. This Proxy Statement/Prospectus does not cover any
resales of PNC Common Stock received in the Merger by persons who may be deemed
to be affiliates of Hilliard Lyons.
The Agreement provides that PNC and Hilliard Lyons shall cooperate
and use all commercially reasonable efforts to identify those persons who may be
deemed to be affiliates of Hilliard Lyons, and to cause such persons so
identified to deliver to PNC, no later than 30 days prior to the Effective Date,
a written agreement in form and substance mutually satisfactory to the parties.
Such agreement is expected to provide that such persons will not dispose of any
PNC Common Stock except in compliance with the Securities Act and rules and
regulations promulgated thereunder. It is anticipated that each director and
executive officer of Hilliard Lyons will execute such an agreement.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
PNC has a Dividend Reinvestment and Stock Purchase Plan, which
provides, for those shareholders who elect to participate, that dividends on PNC
Common Stock may be invested in additional shares of PNC Common Stock at
then-current market price without payment of brokerage commissions, fees or
service charges. The plan also permits participants to invest voluntary cash
payments, within certain dollar limitations, in additional shares of PNC Common
Stock at then-current market prices. It is anticipated that, after the Effective
Date, PNC will continue to offer such a Dividend Reinvestment and Stock Purchase
Plan, and that shareholders of Hilliard Lyons who receive PNC Common Stock in
the Merger will have the right to participate therein.
ACCOUNTING TREATMENT
Upon consummation of the Merger, the transaction will be accounted
for as a purchase, and all of the assets and liabilities of Hilliard Lyons will
be recorded in PNC's consolidated financial statements at their estimated fair
value at the Effective Date. The amount by which the purchase price paid by PNC
exceeds the fair value of the net tangible and identifiable intangible assets
acquired by PNC through the Merger will be recorded as goodwill and amortized
over the period of expected benefit. PNC currently estimates that, based on
preliminary accounting estimates, the Merger would result in identifiable
intangible assets and goodwill approximating $170 million.
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CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
PNC is a Pennsylvania corporation subject to the provisions of the
Pennsylvania Business Corporation Law of 1988, as amended (the "Pennsylvania
Business Corporation Law"). Hilliard Lyons is a Kentucky corporation subject to
the provisions of the Kentucky Business Corporation Act. Upon consummation of
the Merger, shareholders of Hilliard Lyons, whose rights are governed by
Hilliard Lyons' Articles of Incorporation and By-Laws and by the Kentucky
Business Corporation Act, will become shareholders of PNC, and their rights will
be governed by PNC's Articles of Incorporation and By-Laws and by the
Pennsylvania Business Corporation Law.
The following is a summary of the material differences between the
rights of shareholders of PNC and Hilliard Lyons. This summary does not purport
to be a complete discussion of, and is qualified in its entirety by reference
to, the governing law and the articles of incorporation and by-laws of each
corporation.
AUTHORIZED COMMON STOCK. PNC is authorized to issue 450 million
shares of PNC Common Stock, of which 301,563,813 were issued and outstanding and
51,230,874 were held in treasury, as of July 31, 1998. Hilliard Lyons is
authorized to issue 5 million shares of Hilliard Lyons Common Stock, of which
3,581,400 were issued and outstanding and none were held in treasury, as of
August 20, 1998.
AUTHORIZED PREFERRED STOCK. PNC is authorized to issue 17,361,631
shares of PNC Preferred Stock (as hereinafter defined), of which 6,698,831 were
issued and outstanding in five series, as of July 31, 1998 (collectively, the
"PNC Preferred Stock"). The rights and preferences evidenced by shares of PNC
Common Stock are limited or qualified by the rights and preferences evidenced by
shares of PNC Preferred Stock. Information with respect to the relative rights
and preferences of PNC Common Stock and PNC Preferred Stock is included in the
description of PNC Common Stock incorporated herein by reference. See "AVAILABLE
INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE." The PNC Board may establish
and designate additional series of PNC Preferred Stock and fix and determine the
terms thereof by resolution. Hilliard Lyons is not authorized to issue preferred
stock.
ISSUANCE OF AUTHORIZED SHARES. The PNC Board generally may authorize
the issuance of authorized and unissued shares of PNC Common Stock or PNC
Preferred Stock upon a majority vote of the PNC Board present at a meeting at
which a quorum is present. PNC is required by the rules of the NYSE to submit
certain transactions to a vote of its shareholders, including, without
limitation, those in which the issuance of shares of PNC Common Stock could
result in an increase in the number of outstanding shares by 20% or more. The
Hilliard Lyons Board may authorize the issuance of authorized and unissued
shares of Hilliard Lyons Common Stock upon a majority vote of the Hilliard Lyons
Board present at a meeting at which a quorum is present.
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AMENDMENT OF ARTICLES. Under the Pennsylvania Business Corporation
Law, an amendment to PNC's Articles of Incorporation can be proposed by adoption
of a resolution by the PNC Board. While the Pennsylvania Business Corporation
Law provides generally that an amendment to a corporation's articles of
incorporation can be proposed also by a petition of shareholders entitled to
cast at least 10% of the votes that all shareholders are entitled to cast
thereon, Pennsylvania law eliminates that right in the case of a corporation,
such as PNC, that is registered under the Exchange Act. An amendment must be
submitted to a vote and be approved by a majority of the shareholders entitled
to vote thereon and, if any class or series of shares is entitled to vote
thereon as a class, the affirmative vote of a majority of the votes cast in each
such class vote, except for amendments on matters specified in Section 1914(c)
of the Pennsylvania Business Corporation Law that do not require shareholder
approval. Amendments affecting the relative rights and preferences of shares are
subject to special restrictions. Under the Kentucky Business Corporation Act, an
amendment to Hilliard Lyons' Articles of Incorporation (except for amendments on
matters specified in Section 10-020 of the Kentucky Business Corporation Act
that do not require shareholder approval) must be approved by the Hilliard Lyons
Board and then submitted to a vote at a meeting of the shareholders where it
must receive an affirmative vote of a majority of the shares entitled to vote
thereon and, if any class of shares is entitled to vote thereon as a class, the
affirmative vote of a majority of the votes cast in each class. Amendments on
certain matters require a greater shareholder vote and are subject to special
procedures. In addition, Hilliard Lyons' Articles of Incorporation provide that
sections thereof regarding share transfer restrictions, indemnification and
amendment may be amended only by the affirmative vote of the holders of 75% of
the Hilliard Lyons Common Stock.
AMENDMENT OF BY-LAWS. PNC's By-Laws may be altered, amended, added to
or repealed by a vote of a majority of the PNC Board at any regular meeting of
the PNC Board or at any special meeting of the PNC Board called for that
purpose. However, PNC's Articles of Incorporation provide that this authority to
make, amend and repeal the By-Laws, while vested in the PNC Board, is subject to
the power of the shareholders to change such action. Moreover, the PNC Board may
not adopt or change a By-Law on certain subjects committed expressly to the
shareholders by Section 1504(b) of the Pennsylvania Business Corporation Law.
Hilliard Lyons' By-Laws may be altered, amended or repealed by a vote of the
majority of the Hilliard Lyons Board at any regular or special meeting of the
Hilliard Lyons Board. However, under the Kentucky Business Corporation Act, a
corporation's shareholders may amend or repeal the corporation's by-laws even
though that power is also given to the directors. Moreover, the Hilliard Lyons
Board may not adopt or change a By-Law on certain subjects committed expressly
to the shareholders by the Kentucky Business Corporation Act.
NOTICE OF SHAREHOLDER MEETINGS. PNC's By-Laws provide that written
notice of every meeting of the shareholders shall be given to each shareholder
of record entitled to vote at the meeting at least five days prior to the
meeting date, unless a greater notice period is required by law. The
Pennsylvania Business Corporation Law states that five days notice is sufficient
unless the meeting will consider a "fundamental change," in which case ten days
notice is required. "Fundamental changes" include, without limitation,
amendments of articles of
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incorporation, mergers, consolidations, divisions, conversions, voluntary
dissolutions, and involuntary liquidations. Hilliard Lyons' By-Laws provide,
consistent with the Kentucky Business Corporation Act, that written notice of
the time, place and (for a special meeting only) purpose of every meeting of
shareholders shall be mailed, not fewer than ten nor more than 50 days before
the date of the meeting, to each shareholder entitled to vote at the meeting at
his address as it appears on the stock transfer books of Hilliard Lyons.
RECORD DATE. Consistent with the Pennsylvania Business Corporation
Law, PNC's By-Laws state that the PNC Board may fix a record date not more than
90 days prior to the date of any meeting of shareholders, the date fixed for the
payment of any dividend or distribution, the date fixed for the allotment of
rights or the date when any change or conversion or exchange of shares will be
made or go into effect. The ownership of PNC stock on such record date shall
determine whether a shareholder is of record and therefore entitled to notice
of, or to vote at, such meeting, to receive such dividend or distribution,
receive such allotment of rights, or have his shares converted or exchanged,
respectively. Neither Hilliard Lyons' Articles of Incorporation nor its By-Laws
contains any provision respecting the fixing of record dates. The Kentucky
Business Corporation Act provides that if a corporation's bylaws do not fix or
provide for fixing a record date, the board of directors may fix a future date
as the record date, provided that it is not more than 70 days before the meeting
or other action requiring a determination of shareholders.
SPECIAL SHAREHOLDERS' MEETINGS. PNC's By-Laws provide that a special
meeting of shareholders can be called, at any time, only by the PNC Board, the
Chairman of the Board, the President, or a Vice Chairman of the Board. While the
Pennsylvania Business Corporation Law provides generally that in addition to the
foregoing persons, a group of shareholders entitled to cast at least 20% of the
votes that all shareholders are entitled to cast at the particular meeting may
call a special meeting, this provision does not apply to, among others,
corporations, such as PNC, that are registered under the Exchange Act. Since PNC
is registered under the Exchange Act, shareholders of PNC are not entitled to
call a special meeting. Hilliard Lyons' By-Laws provide that a special meeting
of shareholders may be called by either the Hilliard Lyons Board or the holders
of at least 20% of all the shares entitled to vote at the special meeting.
DIRECTORS. PNC's By-Laws provide that the business of PNC shall be
managed by the PNC Board which is to consist of not less than five nor more than
36 members. The PNC Board currently consists of 17 directors. Directors hold
office from the time they are elected by the shareholders of PNC until the next
succeeding annual meeting of the PNC shareholders. Vacancies in the PNC Board
may be filled by a majority of the remaining directors though less than a
quorum, and any director so elected shall serve until the next annual meeting of
the PNC shareholders, at which time a successor shall be elected and qualified.
PNC's By-Laws authorize the PNC Board to appoint committees and to delegate
certain of its functions to such committees, and establish the Executive
Committee, the Audit Committee, the Credit Committee, the Personnel and
Compensation Committee, the Corporate Governance Committee, and the Finance
Committee. The Executive Committee is vested with most of the general powers of
the PNC Board. Hilliard Lyons' By-Laws fix the number of directors at 11
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although its Articles of Incorporation allow any number between three and 25.
Directors are elected at the annual meeting of Hilliard Lyons shareholders and
hold office until the next annual meeting following their election and until
their successors are elected and have qualified. Vacancies in the Hilliard Lyons
Board may be filled by the affirmative vote of the remaining directors though
less than a quorum, and any director so elected shall serve until the next
annual meeting of the Hilliard Lyons shareholders. Directors of Hilliard Lyons
are elected by cumulative voting of the Hilliard Lyons shareholders. Hilliard
Lyons' Articles of Incorporation and By-Laws authorize the Hilliard Lyons Board
to appoint committees and to delegate certain of its functions to such
committees. The By-Laws establish an Executive Committee that, at times when the
Hilliard Lyons Board is not in session, has and may exercise all of the
authority of the Hilliard Lyons Board except with respect to certain fundamental
changes.
NOMINATION OF DIRECTORS. PNC's By-Laws provide that nominations for
the election of directors may be made only (i) pursuant to PNC's notice of such
meeting, (ii) by the presiding officer, (iii) by or at the direction of a
majority of the PNC Board, or (iv) by one or more shareholders in accordance
with certain rules of the Commission. Furthermore, a shareholder may make a
nomination for the election of a director only if written notice of such
nomination has been received by the Secretary of PNC generally not later than 90
days prior to the annual meeting. The nomination must comply with certain
requirements and specifications enumerated in PNC's By-Laws, or it will not be
recognized by the presiding officer of the meeting. Hilliard Lyons' By-Laws
contain no restrictions on the ability of the holders of Hilliard Lyons Common
Stock to nominate one or more persons for election as directors.
REMOVAL OF DIRECTORS. The Pennsylvania Business Corporation Law
provides that any director, or all of them, may be removed by a vote of
shareholders entitled to elect directors. Shareholder removal of directors is
restricted if the board of directors is classified, if shareholders vote
cumulatively when electing directors, or if the by-laws contain provisions
addressing shareholder removal of directors, but none of these restrictions
applies to PNC. Directors may remove a fellow director if he or she has been
judicially declared of unsound mind, has been convicted of an offense punishable
by imprisonment for more than one year or has failed to accept the office, or
upon any other proper cause that the by-laws may specify. A court may remove a
director upon application in a derivative suit in case of fraudulent or
dishonest acts, gross abuse of authority or discretion, or for any other proper
cause. The Kentucky Business Corporation Act states that any director, or all of
them, may be removed with or without cause by a majority of the votes cast by
the shares entitled to vote for the election of directors. However, because
Hilliard Lyons has adopted cumulative voting of directors, under the Kentucky
Business Corporation Act a director may not be removed if the number of votes
sufficient to elect him under cumulative voting voted against his removal.
Shareholder removal of directors is further restricted if the director sought to
be removed is elected by a voting group, and may be limited to removal for cause
by the articles of incorporation, but neither of these restrictions apply to
Hilliard Lyons. The Kentucky Business Corporation Act contains no provisions
regarding removal of a director by other directors or by a court.
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OFFICERS. The PNC By-Laws establish the following offices: Chairman
of the Board, President, one or more Vice Chairmen, one or more Vice Presidents
(including Senior Executive Vice Presidents, Executive Vice Presidents, and
Senior Vice Presidents), Secretary, Treasurer, Controller, and General Auditor.
The Board of Directors must designate from among the Chairman of the Board,
President and Vice Chairman, an officer who will serve as Chief Executive
Officer. Officers having the rank of Senior Vice President or higher are elected
by the Board of Directors; other officers are appointed by the Chief Executive
Officer. The PNC Board is authorized by the By-Laws to create further officers
and appoint persons to them. Hilliard Lyons' Articles of Incorporation provide
for a President, a Vice President, a Secretary, and a Treasurer, and authorize
the Board to elect or appoint other officers. In addition to the foregoing
offices, the Hilliard Lyons By-Laws establish a Chairman of the Board and allow
there to be multiple Vice Presidents.
LIMITATIONS OF LIABILITY OF DIRECTORS AND OFFICERS. The shareholders
of a Pennsylvania corporation may adopt a by-law that eliminates the personal
liability of a director, except when the director breaches or fails to perform
the duties of his or her office and such breach or failure to perform
constitutes self-dealing, willful misconduct, or recklessness. PNC's By-Laws
contain a provision that limits a director's liability to the full extent
permitted by law. Under the Kentucky Business Corporation Act, a Kentucky
corporation may provide that a director shall not be personally liable to the
corporation or its shareholders for damages for breach of any duty owed to the
corporation or its shareholders, except that such provision shall not relieve a
director from liability for any breach of duty based upon an act or omission (i)
in breach of such person's duty of loyalty to the corporation or its
shareholders, (ii) not in good faith or involving a knowing violation of law,
(iii) in connection with a vote for an unlawful distribution to shareholders, or
(iv) resulting in receipt by such person of an improper personal benefit.
Hilliard Lyons' Articles of Incorporation eliminate a director's liability for,
and accountability for profits with respect to, contracts and business
transactions between Hilliard Lyons and the director wherein the director has an
interest that is or might be adverse to the interest of Hilliard Lyons, provided
that the contract or transaction was reasonable and on terms fair to Hilliard
Lyons.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Pennsylvania Business
Corporation Law empowers a corporation to indemnify any representative of the
corporation for expenses, judgments, fines and settlements incurred by him in
connection with an action or proceeding by reason of the fact that he was a
representative of the corporation, provided that the representative acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation (or, in the case of a criminal proceeding,
had no reasonable cause to believe that his conduct was unlawful). The
proceedings with respect to which a representative may be indemnified include
shareholder derivative suits, provided that the representative is not adjudged
liable to the corporation. A Pennsylvania corporation is required to indemnify a
representative who is successful in any such proceeding (on the merits or
otherwise) for his expenses. PNC's By-Laws provide indemnification for
directors, officers, employees and agents to the full extent permitted by the
Pennsylvania Business Corporation Law. Aside from PNC's obligation under its
By-Laws and the Pennsylvania Business
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Corporation Law to indemnify its officers and directors, PNC has contractually
agreed to indemnify, defend and hold harmless the officers, directors, employees
and agents of Hilliard Lyons and its subsidiaries against all losses, expenses,
claims, damages or liabilities arising out of actions or omissions which were
committed on or prior to the Effective Date by such persons in the course of
acting on behalf of Hilliard Lyons (or a subsidiary), to the extent such persons
are entitled to indemnification under the Kentucky Business Corporation Act and
Hilliard Lyons' Articles of Incorporation and By-Laws (or the statute and
governing documents with respect to a subsidiary, as the case may be) as in
effect on the date of the Agreement. See "PROPOSED MERGER -- Management and
Operations After the Merger -- Indemnification and Insurance." The Kentucky
Business Corporation Act empowers a corporation to indemnify a director for
liability incurred in a proceeding to which he was made a party because he was a
director if the director (i) conducted himself in good faith, (ii) reasonably
believed that his conduct was in the best interests of the corporation (or, in
the case of conduct not in his official capacity, that his conduct was at least
not opposed to its best interests), and (iii) in the case of criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful.
Indemnification is prohibited in derivative suits where the director was
adjudged liable, and in any case where the director was adjudged liable on the
basis of a breach of the duty of loyalty. The Kentucky Business Corporation Act
mandates indemnification for expenses incurred in connection with a proceeding
where the director was wholly successful on the merits. Indemnification of
non-director officers, employees and agents is treated differently from, and
generally is narrower than, indemnification of directors under the Kentucky
Business Corporation Act. Hilliard Lyons' Articles of Incorporation provide that
Hilliard Lyons shall indemnify its directors, officers and employees against
liability and expenses incurred in connection with proceedings to which such
person was made a party by reason of the fact that he was serving as a director,
officer or employee, to the fullest extent permitted under Kentucky law.
SHAREHOLDER PROPOSALS. PNC's By-Laws provide that a shareholder may
make a proposal for action at the annual meeting of PNC shareholders only in
accordance with applicable Commission rules, and only if he provides written
notice to the Secretary of PNC generally not later than 90 days prior to the
annual meeting. This written notice must comply with certain requirements or
specifications set forth in PNC's By-Laws or it will not be recognized as a
valid proposal for action at the annual meeting. Nothing in Hilliard Lyons'
Articles of Incorporation or By-Laws or in the Kentucky Business Corporation Act
addresses shareholder proposals.
SHAREHOLDER RIGHTS OF INSPECTION. Under the Pennsylvania Business
Corporation Law, every shareholder shall, upon written verified demand stating
the purpose thereof, have a right to examine the share register, books and
records of account, and records of proceedings of the corporation, for any
purpose reasonably related to the interest of the person as a shareholder. Such
shareholder must be given access to such share register, books and records of
account, and records of proceedings within five business days of receipt of the
demand. In addition, the information contained in the voting list of
shareholders must be produced and made available at any shareholder meeting.
Under the Kentucky Business Corporation Act, a shareholder is
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entitled to inspect and copy, without qualification, the articles of
incorporation, bylaws, board resolutions, minutes of shareholder meetings, and
written communications to shareholders after serving written notice of his
demand upon the corporation within five business days of the date upon which
inspection is to be made. In addition, if a shareholder makes a demand in good
faith and for a proper purpose and describes with reasonable particularity his
purpose and the records he desires to inspect, and the records are directly
connected with his purpose, he may inspect and copy minutes of the board of
directors and accounting records. In addition, at the time of any shareholder
meeting and five days beforehand, the voting list of shareholders must be
available for inspection by any shareholder.
SHAREHOLDER CONSENTS. Under the Pennsylvania Business Corporation
Law, any action required or permitted to be taken at a meeting of the
shareholders of PNC may be taken without a meeting only if written consents are
obtained from all shareholders who would be entitled to vote at a meeting for
such purpose. Under Hilliard Lyons' Articles of Incorporation and the Kentucky
Business Corporation Act, any action required or permitted to be taken at a
meeting of shareholders of Hilliard Lyons may be taken without a meeting only if
such action is approved by the unanimous written consent of the shareholders.
DISTRIBUTIONS. Under the Pennsylvania Business Corporation Law, PNC
may pay dividends and purchase, redeem, or otherwise acquire its own shares
unless, after giving effect thereto, it would be unable to pay its debts as they
became due in the usual course of business, or its total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distributions. Under
PNC's Articles of Incorporation, PNC may not pay dividends, purchase, redeem or
otherwise acquire PNC Common Stock until all past dividends on PNC Preferred
Stock (to the extent cumulative) have been paid, or declared and set apart for
payment, in full. Aside from state law and PNC's Articles of Incorporation, the
ability of PNC to make distributions to the holders of PNC Common Stock will
depend to a large extent upon the amount of dividends that PNC's banking
subsidiaries, which are subject to certain restrictions imposed generally by
regulatory authorities, pay to PNC. In addition, the bank regulatory authorities
have the authority to prohibit PNC and its subsidiary banks from engaging in an
unsafe or unsound practice in conducting their business. The payment of
dividends, depending on the financial condition of the subsidiary bank in
question or PNC, could be deemed to constitute such an unsafe or unsound
practice (and, therefore, the payment of dividends could be prohibited). Under
the Kentucky Business Corporation Act, Hilliard Lyons may not pay dividends or
purchase, redeem, or otherwise acquire its own shares if, after giving effect
thereto, (i) it would be unable to pay its debts as they become due in the usual
course of business or (ii) its total assets would be less than the sum of its
total liabilities plus the amount necessary to satisfy the preferential rights
upon dissolution of shareholders whose preferential rights are superior to the
rights of those receiving the distribution. Hilliard Lyons is not subject to any
other regulatory restrictions on distributions. The rights of holders of
Hilliard Lyons Common Stock to receive distributions are not subordinate to the
rights of holders of any preferred stock, because no preferred stock has been
authorized by Hilliard Lyons.
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<PAGE> 59
LIQUIDATION RIGHTS. In the event of the liquidation, dissolution or
winding-up of the affairs of PNC, holders of outstanding shares of PNC Common
Stock are entitled to share, in proportion to their respective interests, in
PNC's assets and funds remaining after payment, or provision for payment, of all
debts and other liabilities of PNC. The rights of holders of outstanding shares
of PNC Common Stock upon liquidation, dissolution or winding-up will be
subordinate to the rights of the holders of preferred stock issued by PNC, which
rights may include accrued and unpaid dividends with respect to series of
preferred stock that are cumulative. Because PNC is a bank holding company, its
rights, the rights of its creditors and the rights of its shareholders to
participate in the assets of any subsidiary upon the liquidation or
recapitalization of that subsidiary may be subject to the prior claims of the
subsidiary's creditors except to the extent that PNC may itself be a creditor
with recognized claims against the subsidiary. In the event of the liquidation,
dissolution or winding-up of the affairs of Hilliard Lyons, holders of the
outstanding shares of Hilliard Lyons Common Stock are entitled to share, in
proportion to their respective interests, Hilliard Lyons' assets and funds
remaining after payment, or provision for payment, of all debts and other
liabilities of Hilliard Lyons. The rights of holders of Hilliard Lyons Common
Stock to so share in Hilliard Lyons' assets and funds will not be subordinate to
the rights of holders of any preferred stock, because no preferred stock has
been authorized by Hilliard Lyons.
FUNDAMENTAL CHANGES. Under the Pennsylvania Business Corporation Law,
a plan of merger or consolidation, a plan of share exchange or plan of transfer
of all or substantially all of the assets of a corporation may be adopted if,
among other conditions, it receives the affirmative vote of a majority of the
votes cast by all shareholders entitled to vote thereon. No shareholder vote is
required for a merger where the articles of incorporation of the surviving
corporation are identical to those of the corporation being merged, or for a
merger of an 80%-owned subsidiary into the parent. In certain circumstances,
shareholders may be entitled to dissent from such transactions and obtain fair
value in cash for their shares. See " -- Rights of Dissent and Appraisal." In
addition to and aside from shareholder voting rights provided by Pennsylvania
law, NYSE rules governing corporations whose stock is listed on the NYSE, such
as PNC, require a shareholder vote on a merger if stock being issued in
connection therewith possesses voting power equal to at least 20% of the voting
power of the common stock outstanding immediately before the merger. Under the
Kentucky Business Corporation Act, a plan of merger or share exchange may be
adopted if, among other conditions, it is approved by each voting group entitled
to vote separately on the plan by a majority of all the votes entitled to be
cast on the plan by that voting group. No shareholder vote is required for the
surviving corporation of a merger where (i) the post-merger articles of
incorporation are identical to those before the merger, (ii) each shareholder of
the surviving corporation has rights equal to those enjoyed before the merger,
(iii) the number of voting shares outstanding immediately after the merger will
not exceed by more than 20% the number of voting shares outstanding immediately
before the merger, and (iv) the number of shares entitled to participate in
distributions outstanding immediately after the merger will not exceed by more
than 20% the number of such participating shares outstanding immediately before
the merger. In addition, no shareholder vote is required for a merger of a
90%-owned subsidiary into the parent. A sale of all or
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<PAGE> 60
substantially all of the assets of a corporation must be approved by a majority
of all the votes entitled to be cast on the transaction. In certain
circumstances, shareholders may be entitled to dissent from such transactions
and obtain fair value in cash for their shares. See " -- Rights of Dissent and
Appraisal." The application of these dissenters' rights provisions of the
Kentucky Business Corporation Act to the Merger is discussed elsewhere in this
Proxy Statement/Prospectus. See "PROPOSED MERGER -- Dissenters' Rights."
ANTI-TAKEOVER STATUTES. In Article VIII of its By-Laws, PNC has opted
out of the Pennsylvania Control Shares Act (Subchapter G of Chapter 25 of the
Pennsylvania Business Corporation Law), which would otherwise enable existing
shareholders of PNC in certain circumstances to block the voting rights of an
acquiring person who makes or proposes to make a control-share acquisition.
However, PNC remains subject to certain other provisions of Pennsylvania law
that may have the effect of discouraging a takeover of PNC. First, the requisite
shareholder vote for transactions such as mergers, consolidations, share
exchanges and divisions is modified if the other party to the transaction is a
shareholder of the corporation, in which case a majority of the disinterested
shares, rather than a majority of the outstanding shares, is required in order
to consummate the transaction. Second, persons who, through a "control
transaction," acquire the right to cast at least 20% of the votes required for
an election of directors, become subject to the obligation to pay objecting
shareholders fair value for their shares. Third, business combinations with a
20%-plus shareholder are subject to heightened voting and approval requirements.
None of these Pennsylvania laws applies to the Merger. Under the Kentucky
Business Corporation Act, business combinations with a 10%-plus shareholder are
subject to heightened voting requirements, including but not limited to the
affirmative vote of at least 80% of the outstanding shares and two-thirds of the
disinterested shares, and the approval of a majority of the independent members
of the board of directors. In certain circumstances, an exemption may be
available from these heightened voting requirements. This Kentucky law does not
apply to the Merger.
RIGHTS OF DISSENT AND APPRAISAL. Under the Pennsylvania Business
Corporation Law, certain corporate actions trigger a shareholder's right to
dissent from that action and obtain payment of the fair value of his shares.
However, no dissenters' rights are available for shareholders of a corporation
(i) listed on a national securities exchange, or (ii) the shares of which are
held of record by more than 2,000 shareholders, except in very limited
circumstances. Because PNC Common Stock is listed on the NYSE and PNC has more
than 2,000 shareholders, dissenters' rights that would otherwise be provided
under Pennsylvania law are generally not available to holders of PNC Common
Stock. Under the Kentucky Business Corporation Act, certain corporate actions
trigger a shareholder's right to dissent from that action and obtain payment of
the fair value of his shares. Such dissenters' rights are available to the
shareholders of a Kentucky corporation without exception or qualification. The
Kentucky Business Corporation Act contains strict procedures that must be
followed by a dissenting shareholder in order to perfect his right to receive
the fair value of his shares. See "PROPOSED MERGER -- Dissenters' Rights." If
these procedures are followed, the shareholder will be paid in cash that amount
that the corporation estimates to be the fair value of his shares, and the
shareholder has the right to seek judicial appraisal if he is dissatisfied with
the amount paid.
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<PAGE> 61
RESTRICTIONS ON TRANSFERABILITY. PNC Common Stock is publicly traded
and listed on the NYSE. There are no provisions in PNC's Articles of
Incorporation or By-Laws that restrict the transferability of the PNC Common
Stock to be received by Hilliard Lyons shareholders as the Stock Consideration;
however, certain restrictions on transfer under the federal securities laws may
apply to certain recipients of PNC Common Stock. See "PROPOSED MERGER --
Restrictions on Resale by Affiliates." There is no active trading market for
Hilliard Lyons Common Stock. Moreover, Hilliard Lyons' Articles of Incorporation
contain certain restrictions on transferability that give Hilliard Lyons, in the
event that a shareholder desires to sell shares of Hilliard Lyons Common Stock,
an option to repurchase those shares of Hilliard Lyons Common Stock at adjusted
book value paid in some combination of cash and a promissory note.
LONG-TERM INTERESTS. In Article VIII of its By-Laws, PNC has opted
out of a certain provision of the Pennsylvania Control Shares Act that
authorizes directors, in discharging their fiduciary duties, to consider, in a
broader fashion than might otherwise be the case, the long-term interests of the
corporation, including benefits that may accrue to a corporation from its
long-term plans and the possibility that these interests may be best served by
the continued independence of the corporation. There is no analogous provision
in the Kentucky Business Corporation Act.
DISSENTERS' RIGHTS
Holders of Hilliard Lyons Common Stock will be entitled to statutory
dissenters' rights in connection with the Merger under applicable Kentucky law.
Under Subtitle 13 of the Kentucky Business Corporation Act, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, consummation of a plan of merger to which the corporation is a
party and for which shareholder approval is required. A holder of Hilliard Lyons
Common Stock who wishes to assert dissenters' rights ("Dissenting Shareholder")
must deliver written notice of his intent to demand payment for his shares
before the vote on the Merger is taken at the Special Meeting, and must not vote
his shares in favor of the Merger at the Special Meeting. It is not necessary
that a Dissenting Shareholder vote on the Merger at the Special Meeting, but a
vote in favor of the Merger, whether in person or by proxy, will eliminate that
Dissenting Shareholder's rights under Subtitle 13 of the Kentucky Business
Corporation Act. Delivery of written notice prior to the vote on the Merger is
essential; a vote against the Merger at the Special Meeting, by itself, will not
satisfy the notice requirement.
If the Merger is authorized at the Special Meeting, Hilliard Lyons
will within ten days of the Special Meeting deliver to each Dissenting
Shareholder a dissenters' notice that (i) states where the payment demand must
be sent and where and when certificates for certificated shares must be
deposited, (ii) informs holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received, (iii)
supplies a form for demanding payment, (iv) sets a date between 30 and 60 days
from delivery of the dissenters'
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notice, before which date Hilliard Lyons must have received a demand for
payment, and (iv) is accompanied by a copy of Subtitle 13 of Chapter 271B of the
Kentucky Revised Statutes.
A Dissenting Shareholder must then demand payment, certify whether he
acquired beneficial ownership of the shares before the date of the first
announcement of the Merger, and deposit his certificates in the place specified
by the dissenters' notice. This demand must be made by the date set in the
dissenters' notice, or the Dissenting Shareholders will be foreclosed from
exercising dissenters' rights.
Hilliard Lyons will pay each Dissenting Shareholder who complies
fully with these conditions the amount estimated to be the fair value of his
Hilliard Lyons Common Stock plus accrued interest, in cash. The cash payment
will be accompanied by copies of Hilliard Lyons' balance sheet, income
statement, and statement of changes in shareholders' equity for the most recent
fiscal year (and the latest available interim financial statements, if any), a
statement of the estimated fair value of the Dissenting Shareholder's Hilliard
Lyons Common Stock, an explanation of how interest was calculated, and a
statement of the Dissenting Shareholder's right to demand payment under Kentucky
Revised Statutes Section 271B.13-280.
If a Dissenting Shareholder is dissatisfied with the estimate of the
fair value of his shares of Hilliard Lyons Common Stock, he may within 30 days
so notify Hilliard Lyons under Section 271B.13-280 and propose his own estimate
of the fair value of his shares and the amount of interest due. In the event
that any dispute over the fair value of the Dissenting Shareholder's shares of
Hilliard Lyons Common Stock is not resolved, Hilliard Lyons will within 60 days
commence a proceeding in the Circuit Court of Jefferson County, State of
Kentucky, in which proceeding the fair value of the Hilliard Lyons Common Stock
will be appraised and judgment will be entered for the Dissenting Shareholder in
the amount determined, plus fees and expenses in certain circumstances.
THE FOREGOING IS ONLY A SUMMARY OF THE RIGHTS OF A DISSENTING
SHAREHOLDER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUBTITLE 13 OF
CHAPTER 271B OF THE KENTUCKY REVISED STATUTES, ATTACHED TO THIS PROXY
STATEMENT/PROSPECTUS AS APPENDIX C. ANY HOLDER OF HILLIARD LYONS COMMON STOCK
WHO INTENDS TO DISSENT FROM THE MERGER SHOULD CAREFULLY REVIEW THE TEXT OF THE
APPLICABLE PROVISIONS OF SUBTITLE 13 AND SHOULD ALSO CONSULT WITH AN ATTORNEY.
THE FAILURE OF A DISSENTING SHAREHOLDER TO FOLLOW PRECISELY THE PROCEDURES
SUMMARIZED ABOVE AND SET FORTH IN SUBTITLE 13 MAY RESULT IN LOSS OF DISSENTERS'
RIGHTS. NO FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTERS' RIGHTS OR ANY
STEPS ASSOCIATED THEREWITH WILL BE FURNISHED TO HOLDERS OF HILLIARD LYONS COMMON
STOCK, EXCEPT AS INDICATED ABOVE OR OTHERWISE REQUIRED BY LAW.
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In general, any Dissenting Shareholder who perfects his right to be
paid the fair value of his shares of Hilliard Lyons Common Stock in cash will
recognize taxable gain or loss for U.S. federal income tax purposes upon receipt
of such cash. See " -- Certain U.S. Federal Income Tax Consequences."
As provided in the Kentucky Business Corporation Act, after
consummation of the Merger, the obligations of Hilliard Lyons with respect to
Dissenting Shareholders will become obligations of PNC.
INFORMATION ABOUT HILLIARD LYONS
DESCRIPTION OF THE BUSINESS
Hilliard Lyons, one of the oldest securities firms in the United
States, is a holding company engaged in the securities brokerage business
primarily through the Broker Subsidiary. The Broker Subsidiary is a
broker-dealer in listed and unlisted securities including municipal bonds, an
investment advisor managing as of August 31, 1998 approximately $4.9 billion in
discretionary assets and an underwriter of corporate and municipal securities.
The Broker Subsidiary is licensed as a broker-dealer in every state except Maine
and is a member of the New York, American, Boston and Chicago Stock Exchanges,
the NASD and the Chicago Board Options Exchange. The Broker Subsidiary is also a
member of the Securities Investor Protection Corporation. Hilliard Lyons has 14
other wholly-owned subsidiaries, including the Trust Company, H-L Insurance
Services, H-L Ohio Agency, Inc. and 11 equipment and real estate subsidiaries.
Hilliard Lyons is beneficially owned by 328 of its employees and by the 401(k)
plan. There is no established public trading market for the Hilliard Lyons
Common Stock.
Hilliard Lyons delivers services to clients through an integrated
network of approximately 90 offices located in 13 states in the Midwest and
South. Hilliard Lyons offers the following products and services to its clients
in the following areas:
LISTED SECURITIES/CLEARING. Hilliard Lyons acts as agent for customers
who wish to buy or sell securities on the New York, Boston, American and Chicago
stock exchanges. In addition to its own floor brokers, Hilliard Lyons has
working relationships with other floor brokers to insure sufficient coverage on
the floors of the exchanges. Hilliard Lyons effects its own clearing in all
securities through the National Securities Clearing Corporation. Hilliard Lyons
effects its own clearing in options transactions through the Options Clearing
Corporation.
UNLISTED SECURITIES. Hilliard Lyons' activities as agent in
over-the-counter ("OTC") securities are similar to its activities in listed
securities. As principal, Hilliard Lyons acts as a market maker in the unlisted
securities of approximately 250 companies. In fiscal 1997, approximately 40% of
Hilliard Lyons' transactions were as agent, and the balance as
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principal. Hilliard Lyons utilizes various systems to accomplish its trading,
including NASDAQ systems quoting approximately 7,000 securities, the BRASS
system for effecting ticketless trading, INSTINET for institutional trading and
other systems as required.
MUNICIPAL BONDS. Hilliard Lyons' Municipal Bond Department is engaged
in all phases of the municipal bond business, including advisory services,
trading, underwriting, marketing and sales. These activities are accomplished
through the firm's four municipal desks, located in Louisville, Cincinnati,
Indianapolis and Nashville. The Municipal Bond Department also serves the firm
through its Unit Investment Trust ("UIT") Desk, which involves the underwriting
of, and maintaining a secondary market in, UITs.
TAXABLE FIXED INCOME. Hilliard Lyons' Taxable Fixed Income Desk offers
a full range of taxable debt instruments to the firm's clients, including
Treasury securities, securities of other government agencies, mortgage backed
securities, zero coupon bonds, corporate bonds, preferred stocks and
certificates of deposit. Secondary market activity is the most significant
contributor to the Taxable Fixed Income Department's revenues.
SYNDICATE. Hilliard Lyons' syndicate activities consist of establishing
syndicates and selling groups to underwrite and distribute underwritings managed
by Hilliard Lyons, as well as participating in underwritings managed by other
investment banking firms. The Syndicate Department allocates the securities
offered in such underwritings among Hilliard Lyons' branch offices.
INVESTMENT BANKING. The Investment Banking Department offers a variety
of services, including merger and acquisition advisory services, capital raising
and valuation services, to corporate and other business clients. The Investment
Banking Department routinely represents client companies involved in a purchase
or sale, underwrites public equity and debt offerings, serves as placement agent
for client companies raising private equity and debt capital and performs
appraisals for client companies.
INVESTMENT MANAGEMENT. The Investment Management Group of Hilliard
Lyons consists of the following groups:
- Hilliard Lyons Investment Advisors is the operation through
which the Investment Management Group provides investment
management services, including portfolio management for
individuals, charitable and educational funds, retirement
funds and other institutional portfolios. Hilliard Lyons
Investment Advisors also manages two mutual funds, the
Hilliard Lyons Government Fund, Inc. and the Hilliard Lyons
Growth Fund, Inc. As of August 31, 1998, assets under
management were approximately $1.5 billion.
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<PAGE> 65
- Hilliard Lyons Government Fund is a registered open-end
investment company operating as a no-load money fund. Its net
asset value as of August 31, 1998 was approximately $945
million.
- Hilliard Lyons Growth Fund is a registered, open-end
non-diversified investment company with approximately $78
million under management as of August 31, 1998. The fund
invests primarily in common stocks.
- Hilliard Lyons Administrator provides administrative services
for Duff & Phelps Selected Utilities, Inc., an independent
mutual fund.
- The Trust Company, founded in 1983, operates under a charter
granted by the Kentucky Department of Banking and Securities.
As of August 31, 1998 assets under management totaled
approximately $2.3 billion.
RESEARCH. Hilliard Lyons' Research Department provides proprietary
research on approximately 160 companies, predominantly companies with small to
mid-capitalization. Analysts conduct research on companies within assigned
industry groups. The Research Department also provides a variety of other
services to the firm's financial consultants, including portfolio reviews,
library services, historical price information and estate valuations.
FINANCIAL SERVICES. Hilliard Lyons Financial Services Department
consists of four groups: Mutual Funds, Insurance and Annuity Services,
Retirement Plan Services and Consulting Services. The responsibility of each of
these areas is to provide technical, marketing and administrative support to the
Hilliard Lyons' sales force. In 1997, approximately 63% of Financial Services
revenues consisted of commissions and service fees from the sale of mutual
funds. 37% resulted in commissions from insurance and annuity products.
PROPERTIES. Hilliard Lyons owns the Hilliard Lyons Center located in
Louisville, Kentucky, which serves as Hilliard Lyons' headquarters. The Hilliard
Lyons Center has 304,245 square feet of usable space. Hilliard-Lyons Building
Corporation, a wholly owned subsidiary of Hilliard Lyons, leases a portion of
the Hilliard Lyons Center to independent third parties. In addition, both
Hilliard Lyons and the Broker Subsidiary lease various office spaces for all
retail brokerage operations from independent third party landlords on a variety
of terms. No one lease is material to Hilliard Lyons.
LITIGATION. Hilliard Lyons is involved in various litigations in the
ordinary course of its business.
First of Michigan Corporation filed an arbitration proceeding in
December 1997 against Hilliard Lyons and the former branch managers of First of
Michigan who joined Hilliard Lyons, claiming that Hilliard Lyons improperly
hired 90 employees of First of
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Michigan from 12 branch offices in November 1997. First of Michigan claims that
Hilliard Lyons' alleged conduct constituted unfair competition, inducing breach
of fiduciary duty, conversion, inducing breach of contract, tortious
interference with contracts and advantageous business relationships,
misappropriation of trade secrets and confidential information and unjust
enrichment. Hilliard Lyons has denied First of Michigan's allegations of
wrongdoing and is vigorously contesting these claims.
COMPETITION. Hilliard Lyons is subject to intense competition in all
aspects of its business from companies in the securities business, many of which
are larger than Hilliard Lyons, banks, insurance companies and other
organizations offering financial services. Over the past several years, there
has been a rapid increase in consolidation in the securities industry,
particularly as a result of banks acquiring securities firms. As a result,
Hilliard Lyons faces some competitors that are larger, better capitalized and
more diversified than they were several years ago. In addition, competition
exists from discount brokerage firms, most of which offer trading at lower
commission rates via the internet.
HILLIARD LYONS STOCK PRICE AND DIVIDENDS
Hilliard Lyons Common Stock is not traded in any established market and
no price quotations are available therefor. The aggregate number of shares
available for purchase under the Plan each year is determined by the Hilliard
Lyons Board. The Articles of Incorporation impose certain restrictions on the
sale of Hilliard Lyons' Common Stock by shareholders. The purchase price of the
shares each year is their adjusted book value (as defined by the Plan) as of
November 30 of the previous year. The following table shows the aggregate
purchases and sales, adjusted book value and dividends paid for the past three
fiscal years.
<TABLE>
<CAPTION>
Fiscal Year
Ended Shares Shares Adjusted Dividends
November 30 Issued Redeemed Book Value Paid
<S> <C> <C> <C> <C>
1997 133,600 156,100 $29.03 $0.22
1996 154,300 325,200 $25.38 $0.20
1995 135,100 136,800 $21.69 $0.05
</TABLE>
Between the date of the Agreement and the Closing Date, Hilliard Lyons
may not without PNC's consent make distributions or pay dividends to its
shareholders (except immediately prior to the Closing Date with respect to
post-June 30, 1998
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<PAGE> 67
earnings, subject to certain adjustments). See "SUMMARY -- Market Prices and
Dividend Data;" "PROPOSED MERGER -- Business Pending the Merger."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Hilliard Lyons Common Stock at [OCTOBER ___,] 1998, by (i) each
shareholder known to Hilliard Lyons to own 5% or more of the Hilliard Lyons
Common Stock, (ii) each Director of Hilliard Lyons, (iii) the Chief Executive
Officer and each of the four most highly compensated executive officers of
Hilliard Lyons, and (iv) all current Directors and executive officers as a
group. Except as set forth in the footnotes to the following table, each
stockholder has sole dispositive and voting power with respect to the shares of
Hilliard Lyons Common Stock shown as owned by him.
<TABLE>
<CAPTION>
Amount and Nature Percent of Class
Name and Address of Owner of Ownership
- ------------------------- ------------
<S> <C> <C>
5% STOCKHOLDERS: 244,910 (1) 6.84%
James W. Stuckert
Hilliard-Lyons, Inc.
501 South Fourth Street
Louisville, KY 40202
EXECUTIVE OFFICERS AND DIRECTORS:
James M. Rogers 34,400 0.96%
James R. Allen 62,023 (2) 1.73%
E. Neal Cory, II 24,216 (3) 0.68%
Brian Boor 68,991 (4) 1.93%
Robert Duling 10,505 (5) 0.29%
Ronald Hollander 23,700 (6) 0.66%
Peter Mahurin 155,765 (7) 4.35%
Samuel C. Harvey 29,225 (8) 0.82%
F. James Walker 62,304 (9) 1.74%
All Current Directors and 745,627 20.82%
Executive Officers as a Group
(14 persons)
</TABLE>
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<PAGE> 68
(1) Includes 4,909 shares held of record by the 401(k) plan and
beneficially owned by such shareholder.
(2) Includes 22 shares held of record by the 401(k) plan and beneficially
owned by such shareholder.
(3) Includes 2,900 shares held as an individual; 21,100 shares owned by the
E. Neal Cory, II Living Trust, of which E. Neal Cory, II is a trustee;
and 216 shares held of record by the 401(k) and beneficially owned by
such shareholder.
(4) Includes 1990 shares held of record by the 401(k) plan and beneficially
owned by such shareholder.
(5) Includes 5 shares held of record by the 401(k) plan and beneficially
owned by such shareholder.
(6) All 23,700 shares are held by the Ronald G. Hollander Revocable Trust,
of which Ronald G. Hollander is a trustee.
(7) Includes 3,565 shares held of record by the 401(k) plan and
beneficially owned by such shareholder.
(8) Includes 2,124 shares held of record by the 401(k) plan and
beneficially owned by such shareholder.
(9) Includes 2,303 shares held of record by the 401(k) plan and
beneficially owned by such shareholder.
CERTAIN FINANCIAL INFORMATION
Historical consolidated financial information for Hilliard Lyons
including the statements of financial condition as of November 30, 1997, 1996
and 1995, and August 31, 1998 and 1997, and the related statements of income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended November 30, 1997, 1996 and 1995, and for the
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<PAGE> 69
nine-month period ended August 31, 1998 and 1997 is included herein. See
"HILLIARD LYONS CONSOLIDATED FINANCIAL INFORMATION."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Hilliard Lyons, together with its subsidiaries, provides diversified
financial services including securities brokerage, trading, investment banking,
insurance, trust services and asset management. Hilliard Lyons operates
principally through the Broker Subsidiary, a wholly-owned subsidiary that acts
as a full-service regional brokerage, investment advisor and investment banking
firm through approximately 90 sales offices in 13 states. The Broker Subsidiary
is a member of the NYSE, and is the largest broker-dealer headquartered in
Kentucky. Hilliard Lyons also operates the Trust Company, a Kentucky corporation
that conducts fiduciary and trust-related business, but does not conduct other
banking activities, such as lending and accepting deposits.
All aspects of Hilliard Lyons' business are highly competitive and
impacted by regulatory and other factors outside of its control, including
general economic and financial conditions, the volume and price levels of
securities markets, the demand for investment banking services and interest rate
volatility. Hilliard Lyons closely monitors its operating environment to enable
it to respond promptly to market cycles. In addition, Hilliard Lyons seeks to
lessen earnings volatility by controlling expenses, increasing fee-based
business and developing new revenue sources. Nonetheless, operating results of
any individual period should not be considered representative of future
performance.
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
YEAR 2000
In anticipation of technology and other changes required for the
transition to the year 2000, Hilliard Lyons has been in regular contact with all
of its external providers of technology and software services. Hilliard Lyons
will be an active participant in the testing process of securities industry
procedures. In addition, committees have been formed to identify all internal
processes and services that will be impacted. Management has not determined what
the cost associated with implementing all necessary changes for the Year 2000
transition will be but does not expect it to be material to Hilliard Lyons'
results of operations, financial condition or cash flows. Management believes
Hilliard Lyons has taken all reasonable precautions to ensure a smooth
transition.
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<PAGE> 70
However, like all securities firms, Hilliard Lyons' brokerage business is highly
dependent on outside service providers and, as such, any problems encountered
could potentially have a material adverse effect on Hilliard Lyons' business
activities and, accordingly, its results of operations, financial condition and
cash flows.
RESULTS OF OPERATIONS
Total revenues increased $22.8 million (17%) to $160 million for 1997
compared to 1996. Net income for the same period decreased $1.1 million (9%) to
$11.6 million. Low inflation, low interest rates and a growing economy helped to
boost retail trade volumes and revenues. In November, Hilliard Lyons hired
approximately 90 individuals and opened nine new offices throughout Michigan
bringing the total number of Michigan offices to eleven.
Commissions, which include revenues from listed and over-the-counter
equity transactions as well as mutual fund transactions, increased $12.2 million
(21%), with revenues from mutual fund transactions accounting for over $5
million of the increase. Listed securities commissions executed on the NYSE
increased $6.7 million (32%). Record stock market volume and price levels fueled
the increased demand for these products. Revenue from principal transactions
includes realized and unrealized gains and losses on trading accounts and
related sales credits. Revenue from principal transactions increased $3.5
million (14%), primarily in the areas of taxable fixed income and government
trading. Equity market-making activities are the largest component of principal
transactions. The Broker Subsidiary engages in market-making activities in over
250 stocks. Investment banking revenues are derived from Broker's participation
in underwriting of municipal and corporate securities and closed-end funds as
well as municipal and corporate consulting fees. Investment banking revenues
decreased $1.8 million (18%). Increases in municipal underwriting and consulting
were offset by a decrease in both fixed income and equity underwriting as well
as corporate consulting fees. Revenues from investment management result from
various services provided to trust and managed accounts including client
profiling, asset allocation, manager selection and performance measurement.
Investment management revenues increased $3.4 million (21%) with essentially
equal contributions from the Broker Subsidiary investment advisory area and
Trust Company. Interest income, primarily derived from customer borrowings on
margin, increased $2.3 million (23%). Revenues from insurance products include
sales of fixed and variable rate annuities as well as life insurance. Insurance
revenues increased $3.2 million (27%) compared to 1996 primarily from annuity
sales.
Total expenses increased $24.6 million (21%) compared to the same period
in 1996. The largest expense category, employee compensation and benefits
increased $10 million (13%) in conjunction with the increase in revenues as well
as an increase in certain discretionary bonus programs associated with the level
of pre-tax earnings. Payroll and other taxes increased proportionately with the
increase in compensation expense and revenues. Clearing and floor commissions
increased 8% due to the increase in listed commission revenue discussed above.
Promotion and development expenses rose due to increased media marketing efforts
and sponsorships. Occupancy and equipment rental expenses increased $3 million
(35%). In October
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<PAGE> 71
1996, the Broker Subsidiary converted its proprietary brokerage accounting
system to a state-of-the-art, real-time system including hardware upgrades and
the implementation of a client-server based broker-workstation network
throughout the organization. Hilliard Lyons entered into a five-year service
bureau agreement with BETA Systems. BETA costs for the fiscal year were $1.8
million. Conversion costs of $1.4 million are being amortized equally over a
sixty month period. Hilliard Lyons leases the majority of its computer hardware
and accounts for these costs under equipment rental. Other one-time expenses of
approximately $.2 million resulted from the termination of certain computer
equipment leases. Communications expenses increased due to the Michigan
expansion as well as speed enhancements to the existing sales office data lines.
Interest expense increased to support the additional customer margin borrowings
discussed above. Other expenses increased $8 million (153%). Expansion costs
into Michigan as well as other areas resulted in one-time costs of approximately
$1.5 million. Costs for new customer statements resulting from the BETA
conversion, as well as consulting expenses associated with the system
implementation and training, were approximately $3.6 million. Legal fees,
charitable contributions and the additional funding of certain reserves
increased $1.7 million. The provision for income taxes decreased $.7 million
(10%) due to the respective decrease in pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash used for operating activities showed a net increase. The largest
source of cash resulted from an increase in payables to brokers, dealers and
clearing organizations ($10.6 million). The greatest use of cash resulted from
the increase in customer receivables ($39.1 million), primarily margin
borrowings. Due to the nature of the Broker Subsidiary's business, the changes
in operating asset and liability account balances for any particular accounting
period can be quite large and, therefore, are not useful indicators of long-term
trends in the sources or uses of cash. Cash provided by financing and investing
activities showed a net increase due to an increase in short-term bank
borrowings. At November 30, 1997, approximately 87% of Hilliard Lyons' assets
were liquid, consisting mainly of cash or assets readily convertible into cash.
The Broker Subsidiary's largest asset is its receivable from customers,
representing borrowings by customers to finance the purchase of securities on
margin. Such receivable from customers is substantially financed by equity
capital and short-term borrowings under established lines of credit with several
banking institutions. A total of $80 million in approved lines of credit was
available to the Broker Subsidiary at November 30, 1997, of which $48.8 million
was outstanding.
The Broker Subsidiary is subject to the net capital requirements of the
Commission and the NYSE, which are designed to measure the general financial
soundness and liquidity of broker-dealers. The Broker Subsidiary has
consistently operated well in excess of the minimum requirements. At November
30, 1997, the Broker Subsidiary's net capital of $52.7 million exceeded the
minimum requirement by $43.7 million.
Management believes that funds provided by net cash earnings combined with
the liquidity of its assets, its existing capital base and its available lines
of credit are fully adequate to meet Hilliard Lyons' financing needs for the
foreseeable future. Hilliard Lyons does not engage in any derivative trading
that would result in any additional off-balance sheet risk.
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<PAGE> 72
CONTINGENT MATTERS
The Broker Subsidiary is the subject of claims made in several civil
actions arising out of its business as a broker-dealer. The Broker Subsidiary
provides for costs related to contingencies when a loss is probable and the
amount is reasonably determinable. Management believes that their ultimate
resolution, to the extent not previously provided for, will not have a material
adverse effect on the financial condition, liquidity, or results of operations
of the Broker Subsidiary. However, depending on the amount and timing of an
unfavorable resolution to a contingency, it is possible that the Broker
Subsidiary's future results of operations or cash flows could be materially
affected in a particular quarter.
OUTLOOK
Hilliard Lyons is focusing on growing its business in the 13 states it currently
operates in as well as continuing its expansion into other states as
opportunities become available. Recruiting efforts for experienced financial
consultants is continuing as well as the development of new financial products
and services. Hilliard Lyons monitors the level of all expenses closely and
makes adjustments wherever beneficial savings can be achieved.
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<PAGE> 73
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
RESULTS OF OPERATIONS
Total revenues increased $21.6 million (19%) to $137.2 million for 1996
compared to 1995. Net income for the same period increased $2.9 million (31%) to
$12.7 million. Low inflation, low interest rates and a growing economy helped to
boost retail trade volumes and revenues.
Commissions, which include revenues from listed and over-the-counter
equity transactions as well as mutual fund transactions, increased $11.2 million
(24%), with revenues from mutual fund transactions accounting for over $7
million of the increase. Over-the-counter equity commissions increased $4.9
million (90%). Record stock market volume and price levels fueled the increased
demand for these products. Revenue from principal transactions includes realized
and unrealized gains and losses on trading accounts and related sales credits.
Revenue
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<PAGE> 74
from principal transactions increased $1.9 million (9%), with equity
market-making activities, the largest component of principal transactions,
comprising $2.7 which was partially offset by decreases in the area of taxable
fixed income trading. The Broker Subsidiary engages in market-making activities
in over 250 stocks. Investment banking revenues are derived from the Broker
Subsidiary's participation in underwriting of municipal and corporate securities
and closed-end funds as well as municipal and corporate consulting fees.
Investment banking revenues increased $1.4 million (17%) in the areas of equity
underwriting as well as both municipal and corporate consulting fees. Revenues
from investment management result from various services provided to trust and
managed accounts including client profiling, asset allocation, manager selection
and performance measurement. Investment management revenues increased $2.7
million (20%) with essentially equal contributions from the Broker Subsidiary's
investment advisory area and Trust Company. Interest income, primarily derived
from customer borrowings on margin, increased $.6 million (7%). Revenues from
insurance products include sales of fixed and variable rate annuities as well as
life insurance. Insurance revenues increased $2.9 million (33%) compared to 1995
primarily from annuity sales.
Total expenses increased $17.1 million (17%) compared to the same period
in 1995. The largest expense category, employee compensation and benefits
increased $13.4 million (20%) in conjunction with the increase in revenues as
well as an increase in certain discretionary bonus programs associated with the
level of pre-tax earnings. Payroll and other taxes increased proportionately
with the increase in compensation expense and revenues. Clearing and floor
commissions decreased 7% due to a decrease in listed commission revenue as the
demand switched more towards over-the-counter equities as discussed above.
Promotion and development expenses rose due to increased media marketing efforts
and sponsorships. Occupancy and equipment rental expenses increased primarily
due to the lease costs associated with additional computer equipment. Broker
leases the majority of its computer hardware and accounts for these costs under
equipment rental. In October 1996, the Broker Subsidiary converted its
proprietary brokerage accounting system to a state-of-the-art, real-time system
including hardware upgrades and the implementation of a client-server based
broker-workstation network throughout the organization. The Broker Subsidiary
entered into a five-year service bureau agreement with BETA Systems.
Communications expenses increased due mainly to enhanced features on the broker
workstations. Interest expense increased to support the additional customer
margin borrowings discussed above. Other expenses increased $1.1 million (28%),
mainly resulting from BETA conversion consulting expenses associated with the
system implementation and training. The provision for income taxes increased
$1.5 million (25%) due to the respective increase in pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities showed a net increase. The largest
source of cash resulted from an increase in payables to brokers, dealers and
clearing organizations ($6.9 million). The greatest use of cash resulted from
the increase in customer receivables ($14 million), primarily margin borrowings.
Due to the nature of the Broker's business, the changes in operating asset and
liability account balances for any particular accounting period can be quite
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<PAGE> 75
large and, therefore, are not useful indicators of long-term trends in the
sources or uses of cash. Cash used for financing and investing activities showed
a net increase due to repayments of short-term bank borrowings and purchases of
securities available-for-sale. At November 30, 1996, approximately 87% of the
Hilliard Lyons' assets were liquid, consisting mainly of cash or assets readily
convertible into cash. The Broker Subsidiary's largest asset is its receivable
from customers, representing borrowings by customers to finance the purchase of
securities on margin. Such receivable from customers is substantially financed
by equity capital and short-term borrowings under established lines of credit
with several banking institutions. A total of $90 million in approved lines of
credit was available to the Broker Subsidiary at November 30, 1996, of which
$21.1 million was outstanding.
The Broker Subsidiary is subject to the net capital requirements of the
Commission and the NYSE, which are designed to measure the general financial
soundness and liquidity of broker-dealers. The Broker Subsidiary has
consistently operated well in excess of the minimum requirements. At November
30, 1996, the Broker Subsidiary's net capital of $56.2 million exceeded the
minimum requirement by $49.9 million.
Management believes that funds provided by net cash earnings combined with
the liquidity of its assets, its existing capital base and its available lines
of credit are fully adequate to meet Hilliard Lyons' financing needs for the
foreseeable future. Hilliard Lyons does not engage in any derivative trading
that would result in any additional off-balance sheet risk.
CONTINGENT MATTERS
The Broker Subsidiary is the subject of claims made in several civil
actions arising out of its business as a broker-dealer. The Broker Subsidiary
provides for costs related to contingencies when a loss is probable and the
amount is reasonably determinable. Management believes that their ultimate
resolution, to the extent not previously provided for, will not have a material
adverse effect on the financial condition, liquidity, or results of operations
of the Broker Subsidiary. However, depending on the amount and timing of an
unfavorable resolution to a contingency, it is possible that the Broker
Subsidiary's future results of operations or cash flows could be materially
affected in a particular quarter.
OUTLOOK
Hilliard Lyons is focusing on growing its business in the 12 states it
currently operates in as well as continuing its expansion into other states as
opportunities become available. Recruiting efforts for experienced financial
consultants is continuing as well as the development of new financial products
and services. Hilliard Lyons monitors the level of all expenses closely and
makes adjustments wherever beneficial savings can be achieved.
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<PAGE> 76
NINE MONTHS ENDED AUGUST 31, 1998 COMPARED TO NINE MONTHS ENDED AUGUST 31, 1997
YEAR 2000
In anticipation of technology and other changes required for the
transition to the year 2000, Hilliard Lyons has been in regular contact with all
of its external providers of technology and software services. Hilliard Lyons
will be an active participant in the testing process of securities industry
procedures. In addition, committees have been formed to identify all internal
processes and services that will be impacted. Management has not determined what
the cost associated with implementing all necessary changes for the Year 2000
transition will be but does not expect it to be material to Hilliard Lyons'
results of operations, financial condition or cash flows. Management believes
Hilliard Lyons has taken all reasonable precautions to ensure a smooth
transition.
- 79 -
<PAGE> 77
However, like all securities firms, Hilliard Lyons' brokerage business is
highly dependent on outside service providers and, as such, any problems
encountered could potentially have a material adverse effect on Hilliard Lyons'
business activities and, accordingly, its results of operations, financial
condition and cash flows.
RESULTS OF OPERATIONS
Total revenues increased $37.1 million (32%) to $152.1 million for the
nine months compared to 1997. Net income for the same period increased $4.4
million (58%) to $12.1 million. Low inflation, low interest rates and a growing
economy helped to boost retail trade volumes and revenues. Hilliard Lyons
continues to hire experienced financial consultants and open new offices
increasing its client base and assets under management.
Commissions, which include revenues from listed and over-the-counter
equity transactions as well as mutual fund transactions, increased $19.0 million
(38%), with revenues from mutual fund transactions accounting for over $10
million of the increase. Record stock market volume and price levels fueled the
increased demand for these products. Revenue from principal transactions
includes realized and unrealized gains and losses on trading accounts and
related sales credits. Revenue from principal transactions decreased $4.5
million (22%) with equity market-making activities, the largest component of
principal transactions, comprising $4.2 million of the total decrease. Broker
engages in market-making activities in over 250 stocks. Investment banking
revenues are derived from the Broker Subsidiary's participation in underwriting
of municipal and corporate securities and closed-end funds as well as municipal
and corporate consulting fees. Investment banking revenues increased $6.3
million (129%), primarily in the area of fixed-income securities. Revenues from
investment management result from various services provided to trust and managed
accounts including client profiling, asset allocation, manager selection and
performance measurement. Investment management revenues increased $4.8 million
(33%) with equal contributions from the Broker Subsidiary's investment advisory
area and Trust Company. Interest income, primarily derived from customer
borrowings on margin, increased $3.7 million (41%). Revenues from insurance
products include sales of fixed and variable rate annuities as well as life
insurance. Insurance revenues increased $2.1 million (20%) compared to 1997
primarily from annuity sales. In May of this year, the Company sold the Madrid
building, which formerly housed its headquarters from 1968 to 1988, for a gain
of $3.4 million.
Total expenses increased $29.7 million (29%) compared to the same period
in 1997. The largest expense category, employee compensation and benefits
increased $18.7 million (28%) in conjunction with the increase in revenues as
well as an increase in certain discretionary bonus programs associated with the
level of pre-tax earnings. Payroll and other taxes increased proportionately
with the increase in compensation expense and revenues. Promotion and
development expenses rose due to increased media marketing efforts and
sponsorships. Occupancy and equipment rental expenses increased due to the
expansion into Michigan in November 1997 with nine new offices as well as
continued upgrades to the broker-workstation network. Communications expenses
increased due to the Michigan expansion as well as speed enhancements to the
existing sales office data lines. Interest expense increased to support the
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<PAGE> 78
additional customer margin borrowings discussed above. Other expenses increased
$2.7 million (35%). Expansion costs into Michigan as well as other areas
resulted in one-time costs of approximately $1.5 million. The provision for
income taxes increased $2.9 million (61%) due to the respective increase in
pre-tax earnings.
LIQUIDITY AND CAPITAL RESOURCES
Cash used for operating activities showed a net increase for the
nine-month period. The largest source of cash resulted from an increase in
payables to customers ($12.3 million). The greatest use of cash resulted from
the increase in customer receivables ($46.2 million), primarily margin
borrowings, as well as a decrease in payables to brokers, dealers and clearing
organizations ($13.8 million). Due to the nature of the Broker Subsidiary's
business, the changes in operating asset and liability account balances for any
particular accounting period can be quite large and, therefore, are not useful
indicators of long-term trends in the sources or uses of cash. Cash provided by
financing and investing activities showed a net increase due to an increase in
short-term bank borrowings. At August 31, 1998, approximately 89% of Hilliard
Lyons' assets were liquid, consisting mainly of cash or assets readily
convertible into cash. The Broker Subsidiary's largest asset is its receivable
from customers, representing borrowings by customers to finance the purchase of
securities on margin. Such receivable from customers is substantially financed
by equity capital and short-term borrowings under established lines of credit
with several banking institutions. A total of $140 million in approved lines of
credit was available to the Broker Subsidiary at August 31, 1998, of which
$104.2 million was outstanding.
The Broker Subsidiary is subject to the net capital requirements of the
Commission and the NYSE, which are designed to measure the general financial
soundness and liquidity of broker-dealers. The Broker Subsidiary has
consistently operated well in excess of the minimum requirements. At August 31,
1998 Broker's net capital of approximately $65 million exceeded the minimum
requirement by approximately $53 million.
Management believes that funds provided by net cash earnings combined with
the liquidity of its assets, its existing capital base and its available lines
of credit are fully adequate to meet Hilliard Lyons' financing needs for the
foreseeable future. Hilliard Lyons does not engage in any derivative trading
that would result in any additional off-balance sheet risk.
CONTINGENT MATTERS
The Broker Subsidiary is the subject of claims made in several civil
actions arising out of its business as a broker-dealer. The Broker Subsidiary
provides for costs related to contingencies when a loss is probable and the
amount is reasonably determinable. Management believes that their ultimate
resolution, to the extent not previously provided for, will not have a material
adverse effect on the financial condition, liquidity, or results of operations
of the Broker Subsidiary. However, depending on the amount and timing of an
unfavorable resolution to a contingency, it is possible that the Broker
Subsidiary's future results of operations or cash flows could be materially
affected in a particular quarter.
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<PAGE> 79
OUTLOOK
Hilliard Lyons is focusing on growing its business in the 13 states it
currently operates in as well as continuing its expansion into other states as
opportunities become available. Recruiting efforts for experienced financial
consultants is continuing as well as the development of new financial products
and services. Hilliard Lyons monitors the level of all expenses closely and
makes adjustments wherever beneficial savings can be achieved.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Hilliard Lyons has retained PricewaterhouseCoopers LLP to serve as
independent accountants for Hilliard Lyons for the fiscal years ending November
30, 1998 and 1997. A representative of PricewaterhouseCoopers LLP is expected to
be present at the Special Meeting, will have an opportunity to make a statement
if he or she desires and will be available to respond to appropriate questions.
EXPERTS
The consolidated financial statements of PNC incorporated by
reference in PNC's Annual Report on Form 10-K for the year ended December 31,
1997, have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon incorporated by reference therein and incorporated
herein by reference. Such consolidated financial statements are incorporated
herein by reference in reliance upon such report given by the authority of such
firm as experts in accounting and auditing.
The consolidated financial statements of Hilliard Lyons and its
subsidiaries for the years ended November 30, 1996 and 1995, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
included elsewhere herein. The financial statements referred to above are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
On May 28, 1997, the Board of Hilliard Lyons approved the engagement
of PricewaterhouseCoopers LLP as its independent auditors for the year ended
November 30, 1997, to replace the firm of Ernst & Young LLP.
The report of Ernst & Young LLP on Hilliard Lyons' consolidated
financial statements for the year ended November 30, 1996, did not contain an
adverse opinion and was not qualified or modified as to uncertainty, audit scope
or accounting principles.
In connection with the audit of Hilliard Lyons' consolidated
financial statements for the years ended November 30, 1996 and 1995, and in the
subsequent interim period through May 28, 1997, there were no disagreements with
Ernst & Young LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope and procedures which if not
resolved to the satisfaction of Ernst & Young LLP would have caused Ernst &
Young LLP to make reference to the matter in their report.
The consolidated financial statements of Hilliard Lyons and its
subsidiaries at November 30, 1997 and for the year ended November 30, 1997 have
been audited by PricewaterhouseCoopers LLP, independent accountants,
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<PAGE> 80
as set forth in their report dated December 23, 1997 included elsewhere herein.
The financial statements referred to above are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
Audited financial statements to be included in subsequently filed
documents will be incorporated herein in reliance upon the reports of
independent auditors pertaining to such financial statements (to the extent
covered by consents filed with the Commission) given upon the authority of such
firms as experts in accounting and auditing.
LEGAL OPINION
A legal opinion that states that the issuance of the shares of PNC
Common Stock offered hereby, when issued in accordance with the terms of the
Agreement, will be validly issued, fully paid and nonassessable, has been
rendered by Kathleen Clover, Esq., Senior Counsel of PNC.
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<PAGE> 81
HILLIARD LYONS
CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants.........................................................................
Consolidated Statements of Financial Condition --
November 30, 1997 and 1996...........................................................................
Consolidated Statements of Income -- For the Years Ended
November 30, 1997 and 1996...........................................................................
Consolidated Statements of Changes in Stockholders' Equity
-- For the Years Ended November 30, 1997 and 1996.....................................................
Consolidated Statements of Cash Flows -- For the Years Ended
November 30, 1997 and 1996...........................................................................
Notes to Consolidated Financial Statements................................................................
Report of Independent Auditors............................................................................
Consolidated Statements of Financial Condition --
November 30, 1996 and 1995...........................................................................
Consolidated Statements of Income -- For the Years Ended
November 30, 1996 and 1995...........................................................................
Consolidated Statements of Changes in Stockholders' Equity
-- For the Years Ended November 30, 1996 and 1995...................................................
Consolidated Statements of Cash Flows -- For the Years Ended
November 30, 1996 and 1995...........................................................................
Notes to Consolidated Financial Statements................................................................
Consolidated Statements of Financial Condition -- August 31, 1998 and 1997 (Unaudited)....................
Consolidated Statements of Income -- For the Nine Months Ended
August 31, 1998 and 1997 (Unaudited).................................................................
Consolidated Statements of Changes in Stockholders' Equity
-- For the Nine Months Ended August 31, 1998 and 1997 (Unaudited)...................................
Consolidated Statements of Cash Flows -- For the Nine Months Ended
August 31, 1998 and 1997 (Unaudited).................................................................
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Hilliard Lyons, Inc.:
We have audited the accompanying consolidated statement of financial condition
of Hilliard Lyons, Inc. and Subsidiaries as of November 30, 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hilliard Lyons,
Inc. and Subsidiaries as of November 30, 1997, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
December 23, 1997
F-2
<PAGE> 83
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 12,406,809 $ 9,732,516
Deposits with clearing organizations 1,441,978 856,000
Receivable from brokers, dealers and clearing organizations 3,997,391 8,944,240
Receivable from customers 158,462,363 119,283,363
Securites owned, at market value 27,145,279 26,273,263
Securities available-for-sale, at fair value (note 5) 14,266,372 11,848,439
Deferred income taxes 2,158,000 993,000
Property and equipment, net 19,893,269 19,023,996
Other assets and accounts receivable 10,016,842 5,870,365
-------------------------------
Total Assets $249,788,303 $202,825,182
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable to banks $ 48,800,000 $ 21,100,000
Drafts payable 15,445,524 15,997,317
Payable to brokers, dealers and clearing organizations 19,504,789 8,874,430
Payable to customers 27,176,539 24,779,624
Securities sold, but not yet purchased, at market value 2,205,059 2,790,334
Accrued compensation and benefits 20,991,858 16,804,847
Income taxes payable 1,394,076 458,682
Accounts payable and other accrued expenses 4,639,242 7,960,416
Mortgage and other secured notes payable 8,641,861 9,222,218
Notes payable to banks, subordinated to claims of general creditors 1,600,000 2,800,000
-------------------------------
Total Liabilities and Subordinated Debt 150,398,948 110,787,868
-------------------------------
Commitments and Contingencies--(note 11) - -
Stockholders' equity:
Common stock, no par value; 5,000,000 shares authorized;
issued and outstanding (1997 - 3,603,900 shares,
1996 - 3,774,800 shares), at stated value 1,801,950 1,887,400
Paid-in capital - 85,980
Unrealized appreciation of securities available-for-sale 1,982,000 1,035,000
Retained earnings 95,605,405 89,028,934
-------------------------------
Total stockholders' equity 99,389,355 92,037,314
-------------------------------
Total liabilities and stockholders' equity $249,788,303 $202,825,182
===============================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 84
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
REVENUES 1997 1996
---------------------------------
<S> <C> <C>
Commissions $ 70,831,407 $ 58,554,759
Principal transactions 28,283,881 24,744,783
Investment banking 8,230,380 10,096,862
Investment management 20,072,341 16,591,763
Interest and dividends 12,879,136 10,491,405
Insurance products 15,307,820 12,058,173
Other (note 13) 4,447,372 4,704,543
---------------------------------
160,052,337 137,242,288
---------------------------------
EXPENSES
Employee compensation and benefits 89,760,417 79,695,068
Clearing and floor commissions 2,222,217 2,049,479
Payroll and other taxes 5,613,381 4,855,814
Promotion and development 4,005,251 3,513,946
Occupancy and equipment rental 11,826,016 8,735,010
Communications 10,669,968 9,141,472
Interest 3,905,891 3,370,591
Other 13,324,538 5,274,289
---------------------------------
141,327,679 116,635,669
---------------------------------
Income before provision for income taxes 18,724,658 20,606,619
Provision for income taxes (note 14):
Current 8,256,652 7,919,105
Deferred (1,165,000) (53,000)
---------------------------------
7,091,652 7,866,105
---------------------------------
Net Income $ 11,633,006 $ 12,740,514
=================================
Net Income per share $3.15 $3.37
=================================
Weighted average shares outstanding 3,697,995 3,775,260
=================================
Cash dividends paid $0.22 $0.20
=================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 85
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock of Securities
---------------------------- Paid-in Available- Retained
Shares Amount Capital for-Sale Earnings Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1995 3,776,500 $1,888,250 $ 126,243 $ 485,000 $77,043,380 $79,542,873
Issuance of common stock 135,100 67,550 2,851,924 2,919,474
Repurchase of common stock (136,800) (68,400) (2,892,187) (2,960,587)
Change in market value of securities 550,000 550,000
Net income 12,740,514 12,740,514
Dividends paid (754,960) (754,960)
----------------------------------------------------------------------------------------
Balance at November 30, 1996 3,774,800 1,887,400 85,980 1,035,000 89,028,934 92,037,314
Issuance of common stock 154,300 77,150 3,838,984 3,916,134
Repurchase of common stock (325,200) (162,600) (3,924,964) (4,263,677) (8,351,241)
Change in market value of securities 947,000 947,000
Net income 11,633,006 11,633,006
Dividends paid (792,858) (792,858)
----------------------------------------------------------------------------------------
Balance at November 30, 1997 3,603,900 $1,801,950 $ - $1,982,000 $95,605,405 $99,389,355
========================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 86
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,633,006 $ 12,740,514
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 2,404,476 2,364,546
Deferred income taxes (1,165,000) (53,000)
Other (8,124) (6,198)
Decrease (increase) in operating assets:
Deposits with clearing organizations (585,978) -
Receivable from brokers, dealers and clearing organizations 4,946,849 (1,978,683)
Receivable from customers (39,179,000) (14,033,742)
Securities owned, at market value (872,016) (4,140,351)
Other assets and accounts receivable (4,138,353) (2,784,404)
Increase (decrease) in operating liabilities:
Payable to brokers, dealers and clearing organizations 10,630,359 6,991,374
Payable to customers 2,396,915 2,708,193
Securities sold, but not yet purchased, at market value (585,275) 902,128
Accrued compensation and benefits 4,187,011 4,948,280
Income taxes payable 935,394 (1,372,477)
Accounts payable and other accrued expenses (3,321,174) 4,309,765
----------------------------------
Net cash provided by (used for) operating activities (12,720,910) 10,595,945
----------------------------------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings 27,700,000 (8,300,000)
Net increase (decrease) in drafts payable (551,793) 2,301,132
Proceeds from issuance of common stock 3,916,134 2,919,474
Repayments of mortgage and other secured notes (580,357) (540,297)
Repayments of subordinated liabilities (1,200,000) (1,200,000)
Repurchase of common stock (8,351,241) (2,960,587)
Dividends paid (792,858) (754,960)
----------------------------------
Net cash provided by (used for) financing activities 20,139,885 (8,535,238)
----------------------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (1,470,933) (8,597,572)
Proceeds from sales and maturities of securities available-for-sale - 3,582,782
Purchases of fixed assets and leasehold improvements (3,273,749) (1,674,961)
----------------------------------
Net cash used for investing activities (4,744,682) (6,689,751)
----------------------------------
Increase (decrease) in cash and cash equivalents 2,674,293 (4,629,044)
Cash and cash equivalents at beginning of year 9,732,516 14,361,560
----------------------------------
Cash and cash equivalents at end of period $ 12,406,809 $ 9,732,516
==================================
Supplemental disclosures of cash flow information:
Income tax payments $ 7,500,559 $ 9,797,570
==================================
Interest payments $ 3,864,987 $ 3,370,591
==================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
The consolidated financial statements include the accounts of Hilliard Lyons,
Inc. and its wholly-owned subsidiaries (the Company). The principal subsidiary,
J.J.B. Hilliard, W.L. Lyons, Inc. (the Broker/Dealer), is engaged in
broker/dealer and other related activities. In addition, certain subsidiaries
are engaged in trust activities and in the development, management and rental of
equipment and real estate. Also, certain subsidiaries serve as general and
limited partners in limited partnerships formed in connection with these
activities. The Company conducts business principally in the mideast.
2. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Hilliard Lyons, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
SECURITIES TRANSACTIONS: Securities transactions, along with related profit
and loss, commission income and expenses are recorded on a trade date
basis. Securities owned and securities sold, but not yet purchased, are
recorded at market value based upon quoted market prices. Gains and losses,
both realized and unrealized, are included in principal transactions.
INVESTMENT BANKING: Investment banking revenues include gains, losses and
fees, net of syndicate expenses, arising from securities offerings in which
the Company acts as an underwriter or agent. Management and underwriting
fees are recorded at the time the underwriting is completed and/or the
income is reasonably determinable.
INVESTMENT MANAGEMENT FEES: Investment management fees are received on a
quarterly or semiannual basis and are recognized as income when received.
SECURITIES BORROWED: Securities borrowed are recorded at the amount of cash
collateral advanced. Securities borrowed transactions require the Company
to deposit cash with the lender. The amount of collateral required to be
deposited for securities borrowed is an amount generally in excess of the
market value of the applicable securities. The Company monitors the market
value of securities borrowed daily, with additional collateral deposited or
refunded as necessary.
F-7
<PAGE> 88
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COLLATERAL: The Broker/Dealer continues to report assets it has pledged as
collateral in secured borrowings and other arrangements when the secured
party cannot sell or repledge the assets or the Broker/Dealer can
substitute collateral or otherwise redeem it on short notice.
CASH AND CASH EQUIVALENTS: Cash equivalents are defined as short-term,
highly liquid investments with original maturities of 90 days or less. At
November 30, 1997, cash held in banks was in excess of the $100,000 amount
covered by federal depository insurance.
DEPOSITS WITH CLEARING ORGANIZATIONS: Deposits with clearing organizations
include U.S. Government obligations with a market value of approximately
$396,000 and $390,000 at November 30, 1997 and 1996, respectively.
SECURITIES AVAILABLE-FOR-SALE: For securities available-for-sale,
management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance
sheet date. Securities available-for-sale are stated at fair value, with
the unrealized gains and losses reported as a separate component of
stockholders' equity.
DEPRECIATION AND AMORTIZATION: Furniture and fixtures are depreciated over
their estimated economic lives, generally three to seven years, principally
using accelerated methods which are not materially different from the
straight-line method. Leasehold improvements are amortized over the shorter
of the term of the lease or the estimated useful life using the
straight-line method. Buildings and building improvements are depreciated
over their estimated economic lives on the straight-line method.
NET INCOME PER SHARE: Net income per share is based upon the average number
of shares of common stock outstanding during each year.
USE OF ESTIMATES: The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS: Certain amounts related to the year ended November 30,
1996 have been reclassified to conform to the current year's presentation,
with no effect on total assets, total liabilities and stockholders' equity
or net income.
F-8
<PAGE> 89
3. SECURITIES OWNED AND SECURITIES SOLD, BUT NOT YET PURCHASED:
Securities owned and securities sold, but not yet purchased, consist of the
following, at market value, at November 30:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- -------------------------------
SOLD, BUT NOT SOLD, BUT NOT
OWNED YET PURCHASED OWNED YET PURCHASED
----- ------------- ----- -------------
<S> <C> <C> <C> <C>
Certificate of deposit $ 239,645 $ 77,318 $ 156,614 --
U.S. Government obligations 4,780,702 -- 3,735,252 $ 79,067
State and municipal government
obligations 8,646,792 5,321 6,447,767 86,540
Corporate obligations 1,782,141 314,642 6,693,927 64,853
Stocks 11,695,999 1,807,778 9,239,703 2,559,874
----------- ----------- ----------- -----------
$27,145,279 $ 2,205,059 $26,273,263 $ 2,790,334
=========== =========== =========== ===========
</TABLE>
4. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS:
Receivables from and payables to brokers, dealers and clearing organizations
arise from the settlement of securities transactions executed for customers or
the Company and consist of the following at November 30:
<TABLE>
<CAPTION>
RECEIVABLE PAYABLE
------------------------------ ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Securities failed-to-deliver/receive $ 900,378 $ 1,366,536 $11,511,839 $ 1,732,114
Deposits on securities borrowed 1,017,500 2,148,400 -- --
Amounts due from/to brokers
and dealers through
clearing organizations 2,079,513 5,429,304 7,992,950 7,142,316
----------- ----------- ----------- -----------
$ 3,997,391 $ 8,944,240 $19,504,789 $ 8,874,430
=========== =========== =========== ===========
</TABLE>
Receivables are collateralized by the underlying securities. The market value of
such securities at November 30, 1997 and 1996 approximates the amounts
receivable from and payable to brokers, dealers and clearing organizations.
5. SECURITIES AVAILABLE-FOR-SALE:
At November 30, 1997, the Company owned $8,000,000 (par value) of U.S. Treasury
notes with coupon rates of interest ranging from 5.125% to 6.25%. Of the
outstanding U.S. Treasury notes at November 30, 1997, $7,903,479 of amortized
cost and $7,957,453 of market value securities mature in 1998. The remaining
$1,017,031 of amortized cost and $1,016,250 of market value U.S. Treasury notes
mature in 2003. At November 30, 1996 the Company owned U.S. Treasury notes in
the amount of $8,526,875 with an amortized cost of $8,485,703. Also included in
securities available-for-sale are equity securities, at fair value of $5,292,669
(cost - $3,363,862) for 1997 and $3,321,564 (cost - $2,327,736) for 1996.
F-9
<PAGE> 90
6. PROPERTY AND EQUIPMENT:
Property and equipment at November 30, 1997 and 1996 is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 800,000 $ 800,000
Buildings 5,718,536 5,718,536
Building Improvements 18,381,724 17,305,014
Furniture and fixtures 8,517,308 7,127,148
Leasehold improvements 4,149,748 3,831,205
Construction in process 483,776 --
------------- -------------
38,051,092 34,781,903
Accumulated depreciation and amortization (18,157,823) (15,757,907)
------------- -------------
Property and equipment, net $ 19,893,269 $ 19,023,996
============= =============
</TABLE>
Portions of the buildings are leased to unrelated companies for terms ranging
from five to twenty years, some with options to renew. Minimum noncancelable
annual rental income under these leases follows:
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
1998 $1,297,000
1999 $1,388,000
2000 $1,214,000
2001 $1,243,000
2002 $ 622,000
Thereafter $ 797,000
</TABLE>
F-10
<PAGE> 91
7. SHORT-TERM BORROWINGS AND MORTGAGE AND OTHER SECURED NOTE PAYABLE:
Short-term borrowings and mortgage and other secured note payable at November
30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Short-term borrowings:
Customer loans, due on demand, fully collateralized by customers' securities
(aggregate market value of $91,044,000 and $60,523,00 at November 30, 1997 and
1996, respectively); variable interest rates, generally based on federal funds
rate, aggregate unused lines of credit of $28,700,000 at
November 30, 1997 $41,300,000 $13,600,000
Firm loan, due on demand, uncollateralized; variable interest rate based on
federal funds rate, aggregate unused lines of
credit of $2,500,000 at November 30, 1997 7,500,000 7,500,000
----------- -----------
Total short-term borrowings $48,800,000 $21,100,000
=========== ===========
Mortgage note payable to a bank by subsidiary, on land,
building and building improvements (carrying value of $16,205,000 and
$16,017,000 at November 30, 1997 and 1996, respectively), guaranteed by the
Company; variable interest rate based on monthly Euro-Rate of the lender
(7.42% and 6.82% at November 30, 1997 and 1996, respectively), payable over
five years in monthly installments, including interest, with final payment
due November 12, 2000 $ 8,585,591 $ 9,151,446
Other note payable, collateralized by certain assets; interest
at annual prime rates 56,270 70,772
----------- -----------
Total mortgage and other secured note payable $ 8,641,861 $ 9,222,218
=========== ===========
</TABLE>
The carrying value of the Company's debt obligations approximate their fair
value due to their variable interest rate.
Annual combined maturities on the mortgage and other secured notes follow:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 $ 638,000
1999 627,000
2000 7,377,000
</TABLE>
F-11
<PAGE> 92
8. LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS:
Liabilities subordinated to claims of general creditors are covered by
agreements approved by the New York Stock Exchange, Inc. (the Exchange) and,
therefore, are available in computing net capital of the Broker/Dealer.
Restrictions relating to net capital and aggregate indebtedness, as contained in
the agreements, are consistent with the requirements of the Exchange.
These subordinated liabilities are unsecured and bear interest at floating rates
based on prime interest rates. The subordinated liabilities are payable in
annual installments through 2000. Management believes carrying amounts of these
liabilities approximate their fair value.
The combined approximate amount of maturities on subordinated liabilities
aggregates $800,000 in 1998, $400,000 in 1999 and $400,000 in 2000.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Company enters into various transactions involving off-balance-sheet
financial instruments, including securities sold short and securities purchased
and sold on a when-issued basis (when-issued securities). These financial
instruments are used to meet the needs of customers, conduct trading activities,
and manage market risks and are, therefore, subject to varying degrees of market
and credit risk.
The obligation for financial instruments sold short represents a commitment to
deliver specified securities. The Company will acquire the required securities
at prevailing future market prices to satisfy this obligation. Accordingly, the
Company's ultimate obligation may exceed the amount recognized in the financial
statements. Exposure to market risk is managed by the Company through position
limits and other controls, and by entering into offsetting securities positions.
In the normal course of business, the Company's customer activities involve the
execution, settlement, and financing of various customer securities
transactions. These transactions may expose the Company to off-balance-sheet
risk in the event the customer or other broker is unable to fulfill its
contracted obligations and the Company has to purchase or sell the financial
instrument underlying the contract at a loss.
The Company's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, the Company extends credit to its
customers, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customers' accounts. In connection
with these activities, the Company executes and clears customer transactions
involving the sale of securities not yet purchased, substantially all of which
are transacted on a margin basis subject to individual exchange regulations.
Such transactions may expose the Company to significant off-balance-sheet risk
in the event margin requirements are not sufficient to fully cover losses that
customers may incur. In the event the customer fails to satisfy its obligations,
the Company may be required to purchase or sell financial instruments at
prevailing market prices to fulfill the customer's obligations.
F-12
<PAGE> 93
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED:
The Company seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with various
regulatory and internal guidelines. The Company monitors required margins levels
daily and, pursuant to such guidelines, requires the customer to deposit
additional collateral or to reduce positions when necessary.
The Company's customer financing and securities settlement activities require
the Company to pledge customer securities as collateral in support of various
secured financing sources such as bank loans. In the event the counterparty is
unable to meet its contractual obligation to return customer securities pledged
as collateral, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its customer
obligations. The Company controls this risk by monitoring the market value of
securities pledged on a daily basis and by requiring adjustments of collateral
levels in the event of excess market exposure. In addition, the Company
establishes the credit limits for such activities and monitors compliance on a
daily basis.
10. NET CAPITAL REQUIREMENTS:
As a registered broker/dealer and member of the Exchange, the Broker/Dealer is
subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule
15c3-1) (the Rule). The Rule requires the maintenance of minimum net capital and
requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. The Rule also provides that a reduction in
business is required if the ratio exceeds 12 to 1 and business may not be
expanded and cash dividends and other payments would be precluded if the ratio
exceeds 10 to 1. Net capital and aggregate indebtedness change from day to day
but, at November 30, 1997, the Broker/Dealer's ratio of aggregate indebtedness
to net capital was 2.58 to 1. Net capital, as defined, was approximately
$52,753,000, which exceeded the minimum required amount by approximately
$43,697,000.
11. COMMITMENTS AND CONTINGENT LIABILITIES:
In the normal course of business, the Company enters into underwriting and
when-issued commitments. The Company had contractual commitments relating to
underwriting agreements and purchase of securities on a when-issued basis of
approximately $4,665,000 at November 30, 1997, all of which were subsequently
settled and had no material effect on the Company's financial positions.
In accordance with industry practice, the Company generally settles securities
transactions executed on behalf of its customers within three business days
after the trade date. This risk of loss on unsettled transactions is the same as
settled transactions and relates to the customers' or brokers' inability to meet
the terms of their contracts. Settlement of these transactions is not expected
to have a material effect on the Company's consolidated financial condition.
F-13
<PAGE> 94
11. COMMITMENTS AND CONTINGENT LIABILITIES, CONTINUED:
The Company is involved in various matters of litigation and claims in the
normal course of business. It is management's opinion, after consultation with
outside legal counsel, that ultimate losses, if any, relating to such litigation
and claims will not be material to the Company's consolidated financial
position.
The Company leases certain of its branch sales offices and telephone and
computer equipment under noncancelable leases expiring between 1998 and 2007.
Certain of these leases contain renewal options and include a provision for
escalation of rentals based upon inflationary factors. Minimum annual rental
repayments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
NOVEMBER 30,
------------
<S> <C>
1998 $ 5,180,000
1999 3,954,000
2000 2,214,000
2001 1,782,000
2002 1,493,000
Thereafter 1,985,000
</TABLE>
Total rental expense for 1997 and 1996 approximated $5,552,000 and $4,965,000,
respectively.
The Company is committed under agreements with two retired stockholders to
serially repurchase 230,800 shares of common stock at $21.69 per share over the
next four years. The Company's stock repurchase obligations under the agreements
approximate $1,252,000 annually through 2001.
The Company is committed under separate agreements to pay fees to retired
stockholders who have agreed to lend their shares of common stock to the
Company. The fees are based upon the book value of the shares lent and are
computed at an annual rate of 2% above prime (10.50% at November 30, 1997). Fees
paid pursuant to these agreements during 1997 and 1996 approximated $543,000 and
$588,000, respectively.
12. EMPLOYEE BENEFIT PLANS:
The Company has a contributory profit sharing plan which covers substantially
all employees after a short waiting period. Company contributions to the plan
include matching of employee contributions and discretionary amounts determined
by the Company's board of directors. Total company contributions amounted to
$4,000,000 and $4,200,000 during the years ended November 30, 1997 and 1996,
respectively.
F-14
<PAGE> 95
12. EMPLOYEE BENEFIT PLANS, CONTINUED:
The Company has a discretionary deferred compensation plan for certain
employees. The Company contributed approximately $1,085,000 and $1,050,000
during the years ended November 30, 1997 and 1996, respectively. At November 30,
1997 and 1996, approximately $4,078,000 and $2,870,000, respectively (included
in accrued compensation and benefits), is accrued for this plan.
13. RELATED PARTY TRANSACTION:
The Company receives investment advisory fees for managing the Hilliard Lyons
Government Fund, an investment company owned by unit holders. Fees earned during
the years ended November 30, 1997 and 1996 were approximately $1,955,000 and
$1,700,000, respectively.
14. INCOME TAXES:
Income taxes as a percentage of income before income taxes in the accompanying
consolidated financial statements are different than the federal statutory rate
of 35% by approximately $384,000 in 1997 and $483,000 in 1996, principally due
to state income taxes and tax exempt interest.
Deferred income taxes and benefits are recognized in the consolidated financial
statements for changes in deferred tax assets or liabilities between years.
Temporary differences which give rise to significant deferred tax assets and
liabilities are deferred sales bonuses, capitalized system conversion expenses,
bad debt and other reserves, and accelerated depreciation. Management has
determined that a valuation for the deferred tax asset was not necessary due
primarily to the Company's taxable income position in prior carryback years.
Net deferred tax amounts on the consolidated statements of financial condition
consist of the following at November 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets $3,048,000 $ 2,362,000
Deferred tax liabilities (890,000) (1,369,000)
---------- -----------
$2,158,000 $ 993,000
========== ===========
</TABLE>
15. STOCKHOLDERS' EQUITY:
The Company adopted the Hilliard Lyons, Inc. Stock Purchase Plan (the Plan)
effective January 1, 1995. Pursuant to the Plan, officers and stockholders of
the Company may purchase available shares of the Company's common stock at its
adjusted book value, which is defined by the Company's Restated Articles of
Incorporation (the Articles) and determined by the Company.
F-15
<PAGE> 96
15. STOCKHOLDERS' EQUITY, CONTINUED:
The Articles provide certain restrictions on the sale of the Company's common
stock by stockholders. The Company has the first option to repurchase common
stock from stockholders who wish to sell their shares. The Company also has the
first option to repurchase common stock from stockholders who retire or
otherwise terminate their employment with the Company. Repurchases of common
stock by the Company are at its adjusted book value.
F-16
<PAGE> 97
Report of Independent Auditors
Board of Directors
Hilliard-Lyons, Inc.
We have audited the accompanying consolidated statements of financial condition
of Hilliard-Lyons, Inc. as of November 30, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hilliard-Lyons,
Inc. at November 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
December 20, 1996
F-17
<PAGE> 98
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 9,732,516 $ 14,361,560
Deposits with clearing organizations 856,000 856,000
Receivable from brokers, dealers and clearing organizations 8,944,240 6,965,557
Receivable from customers 119,283,363 105,249,621
Securites owned, at market value 26,273,263 19,437,208
Securities available-for-sale, at fair value 11,848,439 8,979,353
Deferred income taxes 993,000 940,000
Property and equipment, net 19,023,996 19,707,383
Other assets and accounts receivable 5,870,365 3,085,961
-------------------------------
Total Assets $202,825,182 $179,582,643
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable to banks $ 21,100,000 $ 29,400,000
Drafts payable 15,997,317 13,696,185
Payable to brokers, dealers and clearing organizations 8,874,430 1,883,056
Payable to customers 24,779,624 22,071,431
Securities sold, but not yet purchased, at market value 2,790,334 1,888,206
Accrued compensation and benefits 16,804,847 11,856,567
Income taxes payable 458,682 1,831,159
Accounts payable and other accrued expenses 7,960,416 3,650,651
Mortgage and other secured notes payable 9,222,218 9,762,515
Notes payable to banks, subordinated to claims of general creditors 2,800,000 4,000,000
-------------------------------
Total Liabilities and Subordinated Debt 110,787,868 100,039,770
-------------------------------
Commitments and Contingencies (note 8) - -
Stockholders' equity:
Common stock, no par value - authorized 5,000,000 shares;
issued and outstanding (1996 - 3,774,800 shares;
1995 - 3,776,500 shares); at stated value 1,887,400 1,888,250
Paid-in capital 85,980 126,243
Unrealized appreciation of securities available-for-sale 1,035,000 485,000
Retained earnings 89,028,934 77,043,380
-------------------------------
Total stockholders' equity 92,037,314 79,542,873
-------------------------------
Total liabilities and stockholders' equity $202,825,182 $179,582,643
===============================
</TABLE>
See accompanying notes.
F-18
<PAGE> 99
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
REVENUES 1996 1995
---------------------------------
<S> <C> <C>
Commissions $ 58,554,759 $ 47,330,097
Principal transactions 24,744,783 22,761,732
Investment banking 10,096,862 8,638,455
Investment management 16,591,763 13,859,776
Interest and dividends 10,491,405 9,845,093
Insurance products 12,058,173 9,086,648
Other (note 12) 4,704,543 4,028,439
---------------------------------
137,242,288 115,550,240
---------------------------------
EXPENSES
Employee compensation and benefits 79,695,068 66,255,964
Clearing and floor commissions 2,049,479 2,213,359
Payroll and other taxes 4,855,814 4,703,979
Promotion and development 3,513,946 3,137,600
Occupancy and equipment rental 8,735,010 8,113,229
Communications 9,141,472 7,828,961
Interest 3,370,591 3,165,992
Other 5,274,289 4,110,038
---------------------------------
116,635,669 99,529,122
---------------------------------
Income before provision for taxes 20,606,619 16,021,118
Provision for income taxes (note 10):
Current 7,919,105 6,747,088
Deferred (53,000) (479,000)
---------------------------------
7,866,105 6,268,088
---------------------------------
Net Income $ 12,740,514 $ 9,753,030
=================================
Net Income per share $3.37 $2.58
=================================
Weighted average shares outstanding 3,775,260 3,782,901
=================================
Cash dividends per share paid $0.20 $0.05
=================================
</TABLE>
See accompanying notes.
F-19
<PAGE> 100
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock of Securities
---------------------------- Paid-in Available- Retained
Shares Amount Capital for-Sale Earnings Total
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1994 3,787,400 $1,893,700 $ 347,549 $ (106,000) $67,479,175 $69,614,424
Issuance of common stock 127,900 63,950 2,370,478 2,434,428
Repurchase of common stock (138,800) (69,400) (2,591,784) (2,661,184)
Change in market value of securities 591,000 591,000
Net income 9,753,030 9,753,030
Dividends paid (188,825) (188,825)
---------------------------------------------------------------------------------------
Balance at November 30, 1995 3,776,500 1,888,250 126,243 485,000 77,043,380 79,542,873
Issuance of common stock 135,100 67,550 2,851,924 2,919,474
Repurchase of common stock (136,800) (68,400) (2,892,187) (2,960,587)
Change in market value of securities 550,000 550,000
Net income 12,740,514 12,740,514
Dividends paid (754,960) (754,960)
---------------------------------------------------------------------------------------
Balance at November 30, 1996 3,774,800 $1,887,400 $ 85,980 $1,035,000 $89,028,934 $92,037,314
=======================================================================================
</TABLE>
See accompanying notes.
F-20
<PAGE> 101
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,740,514 $ 9,753,030
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,364,546 2,355,074
Deferred income taxes (53,000) (479,000)
Other (6,198) (9,722)
Decrease (increase) in operating assets:
Receivable from brokers, dealers and clearing organizations (1,978,683) (1,769,279)
Receivable from customers (14,033,742) (14,114,273)
Securities owned, at market value (4,140,351) 1,122,257
Other assets and accounts receivable (2,784,404) (713,843)
Increase (decrease) in operating liabilities:
Payable to brokers, dealers and clearing organizations 6,991,374 560,191
Payable to customers 2,708,193 4,079,293
Securities sold, but not yet purchased, at market value 902,128 82,067
Accrued compensation and benefits 4,948,280 1,190,351
Income taxes payable (1,372,477) 1,459,560
Accounts payable and other accrued expenses 4,309,765 (828,256)
----------------------------------
Net cash provided by operating activities 10,595,945 2,687,450
----------------------------------
Cash flows from financing activities:
Net increase (decrease) in short-term borrowings (8,300,000) 1,500,000
Net increase in drafts payable 2,301,132 2,277,104
Issuance of subordinated debt - 2,000,000
Proceeds from issuance of common stock 2,919,474 2,434,428
Repayments of mortgage and other secured notes (540,297) (321,816)
Repayments of subordinated liabilities (1,200,000) (1,200,000)
Repurchase of common stock (2,960,587) (2,661,184)
Dividends paid (754,960) (188,825)
----------------------------------
Net cash provided by (used for) financing activities (8,535,238) 3,839,707
----------------------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (8,597,572) (5,163,306)
Proceeds from sales and maturities of securities available-for-sale 3,582,782 4,467,442
Purchases of fixed assets and leasehold improvements (1,674,961) (1,589,751)
----------------------------------
Net cash used for investing activities (6,689,751) (2,285,615)
----------------------------------
Increase (decrease) in cash and cash equivalents (4,629,044) 4,241,542
Cash and cash equivalents at beginning of year 14,361,560 10,120,018
----------------------------------
Cash and cash equivalents at end of period $ 9,732,516 $ 14,361,560
==================================
Supplemental disclosures of cash flow information:
Income tax payments $ 9,797,570 $ 5,691,000
==================================
Interest payments $ 3,370,591 $ 3,166,000
==================================
</TABLE>
See accompanying notes.
F-21
<PAGE> 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Hilliard-Lyons,
Inc. and its wholly owned subsidiaries (the Company). The principal subsidiary,
J.J.B. Hilliard, W.L. Lyons, Inc. (Broker/Dealer), is engaged in broker/dealer
and other related activities. In addition, certain subsidiaries are engaged in
trust activities and in the development, management and rental of equipment and
real estate. Also, certain subsidiaries serve as general and limited partners in
limited partnerships formed in connection with these activities. All significant
intercompany balances and transactions have been eliminated. Certain amounts
related to the fiscal year ended November 30, 1995 have been reclassified to
conform to the current year's presentation.
The Broker/Dealer is a party to financial instruments with off-balance-sheet
risk in its normal course of business. Information about such financial
instruments is included throughout the following notes. The Broker/Dealer is
required, in the event of the non-delivery of customers' securities owed the
Broker/Dealer by other broker/dealers, or by its customers, to purchase
identical securities in the open market. Such purchases might result in losses
not reflected in the accompanying statements of financial condition. The market
values of securities owed the Broker/Dealer approximates the amounts payable.
The Broker/Dealer monitors the credit standing of each broker/dealer and
customer with which it conducts business. In addition, the Broker/Dealer seeks
to control the risks associated with its customer activities by requiring
customers to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Broker/Dealer monitors required margin levels daily
and, pursuant to such guidelines, requires the customers to deposit additional
collateral, or to reduce positions, when necessary.
Securities transactions, along with related profit and loss, commission income
and expenses, have historically been recorded on a settlement date basis;
however, during 1996 the Company began to record securities transactions on a
trade date basis. The effect of this change was not significant to the financial
statements. Underwriting revenue is recorded as follows: (l) management and
underwriting fees at the time the underwriting is completed and/or the income is
reasonably determinable, and (2) sales concessions on settlement date.
F-22
<PAGE> 103
1. ACCOUNTING POLICIES (CONTINUED)
Firm trading securities are held for resale in anticipation of short-term market
movements. Firm trading securities, consisting of debt and marketable equity
securities and money market instruments, are stated at fair value. Gains and
losses, both realized and unrealized, are included in principal transactions.
For securities held-to-maturity and available-for-sale, management determines
the appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. Debt securities are
classified as held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities not classified as trading are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses reported in a separate component of
shareholders' equity.
Sales of securities not yet purchased represent an obligation of the
Broker/Dealer to deliver specified securities at a predetermined date and price.
The Broker/Dealer is obligated to acquire the required securities at prevailing
market prices in the future to satisfy this obligation.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. Securities borrowed transactions require the
Company to deposit cash with the lender. With respect to securities loaned, the
Company receives collateral in the form of cash or other collateral in an amount
generally in excess of the market value of securities loaned. The Company
monitors the market value of securities borrowed and loaned on a daily basis,
with additional collateral obtained or refunded as necessary.
Cash equivalents are defined as short-term, highly liquid investments with
original maturities of 90 days or less, other than those held for sale in the
ordinary course of business.
Property is stated at cost, less accumulated depreciation and amortization.
Furniture and fixtures are depreciated over their estimated economic lives
principally using accelerated methods which are not materially different from
the straight-line method. Leasehold improvements are amortized over the lesser
of the economic life of the improvement or the term of the lease using the
straight-line method. Buildings and building improvements are depreciated over
their estimated economic lives on the straight-line method.
F-23
<PAGE> 104
1. ACCOUNTING POLICIES (CONTINUED)
Net income per share is based upon the average number of shares of common stock
outstanding during each year.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Receivable from and payable to brokers, dealers and clearing organizations arise
from the settlement of securities transactions executed for customers or the
Company and consist of the following at November 30:
<TABLE>
<CAPTION>
RECEIVABLE PAYABLE
1996 1995 1996 1995
----------- -------------------------------------------
<S> <C> <C> <C> <C>
Securities failed to
deliver/receive $ 1,366,536 $ 513,302 $ 1,732,114 $ 450,397
Deposits on securities
borrowed 2,148,400 3,001,678 - -
Amounts due from/to
brokers and dealers
through clearing
organizations 5,429,304 3,450,577 7,142,316 1,432,659
----------- ----------- ----------- -----------
$ 8,944,240 $ 6,965,557 $ 8,874,430 $ 1,883,056
=========== =========== =========== ===========
</TABLE>
Receivables are generally collected within thirty days and are collateralized by
securities in physical possession, on deposit, or receivable from customers or
other brokers. The Broker/Dealer does business with brokers that for the most
part are members of the major securities exchanges.
Payables to brokers, dealers and clearing organizations represent amounts due
upon the receipt of securities. Should the broker, dealer or clearing
organization fail to deliver the securities to the Broker/Dealer, the
Broker/Dealer may be required to purchase identical securities in the open
market. The market value of such securities at November 30, 1996 and 1995
approximates the amounts owed to brokers, dealers and clearing organizations.
F-24
<PAGE> 105
3. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivable from and payable to customers arise from cash and margin transactions
executed by the Broker/Dealer on their behalf. In a margin transaction, the
Broker/Dealer extends credit to a customer to purchase securities using the
securities purchased and/or other securities in the customer's account as
collateral for amounts loaned. Amounts loaned are limited by margin regulations
of the Federal Reserve Board and other regulatory authorities and are subject to
the Broker/Dealer's credit review and daily monitoring procedures.
Receivables are collateralized by securities with market values in excess of the
amounts due. The Broker/Dealer's policy is to monitor the market value of
collateral and request additional collateral when required. Such collateral is
not reflected in the accompanying financial statements.
4. PROPERTY
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
-------------------------
<S> <C> <C>
Land $ 800,000 $ 800,000
Buildings 5,718,536 5,718,536
Building improvements 17,305,014 16,778,277
Furniture and fixtures 7,127,148 6,343,321
Leasehold improvements 3,831,205 3,496,553
----------- -----------
34,781,903 33,136,687
Accumulated depreciation and amortization (15,757,907) (13,429,304)
----------- -----------
Property, net $19,023,996 $19,707,383
=========== ===========
</TABLE>
Portions of the buildings are leased to unrelated companies for terms ranging
from five to twenty years; some with options to renew. Minimum noncancelable
annual rental income under these leases follow:
<TABLE>
<S> <C>
1997 $856,000
1998 $856,000
1999 $856,000
2000 $895,000
2001 $895,000
Thereafter $270,000
</TABLE>
F-25
<PAGE> 106
5. NOTES AND MORTGAGES PAYABLE
<TABLE>
<CAPTION>
NOVEMBER 30
1996 1995
-------------------------
<S> <C> <C>
Short-term notes payable to banks:
Customer loans, due on demand, fully collateralized by
customers' and officers' securities covered by margin
agreements (aggregate market value of $60,523,000 and
$62,950,000 at November 30, 1996 and 1995, respectively);
floating interest rates based on federal funds rate of the
lender; 5.92% at November 30, 1996 (interest rates range
from 6.11% to 6.22% at November 30, 1995), aggregate
lines of credit $70,000,000 at November 30, 1996 $ 13,600,000 $ 21,900,000
Firm loan, due on demand, uncollateralized; floating interest
rate based on prime rate (5.82% and 6.12% at November 30,
1995 and 1996 respectively), aggregate lines of credit
$20,000,000 at November 30, 1996 7,500,000 7,500,000
------------ ------------
Total short-term notes payable to banks $ 21,100,000 $ 29,400,000
============ ============
Mortgage note payable to a bank by subsidiary, on land, building
and building improvements (carrying value of $16,017,000
and $16,300,000 at November 30, 1996 and 1995,
respectively), and guaranteed by the Company; floating
interest rate based on monthly Euro-Rate of the lender, (6.82%
and 7.25% at November 30, 1996 and 1995, respectively)
payable over 5 years in monthly installments,
including interest, with final payment due November 12, 2000 $ 9,151,446 $ 9,682,620
Other note payable, collateralized by certain
assets; interest at annual prime rates 70,772 79,895
------------ ------------
Total mortgage and other secured notes payable $ 9,222,218 $ 9,762,515
============ ============
</TABLE>
The carrying values of the Company's debt obligations approximate their fair
value due to their variable interest rate.
F-26
<PAGE> 107
5. NOTES AND MORTGAGES PAYABLE (CONTINUED)
Annual combined maturities on the mortgage and other secured note, follow:
<TABLE>
<S> <C>
1997 $ 658,000
1998 613,000
1999 640,000
2000 7,311,000
</TABLE>
In the event customers' and officers' securities pledged to banks are not
returned, the Broker/Dealer may be exposed to the risk of acquiring identical
securities at prevailing market prices in order to satisfy its customer
obligations. The Broker/Dealer controls this risk by monitoring the market value
of securities pledged on a daily basis and by requiring adjustments of
collateral levels in the event of excess market exposure.
6. NOTES PAYABLE TO BANKS, SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Notes payable to banks, subordinated to claims of general creditors are covered
by agreements approved by the New York Stock Exchange, Inc. (the Exchange) and,
therefore, are available in computing net capital (see Note 7). Restrictions
relating to net capital and aggregate indebtedness, as contained in the
agreements, are consistent with the requirements of the Exchange.
These subordinated notes payable are unsecured, and bear interest at floating
rates based on prime interest rates. The subordinated bank notes are payable in
annual installments through 2000. The carrying amounts of these notes
approximate their fair value.
The combined approximate amount of maturities on subordinated notes aggregates
$1,200,000 in 1997, $800,000 in 1998, $400,000 in 1999 and $400,000 in 2000.
7. NET CAPITAL REQUIREMENTS
The Broker/Dealer is subject to the Securities and Exchange Commission Uniform
Net Capital Rule (Rule 15c3-1) and the capital rules of the Exchange. The rules
require the maintenance of minimum net capital and require that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. The rules also provide that a reduction in business is required if the ratio
exceeds 12 to 1 and business may not be
F-27
<PAGE> 108
7. NET CAPITAL REQUIREMENTS (CONTINUED)
expanded and cash dividends and other payments would be precluded if the ratio
exceeds 10 to 1. Net capital and aggregate indebtedness change from day to day.
At November 30, 1996, the subsidiary's ratio of aggregate indebtedness to net
capital was 1.70 to 1. Net capital, as defined, was approximately $56,247,000,
which exceeded the minimum required amount by approximately $49,879,000.
8. COMMITMENTS AND CONTINGENT LIABILITIES
At November 30, 1996, the Broker/Dealer had contractual commitments relating to
underwriting agreements and purchases of securities on a when, as and if issued
basis of approximately $979,000.
In accordance with industry practice, the Broker/Dealer generally settles
securities transactions executed on behalf of its customers within three
business days after the trade date. This risk of loss on unsettled transactions
is the same as settled transactions and relates to the customer's or broker's
inability to meet the terms of their contracts. Settlement of these transactions
is not expected to have a material effect on the Company's consolidated
financial position.
The Company is involved in various matters of litigation and claims in the
normal course of business. It is management's opinion that ultimate losses, if
any, relating to such litigation and claims will not be material to the
Company's consolidated financial position.
The Company leases certain of its branch sales offices, telephone and computer
equipment under noncancellable leases expiring between 1997 and 2005. Certain of
these leases contain renewal options and include a provision for escalation of
rentals based upon inflationary factors. Minimum annual rentals under these
leases follow:
<TABLE>
<S> <C>
1997 $3,467,000
1998 2,418,000
1999 1,618,000
2000 607,000
2001 396,000
Thereafter 728,000
</TABLE>
F-28
<PAGE> 109
8. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Total rental expense for 1996 and 1995 approximated $4,965,000 and $4,265,000,
respectively.
The Company is committed under agreements with two retired shareholders to
serially repurchase 316,000 shares of common stock at $21.69 per share over the
next five years. The Company's stock repurchase obligations under the agreements
approximate $1,252,000 annually through 2001.
The Company is committed under separate agreements to pay fees to retired
shareholders who have agreed to lend their shares of common stock to the
Company. The fees are based upon the book value of the shares lent and are
computed at an annual rate of 2% above prime (10.25% at November 30, 1996). Fees
paid pursuant to these agreements during 1996 approximated $588,000.
9. EMPLOYEE BENEFIT PLANS
The Company has a contributory profit sharing plan which covers substantially
all employees after a short waiting period. Company contributions to the plan
include matching of employee contributions and discretionary amounts determined
by the Company's Board of Directors. Total Company contributions amounted to
$4,200,000 and $3,236,000 in 1996 and 1995, respectively.
The Company has a discretionary deferred compensation plan for certain
employees. The Company contributed approximately $1,050,000 and $770,000 in 1996
and 1995, respectively. At November 30, 1996, approximately $2,870,000 (included
in accounts payable, accrued expenses and other liabilities) is accrued for this
plan.
F-29
<PAGE> 110
10. INCOME TAXES
Income taxes as a percentage of income before income taxes in the accompanying
financial statements are different from the normal federal statutory rate of
35% by approximately $483,000 in 1996 and $203,000 in 1995. The difference is
principally due to state income taxes.
Deferred income taxes and benefits are recognized in the consolidated financial
statements for changes in deferred tax assets or liabilities between years.
Temporary differences which give rise to significant deferred tax assets and
liabilities are deferred sales bonuses, capitalized system conversion expenses,
bad debt and other reserves, and accelerated depreciation.
Net deferred tax amounts on the consolidated statements of financial condition
consist of the following at November 30:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets $2,362,000 $1,704,000
Deferred tax liabilities (1,369,000) (764,000)
---------- ----------
$ 993,000 $ 940,000
========== ==========
</TABLE>
11. STOCKHOLDERS' EQUITY
The Company's Board of Directors approved a two-for-one split of the Company's
common stock in the form of a 100% stock dividend for shareholders of record as
of September 30, 1995. The stated value per share was reduced from $1 to $.50
per share.
The Company adopted the Hillard-Lyons, Inc. Stock Purchase Plan (the Plan)
effective January 1, 1995. Pursuant to the Plan, officers and stockholders of
the Company may purchase available shares of the Company's common stock at its
adjusted book value, which is defined by the Company's Restated Articles of
Incorporation (Articles) and determined by the Company.
The Articles provide certain restrictions on the sale of the Company's common
stock by stockholders. The Company has the first option to repurchase common
stock from stockholders who wish to sell their shares. The Company also has the
first option to repurchase common stock from stockholders who retire or
otherwise terminate their employment with the Company. Repurchases of common
stock by the Company are at its adjusted book value.
F-30
<PAGE> 111
12. RELATED-PARTY TRANSACTION
The Broker/Dealer receives investment advisory fees for managing the Hilliard
Lyons Government Fund, an investment company owned by unit holders. Earned fees
were approximately $1,700,000 and $1,300,000 in 1996 and 1995, respectively.
F-31
<PAGE> 112
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1998 1997
-------------------------------
<S> <C> <C>
Cash and cash equivalents $ 24,568,326 $ 14,681,299
Deposits with clearing organizations 1,296,253 856,000
Receivable from brokers, dealers and clearing organizations 8,866,482 4,916,567
Receivable from customers 204,698,124 136,483,128
Securites owned, at market value 26,019,156 26,133,683
Securities available-for-sale, at fair value 14,914,158 14,041,375
Deferred income taxes 2,844,000 1,463,000
Property and equipment, net 21,483,907 19,954,965
Other assets and accounts receivable 11,333,630 8,767,809
-------------------------------
Total Assets $316,024,036 $227,297,826
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term notes payable to banks $104,250,000 $ 46,500,000
Drafts payable 14,706,068 17,233,010
Payable to brokers, dealers and clearing organizations 5,615,637 3,617,624
Payable to customers 39,529,403 26,446,995
Securities sold, but not yet purchased, at market value 1,248,822 1,942,881
Accrued compensation and benefits 22,424,897 17,847,762
Income taxes payable 1,375,809 533,424
Accounts payable and other accrued expenses 5,805,776 6,164,605
Mortgage and other secured notes payable 8,179,497 8,784,641
Notes payable to banks, subordinated to claims of general creditors 1,600,000 2,400,000
-------------------------------
Total Liabilities and Subordinated Debt 204,735,909 131,470,942
-------------------------------
Commitments and Contingencies - -
Stockholders' equity:
Common stock, no par value - authorized 5,000,000 shares;
issued and outstanding (1998 - 3,581,400 shares;
1997 - 3,615,700 shares); at stated value 1,557,953 1,801,950
Paid-in capital - -
Unrealized appreciation of securities available-for-sale 1,940,000 1,546,000
Retained earnings 107,790,174 92,478,934
-------------------------------
Total stockholders' equity 111,288,127 95,826,884
-------------------------------
Total liabilities and stockholders' equity $316,024,036 $227,297,826
===============================
</TABLE>
Note: The interim unaudited consolidated statements of financial condition and
the related consolidated statements of income, changes in stockholders' equity
and cash flows included herein reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of such financial statements.
F-32
<PAGE> 113
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
REVENUES 1998 1997
---------------------------------
<S> <C> <C>
Commissions $ 69,568,740 $ 50,500,518
Principal transactions 16,216,561 20,801,687
Investment banking 11,241,940 4,910,719
Investment management 19,551,626 14,739,203
Interest and dividends 13,104,693 9,308,585
Insurance products 13,234,411 11,049,908
Gain on sale of building 3,442,178 -
Other 5,797,388 3,711,568
---------------------------------
152,157,537 115,022,188
---------------------------------
EXPENSES
Employee compensation and benefits 84,767,252 65,984,493
Clearing and floor commissions 1,679,623 1,681,271
Payroll and other taxes 5,667,973 4,376,007
Promotion and development 3,637,887 2,889,901
Occupancy and equipment rental 10,304,138 8,726,839
Communications 10,569,230 8,081,167
Interest 4,988,629 2,895,868
Other 10,633,652 7,887,965
---------------------------------
132,248,384 102,523,511
---------------------------------
Income before provision for taxes 19,909,153 12,498,677
Provision for income taxes 7,724,384 4,785,000
---------------------------------
Net Income $ 12,184,769 $ 7,713,677
=================================
Net Income per share $3.40 $2.07
=================================
Weighted average shares outstanding 3,584,782 3,727,330
=================================
Cash dividends paid $0.00 $0.00
=================================
</TABLE>
Note: The interim unaudited consolidated statements of financial condition and
the related consolidated statements of income, changes in stockholders' equity
and cash flows included herein reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of such financial statements.
F-33
<PAGE> 114
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock of Securities
--------------------------- Paid-in Available- Retained
Shares Amount Capital for-Sale Earnings Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 1, 1996 3,774,800 $ 1,887,400 $ 85,980 $1,035,000 $ 89,028,934 $ 92,037,314
Issuance of common stock 154,300 77,150 3,838,984 3,916,134
Repurchase of common stock (325,200) (162,600) (3,924,964) (4,263,677) (8,351,241)
Change in market value of securities 511,000 511,000
Net income 7,713,677 7,713,677
----------------------------------------------------------------------------------------
Balance at August 31, 1997 3,603,900 $ 1,801,950 $ - $1,546,000 $ 92,478,934 $ 95,826,884
========================================================================================
Balance at December 1, 1997 3,603,900 $ 1,801,950 $ - $1,982,000 $ 95,605,405 $ 99,389,355
Issuance of common stock 133,600 3,878,408 3,878,408
Repurchase of common stock (156,100) (4,122,405) (4,122,405)
Change in market value of securities (42,000) (42,000)
Net income 12,184,769 12,184,769
----------------------------------------------------------------------------------------
Balance at August 31, 1998 3,581,400 $ 1,557,953 $ - $1,940,000 $107,790,174 $111,288,127
========================================================================================
</TABLE>
Note: The interim unaudited consolidated statements of financial condition and
the related consolidated statements of income, changes in stockholders' equity
and cash flows included herein reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of such financial statements.
F-34
<PAGE> 115
HILLIARD LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,184,769 $ 7,713,677
Adjustments to reconcile net income to net cash used
for operating activities:
Depreciation and amortization 1,877,767 1,771,764
Deferred income taxes (686,000) (470,000)
Gain on sale of building (3,442,178) -
Other 19,562 -
Decrease (increase) in operating assets:
Deposits with clearing organizations 145,725 -
Receivable from brokers, dealers and clearing organizations (4,869,091) 4,027,673
Receivable from customers (46,235,761) (17,199,765)
Securities owned, at market value 1,126,123 139,580
Other assets and accounts receivable (1,316,788) (2,897,444)
Increase (decrease) in operating liabilities:
Payable to brokers, dealers and clearing organizations (13,889,152) (5,256,806)
Payable to customers 12,352,864 1,667,371
Securities sold, but not yet purchased, at market value (956,237) (847,453)
Accrued compensation and benefits 1,433,039 1,042,915
Income taxes payable (18,267) 74,742
Accounts payable and other accrued expenses 1,166,534 (1,795,811)
---------------------------------
Net cash used for operating activities (41,107,091) (12,029,557)
---------------------------------
Cash flows from financing activities:
Net increase in short-term borrowings 55,450,000 25,400,000
Net increase (decrease) in drafts payable (739,456) 1,235,693
Proceeds from issuance of common stock 3,878,408 3,916,134
Repayments of mortgage and other secured notes (462,364) (437,577)
Repayments of subordinated liabilities - (400,000)
Repurchase of common stock (4,122,405) (8,351,241)
Dividends paid - -
---------------------------------
Net cash provided by financing activities 54,004,183 21,363,009
---------------------------------
Cash flows from investing activities:
Purchase of securities available-for-sale (6,012,542) (4,195,213)
Proceeds from sales and maturities of securities available-for-sale 5,322,756 2,513,277
Proceeds from sale of building 3,903,102 -
Net purchases of fixed assets and leasehold improvements (3,948,891) (2,702,733)
---------------------------------
Net cash provided by (used for) investing activities (735,575) (4,384,669)
---------------------------------
Increase in cash and cash equivalents 12,161,517 4,948,783
Cash and cash equivalents at beginning of year 12,406,809 9,732,516
---------------------------------
Cash and cash equivalents at end of period $ 24,568,326 $ 14,681,299
=================================
Supplemental disclosures of cash flow information:
Income tax payments $ 8,623,050 $ 5,180,918
=================================
Interest payments $ 4,616,741 $ 2,819,815
=================================
</TABLE>
Note: The interim unaudited consolidated statements of financial condition and
the related consolidated statements of income, changes in stockholders' equity
and cash flows included herein reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary to a
fair presentation of such financial statements.
F-35
<PAGE> 116
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of August 20, 1998,
by and between HILLIARD-LYONS, INC. ("HL"), a Kentucky corporation, having its
principal executive office at Hilliard Lyons Center, Louisville, Kentucky 40202,
and PNC BANK CORP. ("PNC"), a Pennsylvania corporation having its principal
executive office at One PNC Plaza, Pittsburgh, Pennsylvania 15222.
WITNESSETH
WHEREAS, the Board of Directors of each of the parties hereto has
approved the merger of HL with and into PNC upon the terms and conditions set
forth in this Agreement (the "Merger");
WHEREAS, the Board of Directors of each of the parties hereto has
determined that the Merger and the other transactions contemplated hereby are
consistent with, and in furtherance of, their respective business strategies and
goals and are in the best interests of their respective stockholders;
WHEREAS, the parties hereto desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
Merger and the other transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained and intending to be
legally bound hereby, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. "Advisers Act" shall mean the Investment Advisers Act of 1940, as
amended.
1.2. "Affiliate" shall include any "affiliated company" or "affiliated
person" as those terms are defined in Sections 2(a)(2) and 2(a)(3),
respectively, of the Investment Company Act.
1.3. "Anniversary Date" shall mean each anniversary of the Closing
Date, or if such anniversary falls on a day that is not a Business Day, then on
the next Business Day.
1.4. "AMEX" shall mean the American Stock Exchange, Inc.
1.5. "Average Closing Price" shall mean the average of the closing
prices per share of PNC Common Stock on the NYSE-Composite Transactions List (as
reported by The Wall Street Journal or other authoritative source) for the five
(5) NYSE trading days immediately prior to the Effective Date.
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<PAGE> 117
1.6. "Broker" shall mean J.J.B. Hilliard, W.L. Lyons, Inc., a Kentucky
corporation and a wholly-owned subsidiary of HL.
1.7. "Business Day" shall mean a day on which national banks in
Pittsburgh, Pennsylvania and in Louisville, Kentucky are open for business.
1.8. "Cause" (i) with respect to a Key Manager, shall have the meaning
provided in such Key Manager's Employment Agreement; and (ii) with respect to a
Designated Manager who is not a Key Manager, shall mean (A) the Designated
Manager's willful failure to substantially perform his duties for PNC or a
subsidiary of PNC by which he is employed (other than by reason of Disability),
after reasonable demand for substantial performance is delivered by PNC or the
subsidiary of PNC specifically identifying the manner in which PNC or the
subsidiary of PNC believes the Designated Manager has not performed his duties,
(B) the willful engaging by such Designated Manager in conduct that demonstrably
results in injury to PNC or any PNC Subsidiary, or (C) such Designated Manager's
(x) personal dishonesty or breach of fiduciary duty, or (y) willful violation of
any law, rule or regulation (other than traffic violations, misdemeanors or
similar offenses) or final cease-and-desist order. For purposes of clause (ii)
above, no act or failure to act shall be considered "willful" unless done, or
omitted to be done, by a Designated Manager not in good faith and without
reasonable belief that his act or omission was in the best interests of PNC or
any PNC Subsidiary.
1.9. "Closing Date" shall mean the date specified pursuant to Section
2.10 hereof as the date on which the parties hereto shall close the transactions
contemplated herein.
1.10. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.11. "Commission" or "SEC" shall mean the Securities and Exchange
Commission.
1.12. "Commodities Exchange Act" shall mean the Commodities Exchange
Act, as amended.
1.13. "Companies" shall mean, collectively, HL and each of HL's Tax
Affiliates, and "Company" shall mean any one of the foregoing.
1.14. "Designated Managers" shall mean those individuals who are
employees of Broker as of the date hereof, and are designated as participants in
the Management Pool Amount.
1.15. "Disability" (i) with respect to a Key Manager, shall have the
meaning provided in such Key Manager's Employment Agreement, and (ii) with
respect to a Designated Manager who is not a Key Manager, shall mean such
Designated Manager's physical or mental incapacity in accordance with PNC's
disability policy as then in effect.
1.16. "Employment Agreement" shall mean an Employment Agreement
substantially in the form set forth in Exhibit 1.16.
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<PAGE> 118
1.17. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
1.18. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1.19. "Federal Reserve" shall mean the Board of Governors of the
Federal Reserve System, or a Federal Reserve Bank acting under delegated
authority.
1.20. "Fund Board" shall mean the Board of Trustees of any Investment
Company.
1.21. "GAAP" shall mean generally accepted accounting principles.
1.22. "Good Reason" shall mean (i) with respect to a Key Manager, as
such term is defined in such Key Manager's Employment Agreement; and (ii) with
respect to a Designated Manager who is not a Key Manager, unless any of the
following actions are taken with the consent of the Designated Manager, (A) any
significant reduction or adverse change in the nature or scope of such
Designated Manager's authority, duties, status or position as of the Effective
Date, (B) a relocation of such Designated Manager's place of work outside a 35
mile radius from the location of such Designated Manager's place of work as of
the Effective Date, or (C) a reduction in the base salary and/or benefits of
such Designated Manager as in effect on the Effective Date.
1.23. "Good Title" shall mean good and marketable title in and to an
asset free and clear of any Security Interest, or other restriction of any kind
or nature or claim of any third party, including without limitation, any
agreement, understanding or restriction affecting the voting rights or other
incidents of record or beneficial ownership pertaining to such interests.
1.24. "Governmental Body" shall mean any: (i) nation, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (ii) federal, State, local, municipal, or other
government; or (iii) governmental or quasi-governmental authority of any nature
(including any governmental division, department, agency, commission,
instrumentality, official, organization, unit, body or entity and any court or
other tribunal).
1.25. "HL Financial Statements" shall mean (i) the audited consolidated
statements of financial condition of HL as of November 30, 1997, 1996 and 1995
and the related consolidated statements of income, cash flows and changes in
stockholders' equity (including the related notes, if any) for each of the three
years ended November 30, 1997, 1996 and 1995 as Previously Disclosed by HL, and
(ii) the unaudited consolidated statements of financial condition of HL and
related consolidated statements of income, cash flows and changes in
stockholders' equity (including the related notes, if any) as delivered by HL to
PNC with respect to periods ended subsequent to November 30, 1997.
1.26. "HL Subsidiary" shall mean Broker and any other corporation or
similar entity 25% or more of the equity or 25% or more of any class of voting
securities of which is owned directly or indirectly by or for the benefit of HL.
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<PAGE> 119
1.27. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1978, as amended.
1.28. "Intellectual Property" shall mean domestic and foreign letters
patent, patent applications, software, know-how, trade secrets, trade names,
common law and other trademarks, service marks, trademark registrations and
applications, copyrights, copyright registrations and applications, other
proprietary rights, other embodiments of intellectual property, either owned by,
licensed to or otherwise used by HL or any HL Subsidiary.
1.29. "Investment Companies" shall mean the investment companies or
business development companies registered or required to be registered under the
Investment Company Act to which HL or an HL Subsidiary serves as investment
advisor or general partner.
1.30. "Investment Company Act" shall mean the Investment Company Act of
1940, as amended.
1.31. "Key Brokers" shall mean those individuals Previously Disclosed.
1.32. "Key Managers" shall mean James W. Stuckert, James M. Rogers,
James R. Allen and E. Neal Cory, II.
1.33. "Material Adverse Effect", when applied to a party, shall mean an
event, occurrence or circumstance (including without limitation, any breach of a
representation or warranty contained herein by such party) which (i) has a
material adverse effect on the financial condition, results of operations, or
business of such party and its subsidiaries, taken as a whole, or (ii) would
materially impair any party's ability to timely perform its obligations under
this Agreement or the consummation of any of the transactions contemplated
hereby; provided, that a Material Adverse Effect with respect to a party shall
not include events or conditions generally affecting the securities industry or
effects resulting from general economic conditions (including changes in
interest rates), changes in accounting practices or changes to statutes,
regulations or regulatory policies, that do not have a materially more adverse
effect on such party than that experienced by similarly situated financial
services companies.
1.34. "NASD" shall mean the National Association of Securities Dealers,
Inc. and its affiliated entities, including, but not limited to, NASD-Regulation
and NASDAQ.
1.35. "NYSE" shall mean the New York Stock Exchange.
1.36. "OCC" shall mean the Office of the Comptroller of the Currency.
1.37. "Other Direct Participation Program" shall mean a direct
participation program as defined in the rules of the NASD that is sponsored,
controlled or advised on a contractual basis by HL or any HL Subsidiary, other
than a Private Investment Fund.
1.38. "Person" shall mean a natural person, a company, corporation,
partnership, limited liability company, association, trust, joint venture or any
other entity whether incorporated or not, a Governmental Body, or an SRO.
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<PAGE> 120
1.39. "PNC Common Stock" has the meaning set forth in Section 2.5(a).
1.40. "PNC Financial Statements" shall mean (i) the consolidated
balance sheets of PNC as of June 30, 1998 and as of December 31, 1996 and 1997,
and the related consolidated statements of income, cash flows and changes in
shareholders' equity (including related notes, if any) for the six months ended
June 30, 1998 and each of the three years ended December 31, 1997, 1996 and 1995
as filed by PNC in SEC Documents, and (ii) the consolidated balance sheets of
PNC and related consolidated statements of income, cash flows and changes in
shareholders' equity (including related notes, if any) as filed by PNC in SEC
Documents with respect to periods ended subsequent to June 30, 1998.
1.41. "Pooled Investment Vehicle" shall mean an Investment Company,
Private Investment Fund, or Other Direct Participation Program.
1.42. "Previously Disclosed" shall mean disclosed prior to the
execution hereof in a letter dated of even date herewith from HL and delivered
to PNC.
1.43. "Private Investment Fund" shall mean a company that would be an
"investment company" as defined in the Investment Company Act but for Section
3(c)(1) or Section 3(c)(7) of that Act, and that is sponsored, controlled or
advised on a contractual basis by HL or any HL Subsidiary.
1.44. "Property Subsidiary" shall mean each direct or indirect
subsidiary of HL that owns real property or that serves as a general partner of
a partnership that owns real property or that is a member and manager of a
limited liability company that owns real property, other than real property
occupied predominantly by HL or an HL Subsidiary and used by HL or an HL
Subsidiary for the conduct of securities, insurance, or investment management
business or businesses.
1.45. "Property Subsidiary Partnership" shall mean each partnership or
limited liability company for which HL or an HL Subsidiary serves as a general
partner or member and manager, other than real property occupied predominantly
by HL or an HL Subsidiary and used by HL or an HL Subsidiary for the conduct of
securities, insurance, or investment management business or businesses.
1.46. "Proxy Statement" shall mean the proxy statement/prospectus (or
similar document) together with any supplements thereto sent to the shareholders
of HL to solicit their votes in connection with this Agreement and to be
submitted with the Registration Statement.
1.47. "Registration Statement" shall mean the registration statement
with respect to the PNC Common Stock to be issued in connection with the Merger.
1.48. "Regulations" shall mean the Income Tax Regulations, including
Temporary Regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
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<PAGE> 121
1.49. "Rights" shall mean warrants, options, rights, preemptive rights,
convertible securities and other arrangements or commitments which obligate an
entity to issue or dispose of any of its capital stock, and stock appreciation
rights, performance units and other similar stock-based rights whether they
obligate the issuer thereof to issue stock or other securities or to pay cash.
1.50. "SEC Documents" shall mean all reports and registration
statements filed, or required to be filed, by law, by contract or otherwise, by
an entity pursuant to the Securities Laws.
1.51. "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.52. "Securities Laws" shall mean the Securities Act; the Exchange
Act; the Investment Company Act; the Advisers Act; the Trust Indenture Act of
1939, as amended; and the rules and regulations of the Commission, the Federal
Reserve, and the Treasury Department, promulgated thereunder.
1.53. "Security Interest" shall mean any mortgage, pledge, lien,
encumbrance, charge or other security interest.
1.54. "Short Taxable Year" shall mean a Taxable Year that either begins
or ends on the Effective Date or begins on the date immediately after the
Effective Date.
1.55. "SIPC" shall mean the Securities Investor Protection Corporation.
1.56. "Split Period" shall mean a Taxable Year that begins on or before
the Effective Date and ends after the Effective Date.
1.57. "SRO" shall mean the NASD, the Municipal Securities Rulemaking
Board, the NYSE and each other securities exchange registered with the SEC
pursuant to Section 6 of the Exchange Act in which HL or any HL Subsidiary is a
member or member organization, and any clearing agency or securities depository
registered with the SEC pursuant to Section 17A of the Exchange Act in which HL
or any HL Subsidiary is a member or member organization.
1.58. "SRO Documents" shall mean all reports, sales literature, and
registration statements and other documents filed by an entity, or required to
be filed by an entity, with an SRO by law, by contract, by SRO Rules, or
otherwise.
1.59. "SRO Rules" shall mean the articles, bylaws, rules, conduct
standards and other regulations of an SRO that govern the conduct of business by
its members, member organizations or participants.
1.60. "State" shall mean any state of the United States of America or
the District of Columbia, or a local jurisdiction thereof.
1.61. "State Documents" shall mean all reports, license applications
and registration statements filed, or required to be filed, by law, by contract
or otherwise, by an entity pursuant to State Insurance Laws or State Securities
Laws.
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1.62. "State Insurance Laws" shall mean all laws governing offers and
sales of annuities and insurance products or the business of being an insurance
agent, broker, or adviser, of any State, and all regulations thereunder.
1.63. "State Securities Laws" shall mean all "blue sky" laws, or other
laws governing offers and sales of securities or the business of being a
securities broker, dealer, investment adviser, investment company or agent, of
any State, and all regulations thereunder.
1.64. "Tax" or "Taxes" shall mean all taxes, however denominated,
including any interest, penalties, criminal sanctions or additions to tax
(including, without limitation, any underpayment penalties for insufficient
estimated tax payments) or other additional amounts that may become payable in
respect thereof (or in respect of a failure to file any Tax Return when and as
required), imposed by any Governmental Body, which taxes shall include, without
limiting the generality of the foregoing, all income taxes, payroll and
employment taxes, withholding taxes (including withholding taxes in connection
with amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other Person), unemployment insurance taxes, social security (or
similar) taxes, sales and use taxes, excise taxes, franchise taxes, gross
receipts taxes, occupation taxes, real and personal property taxes, stamp taxes,
value added taxes, transfer taxes, profits or windfall profits taxes, licenses
in the nature of taxes, estimated taxes, severance taxes, duties (custom and
others), workers' compensation taxes, premium taxes, environmental taxes
(including taxes under Section 59A of the Code), disability taxes, registration
taxes, alternative or add-on minimum taxes, estimated taxes, and other fees,
assessments, charges or obligations of the same or of a similar nature, whether
arising before, on or after the Effective Date.
1.65. "Tax Affiliate" shall mean, with respect to any Person (the
"given Person"), any corporation, partnership, limited liability company, joint
venture or other entity which the given Person controls directly or indirectly
(through one or more intermediaries). For purposes of this definition, "control"
means the possession, direct or indirect, of the power either (i) to vote fifty
percent (50%) or more of the voting interests of a corporation, partnership,
limited liability company, joint venture or other entity, or (ii) to direct or
cause the direction of the management and policies of a corporation,
partnership, limited liability company, joint venture or other entity, whether
by contract or otherwise.
1.66. "Tax Attributes" shall mean (i) any losses, credits and other tax
attributes that may be carried forward or back on a separate return or
consolidated, combined or unitary basis to a Taxable Year other than the Taxable
Year in which such attribute is recognized or generated, including, but not
limited to, net operating losses, alternative minimum tax credits, targeted jobs
tax credits, investment tax credits, foreign tax credits, research and
development credits or similar credits under State or local law, and (ii) any
other tax attribute, including, but not limited to, the tax basis and
depreciable life of any asset, which arose in or is attributable to one Taxable
Year but which affects the calculation of taxable income in one or more other
Taxable Years.
1.67. "Taxable Year" shall mean any taxable year or any other taxable
period (including any Short Taxable Year) with respect to which any Tax may be
imposed under any applicable statute, rule or regulation.
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<PAGE> 123
1.68. "Total Equity" includes all equity interests in a corporation,
partnership, limited liability company, association, trust or other entity.
"Total Equity" shall include for purposes of calculating in Section 3.2(b)
hereof the percentage of Total Equity owned directly or indirectly by or for the
benefit of HL or an HL Subsidiary: any equity interests in an entity owned
directly or indirectly by or for the benefit of HL or an HL Subsidiary;
warrants, options, convertible securities or other contractual rights to acquire
voting securities of an entity, owned directly or indirectly by or for the
benefit of HL or an HL Subsidiary; and subordinated debt instruments or
defaulted or nonperforming debt instruments, owned directly or indirectly by or
for the benefit of HL or an HL Subsidiary; but shall not include warrants,
options, convertible securities and other contractual rights to acquire voting
securities or subordinated debt instruments or defaulted or nonperforming debt
instruments owned by Persons other than HL or an HL Subsidiary that are not
owned directly or indirectly by or for the benefit of HL or an HL Subsidiary.
1.69. "Voting Securities" shall mean "voting securities" as defined in
Regulation Y, 12 C.F.R. ss. 225.2, or any successor regulation thereto.
ARTICLE II
MERGER
2.1. THE MERGER
Subject to the terms and conditions of this Agreement, on the Effective
Date (as hereinafter defined), HL shall be merged with and into PNC, pursuant to
the provisions of, and with the effect provided in, 23 Ky. Code Ch. 271B,
subtitle 11 and 15 Pa. Code Ch. 19, subchapter C. On the Effective Date, the
separate existence of HL shall cease and PNC, as the surviving entity, shall
continue unaffected and unimpaired by the Merger. (PNC as existing on and after
the Effective Date being hereinafter sometimes referred to as the "Surviving
Corporation").
2.2. ARTICLES OF INCORPORATION AND BY-LAWS
The Articles of Incorporation and the By-laws of PNC in effect
immediately prior to the Effective Date shall be the Articles of Incorporation
and By-laws of the Surviving Corporation, in each case until amended in
accordance with applicable law.
2.3. BOARD OF DIRECTORS
On the Effective Date, the Board of Directors of the Surviving
Corporation shall consist of those persons serving as directors of PNC
immediately prior to the Effective Date.
2.4. CAPITAL
The shares of capital stock of the Surviving Corporation issued and
outstanding immediately prior to the Effective Date shall, on the Effective
Date, continue to be issued and outstanding.
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2.5. CONVERSION AND EXCHANGE OF HL SHARES FOR STOCK CONSIDERATION AND CASH
CONSIDERATION; FRACTIONAL SHARE INTERESTS
(a) On the Effective Date, each share of the common stock of HL, no par
value per share (the "HL Common Stock"), outstanding immediately prior to the
Effective Date (except as provided in paragraphs (b), (e) and (f) of this
Section 2.5, and Section 2.11), shall by virtue of the Merger be converted into
(i) that number of fully paid and nonassessable shares of common stock, par
value $5.00 per share, of PNC (the "PNC Common Stock") that is the quotient of
(A) $192,500,000, divided by (B) an amount equal to the product of (x) the
Average Closing Price, multiplied by (y) the number of issued and outstanding
shares of HL Common Stock immediately prior to the Effective Date (the "Stock
Consideration"); and (ii) the right to receive a cash amount that is the
quotient of (A) $82,500,000, divided by (B) the number of issued and outstanding
shares of HL Common Stock immediately prior to the Effective Date (the "Cash
Consideration"); provided, however, that except as otherwise provided in Section
2.9, if the Average Closing Price is less than $52.00, then at the option of
PNC, the Stock Consideration may be decreased and the Cash Consideration may be
increased (provided they together aggregate $275,000,000) so that no more than
3,700,000 shares of PNC Common Stock are issued in the Merger.
(b) On the Effective Date, all shares of HL Common Stock held in the
treasury of HL or owned beneficially by any subsidiary of HL other than in a
fiduciary capacity or in connection with a debt previously contracted, shall be
cancelled and no cash, stock or other property shall be delivered in exchange
therefor.
(c) On and after the Effective Date, each holder of a certificate or
certificates theretofore representing outstanding shares of HL Common Stock (and
such certificate being referred to hereinafter as a "Certificate") may surrender
the same to PNC or its agent for cancellation and each such holder shall be
entitled upon such surrender promptly to receive in exchange therefor (i)
certificate(s) representing the number of shares of PNC Common Stock into which
such shares of HL Common Stock have been converted, and (ii) a check in the
amount of total Cash Consideration to which such holder is entitled, without
interest. Until so surrendered, each Certificate shall be deemed for all
purposes to evidence ownership of the number of shares of PNC Common Stock into
which the shares represented by such Certificates have been changed or converted
as aforesaid. No dividends or other distributions declared after the Effective
Date with respect to PNC Common Stock shall be paid to the holder of any
unsurrendered Certificate until the holder thereof shall surrender such
Certificate in accordance with this Section 2.5. After the surrender of a
Certificate in accordance with this Section 2.5, the record holder thereof shall
be entitled to receive any such dividends or other distributions, without any
interest thereon, which theretofore had become payable with respect to shares of
PNC Common Stock represented by such Certificate. Certificates surrendered for
exchange by any Person who is an "affiliate" of HL for purposes of Rule 145(c)
under the Securities Act shall not be exchanged for certificates representing
shares of PNC Common Stock until PNC has received the written agreement of such
Person contemplated by Section 2.8 herein. If any certificate for shares of HL
Common Stock is to be issued in a name other than that in which a certificate
surrendered for exchange is issued, the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and the Person
requesting such exchange shall
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affix any requisite stock transfer tax stamps to the certificate surrendered
or provide funds for their purchase or establish to the reasonable satisfaction
of PNC or its agent that such taxes are not payable.
(d) Upon the Effective Date, the stock transfer books of HL shall be
closed and no transfer of HL Common Stock shall thereafter be made or
recognized. Any other provision of this Agreement notwithstanding, neither PNC
or its agent nor any party to the Merger shall be liable to a holder of HL
Common Stock for any amount paid for property delivered in good faith to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(e) In the event that prior to the Effective Date the outstanding
shares of PNC Common Stock shall have been increased, decreased or changed into
or exchanged for a different number or kind of shares or securities by
reorganization, recapitalization, reclassification, stock dividend, stock split
or other like changes in PNC's capitalization, all without PNC receiving
adequate consideration therefor, then an appropriate and proportionate
adjustment shall be made in the number and kind of shares of PNC Common Stock to
be thereafter delivered pursuant to this Agreement.
(f) Notwithstanding any other provision hereof, each holder of shares
who would otherwise have been entitled to receive a fraction of a share of PNC
Common Stock (after taking into account all Certificates delivered by such
holder) shall receive, in lieu thereof, cash in an amount equal to such
fractional part of a share of PNC Common Stock multiplied by the Average Closing
Price. No such holder shall be entitled to dividends, voting rights or any other
shareholder right in respect of any fractional share.
2.6. EFFECTIVE DATE OF THE MERGER
Articles of merger evidencing the transactions contemplated herein
shall be delivered to the Pennsylvania and Kentucky Secretaries of State for
filing in accordance with Section 2.10 hereof. The Merger shall be effective at
the time and on the date specified in such articles of merger (the "Effective
Date").
2.7. FURTHER ASSURANCES
If at any time the Surviving Corporation shall consider or be advised
that any further assignments, conveyances or assurances are necessary to vest,
perfect or confirm in the Surviving Corporation title to any property or rights
of HL, or otherwise carry out the provisions hereof, the proper officers and
directors of HL, as of the Effective Date, and thereafter the officers of the
Surviving Corporation acting on behalf of HL, shall execute and deliver any and
all proper assignments, conveyances and assurances, and do all things necessary
to vest, perfect or confirm title to such property or rights of the Surviving
Corporation and otherwise carry out the provisions hereof.
2.8. AFFILIATES
HL and PNC shall cooperate and use all commercially reasonable efforts
to identify those Persons who may be deemed to be "affiliates" of HL within the
meaning of Rule 145
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promulgated by the Commission under the Securities Act. HL and PNC shall use all
commercially reasonable efforts to cause each Person so identified to deliver to
PNC no later than 30 days prior to the Effective Date, a written agreement in
form and substance mutually satisfactory to the parties.
2.9. TAX FREE REORGANIZATION
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under the provisions of Section 368(a) of the Code.
Accordingly, notwithstanding anything to the contrary in this Agreement, in
order that the Merger will not fail to satisfy continuity of interest
requirements under applicable federal income tax principles relating to
reorganizations under Section 368(a) of the Code, as reasonably determined by
Arnold & Porter and Richards & O'Neil, LLP, the Cash Consideration shall be
reduced, and the Stock Consideration shall be increased, to the extent necessary
to permit Arnold & Porter to render the tax opinion contemplated by Section
6.1(i).
2.10. CLOSING; ARTICLES OF MERGER
The transactions contemplated by this Agreement shall be consummated at
a closing (the "Closing") to be held at the executive offices of PNC, One PNC
Plaza, Pittsburgh, Pennsylvania, on the first business day following
satisfaction of the conditions to consummation of the Merger set forth in
Article VI hereof (other than such conditions relating to the receipt of
officers' certificates and legal opinions) or such later date within 30 days
thereafter as may be specified by PNC (the "Closing Date"). In connection with
such Closing, PNC shall execute articles of merger and shall cause such articles
to be delivered to the Kentucky Secretary of State in accordance with Section
11-050 of the Kentucky Business Corporation Act and PNC shall execute articles
of merger and shall cause such articles to be delivered to the Pennsylvania
Secretary of State in accordance with Section 1927 of the Pennsylvania Business
Corporation Act.
2.11. DISSENTING SHARES
Notwithstanding anything in this Agreement to the contrary, shares of
HL Common Stock that are issued and outstanding immediately prior to the
Effective Date and that are held by stockholders who (i) have not voted such
shares in favor of the Merger and (ii) have delivered timely a written demand
for appraisal of such Shares in the manner provided in Section 13-210 of the
Kentucky Business Corporation Act shall not be converted into the right to
receive the Merger consideration described in Section 2.5(a), unless and until
such holder shall have failed to perfect, or effectively shall have withdrawn or
lost, such holder's right to appraisal and payment under the Kentucky Business
Corporation Act. If such holder shall have so failed to perfect, or effectively
shall have withdrawn or lost such right, such holder's shares of HL Common Stock
shall thereupon be deemed to have been converted as described in Section 2.5(a),
at the Effective Date, and each share of HL Common Stock shall represent solely
the right to receive the appropriate Merger consideration. From and after the
Effective Date, no stockholder who has demanded appraisal rights as provided in
Section 13-020 of the Kentucky Business Corporation Act shall be entitled to
vote his or her shares for any purpose or to receive payment of dividends or
other distributions with respect to his or her shares (except dividends and
other distributions
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payable to stockholders of record at a date which is prior to the Effective
Date). HL will give PNC prompt notice of all written demands received by HL for
appraisal of shares of HL Common Stock.
2.12. MERGER AND REORGANIZATION OF HL SUBSIDIARIES
HL undertakes and agrees that, if so requested by PNC, it shall take
all necessary action to facilitate the merger of the HL Subsidiaries with
subsidiaries of PNC, or reorganization of the ownership of the HL Subsidiaries
by PNC and its subsidiaries, effective on or after the Effective Date; provided,
however, that in no event shall the Closing be delayed in order to facilitate
any such merger; and provided further, however, that HL shall not be required to
take any action that could adversely affect the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF HL
HL hereby represents and warrants to PNC as follows:
3.1. CAPITAL STRUCTURE OF HL
The authorized capital stock of HL consists of 5,000,000 shares of HL
Common Stock, of which, as of the date hereof, 3,581,400 shares are issued and
outstanding and no shares are held in treasury. As of the date hereof, no shares
of HL Common Stock were reserved for issuance. All outstanding shares of HL
Common Stock are validly issued and outstanding, fully paid and nonassessable.
HL does not have and is not bound by any Rights that are authorized, issued or
outstanding with respect to the capital stock of HL. None of the shares of HL
capital stock has been issued in violation of the preemptive rights of any
Person.
3.2. OWNERSHIP OF HL SUBSIDIARIES; CAPITAL
STRUCTURE OF HL SUBSIDIARIES
(a) HL has Previously Disclosed a list of all the HL Subsidiaries,
including the states in which such HL Subsidiaries are organized, a brief
description of such HL Subsidiaries' principal activities, and if any of such HL
Subsidiaries is not wholly-owned by HL or another HL Subsidiary, the percentage
owned by HL or such other HL Subsidiary and the names,, addresses and percentage
ownership by any other Person.
(b) HL does not own, directly or indirectly, 5% or more of any class of
Voting Securities (including securities owned directly or indirectly by or for
the benefit of HL or HL Subsidiaries, securities convertible into 5% or more of
any class of Voting Securities, or Rights to acquire 5% or more of any class of
Voting Securities) or more than 9.9% of the Total Equity of any partnership,
limited liability company, corporation, bank or other organization, except that
HL owns Good Title in and to all of the issued and outstanding capital stock or
other equity interests of each of the HL Subsidiaries.
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(c) Except as Previously Disclosed, neither HL nor any HL Subsidiary
acts as general partner, managing partner or manager of any partnership or
limited liability company.
(d) The outstanding shares of capital stock of each HL Subsidiary are
validly issued and outstanding, fully paid and nonassessable. None of the shares
of capital stock of any HL Subsidiary has been issued in violation of the Rights
of any Person.
(e) Except as Previously Disclosed, no Rights are authorized, issued or
outstanding with respect to the equity interests in any HL Subsidiary, and there
are no agreements, understandings or commitments relating to the right of HL, or
an HL Subsidiary to vote or to dispose of said interests.
(f) HL has Previously Disclosed to PNC true and correct copies of all
subordinated capital agreements of Broker as currently in effect, and copies of
each other agreement as currently in effect by which Broker borrows an amount
representing more than 5% of its gross assets.
3.3. ORGANIZATION, STANDING AND AUTHORITY OF HL AND HL SUBSIDIARIES
HL and each HL Subsidiary is duly registered, licensed and qualified to
do business in the states of the United States and foreign jurisdictions where
its ownership or leasing of property or the conduct of its business requires
such registration, licensing or qualification (including, but not limited to,
licensing or registration as a broker-dealer, investment adviser, municipal
securities dealer, government securities dealer, insurance agency, insurance
broker, or insurance advisor) and where the failure to so qualify would have a
Material Adverse Effect on HL and is a member or member organization in good
standing of each SRO in which membership is required by the nature of its
business and where the failure to be a member or member organization would have
a Material Adverse Effect on HL. HL has Previously Disclosed a complete schedule
listing all jurisdictions in which it or an HL Subsidiary is licensed or
registered and all SROs in which HL or an HL Subsidiary is a member, member
organization or participant, in each case indicating the specific entity that is
licensed, registered or a member, member organization or participant, the nature
of the license, registration or membership and (if applicable) the next renewal
or expiration date of such license, registration or membership. Broker is duly
registered, qualified to do business and in good standing as a broker-dealer
with the SEC and is a member organization in good standing of the NASD, the
NYSE, the AMEX, the Boston Stock Exchange, the Chicago Stock Exchange and the
Chicago Board Options Exchange.
3.4. OTHER ACTIVITIES
(a) Neither HL nor any HL Subsidiary is registered under the
Commodities Exchange Act, or engaged in any activity that would require
registration thereunder.
(b) HL has Previously Disclosed a list of all insurance products
offered by HL or an HL Subsidiary. HL and the HL Subsidiaries do not engage in
the sale of insurance products other than life, long term care and annuities
products.
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(c) HL has Previously Disclosed a complete list of the Property
Subsidiaries and Property Subsidiary Partnerships, including the name,
jurisdiction and date of organization of each entity, and the address and nature
of the real property owned. Except as Previously Disclosed, other than the
Property Subsidiary Partnerships, neither HL, an HL Subsidiary, nor an HL
Subsidiary Partnership owns or leases any real property other than real property
used exclusively to house the business operations of HL or the HL Subsidiaries.
3.5. AUTHORIZED AND EFFECTIVE AGREEMENT
(a) HL has all requisite power and authority to enter into and perform
all of its obligations under this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action in respect thereof
on the part of HL, except that the affirmative vote of the holders of a majority
of the shares of HL Common Stock cast by the holders of such shares entitled to
vote thereon is the only shareholder vote required to approve this Agreement
pursuant to the Kentucky Business Corporation Act and HL's Articles of
Incorporation and By-laws. The Board of Directors of HL has directed that this
Agreement be submitted to HL's stockholders for approval at a special meeting to
be held no later than 60 days following the date the Registration Statement has
been declared effective by the SEC and the Proxy Statement has been mailed to
HL's stockholders.
(b) This Agreement constitutes the legal, valid and binding obligation
of HL, enforceable against it in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
(c) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby, nor compliance by HL with
any of the provisions hereof shall (i) conflict with or result in a breach of
any provision of the articles or certificate of incorporation, charter or bylaws
or similar charter documents of HL or any HL Subsidiary, (ii) except as
Previously Disclosed and except for any deemed termination of advisory
agreements under the Advisers Act or the Investment Company Act, constitute or
result in a breach of any term, condition or provision of, or constitute a
default under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any lien, charge or
encumbrance upon any property or asset of HL or an HL Subsidiary, pursuant to,
any note, bond, mortgage, indenture, lease, license, agreement or other
instrument or obligation to which HL or any HL Subsidiary is a party, or (iii)
violate any order, writ, injunction, decree, statute, rule, regulation or SRO
Rule applicable to HL or any HL Subsidiary, except in the case of clauses (ii)
and (iii) for any such breaches, defaults, rights, liens, charges, encumbrances
and violations that would not, individually or in the aggregate, have a Material
Adverse Effect on HL.
(d) Except as Previously Disclosed, and except for (i) any requisite
filings under the HSR Act or filing of a copy of the Federal Reserve application
with the Federal Trade Commission in lieu of an HSR filing, (ii) the requisite
filings with, notices to and approval of the Federal Reserve, (iii) the filing
with the SEC of the Proxy Statement and the Registration
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Statement, (iv) the filing of the articles of merger with the Pennsylvania and
Kentucky Secretaries of State, (v) any consents, authorizations, approvals,
filings or exemptions in connection with compliance with the applicable
provisions of federal, state and foreign laws (including, without limitation,
securities and insurance laws) relating to the regulation of broker-dealers,
trust companies, investment advisers and insurance agencies and the rules of any
applicable SRO, (vi) the consents, approvals and notices required under the
Investment Company Act and the Advisers Act, (vii) the approval of this
Agreement by the requisite vote of the stockholders of HL, (viii) consents,
approvals, filings and registrations the failure of which to obtain has not
resulted in and would not, individually or in the aggregate, result in or be
reasonably likely to result in a Material Adverse Effect on HL or prevent
consummation by HL of the transactions contemplated by this Agreement, and (ix)
consents, approvals, filings and registrations required under Title 25 of the
Kentucky Revised Statutes, Chapter 287, Section 95, no consent, approval or
authorization of, or declaration, notice, filing or registration with, any
governmental or regulatory authority, or any other Person, is required to be
made or obtained by HL or any HL Subsidiary on or prior to the Closing Date in
connection with the execution, delivery and performance of this Agreement or the
consummation by HL of the transactions contemplated hereby.
3.6. SEC, STATE, AND SRO DOCUMENTS
Since December 31, 1993, HL and the HL Subsidiaries have filed all SEC
Documents, SRO Documents and State Documents (collectively "Regulatory
Documents"), required to be filed by them pursuant to the Securities Laws, SRO
Rules, State Securities Laws or State Insurance Laws, and as of their respective
dates such Regulatory Documents complied in all material respects with the
applicable laws and rules. Neither HL nor any HL Subsidiary has any obligation
to file any Regulatory Documents on behalf of any entity other than itself
(other than HL on behalf of the HL Subsidiaries and the Investment Companies).
3.7. FINANCIAL STATEMENTS; BOOKS AND RECORDS; MINUTE BOOKS
Except as Previously Disclosed, the HL Financial Statements fairly
present in all material respects the consolidated financial condition of HL and
the HL Subsidiaries as of the dates indicated and the consolidated results of
operations, changes in stockholders' equity and cash flows of HL and HL
Subsidiaries for the periods then ended in conformity with GAAP applied on a
consistent basis except as disclosed therein (subject to normal year-end audit
adjustments, in the case of unaudited statements). The books and records of HL
and each HL Subsidiary fairly reflect in all material respects the transactions
to which it is a party or by which its properties are subject or bound. Such
books and records have been properly kept and maintained and are in compliance
in all material respects with all applicable legal, SRO and accounting
requirements. The minute books of HL and Broker contain records that are
accurate in all material respects of all corporate actions of their respective
shareholders and boards of directors (including committees of their respective
boards of directors).
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3.8. MATERIAL ADVERSE CHANGE
Since November 30, 1997, there has not been any event, occurrence or
development with respect to HL or the HL Subsidiaries which has had, or is
reasonably likely to have, a Material Adverse Effect on HL.
3.9. ABSENCE OF UNDISCLOSED LIABILITIES
Except (i) as reflected, reserved and Previously Disclosed or disclosed
in the HL Financial Statements, (ii) liabilities incurred in the ordinary course
of business since November 30, 1997, or (iii) as Previously Disclosed, neither
HL nor any HL Subsidiary has incurred any liability (contingent or otherwise)
that individually or in the aggregate is reasonably likely to have a Material
Adverse Effect on HL.
3.10. PROPERTIES
HL and the HL Subsidiaries have Good Title to all of the properties and
assets, real and personal, reflected on the HL Financial Statements as of
November 30, 1997 or acquired after such date, except (i) liens for current
taxes not yet due and payable; (ii) as Previously Disclosed; (iii) for Security
Interests Previously Disclosed; (iv) imperfections of title and easements which
are not individually or in the aggregate reasonably likely to have a Material
Adverse Effect; and (v) dispositions in the ordinary course of business. Except
as Previously Disclosed, all leases pursuant to which either HL or an HL
Subsidiary, as lessee, leases real and personal property are valid and
enforceable in accordance with their respective terms. Except as Previously
Disclosed, each piece of real property used by HL or the HL Subsidiaries is in
good condition and repair, ordinary wear and tear excepted, is serviced by all
necessary utilities, and has facilities suitable for the use intended for such
real property. There is no condemnation or similar proceeding pending or to HL's
knowledge threatened that would preclude or impair the use of such real property
as presently being used in the conduct of the business of HL or the HL
Subsidiaries.
3.11. TAX MATTERS
(a) HL has Previously Disclosed all Tax Returns, examination reports
and statements of deficiencies filed by, with respect to, or relating to any
Company for Taxable Years ended on or after January 1, 1995, and those income
Tax Returns that currently are the subject of audit.
(b) Except as Previously Disclosed, HL hereby represents, warrants and
covenants to PNC that:
(i) All reports and returns with respect to Taxes and Tax
related information reporting requirements that were required to be filed by or
with respect to the Companies, including without limitation, consolidated
federal income tax returns of the Companies (collectively the "Tax Returns"),
have been duly filed, or requests for extensions have been timely filed and have
not expired, and such Tax Returns were true, complete and accurate in all
material respects. All material Taxes (whether or not shown on any Tax Return)
with respect to Taxable Years ending on or before the Effective Date and for
that portion of any Split Period ending on the Effective Date (i) have been or
will be paid on or before the Closing Date or (ii)
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adequate reserves and/or liabilities have been or will be established for
such Taxes on the financial books and records of the Companies.
(ii) The amount of HL's deferred taxes shown on the HL
Financial Statements accurately reflect the application (on a consolidated basis
for all the Companies) of Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" and
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
(iii) All Taxes due with respect to completed and settled
examinations have been paid in full.
(iv) No issues have been raised by a relevant taxing authority
in connection with the examination of any of the Tax Returns which are
reasonably likely, individually or in the aggregate, to result in a
determination that would have a Material Adverse Effect, except as reserved
against in the HL Financial Statements prior to the Effective Date.
(v) No waivers of statutes of limitations have been given or
requested with respect to any Tax Returns covering the Companies or any Taxes
payable by the Companies. Except as Previously Disclosed, no audit examination,
deficiency, adjustment, refund claim or litigation with respect to the Tax
Returns, paid or unpaid Taxes of the Companies or Tax Attributes of the
Companies has been proposed, asserted or assessed or is pending. To HL's
knowledge, there are no material (i) Security Interests with respect to Taxes
(other than liens for Taxes not yet due and payable) or (ii) outstanding
liabilities with respect to Taxes that could form the basis for Security
Interests, upon any of the properties or assets, whether real, personal or
mixed, tangible or intangible, of the Companies.
(vi) None of the Companies is nor will become a party to any
agreement providing for the allocation or sharing of, or indemnification for,
Taxes. The Companies do not owe (and as of the Effective Date will not owe) any
payments to any Person pursuant to any agreement between any Company and any
other Person providing for the allocation or sharing of, or indemnification for,
Taxes. No Person has entered into any agreement with any Taxing Authority that
will bind PNC or any Company for any Taxable Year ending after the Effective
Date.
(vii) No tax elections or tax accounting elections have been
made (or will be made prior to the Effective Date) with respect to any Company
(or any predecessor thereof) affecting any Taxable Year that remains open under
the applicable statute of limitations. There are no intercompany items or
corresponding items (within the meaning of Section 1.1502-13(b) of the
Regulations) in any Company.
(viii) No Company is a "foreign person" within the meaning of
Section 1445 of the Code. No Company has participated or cooperated (and through
the Effective Date no Company will participate or cooperate) in any
international boycott within the meaning of Section 999(b) of the Code.
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(ix) None of HL, the HL Subsidiaries, PNC or any direct or
indirect subsidiary of PNC, as a consequence of HL's actions prior to the
Effective Date, will be obligated to make a payment to an individual that would
be a "parachute payment" as such term is defined in Section 280G of the Code
without regard to whether such payment is to be performed in the future.
(x) No claim has ever been made by a Governmental Body in a
jurisdiction where any Company does not file Tax Returns or pay Taxes that such
Company was, is or may be subject to Tax by that jurisdiction.
(xi) No Company has been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(xii) As of the most recent practicable date: (i) the
Companies' negative basis in their partnership assets does not exceed $100,000;
and (ii) there are no excess loss accounts (as that term is used in Section
1.1502-19 of the Regulations) of the Companies in the stock of any Tax Affiliate
of HL.
(xiii) To the best of the Companies' knowledge, there is no
outstanding power of attorney (including, without limitation, any Internal
Revenue Service Form 2848) authorizing any Person other than one or more of the
Companies to perform any acts on behalf of any Company relating to Tax matters
or contacts with any Taxing Authority.
3.12. EMPLOYEE BENEFIT PLANS
(a) HL has made available true and complete copies of all qualified
pension or profit-sharing plans, any deferred compensation, consulting, bonus or
group insurance contract or any other incentive, welfare or employee benefit
plan or agreement currently maintained for the benefit of employees or former
employees of HL or any HL Subsidiary or under which HL or any HL Subsidiary has
any liability (the "Plans"), and will make available to PNC (i) the most recent
financial reports prepared with respect to any qualified plans, (ii) the most
recent annual reports filed with any government agency with respect to the
Plans, and (iii) rulings and determination letters and any open requests for
rulings or letters that pertain to any qualified plan since December 31, 1994.
(b) Neither HL nor any HL Subsidiary (nor any pension plan maintained
by any of them) has incurred or reasonably expects to incur any material
liability to the Pension Benefit Guaranty Corporation or to the Internal Revenue
Service with respect to any pension plan qualified under Section 401 of the
Code. No Plan is covered by Title IV of ERISA or Section 412 of the Code.
(c) Neither HL nor any HL Subsidiary participates in, or has incurred
any liability under Section 4201 of ERISA for a complete or partial withdrawal
from, a multiemployer plan as such term is defined in ERISA. No Plan is a
multiemployer plan.
(d) Except as Previously Disclosed, a favorable determination letter
has been issued by the Internal Revenue Service with respect to each "employee
pension plan" (as defined in
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Section 3(2) of ERISA) of HL or any HL Subsidiary which is intended to be a
qualified plan to the effect that the form of such plan is qualified under
Section 401 of the Code and tax exempt under Section 501 of the Code. No such
letter has been revoked or, to the knowledge of HL, threatened to be revoked and
HL does not know of any reasonable ground on which such revocation may be based.
Except as Previously Disclosed, such plans have been operated in all material
respects in accordance with their terms and applicable law.
(e) No prohibited transaction (which shall mean any transaction
prohibited by Section 406 of ERISA and not exempt under Section 408 of ERISA)
has occurred with respect to any "employee benefit plan" (as defined in Section
3(3) of ERISA) maintained by HL or any HL Subsidiary which would result in the
imposition, directly or indirectly, of an excise tax under Section 4975 of the
Code that would have, individually or in the aggregate, a Material Adverse on
HL.
(f) Except as Previously Disclosed, no Plan provides benefits,
including without limitation, death or medical benefits (whether or not
insured), with respect to current or former employees or directors of HL or any
HL Subsidiary after retirement or other termination of service (other than (i)
coverage mandated by applicable law, (ii) death benefit or retirement benefits
under any "employee pension plan," as that term is defined in Section 3(2) of
ERISA, (iii) deferred compensation benefits accrued as liabilities on the HL
Financial Statements, or (iv) benefits, the full cost of which is borne by the
current or former employee or director (or his beneficiary).
(g) Except as Previously Disclosed, the consummation of the
transactions contemplated by this Agreement will not (i) entitle any current or
former employee or director of HL or any HL Subsidiary to severance pay,
unemployment compensation or any similar payment, or (ii) accelerate the time of
payment or vesting, or increase the amount, of any compensation due to any such
current or former employee or director, or (iii) renew or extend the term of any
agreement regarding compensation for any such current or former employee or
director.
3.13. CERTAIN CONTRACTS
(a) Except as Previously Disclosed, neither HL nor any HL Subsidiary is
a party to, or is bound by, (i) any material agreement, arrangement or
commitment whether or not made in the ordinary course of business restricting
its business activities, (ii) any material agreement, indenture or other
instrument relating to the borrowing of money by HL or any HL Subsidiary or the
guarantee by HL or any HL Subsidiary of any such obligation, or (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former officer or employee.
(b) HL has Previously Disclosed a true, complete and correct schedule
as of July 31, 1998, that lists by name each client that is a Pooled Investment
Vehicle, specifies whether it is an Investment Company, Private Investment Fund,
or Other Direct Participation Program, and specifies the fee arrangements,
annual fee payments to HL or an HL Subsidiary, and assets of the Pooled
Investment Vehicle (as of June 30, 1998 or the most recent date for which such
information is reasonably available) for each such entity, and for all other
investment
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management clients of HL or an HL Subsidiary the assets under management and
monthly fees in the aggregate for the six months ended June 30, 1998, classified
by the type of investment management program to which each relates. Each
investment management client is being served by HL or an HL Subsidiary in
accordance with the investment management agreement or other contract or
instrument governing the relationship with the client's account and no such
client has indicated to HL or an HL Subsidiary, in writing or, to the knowledge
of HL, orally, any intent to terminate such contract, except for such
indications which would not, individually or in the aggregate, have a Material
Adverse Effect on HL, or to withdraw any assets under management.
(c) Neither HL nor any HL Subsidiary is in default under any agreement,
commitment, arrangement, lease, insurance policy or other instrument whether
entered into in the ordinary course of business or otherwise and whether written
or oral, and there has not occurred any event that, with the lapse of time or
giving of notice or both, would constitute such a default, which default or
event, individually or in the aggregate, is reasonably likely to have a Material
Adverse Effect on HL.
(d) Except as Previously Disclosed, no officer, director or employee of
HL or any HL Subsidiary and no affiliate or associate (as such terms are defined
in Rule 12b-2 under the Exchange Act) of any such Person (i) has any loan or
other obligation outstanding to or from HL or an HL Subsidiary or for which HL
or an HL Subsidiary is or may be liable under guaranty or otherwise, (ii) has
any material business relationship with HL or an HL Subsidiary (other than as a
shareholder, employee or director), or (iii) to HL's knowledge, has any material
interest in any Person with which HL or an HL Subsidiary has entered into any
contract or lease, or with which HL or an HL Subsidiary does business and which
would influence that Person in doing business with HL or the HL Subsidiary,
other than such contracts, leases or business relationships as are on arms'
length terms not less favorable to HL or the HL Subsidiary than would be
available from an unaffiliated third party.
3.14. LEGAL PROCEEDINGS
(a) Except as Previously Disclosed, there are no material actions,
arbitrations, suits or proceedings instituted, pending or, to the knowledge of
HL, threatened (or unasserted but considered by HL probable of assertion and
which if asserted would have at least a reasonable probability of an unfavorable
outcome) against HL or an HL Subsidiary, or against any asset, interest or right
of HL or an HL Subsidiary, other than such actions, arbitrations, suits or
proceedings that would not, individually or in the aggregate, have a Material
Adverse Effect on HL.
(b) Except as Previously Disclosed, to the knowledge of HL, there are
no actions, arbitrations, suits or proceedings instituted, pending or threatened
(or unasserted but considered by HL probable of assertion and which if asserted
would be reasonably expected to have an unfavorable outcome) against any present
or former officer, director, employee or customer of HL or an HL Subsidiary,
that might give rise to a claim for indemnification and that (i) has a
reasonable probability of an unfavorable outcome and (ii) in the event of an
unfavorable outcome, would, individually or in the aggregate, have a Material
Adverse Effect on HL.
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3.15. COMPLIANCE WITH LAWS
(a) Except as Previously Disclosed, HL and the HL Subsidiaries, and the
Pooled Investment Vehicles are and have been at all times within the past three
years in compliance with all statutes, regulations and SRO Rules applicable to
the conduct of their businesses, and neither HL nor any Subsidiary has received
notification from any agency or department of federal, state or local government
or SRO (i) asserting a violation of any such statute, regulation or SRO Rule,
(ii) threatening to revoke any license, franchise, permit, government
authorization or membership, or (iii) restricting or in any way limiting its
operations, except for such failures to comply, violations, revocations or
restrictions which would not, individually or in the aggregate, have a Material
Adverse Effect on HL.
(b) HL and the HL Subsidiaries have in place and adhere to compliance
manuals, policies and procedures, suitability standards, recordkeeping and
monitoring systems, training programs, audit routines, codes of ethics and
supervisory systems reasonably necessary to assure compliance by HL, the HL
Subsidiaries, and their officers, directors and employees, with Securities Laws,
SRO Rules, and applicable state or federal laws regulating securities,
insurance, and investment management, or designed to detect improper transfers
of funds or "money laundering."
(c) Except as Previously Disclosed, within the past five years neither
HL nor any of the HL Subsidiaries nor any of their respective officers,
directors or employees has been the subject of any disciplinary proceeding or
enforcement order arising under the Securities Laws, SRO Rules, or state or
federal laws governing securities, insurance, or investment advisory business,
that would be required to be, but has not been, disclosed on Forms ADV or BD,
and no such disciplinary proceeding or proceedings for the issuance of an
enforcement order is pending or except as Previously Disclosed, to the knowledge
of HL, threatened.
(d) Except as Previously Disclosed, neither HL nor any HL Subsidiary
nor to HL's knowledge any of their respective officers, directors or employees
within the past five years has been enjoined by order, judgment or decree from
engaging or continuing to engage in any conduct or practice in connection with
the purchase or sale of securities, or insurance or in connection with the
investment management business.
(e) Except as Previously Disclosed, neither HL nor any HL Subsidiary
nor to HL's knowledge any of their respective officers, directors or employees
is or has within the past five years been disqualified or become ineligible to
serve as, or subject to any disqualification which would be the basis for any
denial, suspension or revocation of any license or registration to act as, an
investment adviser under the Advisers Act (or comparable State or SRO Rules), a
broker or dealer under the Exchange Act (or comparable State or SRO Rules), or
an insurance agent or broker under State Insurance Laws or foreign insurance
laws.
(f) For each offering and sale of securities since July 30, 1995, for
which HL or any HL Subsidiary has served as underwriter or placement agent, HL
or the appropriate HL Subsidiary conducted a reasonable investigation (as that
term is used in Section 11 of the Securities Act) of the issuer and the
securities being offered and had reasonable grounds to believe and did believe
at the time of such offer and sale, that the statements contained in the
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offering documents were true and that there was no omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, regardless of whether the securities were registered under the
Securities Act.
(g) Except as Previously Disclosed, HL and each HL Subsidiary is and
has been in compliance in all material respects with all federal, state and
local and regulations and the common law relating to employment and employment
practices with respect to its current and former employees, including, but not
limited to, the Fair Labor Standards Act, Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, state and local human rights
laws, ERISA, the National Labor Relations Act, state labor laws, the Worker
Adjustment and Retraining Notification Act, the Rehabilitation Act of 1974, the
Occupational Safety and Health Act, state workers' compensation laws, state
disability laws, state unemployment laws, the Immigration Reform and Control Act
of 1986, the Polygraph Protection Act of 1988, the Equal Pay Act, the
Consolidated Omnibus Budget Reconciliation Act of 1986 and the Americans With
Disabilities Act.
3.16. LABOR MATTERS
(a) No collective bargaining arrangement or agreement or similar
arrangement or agreement with any labor organization, or work rules or practices
agreed to with any labor organization or employee association, exists which is
binding upon HL or any HL Subsidiary. There are no unfair labor practice
complaints pending against HL or any HL Subsidiary before any governmental
agency. There are no strikes, slowdowns, work stoppages, lockouts, or to HL's
knowledge, threats thereof, by or with respect to any employees of HL or any HL
Subsidiary. Since January 1, 1997 and prior to the date hereof, HL and the HL
Subsidiaries have not experienced any attempt by organized labor or its
representatives to make HL or any HL Subsidiary conform to demands of organized
labor relating to their employees or to enter into a binding agreement with
organized labor that would cover the employees of HL or any HL Subsidiary and
neither HL nor any HL Subsidiary has experienced a work stoppage or other labor
difficulty since January 1, 1997.
(b) Except as Previously Disclosed, there are no claims, causes of
action, charges, suits, complaints, administrative proceedings, government
investigations or proceedings, arbitrations or other proceedings pending or
threatened against HL or any HL Subsidiaries or any of their officers, directors
or employees relating to any current or former employee with respect to
employment matters relating to HL or any HL Subsidiary, and neither HL, nor any
HL Subsidiary has received any notice of, nor has knowledge of any basis for any
claim or assertion of liability against HL, any HL Subsidiary, relating to any
federal, state, local or foreign law and regulations or the common law relating
to employment or employment practices in regard of any current or former
employee.
3.17. BROKERS AND FINDERS
Neither HL nor any HL Subsidiary has employed any broker, finder or
financial advisor or incurred any liability for any fees or commissions (other
than legal and accounting fees) in connection with the transactions contemplated
herein, except for HL's retention of Berkshire Capital Corporation to perform
certain financial advisory services.
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3.18. INSURANCE
(a) HL and the HL Subsidiaries currently maintain insurance in amounts
that the management of HL reasonably has determined to be prudent in accordance
with industry practices. Except as Previously Disclosed, neither HL nor any HL
Subsidiary has been refused any insurance coverage sought or applied for within
the last three years.
(b) The customer accounts of Broker are insured by the SIPC in
accordance with the Exchange Act and Broker has paid all assessments and filed
all reports required by SIPC.
3.19. INTELLECTUAL PROPERTY
HL has Previously Disclosed an accurate list of all of the Intellectual
Property the absence of which would have a Material Adverse Effect on HL. HL or
the HL Subsidiaries own the entire right, title and interest in and to all the
Intellectual Property or have the right to use the same as used in the business
and operations of HL and the HL Subsidiaries as presently conducted. None of the
Intellectual Property is subject to any outstanding order, decree, judgment,
stipulation, settlement, agreement, lien, charge, encumbrance or attachment,
which order, decree, judgment, stipulation, agreement, lien, charge, encumbrance
or attachment would have a Material Adverse Effect. Upon consummation of the
transactions contemplated by this Agreement, HL and Broker will be entitled to
continue to use all the Intellectual Property without the payment of any fees,
royalties or other payments resulting from the Merger. To the knowledge of HL,
the business and operations of HL and the HL Subsidiaries as presently
conducted, and the use of Intellectual Property therein, does not infringe the
patent, trademark, copyright, trade secret or other proprietary rights of any
third party.
3.20. ENVIRONMENTAL LIABILITY
Neither HL nor any HL Subsidiary has received any written notice of any
legal, administrative, arbitral or other proceeding, claim or action and, to the
knowledge of HL, there is no governmental investigation of any nature ongoing,
in each case that could reasonably be expected to result in the imposition, on
HL or any HL Subsidiary, of any liability arising under any local, state,
federal or foreign environmental statute, regulation or ordinance including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, which liability would have a Material Adverse
Effect on HL; except as Previously Disclosed, there are no facts or
circumstances known to HL which could reasonably be expected to form the basis
for any such proceeding, claim, action or governmental investigation that would
impose any such liability; and neither HL nor any HL Subsidiary is subject to
any agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.
3.21. FIDUCIARY ACTIVITIES
Except as Previously Disclosed, HL and the HL Subsidiaries have
properly administered all accounts for which any of them acts as a fiduciary,
including but not limited to accounts for which any of them serves as an agent,
custodian, investment advisor or broker, in accordance with the terms of the
governing documents and applicable state and federal law and regulation
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and common law except where the failure to so administer such accounts would not
have a Material Adverse Effect on HL.
3.22. BROKER-DEALER, INVESTMENT ADVISER, INVESTMENT COMPANIES, ETC.
(a) Broker is not subject to any restrictions on its operations or
activities imposed by the SEC pursuant to the Securities Laws (except for
restrictions generally imposed by rule, regulation or administrative policy on
broker-dealers generally).
(b) (i) HL and the HL Subsidiaries act as investment advisers to the
Investment Companies under Previously Disclosed investment advisory contracts
that are in full force and effect. Each of HL and the HL Subsidiaries has all
requisite power and authority to perform its investment advisory agreements with
the respective Investment Companies. Such investment advisory agreements were
duly approved by all appropriate parties in accordance with the applicable
provisions of the Investment Company Act. None of the information or data (other
than information or data furnished by PNC) in the proxy materials required for
the shareholder approvals referred to in Section 5.2 hereof and provided by HL
or an HL Subsidiaries will contain at the time of the related meeting of
shareholders any untrue statement of a material fact or any omission of any
material fact, the omission of which would be misleading in the circumstances in
which made.
(ii) None of HL, the HL Subsidiaries, or their Affiliates or
officers is ineligible pursuant to Section 9(a) of the Investment Company Act to
serve as investment adviser (or in any other capacity) to a registered
investment company. None of HL, the HL Subsidiaries, or their Affiliates or
officers has knowledge of any allegation that, or knowledge of an investigation
or inquiry by the Commission, its staff or any other agency or authority as to
whether, any of HL, the HL Subsidiaries, or their Affiliates or officers has
engaged in any of the conduct specified in Section 9(b) of the Investment
Company Act or Section 203(e) of the Advisers Act.
(iii) To HL's knowledge, each Investment Company is qualified and
has been qualified as a "regulated investment company" under Subchapter M of the
Code for all taxable years or quarters of taxable years for the six years ended
April 30, 1997 or such shorter period as the Investment Company has elected such
status.
(iv) Each Investment Company is an "open-end company" within the
meaning of the Investment Company Act.
(v) Each Investment Company is in compliance in all material
respects with the Securities Laws, State Securities Laws and SRO Rules and has
been in compliance therewith in all material respects at all times since January
1, 1994 when such compliance has been required; and since January 1, 1994 HL and
the HL Subsidiaries have complied in all material respects and are in material
compliance with the terms of the respective investment advisory agreements with
each Investment Company and their responsibilities as investment advisor under
applicable law.
(vi) No Investment Company is subject to or bound by any
judgment, order, writ, injunction or decree of any court, or of any governmental
body, including the Commission, or of any arbitrator, that would prevent the
full conduct of the business of such Investment Company
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in accordance with its current practices, and no litigation, investigation,
inquiry or governmental proceeding is pending or, to HL's knowledge, threatened,
against or affecting any Investment Company or the properties, assets or
business of the Investment Company before any court, arbitrator, Governmental
Body or SRO that would affect any Investment Company in any materially adverse
manner or delay, hinder or prohibit the solicitation of proxies from
shareholders of the Investment Company in the manner contemplated herein, or the
execution or delivery of new investment advisory contracts by the Investment
Company.
(c) Each Other Direct Participation Program and Private Investment Fund
has complied with all material federal and state tax laws, regulations and other
requirements and made all material filings, as are required to qualify that
Other Direct Participation Program or Private Investment Fund for any
pass-through tax treatment, avoidance of U.S. taxation, or other favorable tax
treatment that is mentioned or described in the offering documents or sales
literature that is or was used to offer or sell interests in that Other Direct
Participation Program or Private Investment Fund, and to HL's knowledge each
Other Direct Participation Program or Private Investment Fund is eligible for
such favorable tax treatment and has not received notice from any state or
federal tax authority of a denial, suspension or revocation of such favorable
tax status or a notice that such favorable tax status is the subject of an
investigation, challenge, or other proceeding by the state or federal tax
authority that could lead to a denial, suspension or revocation of such
favorable tax status.
(d) To HL's knowledge: (i) each Pooled Investment Vehicle is registered
with the SEC under the Investment Company Act or is exempt from registration as
an investment company under the Investment Company Act; and (ii) each Pooled
Investment Vehicle owns assets and is operating in conformity with its
partnership agreement, charter, articles, bylaws or other governing documents
and in a manner consistent with the description and investment restrictions
contained in offering documents used to offer and sell interests in it and
periodic reports provided to investors in it except where the failure to so
operate would not have a Material Adverse Effect on HL.
(e) To HL's knowledge: (i) each Pooled Investment Vehicle is duly
organized and validly existing and in good standing under the laws of the
jurisdiction of its organization and has the requisite corporate power and
authority to own all its properties and assets and to carry on its business as
it is now being conducted; (ii) offers and sales of each Pooled Investment
Vehicle shares or other equity interests have been undertaken in compliance with
applicable federal and state securities laws and SRO Rules; and (iii) no
offering documents or other sales material used in connection with the sale of
shares of any Pooled Investment Vehicle included any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(f) Except as Previously Disclosed, neither HL nor any HL Subsidiary
serves as "principal underwriter" as that term is defined in the Investment
Company Act for any investment company, nor is either HL or any HL Subsidiary
identified in SEC Documents or the advertising or sales literature of any
investment company as the distributor or principal underwriter for any
investment company.
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3.23. DERIVATIVES
All exchange-traded or over-the-counter swap, forward, future, option,
cap, floor or collar financial contract or any other similar arrangement,
whether entered into for HL's account, or for the account of one or more of the
HL Subsidiaries or their customers, were entered into (i) in accordance with
prudent business practices and all applicable laws, rules, regulations and
regulatory policies, and (ii) with counterparties believed to be "eligible swap
participants" under Part 35 of 12 C.F.R. and financially responsible at the
time; and each of them constitutes the valid and legally binding obligation of
HL or HL Subsidiary, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles), and are in full force and effect. Neither HL nor any HL Subsidiary,
nor to the knowledge of HL any other party thereto, is in breach of any of its
obligations under any such agreement or arrangement. HL's Financial Statements
disclose the value of such agreements and arrangements on a mark-to-market basis
in accordance with GAAP and, since July 31, 1998, there has not been a change in
such value that, individually or in the aggregate, has resulted in a Material
Adverse Effect on HL.
3.24. ACCOUNTING CONTROLS
Each of HL and the HL Subsidiaries has devised and maintained systems
of internal accounting controls sufficient to provide reasonable assurances, in
the judgment of the Board of Directors of HL, that (a) all material transactions
are executed in accordance with management's general or specific authorization,
(b) all material transactions are recorded as necessary to permit the
preparation of financial statements in conformity with GAAP consistently applied
with respect to broker-dealers or any other criteria applicable to such
statements, (c) access to the material property and assets of HL and the HL
Subsidiaries is permitted only in accordance with management's general or
specific authorization, and (d) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
3.25. YEAR 2000 COMPLIANCE
HL has taken all reasonable steps necessary to address the software,
accounting and record keeping issues raised by the "Year 2000" issue and HL does
not expect the cost of addressing such issues to have a Material Adverse Effect
on HL.
3.26. NO KNOWLEDGE
Except as Previously Disclosed, HL knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in such Section
6.1(b).
3.27. CERTAIN INFORMATION
When the Registration Statement or any post-effective amendment thereto
shall become effective, and at all times subsequent to such effectiveness up to
and including the time of the HL
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Common stockholders' meeting to vote upon the Merger, such Registration
Statement and all amendments or supplements thereto, with respect to all
information set forth therein furnished by HL relating to HL and the HL
Subsidiaries, (i) shall comply in all material respects with the applicable
provisions of the Securities Laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PNC
PNC hereby represents and warrants to HL as follows:
4.1. CAPITAL STRUCTURE OF PNC
The authorized capital stock of PNC consists at July 31, 1998 of (i)
17,361,631 shares of preferred stock, par value $1 per share (the "PNC Preferred
Stock"), of which at such date the following series and respective number of
shares were issued and outstanding: 14,144 shares of $1.80 Cumulative
Convertible Preferred Stock, Series A; 4,384 shares of $1.80 Cumulative
Convertible Preferred Stock, Series B; 288,466 shares of $1.60 Cumulative
Convertible Preferred Stock, Series C; 391,837 shares of $1.80 Cumulative
Convertible Preferred Stock, Series D, and 6,000,000 shares of Fixed/Adjustable
Rate Noncumulative Preferred Stock, Series F; and (ii) 450,000,000 shares of PNC
Common Stock, of which 301,563,813 shares were issued and outstanding and
51,230,874 shares were held in treasury. All outstanding shares of PNC capital
stock have been duly issued and are validly outstanding, fully paid and
nonassessable. None of the shares of PNC's capital stock has been issued in
violation of the preemptive rights of any Person. The shares of PNC Common Stock
to be issued in connection with the Merger have been duly authorized and, when
issued in accordance with the terms of this Agreement, will be validly issued,
fully paid, nonassessable and free and clear of any preemptive rights.
4.2. ORGANIZATION, STANDING AND AUTHORITY OF PNC
PNC is a duly organized corporation, validly existing and in good
standing under the laws of Pennsylvania, with full corporate power and authority
to carry on its business as now conducted and is duly licensed or qualified to
do business in the states of the United States and foreign jurisdictions where
its ownership or leasing of property or the conduct of its business requires
such qualification, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on PNC. PNC is registered as a bank
holding company under the Bank Holding Company Act of 1956, as amended.
4.3. AUTHORIZED AND EFFECTIVE AGREEMENT
(a) PNC has all requisite power and authority to enter into and perform
all of its obligations under this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action in respect thereof
on the part of PNC.
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(b) This Agreement constitutes the legal, valid and binding obligation
of PNC, enforceable against it in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.
(c) Neither the execution and delivery of this Agreement, nor
consummation of the transactions contemplated hereby, nor compliance by PNC with
any of the provisions hereof shall (i) conflict with or result in a breach of
any provision of the articles or certificate of incorporation, charter or bylaws
or similar charter documents of PNC, (ii) constitute or result in a breach of
any term, condition or provision of, or constitute a default under, or give rise
to any right of termination, cancellation or acceleration with respect to, or
result in the creation of any lien, charge or encumbrance upon any property or
asset of PNC, pursuant to, any note, bond, mortgage, indenture, lease, license,
agreement or other instrument or obligation to which PNC is a party, or (iii)
violate any order, writ, injunction, decree, statute, rule, regulation or SRO
Rule applicable to PNC, except in the case of clauses (ii) and (iii) for any
such breaches, defaults, rights, liens, charges, encumbrances and violations
that would not, individually or in the aggregate, have a Material Adverse Effect
on PNC.
(d) Except for (i) any requisite filings under the HSR Act or filing of
a copy of the Federal Reserve application with the Federal Trade Commission in
lieu of an HSR filing (ii) the requisite filings with, notices to and approval
of the Federal Reserve, (iii) the filing with the SEC of the Proxy Statement and
the Registration Statement, (iv) the filing of the articles of merger with the
Pennsylvania and Kentucky Secretaries of State, (v) any consents,
authorizations, approvals, filings or exemptions in connection with compliance
with the applicable provisions of federal, state and foreign laws (including,
without limitation, securities and insurance laws) relating to the regulation of
broker-dealers, investment advisers and insurance agencies and the rules of any
applicable SRO, (vi) the consents, approvals and notices required under the
Investment Company Act and the Advisers Act, (vii) consents, approvals, filings
and registrations the failure of which to obtain has not resulted in and would
not, individually or in the aggregate, result in or be reasonably likely to
result in a Material Adverse Effect on PNC or prevent consummation by PNC of the
transactions contemplated by this Agreement, and (viii) the matters identified
in Section 3.5(d), no consent, approval or authorization of, or declaration,
notice, filing or registration with, any governmental or regulatory authority,
is required to be made or obtained by PNC or any PNC subsidiary on or prior to
the Closing Date in connection with the execution, delivery and performance of
this Agreement or the consummation by PNC of the transactions contemplated
hereby.
4.4. SEC DOCUMENTS; REGULATORY FILINGS
PNC has filed all SEC Documents required by the Securities Laws and
such SEC Documents complied, as of their respective dates, in all material
respects with the Securities Laws. PNC and each of its subsidiaries has filed
all reports required by statute or regulation to be filed with any federal or
state bank regulatory agency, except where the failure to so file would not have
a Material Adverse Effect on PNC, and such reports were prepared in accordance
with the applicable statutes, regulations and instructions in existence as of
the date of filing of such reports in all material respects.
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4.5. FINANCIAL REPORTS
The PNC Financial Statements fairly present the consolidated financial
position of PNC and its consolidated subsidiaries as of the dates indicated and
the consolidated results of operations, changes in shareholders' equity and cash
flows of PNC and its consolidated subsidiaries for the periods then ended in
conformity with GAAP applicable to financial institutions applied on a
consistent basis except as disclosed therein.
4.6. ABSENCE OF UNDISCLOSED LIABILITIES
Except (i) as reflected, reserved or disclosed in the PNC Financial
Statements, and (ii) liabilities incurred in the ordinary course of business
since December 31, 1997, neither PNC nor any PNC subsidiary has incurred any
liability (contingent or otherwise) that individually or in the aggregate is
reasonably likely to have a Material Adverse Effect on PNC.
4.7. LEGAL PROCEEDINGS
There are no material actions, arbitrations, suits or proceedings
instituted, pending or, to the knowledge of PNC, threatened (or unasserted but
considered by PNC probable of assertion and which if asserted would have at
least a reasonable probability of an unfavorable outcome) against PNC or a PNC
subsidiary, or against any asset, interest or right of PNC or a PNC subsidiary,
other than such actions, arbitrations, suits or proceedings that would not,
individually or in the aggregate, have a Material Adverse Effect on PNC.
4.8. COMPLIANCE WITH LAWS
Each of PNC and its subsidiaries is in compliance in all material
respects with all statutes and regulations applicable to the conduct of its
business, and none of them has received notification from any agency or
department of federal, state or local government (i) asserting a material
violation of any such statute or regulation, (ii) threatening to revoke any
license, franchise, permit or government authorization or (iii) restricting or
in any way limiting its operations, except for such noncompliance, violations,
revocations and restrictions which would not, individually or in the aggregate,
have a Material Adverse Effect on PNC. Neither PNC nor any PNC subsidiary is
subject to any regulatory or supervisory cease and desist order, agreement,
directive, memorandum of understanding or commitment which could be reasonably
anticipated to have a Material Adverse Effect on PNC, and none of them has
received any communication requesting that they enter into any of the foregoing.
4.9. BROKERS AND FINDERS
Neither PNC nor any PNC subsidiary, nor any of their respective
partners, officers, agents, attorneys, directors or employees, has employed any
broker, finder or financial advisor or incurred any liability for any fees or
commissions (other than legal and accounting fees) in connection with the
transactions contemplated herein, except for PNC's retention of Salomon Smith
Barney to perform certain financial advisory services.
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4.10. CERTAIN INFORMATION
When the Registration Statement or any post-effective amendment thereto
shall become effective, and at all times subsequent to such effectiveness up to
and including the time of the HL stockholders' meeting to vote upon the Merger,
such Registration Statement and all amendments or supplements thereto, with
respect to all information set forth therein furnished by PNC relating to PNC
and the PNC subsidiaries, (i) shall comply in all material respects with the
applicable provisions of the Securities Laws, and (ii) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading.
4.11. YEAR 2000 COMPLIANCE
PNC has been subject to a Year 2000 assessment from the Federal Reserve
and has been rated "satisfactory" under the three-tiered rating system for
compliance with the May 5, 1997 Federal Financial Institutions Examination
Council statement entitled "Year 2000 Project Management Awareness" and has not
received and does not expect to receive a Year 2000 "deficiency notification
letter" (as such term is used in Attachment 1 to Federal Reserve Board SR 98-3
(SUP) (March 4, 1998)).
4.12. CAPITALIZATION
PNC is "well-capitalized" for purposes of Federal Reserve Board
Regulation Y (12 C.F.R. Part 225).
4.13. NO KNOWLEDGE
PNC knows of no reason why the regulatory approvals referred to in
Section 6.1(b) should not be obtained without the imposition of any condition of
the type referred to in such Section 6.1(b).
ARTICLE V
COVENANTS
5.1. SHAREHOLDERS' MEETING; APPROVALS
HL shall submit this Agreement to its shareholders for approval at a
special meeting to be held no later than 60 days following the date the
Registration Statement has been declared effective by the SEC and the Proxy
Statement has been mailed to HL's stockholders. The Board of Directors of HL
shall recommend at the shareholders' meeting that the shareholders vote in favor
of such approval.
5.2. PROXY STATEMENT; REGISTRATION STATEMENT
(a) As promptly as practicable after the date hereof, PNC and HL shall
cooperate in the preparation of the Proxy Statement to be mailed to the
shareholders of HL in connection with the Merger and the transactions
contemplated thereby and to be filed by PNC as part of the
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Registration Statement (it being understood that the parties shall use
commercially reasonable efforts to file the Registration Statement and the
preliminary Proxy Statement with the SEC within thirty (30) days of the date
hereof).
(b) PNC will advise HL, promptly after it receives notice thereof, of
the time when the Registration Statement or any post-effective amendment thereto
has become effective or any supplement or amendment has been filed, of the
issuance of any stop order, of the suspension of qualification of the PNC Common
Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information. PNC shall take all actions
necessary to register or qualify the shares of PNC Common Stock to be issued in
the Merger pursuant to all applicable State Securities Laws and shall maintain
such registrations or qualifications in effect for all purposes hereof. PNC
shall apply for approval to list the shares of PNC Common Stock to be issued in
the Merger on the NYSE, subject to official notice of issuance, prior to the
Effective Date.
5.3. CONSENTS AND APPROVALS
(a) Each of the parties hereto agrees to cooperate with the other and
use all commercially reasonable efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws, regulations, conditions imposed by regulatory
authorities and contractual arrangements to consummate the Merger on the
Effective Date and to otherwise make effective the transactions contemplated by
this Agreement and to furnish such information as may be in connection with the
foregoing.
(b) To the extent that the rights of HL or any HL Subsidiary under any
agreement, including any investment advisory contract, may not be assigned
without the consent or approval of another party thereto, HL shall use all
commercially reasonable efforts, and HL shall cause the HL Subsidiaries to use
all commercially reasonable efforts, to obtain any such consent, which
obligation may be satisfied by seeking to obtain the approval of directors and
shareholders of the Investment Companies to new contracts on substantially the
same terms as existing contracts at meetings of shareholders held within 150
days of the date hereof and seeking to obtain the consent of investment advisory
clients that are not Investment Companies in a manner permitted under applicable
law.
(c) HL and the HL Subsidiaries shall prepare and file with the
Commission, appropriate stock exchanges, the NASD, other appropriate SROs, and
each appropriate state or foreign governmental agency such SEC Documents, SRO
Documents, and other documents (or amendments to existing documents) as may be
necessary to ensure the continued effectiveness of all registrations required
for the continued operation of their respective businesses consistent with past
practice from and after the Closing Date. Without limitation of the foregoing,
HL shall prepare and file with the NYSE applications to qualify PNC and any
current subsidiary of PNC as an "Approved Person" of HL to the extent required
by NYSE rules or other applicable SRO rules.
(d) PNC, subject to the cooperation of HL, (i) shall use commercially
reasonable efforts to prepare and submit applications to the appropriate
Governmental Bodies for approval
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of the Merger within thirty (30) days of the date hereof, and (ii) shall
promptly make all other appropriate filings to secure all other approvals,
consents and rulings which are necessary for the consummation of the Merger by
PNC. PNC will provide HL with copies of such applications and responses to the
applicable Governmental Bodies.
5.4. INVESTIGATION AND CONFIDENTIALITY
HL will in good faith endeavor to keep PNC advised of all material
developments relevant to the businesses of HL and the HL Subsidiaries. PNC may
make or cause to be made such investigation of the financial and legal condition
of HL, the HL Subsidiaries and the Pooled Investment Vehicles as PNC reasonably
deems necessary or advisable in connection with the transactions contemplated
herein, provided, however, that such investigation shall be reasonably related
to such transactions and shall not interfere unnecessarily with normal
operations. HL agrees to furnish PNC and PNC's advisors with such financial data
and other information as PNC shall from time to time reasonably request with
respect to the business and properties of HL, the HL Subsidiaries, and the
Pooled Investment Vehicles. No investigation pursuant to this Section 5.4 shall
affect or be deemed to modify any representation or warranty made by, or the
conditions to the obligations to consummate the Merger of, any party hereto. PNC
shall, and shall cause its directors, officers, attorneys and advisors to,
maintain the confidentiality of all information obtained in such investigation
which is not otherwise publicly disclosed by HL or HL Subsidiaries, said
undertaking with respect to confidentiality to survive any termination of this
Agreement pursuant to Section 7.1 hereof. PNC will not use any information
obtained pursuant to this Section 5.4 for any purpose unrelated to the
consummation of the transactions contemplated hereby and, in the event of
termination of this Agreement each party shall return to the furnishing party or
destroy and certify the destruction of all information previously furnished in
connection with the transactions contemplated by this Agreement.
5.5. PRESS RELEASES
HL and PNC shall agree with each other as to the form and substance of
any press release related to this Agreement or the transactions contemplated
hereby, and shall consult each other as to the form and substance of other
public disclosures related thereto, provided, however, that nothing contained
herein shall prohibit either party, following notification to the other party if
practicable, from making any disclosure which its counsel deems to be required
by law.
5.6. COVENANTS OF HL
(a) Prior to the Closing Date, and except as otherwise provided for by
this Agreement or consented to or approved by PNC, HL shall, and shall cause
each HL Subsidiary to, (i) use all commercially reasonable efforts to preserve
its properties, business and relationships with customers, employees and other
Persons consistent with past practice, (ii) continue to serve the Pooled
Investment Vehicles, only in the ordinary course and in substantially the manner
currently served and in accordance with applicable fiduciary duties, (iii) not
implement any material change in the investment policies and practices of any
Pooled Investment Vehicle, without prior consultation with PNC, and (iv)
immediately notify PNC of any material change in the personnel responsible for
the day to day management of each Pooled Investment Vehicle's portfolio.
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(b) Except with the prior written consent of PNC, between the date
hereof and the Closing Date, HL shall not, and HL shall cause the HL
Subsidiaries not to:
(i) carry on its business other than in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
(ii) in the case of HL only, declare, set aside, make or pay
any dividend or other distribution in respect of its equity interests, provided,
however, HL shall have the right immediately prior to the Closing Date to pay a
dividend to the holders of the HL Common Stock equal, in aggregate, to the
post-June 30, 1998 earnings less all expenses related to the transactions
contemplated by this Agreement, including but not limited to, legal fees,
accounting fees and investment banking fees incurred by HL or any of the HL
Subsidiaries, together with appropriate adjustments and accruals through the
Closing Date as reasonably agreed by PNC and HL;
(iii) issue, deliver, sell, dispose of, pledge or otherwise
encumber, or authorize or propose the issuance, sale, disposition or pledge or
other encumbrance of any equity interests of HL or any HL Subsidiary, or incur
any debt obligation or other obligation for borrowed money other than
obligations incurred in the ordinary course of business to fund its normal
operations, as currently conducted;
(iv) issue, grant or authorize any Rights or effect any
recapitalization, reclassification, or like change in capitalization;
(v) except as Previously Disclosed, amend their articles,
bylaws or other charter documents; impose, or suffer the imposition, on any
equity interest held by HL in the HL Subsidiaries of any lien, charge or
encumbrance, or, permit any such lien, charge or encumbrance to exist;
(vi) merge with any other corporation, partnership or other
entity or permit any other corporation, partnership or other entity to merge
into it or consolidate with any other corporation, partnership or other entity;
acquire control over any other corporation, partnership or other entity or
create any subsidiary; or create or sponsor any new Investment Company or series
thereof;
(vii) except as Previously Disclosed, liquidate or, other than
in the ordinary course of business consistent with past practice, sell or
dispose of any material assets, acquire any material assets, or make any capital
expenditures in excess of $20,000 in any one instance;
(viii) except in a manner required by law, in the ordinary
course of business consistent with past practice, or as otherwise agreed to by
PNC, increase the rate of compensation of, pay or agree to pay any bonus to, or
provide any other employee benefit or incentive to, any of its directors,
officers or employees; enter into, modify or extend any employment or severance
contracts with any of its present or former directors, officers or employees; or
enter into or substantially modify or terminate (except as may be required by
applicable law or by the terms of this Agreement) any pension, retirement,
savings, profit
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sharing, deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive or welfare contract, plan or arrangement, or any
trust agreement related thereto, in respect of any of its directors, officers
or other employees;
(ix) change its methods of accounting in effect at November
30, 1997, except as required by changes in GAAP concurred in by its independent
certified public accountants, or change any of its methods of reporting income
and deductions for federal, state or local income tax purposes from those
employed in the preparation of its Tax Returns for the year ended November 30,
1997, except as required by changes in law;
(x) conduct their proprietary trading activities otherwise
than in accordance with, or materially alter or modify any of, their current
proprietary trading policies, other than compensation or capital allocation
policies and guidelines as previously discussed with PNC, including position and
value at risk limitations;
(xi) solicit or encourage inquiries or proposals with respect
to any acquisition, purchase or transfer of all or a substantial portion of the
assets (including investment advisory contracts) of, or a substantial equity
interest in, HL or an HL Subsidiary or any business combination with HL or an HL
Subsidiary other than as contemplated by this Agreement; or authorize any
officer, director, agent or affiliate of it to do any of the above; or fail to
notify PNC immediately if any such inquiries or proposals are received by HL or
an HL Subsidiary;
(xii) except and to the extent required, based upon the
written advice of counsel, in the exercise of the fiduciary obligations of HL or
an HL Subsidiary to any Investment Company, request that any action be taken by
any Fund Board, other than (1) routine actions that would not, individually or
in the aggregate, be reasonably likely to have a Material Adverse Effect on HL,
or (2) actions contemplated by this Agreement; or
(xiii) agree to do any of the foregoing.
(c) Prior to the Closing Date, HL and each HL Subsidiary shall
cooperate with PNC in the design, development and documentation of such internal
controls, compliance manuals, recordkeeping systems and methods of tracking and
reporting "eligible" and "ineligible" gross revenues of HL and the HL
Subsidiaries as may be reasonably requested by PNC or required by the Federal
Reserve.
(d) Prior to the Closing Date, HL and each HL Subsidiary shall upon the
written request of PNC permit the Federal Reserve reasonable access to the
facilities, books, records and personnel of HL and each HL Subsidiary in order
to conduct an infrastructure review of HL and each HL Subsidiary, if the Staff
of the Federal Reserve has stated to PNC that such access is required as a
condition to Federal Reserve approval of the Merger or as a condition to obtain
faster processing of an application to acquire HL pursuant to the Bank Holding
Company Act of 1956, as amended.
(e) Upon PNC's request, HL shall use all commercially reasonable
efforts to assist PNC in preparing (i) a schedule of all guarantees, recourse
items and other off balance sheet
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liabilities of HL and all HL Subsidiaries that are of a type and nature that
would be subject to risk-based capital requirements pursuant to Appendix A to 12
C.F.R Part 225 if the obligor were a bank holding company, and (ii) any Federal
Reserve Form FR Y-20 required to be completed by any HL Subsidiary on an
unconsolidated basis, completed as though such HL Subsidiary were a subsidiary
of a bank holding company.
(f) Upon PNC's request, HL shall use all commercially reasonable
efforts to assist PNC in identifying all businesses or activities, or ownership
or leasing of any asset, directly or indirectly, by HL or any HL Subsidiary,
that is not a permissible business, activity or asset for a bank holding company
under Section 4 of the Bank Holding Company Act of 1956, as amended, and the
applicable rules, regulations and standard conditions to Federal Reserve
approval thereunder.
(g) Upon PNC's request, HL shall provide PNC with a complete list of
officers, directors, employees, principals, registered representatives of HL or
any HL Subsidiaries who also serve as officers, directors, trustees, employees,
principals, registered representatives or in a similar capacity for any trust
company, depository institution, depository institution holding company,
investment company, registered broker-dealer, issuer of variable annuities,
holding company or subsidiary of such an entity, or entity engaged in the issue,
flotation, underwriting, public sale or distribution of securities (other than
HL or any HL Subsidiary).
5.7. RETENTION POOL
(a) On the Effective Date, PNC shall establish a retention pool (the
"Retention Pool") in an amount Previously Disclosed to be used to retain the
Designated Managers and Key Brokers of HL and the HL Subsidiaries. Of the total
Retention Pool amount, a Previously Disclosed broker pool amount (the "Broker
Pool Amount") shall be available for payments to Key Brokers pursuant to clause
(b) of this Section 5.7, and a Previously Disclosed management pool amount (the
"Management Pool Amount") shall be available for payments to the Designated
Managers pursuant to clause (c) of this Section 5.7.
(b) Payments from the Broker Pool Amount shall be made ratably to each
Key Broker on the first, second and third Anniversary Dates, provided that such
Key Broker is employed by PNC or a subsidiary of PNC on such payment date. If a
Key Broker's employment terminates prior to an Anniversary Date due to death or
Disability, such Key Broker (or such Key Broker's heirs, successors or assigns)
shall be entitled to a prorated amount for the portion of the year in which such
death or Disability occurs during which such Key Broker was employed by PNC or a
subsidiary of PNC.
(c) Payments from the Management Pool Amount shall be made to
Designated Managers as follows: (i) one fifteenth on each of the first, second
and third Anniversary Dates and (ii) two fifths on each of the fourth and fifth
Anniversary Dates, provided that such Designated Manager is employed by PNC or a
subsidiary of PNC on such payment date. Notwithstanding the foregoing, if the
employment of a Designated Manager is terminated (i) as a result of death or
Disability, (ii) by PNC or any subsidiary of PNC without Cause, or (iii)
voluntarily by such Designated Manager for Good Reason, then such Designated
Manager shall be entitled to vest, as of such Designated Manager's termination
date, the balance of any portion
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of the Management Pool Amount to which such Designated Manager would otherwise
be entitled pursuant to this Section 5.7, provided, however, that payments of
such vested amounts shall be made pursuant to the terms set forth in the first
sentence of this Section 5.7(c). If any portion of the Management Pool Amount
otherwise payable to a Designated Manager is forfeited because such Designated
Manager ceases to be employed by PNC or any subsidiary of PNC, then the
forfeited amount shall be allocated as determined by the Compensation Committee
of Broker, or in the absence of such Committee a majority of the Key Managers
employed by PNC or a subsidiary of PNC at the time of such determination, such
determinations to be subject to the consent of PNC, which consent shall not be
unreasonably withheld.
5.8. COVENANTS WITH RESPECT TO SECTION 15(F)
In accordance with Section 15(f) of the Investment Company Act and for
the period covered thereby, following the Closing Date, PNC will not engage in
or cause to occur and will use all commercially reasonable efforts to prevent
any of its Affiliates from engaging in or causing any act, practice,
arrangement, thing or matter that imposes, results in, or gives rise to, an
unfair burden on any of the Investment Companies within the meaning of Section
15(f) of the Investment Company Act. For a period of three years following the
Closing Date, PNC shall use all commercially reasonable efforts to assure that
at least 75% of the members of the Board of Directors of the Investment
Companies are not "interested persons" (within the meaning of paragraph (2)(A)
of Section 15(f) of the Investment Company Act) of HL or PNC unless (i) Section
15(f) or otherwise applicable law shall be amended so that such composition of
the Board of Directors is no longer required or (ii) the Investment Companies
shall have been granted an exemption from such provisions.
5.9. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE
(a) PNC shall (or shall cause an appropriate subsidiary of PNC to)
indemnify, defend and hold harmless the present and former officers, directors,
employees and agents of HL or any of HL's Subsidiaries in their capacities as
such (each an "Indemnified Party") after the Effective Date against all losses,
expenses, claims, damages or liabilities arising out of actions or omissions
occurring on or prior to the Effective Date which were committed by such
officers, directors, employees or agents in their capacity as such, to the
extent such persons are entitled to indemnification under the Kentucky Business
Corporation Act and HL's Articles of Incorporation or By-laws as in effect on
the date hereof, or the respective applicable State statutes for the HL
Subsidiaries and articles or certificates of incorporation, charter or by-laws
or similar charter documents for the HL Subsidiaries as in effect on the date
hereof.
(b) In the event PNC 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 PNC assume
the obligations set forth in this section.
(c) The provisions of this Section 5.9 are intended to be for the
benefit of and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
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5.10. PARTICIPATION IN PLANS
To the extent that the 401(k) plan of HL is terminated, employees of HL
shall be eligible to participate in a 401(k) plan of PNC, on substantially the
same terms and conditions applied to other participants in such plan. PNC shall,
for purposes of eligibility to participate under such plan, recognize the
services of any employee of HL with HL or subsidiary or affiliate or predecessor
of HL or any other entity to the extent such service was recognized by HL.
ARTICLE VI
CONDITIONS PRECEDENT
6.1. CONDITIONS PRECEDENT - ALL PARTIES
The respective obligations of the parties hereto to effect the Merger
shall be subject to satisfaction, or waiver pursuant to Section 7.3 herein, of
the following conditions at or prior to the Closing Date:
(a) All corporate action necessary to authorize the execution, delivery
and performance of this Agreement and consummation of the transactions
contemplated hereby shall have been duly and validly taken.
(b) The parties hereto shall have received all regulatory approvals
required to be received prior to consummation of the Merger, all notice periods
and waiting periods required after the granting of any such approvals or after
any filing pursuant to the HSR Act (or pursuant to a Federal Reserve application
filed with the Federal Trade Commission in lieu of an HSR filing) shall have
passed and all conditions contained in any such approval required to have been
satisfied prior to consummation of such transactions shall have been satisfied,
provided, however, that no such approval shall have imposed any condition or
requirement (other than those conditions or requirements customarily imposed by
the Federal Reserve in approving similar transactions involving the acquisition
of securities dealers) which, in the reasonable opinion of the Board of
Directors of PNC, materially and adversely affects the anticipated economic and
business benefits to PNC of the transactions contemplated by this Agreement;
(c) At least 75% of the members of the board of directors of each
Investment Company which has approved a new investment advisory contract (i)
shall not be "interested persons" (as such term is defined in Section 2(a)(19)
of the Investment Company Act) of PNC (or such other entity which will act as
investment adviser to such Investment Company following the Closing Date), of HL
or the HL Subsidiary or of any Affiliate of HL and (ii) shall have been proposed
for election and elected in accordance with Section 16(b) of the Investment
Company Act to the extent required thereby; the composition of the board of
directors of each such Investment Company shall comply with Section 10 of the
Investment Company Act; and the requirements of Section 15(f)(1)(B) of the
Investment Company Act shall have been complied with in that no "unfair burden"
shall have been imposed on any of the Investment Companies as a result of this
Agreement, the transactions contemplated hereunder, new investment advisory
contracts or otherwise;
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(d) All consents required under the agreements Previously Disclosed in
connection with Section 3.5(d) shall have been obtained, except to the extent
failure to obtain any such consents would not be likely to result, individually
or in the aggregate, in a Material Adverse Effect on HL;
(e) The Registration Statement (including any post-effective amendment
thereto) shall be effective under the Securities Act, and no proceeding shall be
pending or to the knowledge of PNC threatened by the Commission to suspend the
effectiveness of such Registration Statement;
(f) To the extent that any lease, license, loan, financing agreement or
other contract or agreement to which HL or any HL Subsidiary is a party requires
the consent of or waiver from the other party thereto as a result of the
transactions contemplated by this Agreement, such consent or waiver shall have
been obtained, unless the failure to obtain such consents or waivers,
individually or in the aggregate, would not have a Material Adverse Effect on
HL;
(g) None of the parties hereto shall be subject to any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits the consummation of the transactions contemplated by this Agreement,
and there are no actual or threatened actions, arbitrations, suits or
proceedings that present a claim to restrain or prohibit the transactions
contemplated herein or to impose any material liability in connection therewith
as to which there is a reasonable probability of an unfavorable outcome and
which, if such an unfavorable outcome was rendered, would, individually or in
the aggregate, have a Material Adverse Effect;
(h) The shares of PNC Common Stock that may be issued in the Merger
shall have been approved for listing on the NYSE, subject to official notice of
issuance; and
(i) HL and PNC shall have received an opinion of Arnold & Porter, in
form and substance reasonably satisfactory to HL and PNC, dated as of the
Closing Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing on the Effective Date, (i) the Merger should be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and (ii) the gain, if any, realized by the
holders of HL Common Stock as a result of the Merger, should be recognized by
each such holder, but in an amount not in excess of the amount of cash received.
In rendering the opinion described in this Section 6.1(i), Arnold & Porter will
rely on representations, assumptions and facts as provided by PNC and HL,
including without limitation the standard representations set forth in Revenue
Procedure 86-42, 1986-2 C.B. 722.
6.2. CONDITIONS PRECEDENT - HL
The obligations of HL to effect the Merger shall be subject to
satisfaction of the following additional conditions at or prior to the Closing
Date unless waived by HL pursuant to Section 7.3 hereof:
(a) Except as otherwise contemplated by this Agreement or consented to
in writing by HL, the representations and warranties of PNC set forth in Article
4 hereof shall be true and
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correct as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date (or on the date when made in the case of any
representation and warranty which specifically relates to an earlier date);
provided, however, that for purposes of determining the satisfaction of the
condition contained in this Section 6.2(a), such representations and warranties
shall be deemed to be true and correct if the failure or failures of such
representations and warranties to be so true and correct (excluding the effect
of any qualification set forth therein relating to "materiality" or "Material
Adverse Effect") are not reasonably likely to constitute or give rise,
individually or in the aggregate, to a Material Adverse Effect on PNC;
(b) PNC shall have in all material respects performed all obligations
and complied with all covenants required by this Agreement; and (c) PNC shall
have delivered to HL a certificate, dated the Closing Date and signed by its
Chairman, President, Executive Vice President or Senior Vice President to the
effect that the conditions set forth in this section have been satisfied.
6.3. CONDITIONS PRECEDENT - PNC
The obligations of PNC to effect the Merger shall be subject to
satisfaction of the following additional conditions at or prior to the Closing
Date unless waived by PNC pursuant to Section 7.3 hereof:
(a) Except as otherwise contemplated by this Agreement or consented to
in writing by PNC, the representations and warranties of HL set forth in Article
3 hereof shall be true and correct as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date (or on the date
when made in the case of any representation and warranty which specifically
relates to an earlier date), provided, however, that for purposes of determining
the satisfaction of the condition contained in this Section 6.3(a), such
representations and warranties shall be deemed to be true and correct if the
failure or failures of such representations and warranties to be so true and
correct (excluding the effect of any qualification set forth therein relating to
"materiality" or "Material Adverse Effect") are not reasonably likely to
constitute or give rise individually or in the aggregate, to a Material Adverse
Effect on HL.
(b) HL shall have performed in all material respects all obligations
and complied with all covenants required by this Agreement;
(c) HL shall have delivered to PNC a certificate, dated the Closing
Date and signed by the Chairman and Chief Executive Officer of HL, to the effect
that the conditions set forth in this section have been satisfied; and
(d) The trustees or boards of directors of each of the Investment
Companies, including a majority of the directors or trustees who are not
interested persons of the investment adviser within the meaning of the
Investment Company Act, shall have approved, and shall have recommended that the
shareholders of such Investment Company approve, new investment advisory
contracts in substantially the form of existing contracts with HL or an HL
Subsidiary; and all investment advisory clients that are not Investment
Companies shall have been provided with notice of the transactions contemplated
by this Agreement and such clients' consents shall
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have been obtained in a manner permitted under applicable law; provided that
this condition shall be deemed to have been satisfied if approvals and consents
are obtained with respect to investment advisory contracts relating to assets
under management by HL and the HL Subsidiaries accounting for, as of June 30,
1998, (i) at least 75% of "annualized fees" other than with respect to advisory
clients that are Investment Companies or Pooled Investment Vehicles, and (ii)
all of the Pooled Investment Vehicles other than the Investment Companies.
Annualized fees with respect to clients that are not Investment Companies or
Pooled Investment Vehicles are agreed to be twice the aggregate fees Previously
Disclosed for the six months ended June 30, 1998.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
7.1. TERMINATION
This Agreement may be terminated:
(a) At any time on or prior to the Closing Date, by the mutual consent
in writing of the parties hereto;
(b) At any time on or prior to the Closing Date, by PNC in writing, if
HL has, or by HL in writing, if PNC has breached (i) in any material respect any
covenant or agreement contained herein or (ii) any representation or warranty
contained herein (provided that a party may terminate this Agreement pursuant to
clause (ii) of this Section 7.1(b) only with respect to a breach or breaches
that would permit such party not to consummate the Merger under the standards
set forth in Section 6.2(a) or Section 6.3(a), as the case may be), and in
either case if such breach has not been cured by the date 30 days after the date
on which written notice of such breach is given to the party committing such
breach;
(c) On or before September 17, 1998, by PNC in writing if by September
3, 1998, fewer than all of the Key Managers have executed an Employment
Agreement;
(d) At any time on or prior to the Closing Date, by HL or PNC, in
writing, (i) in the event that any stockholder approval contemplated by Sections
5.1 and 6.1(a) shall not have been obtained at the meeting of HL stockholders,
including any adjournment or adjournments thereof or (ii) if any of the
applications for prior approval referred to in Section 6.1(b) hereof have been
denied, and the time period for appeals and requests for reconsideration has
run; or
(e) By HL or PNC, in writing, if the Closing Date has not occurred by
the close of business on May 31, 1999.
7.2. EFFECT OF TERMINATION
In the event this Agreement is terminated pursuant to Section 7.1
hereof, this Agreement shall become void and have no effect, except that (i) the
provisions relating to confidentiality and expenses set forth in Sections 5.4
and 8.1, respectively, hereof shall survive any such termination, (ii) a
termination pursuant to Section 7.1(b) shall not relieve the breaching party
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from liability for an uncured willful breach of the covenant, representation,
warranty or agreement giving rise to such termination, and (iii) this Section
7.2 and Sections 8.2, 8.4, 8.5, 8.6, 8.7, 8.8 shall survive any such
termination.
7.3. WAIVER
Except with respect to any required shareholder or regulatory approval,
PNC and HL, respectively, by written instrument signed by an executive officer
of such party, may at any time extend the time for the performance of any of the
obligations or other acts of the other party, and may waive (i) any inaccuracies
of such parties in the representations or warranties contained in this
Agreement, or any document delivered pursuant hereto, (ii) compliance with any
of the covenants, undertakings or agreements of such parties, or satisfaction of
any of the conditions precedent to its obligations, contained herein, or (iii)
the performance by such parties of any of its obligations set out herein.
7.4. AMENDMENT OR SUPPLEMENT
This Agreement may be amended or supplemented at any time by mutual
agreement of the parties hereto. Any such amendment or supplement must be in
writing and approved by their respective Boards of Directors and/or officers
authorized thereby.
7.5. SURVIVAL AFTER MERGER
None of the representations, warranties, agreements and covenants in
this Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Date; provided, however, that this Section 7.5 shall not
limit the survival of any covenant or agreement of the parties that by its terms
contemplates performance after the Effective Date.
ARTICLE VIII
MISCELLANEOUS
8.1. EXPENSES
Each party hereto shall bear and pay all costs and expenses incurred by
it in connection with the transactions contemplated in this Agreement, including
fees and expenses of its own financial consultants, accountants and counsel,
except that PNC and HL each shall bear and pay 50% of all printing and mailing
costs and filing fees associated with the Registration Statement and the Proxy
Statement.
8.2. ENTIRE 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 thereto, written or oral, other than
documents referred to herein and the Confidentiality Agreement dated May 19,
1998 between PNC and HL. The terms and conditions of this Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors. Nothing in this Agreement, expressed or implied, is intended to
confer
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upon any party, other than the parties hereto, and their respective successors,
any rights, remedies, obligations or liabilities.
8.3. NO ASSIGNMENT
No party hereto may assign any of its rights or obligations under this
Agreement to any other Person except that PNC may assign its rights hereunder to
any direct or indirect subsidiary of PNC.
8.4. NOTICES
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
facsimile transmission or overnight express or by registered or certified mail,
postage prepaid, addressed as follows:
If to HL:
Hilliard-Lyons, Inc.
Hilliard Lyons Center
Louisville, Kentucky 40202
Attention: James W. Stuckert
Facsimile No.: (502) 588-9150
With a required copy to:
Richards & O'Neil, LLP
885 Third Avenue
New York, New York 10022
Attention: Floyd Wittlin, Esq.
Facsimile No.: (212) 750-9022
If to PNC:
PNC Bank Corp.
One PNC Plaza
Pittsburgh, Pennsylvania 15265
Attention: James B. Yahner
Facsimile No.: (412) 762-6238
With a required copy to:
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004-1206
Attention: Steven Kaplan, Esq.
Facsimile No.: (202) 942-5999
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8.5. CAPTIONS
The captions contained in this Agreement are for reference purposes
only and are not part of this Agreement.
8.6. COUNTERPARTS
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
8.7. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Pennsylvania applicable to agreements made and
entirely to be performed within such jurisdiction, except to the extent federal
law may be applicable.
8.8. WAIVER OF JURY TRIAL
The parties waive all rights to trial by jury of any claims against
another party or parties hereto relating to this Agreement or the transactions
contemplated by this Agreement.
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IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed in counterparts, by their duly
authorized officers, all as of the day and year first above written.
PNC BANK CORP.
By /s/ JAMES B. YAHNER
-------------------------------
Name: James B. Yahner
Title: Vice President
HILLIARD-LYONS, INC.
By /s/ JAMES W. STUCKERT
-------------------------------
Name: James W. Stuckert
Title: Chairman and Chief
Executive Officer
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APPENDIX B
FORM OF OPINION
___________, 1998
Board of Directors
Hilliard-Lyons, Inc.
501 South 4th Avenue
Louisville, KY 40202
Gentlemen:
We understand that, pursuant to the Agreement and Plan of Merger (the
"Agreement") to be entered into by and between PNC Bank Corp., a Pennsylvania
corporation ("PNC") and Hilliard-Lyons, Inc., a Kentucky corporation ("HL"), HL
will combine with PNC by means of the merger (the "Merger") of HL with and into
PNC (the "Transaction"). We understand that pursuant to the Agreement, at the
closing of the Transaction, PNC will pay $275 million of consideration, made up
of cash and PNC common stock (the "Transaction Consideration"). The ratio of
cash and PNC common stock will be determined based on the share price of PNC on
the last trading date prior to closing of the Transaction. The amount of PNC
stock shall not exceed 70% or be less than that level required for the
Transaction to qualify as a tax-free reorganization, with the balance consisting
of cash. The terms and conditions of the Transaction are set forth in more
detail in the Agreement.
You have requested our opinion as to whether the Transaction
Consideration to be received in the Transaction by the shareholders of HL is
fair to the shareholders of HL from a financial point of view, as of the date
hereof.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and financial information relating to HL and
PNC; (ii) reviewed certain internal financial information and other data
provided to us by the management of HL relating to the business and prospects of
HL, including financial projections for HL; (iii) conducted discussions with
members of the senior management of HL and PNC concerning the operations of HL
and PNC, historical financial information of HL and PNC, future prospects of HL
and other matters relating to HL and PNC; (iv) reviewed the Agreement; (v)
reviewed the financial terms, to the extent publicly available, of certain
acquisition transactions which we considered relevant; (vi) reviewed publicly
available financial and securities market data pertaining to certain publicly
held companies in lines of business we considered to be generally comparable to
those of HL and PNC; (vii) initiated and participated in discussions between HL
and several potential buyers including PNC; and (viii) conducted such other
financial studies, analyses and investigations, and considered such other
information we deemed necessary and appropriate.
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Board of Directors _____________, 1998
Hilliard-Lyons, Inc. Page 2
In conducting our review and arriving at our opinion, with your
consent, we have not assumed any responsibility for independent verification of
any of the foregoing information. We have, with your consent, relied upon the
information described in the preceding paragraph (exclusive of the information
referred to in clauses (vii) and (viii)) being complete and accurate in all
material respects and have relied upon the assurances of the members of
management of HL that they are unaware of any facts that would make the
information or projections provided to us incomplete or misleading. We have not
been requested to and have not made an independent evaluation or appraisal of
any assets or liabilities (contingent or otherwise) of HL and PNC or any of
their respective affiliates, nor have we been furnished with any such evaluation
or appraisal. Further, we have assumed, with your consent, that all of the
information prepared by the management of HL provided to us for purposes of this
opinion, including the projections for HL, was prepared in good faith and on a
basis reflecting the best currently available estimates and judgments of the
management of HL as to the future financial performance of HL and the
assumptions underlying such projections were viewed by management as being
reasonable at the time made. We have not undertaken any independent legal
analysis of the Transaction, any related transactions, the Agreement or any
legal or regulatory proceedings pending or threatened related to HL. We have not
been asked to, and do not, express any opinion as to the after-tax consequences
of the Transaction to the shareholders of HL. In addition, our opinion is based
on economic, monetary and market conditions existing on the date hereof. We have
assumed that the Transaction will be consummated on the terms described in the
Agreement without any waiver of any material items or conditions by the
shareholders of HL and that obtaining the necessary approvals for the
Transaction will not have any adverse effect on HL.
We have not been asked to pass upon, and express no opinion with
respect to, any matter other than the fairness, from a financial point of view,
of the Transaction Consideration to be received by the shareholders of HL.
In rendering this opinion, we are not rendering any opinion as to the
value of HL as a whole or making any recommendations to the board of directors
of HL or any shareholders of HL with respect to the advisability of approving,
recommending or voting in favor of the Transaction.
Berkshire Capital Corporation, as part of its investment banking
business, is engaged in the business of providing financial advisory services
with regard to mergers and acquisitions. We have acted as financial adviser to
HL in connection with the Transaction, have received retainer fees for such
services, and will receive a fee for our services which is contingent upon the
consummation of the Transaction. In addition, HL has agreed to reimburse us for
our reasonable expenses, including attorneys' fees, and to indemnify us against
certain liabilities that may arise out of this assignment, including the
rendering of this opinion.
This opinion is for the use and benefit of the Board of Directors of HL
and is rendered to the Board of Directors of HL in connection with its
consideration of the Transaction.
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Board of Directors _____________, 1998
Hilliard-Lyons, Inc. Page 3
Based upon and subject to the foregoing, we are of the opinion that the
Transaction Consideration to be received in the Transaction by the shareholders
of HL is fair to the shareholders of HL from a financial point of view, as of
the date hereof.
Very truly yours,
BERKSHIRE CAPITAL CORPORATION
By: ____________________
Peter L. Bain
Managing Director
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APPENDIX C
KY Statutes, T. XXIII, Ch. 271B, Subt. 13
BALDWIN'S KENTUCKY REVISED STATUTES ANNOTATED
TITLE XXIII. PRIVATE CORPORATIONS AND ASSOCIATIONS
CHAPTER 271B. BUSINESS CORPORATIONS
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
271B.13-010 DEFINITIONS
271B.13-020 RIGHT TO DISSENT
271B.13-030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
271B.13-200 NOTICE OF DISSENTERS' RIGHTS
271B.13-210 NOTICE OF INTENT TO DEMAND PAYMENT
271B.13-220 DISSENTERS' NOTICE
271B.13-230 DUTY TO DEMAND PAYMENT
271B.13-240 SHARE RESTRICTIONS
271B.13-250 PAYMENT
271B.13-260 FAILURE TO TAKE ACTION
271B.13-270 AFTER-ACQUIRED SHARES
271B.13-280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
JUDICIAL APPRAISAL OF SHARES
271B.13-300 COURT ACTION
271B.13-310 COURT COSTS AND COUNSEL FEES
KY ST Section 271B.13-010
KRS Section 271B.13-010
BALDWIN'S KENTUCKY REVISED STATUTES ANNOTATED
TITLE XXIII. PRIVATE CORPORATIONS AND ASSOCIATIONS
CHAPTER 271B. BUSINESS CORPORATIONS
SUBTITLE 13. DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
Current through End of 1997 1st Ex. Sess.
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271B.13-010 DEFINITIONS
As used in this subtitle:
(1) "Corporation" means the issuer of the shares held by a dissenter, except
that in the case of a merger where the issuing corporation is not the surviving
corporation, then, after consummation of the merger, "corporation" shall mean
the surviving corporation.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under KRS 271B.13-020 and who exercises that right when and in the manner
required by KRS 271B.13-200 to 271B.13-280.
(3) "Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable. In any transaction
subject to the requirements of KRS 271B.12-210 or exempted by KRS
271B.12-220(2), "fair value" shall be at least an amount required to be paid
under KRS 271B.12-220(2) in order to be exempt from the requirements of KRS
271B.12-210.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered in
the records of a corporation or the beneficial owner of shares to the extent of
the rights granted by a nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
271B.13-020 RIGHT TO DISSENT
(1) A shareholder shall be entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following corporate
actions:
(a) Consummation of a plan of merger to which the corporation is a party:
1. If shareholder approval is required for the merger by KRS 271B.11-030 or
the articles of incorporation and the shareholder is entitled to vote on the
merger; or
2. If the corporation is a subsidiary that is merged with its parent under
KRS 271B.11-040;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
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business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
1. Alters or abolishes a preferential right of the shares to a distribution
or in dissolution;
2. Creates, alters, or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase, of the
shares;
3. Excludes or limits the right of the shares to vote on any matter other
than a limitation by dilution through issuance of shares or other securities
with similar voting rights; or
4. Reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under KRS
271B.6-040;
(e) Any transaction subject to the requirements of KRS 271B.12-210 or exempted
by KRS 271B.12-220(2); or
(f) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for his shares under
this chapter shall not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder or
the corporation.
271B.13-030 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he shall dissent with respect to all
shares beneficially owned by any one (1) person and notify the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
shall be determined as if the shares as to which he dissents and his other
shares were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if:
(a) He submits to the corporation the record shareholder's written consent to
the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
(b) He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
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271B.13-200 NOTICE OF DISSENTERS' RIGHTS
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this subtitle and the corporation shall undertake to provide a copy
of this subtitle to any shareholder entitled to vote at the shareholders'
meeting upon request of that shareholder.
(2) If corporate action creating dissenters' rights under KRS 271B.13-020 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in KRS 271B.13-220.
271B.13-210 NOTICE OF INTENT TO DEMAND PAYMENT
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(a) Shall deliver to the corporation before the vote is taken written notice
of his intent to demand payment for his shares if the proposed action is
effectuated; and
(b) Shall not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section shall not be entitled to payment for his shares under this chapter.
271B.13-220 DISSENTERS' NOTICE
(1) If proposed corporate action creating dissenters' rights under KRS
271B.13-020 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of KRS 271B.13-210.
(2) The dissenters' notice shall be sent no later than ten (10) days after the
date the proposed corporate action was authorized by the shareholders, or, if no
shareholder authorization was obtained, by the board of directors, and shall:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the corporation must receive the payment demand, which
date may not be fewer than thirty (30), nor more than sixty (60) days after the
date the notice provided in subsection (1) of this section is delivered; and
(e) Be accompanied by a copy of this subtitle.
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271B.13-230 DUTY TO DEMAND PAYMENT
(1) A shareholder who is sent a dissenters' notice described in KRS 271B.13-220
shall demand payment, certify whether he acquired beneficial ownership of the
shares before the date required to be set forth in the dissenters' notice
pursuant to subsection (2)(c) of KRS 271B.13-220, and deposit his certificates
in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits his share certificates
under subsection (1) of this section shall retain all other rights of a
shareholder until these rights are cancelled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit his share certificates
where required, each by the date set in the dissenters' notice, shall not be
entitled to payment for his shares under this subtitle.
271B.13-240 SHARE RESTRICTIONS
(1) The corporation may restrict the transfer of uncertificated shares from the
date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under KRS 271B.13-260.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares shall retain all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
271B.13-250 PAYMENT
(1) Except as provided in KRS 271B.13-270, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall pay
each dissenter who complied with KRS 271B.13-230 the amount the corporation
estimates to be the fair value of his shares, plus accrued interest.
(2) The payment shall be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year ending not
more than sixteen (16) months before the date of payment, an income statement
for that year, a statement of changes in shareholders' equity for that year, and
the latest available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of the shares;
(c) An explanation of how the interest was calculated; and
(d) A statement of the dissenter's right to demand payment under KRS
271B.13-280.
271B.13-260 FAILURE TO TAKE ACTION
(1) If the corporation does not take the proposed action within sixty (60) days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
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restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under KRS 271B.13-220 and repeat the payment demand
procedure.
271B.13-270 AFTER-ACQUIRED SHARES
(1) A corporation may elect to withhold payment required by KRS 271B.13-250 from
a dissenter unless he was the beneficial owner of the shares before the date set
forth in the dissenters' notice as the date of the first announcement to news
media or to shareholders of the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under subsection
(1) of this section, after taking the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was calculated,
and a statement of the dissenter's right to demand payment under KRS
271B.13-280.
271B.13-280 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER
(1) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under KRS 271B.13-250), or reject the corporation's
offer under KRS 271B.13-270 and demand payment of the fair value of his shares
and interest due, if:
(a) The dissenter believes that the amount paid under KRS 271B.13-250 or
offered under KRS 271B.13-270 is less than the fair value of his shares or that
the interest due is incorrectly calculated;
(b) The corporation fails to make payment under KRS 271B.13-250 within sixty
(60) days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within sixty (60) days after the date set for demanding
payment.
(2) A dissenter waives his right to demand payment under this section unless he
shall notify the corporation of his demand in writing under subsection (1) of
this section within thirty (30) days after the corporation made or offered
payment for his shares.
271B.13-300 COURT ACTION
(1) If a demand for payment under KRS 271B.13-280 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty (60) day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of the
county where a corporation's principal office (or, if none in this state, its
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registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(3) The corporation shall make all dissenters (whether or not residents of this
state) whose demands remain unsettled parties to the proceeding as in an action
against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section shall be plenary and exclusive. The court may
appoint one (1) or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to it. The dissenters shall be
entitled to the same discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding shall be entitled to judgment:
(a) For the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation; or
(b) For the fair value, plus accrued interest, of his after-acquired shares
for which the corporation elected to withhold payment under KRS 271B.13-270.
271B.13-310 COURT COSTS AND COUNSEL FEES
(1) The court in an appraisal proceeding commenced under KRS 271B.13-300 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of appraisers appointed by the court. The court shall assess the costs
against the corporation, except that the court may assess costs against all or
some of the dissenters, in amounts the court finds equitable, to the extent the
court finds the dissenters acted arbitrarily, vexatiously, or not in good faith
in demanding payment under KRS 271B.13-280.
(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters, if the
court finds the corporation did not substantially comply with the requirements
of KRS 271B.13-200 to 271B.13-280; or
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this subtitle.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 1741 to 1743 of the Pennsylvania Business Corporation Law provide
that a corporation may indemnify its representatives (including directors and
officers) against liabilities that they incur in such capacities provided
certain standards are met, including good faith and the reasonable belief that
the particular action is in, or not opposed to, the best interests of the
corporation. In general, this power to indemnify does not exist in the case of
actions against a director or officer by or in the right of the corporation if
the person seeking indemnification is adjudged liable to the corporation. A
corporation is required to indemnify directors and officers against expenses
they may incur in defending actions to which they are made a party by reason of
their status as directors or officers if they are successful on the merits or
otherwise in the defense of such actions.
Section 1746 of the Pennsylvania Business Corporation Law provides that the
foregoing provisions shall not be deemed exclusive of any other rights to which
a person seeking indemnification may be entitled under, among other things, any
bylaw provision, provided that no indemnification may be made in any case where
the act or failure to act giving rise to the claim for indemnification is
determined by a court to have constituted willful misconduct or recklessness.
The By-Laws of PNC provide for the mandatory indemnification of directors and
officers in accordance with and to the full extent permitted by the laws of
Pennsylvania as in effect at the time of such indemnification. PNC's By-Laws
also eliminate, to the maximum extent permitted by the laws of the Commonwealth
of Pennsylvania, the personal liability of directors for monetary damages for
any action taken, or any failure to take any action as a director except in any
case such elimination is not permitted by law. PNC has purchased directors' and
officers' liability insurance covering certain liabilities that may be incurred
by the officers and directors of PNC in connection with the performance of their
duties.
In addition to the foregoing, PNC has undertaken in the Agreement that it
will indemnify, defend and hold harmless the present and former officers,
directors, employees and agents of Hilliard Lyons or its subsidiaries in their
capacities as such against all losses, expenses, claims, damages or liabilities
arising out of actions or omissions occurring on or prior to the Effective Date
of the Merger that were committed by such persons in their capacities as
officers, directors, employees or agents, to the extent such persons were
entitled to indemnification under the Kentucky Business Corporation Act and
Hilliard Lyons' Articles of Incorporation and By-Laws (or the similar law and
governing documents pertaining to a Hilliard Lyons subsidiary, as the case may
be).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
An index of exhibits appears at page II-7, which is incorporated herein by
reference.
II-1
<PAGE> 171
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
Provided, however, that paragraphs 1(a) and 1(b) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in the
Registration Statement.
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 172
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of this Form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the paragraph immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first-class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE> 173
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pittsburgh,
Commonwealth of Pennsylvania, on the 29th day of September, 1998.
PNC BANK CORP.
By: /s/ WALTER E. GREGG, JR.
-------------------------------
Walter E. Gregg, Jr.
Senior Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ THOMAS H. O'BRIEN Chairman, Chief Executive September 29, 1998
- ---------------------------- Officer and Director
Thomas H. O'Brien (Principal Executive Officer)
/s/ ROBERT L. HAUNSCHILD Senior Vice President September 29, 1998
- ---------------------------- and Chief Financial Officer
Robert L. Haunschild* (Principal Financial Officer)
/s/ SAMUEL PATTERSON Senior Vice President and September 29, 1998
- ---------------------------- Controller
Samuel Patterson* (Principal Accounting Officer)
/s/ PAUL CHELLGREN Director September 29, 1998
- ---------------------------
Paul Chellgren*
/s/ ROBERT N. CLAY Director September 29, 1998
- ---------------------------
Robert N. Clay*
II-4
<PAGE> 174
/s/ GEORGE A. DAVIDSON, JR. Director September 29, 1998
- ---------------------------
George A. Davidson, Jr.*
/s/ DAVID F. GIRARD-diCARLO Director September 29, 1998
- ---------------------------
David F. Girard-diCarlo*
/s/ WALTER E. GREGG, JR. Director September 29, 1998
- ---------------------------
Walter E. Gregg, Jr.
/s/ WILLIAM R. JOHNSON Director September 29, 1998
- ---------------------------
William R. Johnson*
/s/ BRUCE C. LINDSAY Director September 29, 1998
- ---------------------------
Bruce C. Lindsay*
/s/ CRAIG McCLELLAND Director September 29, 1998
- ---------------------------
W. Craig McClelland*
/s/ THOMAS H. O'BRIEN Director September 29, 1998
- ---------------------------
Thomas H. O'Brien
/s/ JANE G. PEPPER Director September 29, 1998
- ---------------------------
Jane G. Pepper*
/s/ JACKSON H. RANDOLPH Director September 29, 1998
- ---------------------------
Jackson H. Randolph*
/s/ JAMES E. ROHR Director September 29, 1998
- ---------------------------
James E. Rohr*
/s/ RODERIC H. ROSS
- --------------------------- Director September 29, 1998
Roderic H. Ross*
/s/ RICHARD P. SIMMONS Director September 29, 1998
- ---------------------------
Richard P. Simmons*
/s/ THOMAS J. USHER Director September 29, 1998
- ---------------------------
Thomas J. Usher*
/s/ MILTON A. WASHINGTON Director September 29, 1998
- ---------------------------
Milton A. Washington*
/s/ HELGE H. WEHMEIER Director September 29, 1998
- ---------------------------
Helge H. Wehmeier*
II-5
<PAGE> 175
* By Walter E. Gregg, Jr., Attorney-in-Fact, pursuant to a Power of Attorney
dated September 18, 1998.
II-6
<PAGE> 176
INDEX OF EXHIBITS
Exhibit 2 Agreement and Plan of Merger, included as Appendix A
to the Proxy Statement/Prospectus and incorporated
herein by reference.
Exhibit 3.1 Articles of Incorporation of PNC, as amended,
incorporated herein by reference to Exhibit 99.1 and
99.2 of the Current Report on Form 8-K dated October 7,
1996.
Exhibit 3.2 By-Laws of PNC, as amended, incorporated herein by
reference to Exhibit 99.2 of the Current Report on
Form 8-K dated January 15, 1998.
Exhibit 4 Instruments defining the rights of holders of certain
long-term debt of PNC and consolidated subsidiaries
are not filed as exhibits because the amount of debt
under such instruments is less than 10% of PNC's total
consolidated assets. PNC undertakes to file these
instruments with the Commission upon request.
Exhibit 5 Opinion of Kathleen Clover, Esq., regarding validity
of PNC Common Stock being registered, filed herewith.
Exhibit 8 Opinion of Arnold & Porter, regarding certain U.S.
federal income tax consequences of the Merger, filed
herewith.
Exhibit 23.1 Consent of Ernst & Young LLP, independent auditors for
PNC, filed herewith.
Exhibit 23.2 Consent of Ernst & Young LLP, independent auditors
for Hilliard Lyons, filed herewith.
Exhibit 23.3 Consent of PricewaterhouseCoopers LLP, independent
auditors for Hilliard Lyons, filed herewith.
Exhibit 23.4 Consent of Kathleen Clover, Esq., contained in the
opinion filed as Exhibit 5 hereto.
Exhibit 23.5 Consent of Arnold & Porter, contained in the opinion
filed as Exhibit 8 hereto.
Exhibit 23.6 Consent of Berkshire Capital Corp., filed herewith.
II-7
<PAGE> 177
Exhibit 24 Powers of Attorney of directors and officers of PNC,
filed herewith.
Exhibit 99.1 Form of Proxy Card relating to Hilliard Lyons Common
Stock, filed herewith.
II-8
<PAGE> 1
EXHIBIT 5
September 29, 1998
Board of Directors
PNC Bank Corp.
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Ladies and Gentlemen:
This opinion is issued in connection with the Registration Statement on Form S-4
(the "Registration Statement") of PNC Bank Corp., a Pennsylvania corporation
(the "Corporation"), to be filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
relating to the registration of 4,000,000 shares of the Corporation's common
stock, par value $5.00 (the "Common Stock"), issuable in connection with that
certain Agreement and Plan of Merger dated as of August 20, 1998 (the "Merger
Agreement"), between the Corporation and Hilliard-Lyons, Inc., a Kentucky
corporation ("Hilliard Lyons"). Subject to certain conditions, the Merger
Agreement provides for the merger (the "Merger") of Hilliard Lyons with and into
the Corporation.
As Senior Counsel to the Corporation, I have examined the Registration
Statement, the Merger Agreement and the resolutions adopted by the Corporation's
Board of Directors with respect thereto. I have also examined such records,
certificates and other documents relating to the Corporation that I have
considered necessary or appropriate for the purposes of this opinion.
In making such examination and rendering the opinion set forth below, I have
assumed: (i) the genuineness and authenticity of all signatures on original
documents; (ii) the authenticity of all documents submitted to me as originals;
and (iii) the conformity to originals of all documents submitted to me as
certified, telecopied, photostated or reproduced copies and the authenticity of
all originals of such documents.
<PAGE> 2
For the purposes of this opinion, I have assumed that, at the time of issuance
of the Common Stock, the shareholders of Hilliard Lyons will have approved the
Merger Agreement by the requisite vote at its special meeting of shareholders
and that the Registration Statement will have been declared effective under the
Act. I have also assumed the due authorization and issuance of the outstanding
shares of common stock of Hilliard Lyons.
I am admitted to practice law in the Commonwealth of Pennsylvania and do not
purport to be an expert on or to express any opinion on any laws other than the
laws of the Commonwealth of Pennsylvania and the federal laws of the United
States of America. This opinion speaks as of today's date and is limited to
present statutes, regulations and judicial interpretations. In rendering this
opinion, I assume no obligation to revise or supplement this opinion should
present laws be changed by legislative or regulatory action, judicial decision
or otherwise.
Based on the foregoing, I am of the opinion that, upon the effectiveness of the
Merger, the shares of PNC Common Stock, when issued to the shareholders of
Hilliard Lyons pursuant to, and in accordance with, the terms of the Merger
Agreement, will be validly issued, fully paid and nonassessable.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to me under the caption "Legal Opinion" in the
prospectus, which is a part of the Registration Statement. In giving such
consent, I do not thereby admit that I come within the category of persons whose
consent is required under Section 7 of the Act or the rules and regulations of
the Commission thereunder.
Very truly yours,
/s/ Kathleen Clover
- -------------------
Kathleen Clover
Senior Counsel
<PAGE> 1
EXHIBIT 8
FORM OF OPINION
_____________ ___, 1998
PNC Bank Corp.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222-2707
Hilliard-Lyons, Inc.
Hilliard Lyons Center
501 South Fourth Street
Louisville, Kentucky 40202
Ladies and Gentlemen:
Reference is made to the information set forth under the heading
"PROPOSED MERGER - Certain U.S. Federal Income Tax Consequences" contained in
the Proxy Statement/Prospectus, which is included in the Registration Statement
on Form S-4 (the "Registration Statement"), filed by PNC Bank Corp. ("PNC") with
the Securities and Exchange Commission (the "SEC"), and which is being furnished
to shareholders of Hilliard-Lyons, Inc. ("Hilliard Lyons") in connection with
the solicitation of proxies by the Board of Directors of Hilliard Lyons for
their use at Hilliard Lyons' special meeting of stockholders, at which
stockholders of Hilliard Lyons will be asked to approve an Agreement and Plan of
Merger, dated August 20, 1998, between PNC and Hilliard Lyons. Subject to the
representations, assumptions and other conditions described or referenced in
this letter or under that heading, it is our opinion that the discussion of
certain anticipated material federal income tax consequences contained under
that heading is accurate in all material respects.
Our opinion is based on the case law, Internal Revenue Code, Treasury
Regulations and Internal Revenue Service rulings as they exist at the date
hereof. These authorities are all subject to change, and any such change may be
made with retroactive effect. We can give no assurance that, after such change,
our opinion would not be different. We undertake no responsibility to update or
supplement our opinion following the effective date of the Registration
Statement.
We hereby consent to the filing with the SEC of this opinion as an
exhibit to the Registration Statement and to the reference to our firm under the
heading "PROPOSED MERGER - Certain Federal Income Tax Consequences" contained
therein. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended.
Very truly yours,
Arnold & Porter
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form S-4, and related Prospectus of PNC Bank Corp.
for the registration of 4,000,000 shares of PNC Common Stock in connection with
the Agreement and Plan of Merger, dated August 20, 1998 between PNC Bank and
Hilliard-Lyons, Inc. and to the incorporation by reference therein of our report
dated January 23, 1998, with respect to the consolidated financial statements of
PNC Bank Corp. incorporated by reference in its Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
September 23, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated December 20, 1996, with respect to the
consolidated financial statements of Hilliard-Lyons, Inc. for the years ended
November 30, 1996 and 1995, included in the Registration Statement on Form S-4
and related Prospectus of PNC Bank Corp. for the registration of 4,000,000
shares of PNC common stock in connection with the Agreement and Plan of Merger,
dated August 20, 1998, between PNC Bank Corp. and Hilliard-Lyons, Inc.
("Registration Statement").
Additionally, we were previously principal accountants for Hilliard-
Lyons, Inc. and, under the date of December 20, 1996, we reported on the
consolidated financial statements of Hilliard-Lyons, Inc. and subsidiaries for
the years ended November 30, 1996 and 1995. We have read the statements with
respect to the change in accountants included under the caption "Experts" in the
Registration Statement, and we agree with such statements.
/s/ ERNST & YOUNG LLP
Louisville, Kentucky
September 23, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4
of our report dated December 23, 1997, on our audit of the consolidated
financial statements of Hilliard Lyons, Inc. and Subsidiaries. We also consent
to the references to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
Louisville, Kentucky
September 29, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF BERKSHIRE CAPITAL CORPORATION
We hereby consent to the use of our opinion letter to the Board of
Directors of Hilliard-Lyons, Inc., included as Appendix B to the Proxy
Statement/Prospectus of PNC Bank Corp. ("PNC"), which forms part of the
Registration Statement on Form S-4, relating to the proposed merger of PNC and
Hilliard-Lyons, Inc., and to the references therein to such opinion under the
caption "Proposed Merger-Opinion of Financial Advisor."
In giving such consent, we do not admit and we hereby disclaim that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we hereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/S/ BERKSHIRE CAPITAL CORPORATION
---------------------------------
Berkshire Capital Corporation
New York, New York
September 29, 1998
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
PNC BANK CORP.
REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Executive
Officers of PNC Bank Corp. (the "Corporation"), a Pennsylvania Corporation,
hereby names, constitutes and appoints Walter E. Gregg, Jr., John F. Fulgoney
and Kathleen Clover, or each of them, with full power of substitution, such
person's true and lawful attorney-in -fact and agent to execute in such person's
name, place and stead, in any and all capacities, the Registration Statement to
be filed by the Corporation on Form S-4 under the Securities Act of 1933, as
amended, relating to the shares of the Corporation's Common Stock that may be
issued in connection with the proposed merger of Hilliard Lyons, Inc. with and
into the Corporation.
Such persons hereby ratify and confirm all that any said attorney or
attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
WITNESS the due execution hereof by the following persons in the
capacities indicated, as of September 22, 1998.
Name/Signature Capacity
- -------------- --------
/s/ ROBERT L. HAUNSCHILD Senior Vice President and Chief
- ------------------------ Financial Officer
Robert L. Haunschild
/s/ SAMUEL R. PATTERSON Senior Vice President and Controller
- -----------------------
Samuel R. Patterson
<PAGE> 2
POWER OF ATTORNEY
PNC BANK CORP.
REGISTRATION STATEMENT ON FORM S-4
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors
and/or Executive Officers of PNC Bank Corp. (the "Corporation"), a Pennsylvania
corporation, hereby names, constitutes and appoints Walter E. Gregg, Jr., John
F. Fulgoney and Kathleen Clover, or each of them, with full power of
substitution, such person's true and lawful attorney-in-fact and agent to
execute in such person's name, place and stead, in any and all capacities, the
Registration Statement to be filed by the Corporation on Form S-4 under the
Securities Act of 1933, as amended, relating to the shares of the Corporation's
Common Stock that may be issued in connection with the proposed merger of
Hilliard Lyons, Inc. with and into the Corporation.
Such persons hereby ratify and confirm all that any said attorney or
attorney-in-fact, or any substitute, shall lawfully do or cause to be done by
virtue hereof.
WITNESS the due execution hereof by the following persons in the
capacities indicated, as of September 18, 1998.
Name/Signature Capacity
- -------------- --------
/s/ THOMAS H. O'BRIEN Chairman, Chief Executive Officer and
- --------------------- Director
Thomas H. O'Brien
/s/ PAUL W. CHELLGREN Director
- ---------------------
Paul W. Chellgren
/s/ ROBERT N. CLAY Director
- ------------------
Robert N. Clay
/s/ GEORGE A. DAVIDSON, JR. Director
- ---------------------------
George A. Davidson, Jr.
/s/ DAVID F. GIRARD-DICARLO Director
- ---------------------------
David F. Girard-diCarlo
<PAGE> 3
Name/Signature Capacity
- -------------- --------
/s/ WALTER E. GREGG, JR. Senior Executive Vice President and
- ------------------------ Director
Walter E. Gregg, Jr.
/s/ WILLIAM R. JOHNSON Director
- ----------------------
William R. Johnson
/s/ BRUCE C. LINDSAY Director
- --------------------
Bruce C. Lindsay
/s/ W. CRAIG MCCLELLAND Director
- -----------------------
W. Craig McClelland
/s/ JANE G. PEPPER Director
- ------------------
Jane G. Pepper
/s/ JACKSON H. RANDOLPH Director
- -----------------------
Jackson H. Randolph
/s/ JAMES E. ROHR President, Chief Operating Officer and
- ----------------- Director
James E. Rohr
/s/ RODERIC H. ROSS Director
- -------------------
Roderic H. Ross
/s/ RICHARD P. SIMMONS Director
- ----------------------
Richard P. Simmons
/s/ THOMAS J. USHER Director
- -------------------
Thomas J. Usher
/s/ MILTON A. WASHINGTON Director
- ------------------------
Milton A. Washington
/s/ HELGE H. WEHMEIER Director
- ---------------------
Helge H. Wehmeier
<PAGE> 1
EXHIBIT 99.1
[Front of Proxy Card]
PROXY
HILLIARD-LYONS, INC.
Special Meeting of Shareholders
November ___, 1998
This Proxy is Solicited on Behalf of the Board of Directors of
Hilliard-Lyons, Inc.
KNOW ALL MEN BY THESE PRESENTS, that the undersigned shareholder of
Hilliard-Lyons, Inc., a Kentucky corporation (the "Company"), does hereby
nominate, constitute and appoint Kenneth L. Wagner and James M. Rogers, and each
of them, with full power to act alone, as true and lawful attorneys-in-fact
(each of whom shall have full power of substitution) to vote all shares of
common stock of the Company standing in my name on its books as of the close of
business on October __, 1998, at the special meeting of the shareholders of the
Company to be held on November __, 1998, at 5:00 p.m. local time, at the
Hilliard Lyons Center, 501 South Fourth Street, Louisville, Kentucky, or at any
adjournments or postponements thereof (the "Special Meeting"), with all powers
the undersigned would possess if personally present, as follows:
PROPOSAL to approve the Agreement and Plan of Merger, dated as of
August 20, 1998 (the "Agreement"), by and between the Company and PNC
Bank Corp., a Pennsylvania corporation ("PNC"), pursuant to which the
Company will be merged with and into PNC and the shareholders of the
Company would become shareholders of PNC upon the terms and subject to
the conditions set forth in the Agreement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER.
(YOU ARE REQUESTED TO COMPLETE, SIGN AND RETURN THIS PROXY
PROMPTLY IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE)
<PAGE> 2
[Back of Proxy Card]
THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL ON THE REVERSE SIDE IF NO
INSTRUCTION TO THE CONTRARY IS INDICATED. IF ANY OTHER BUSINESS IS PRESENTED AT
THE SPECIAL MEETING, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SOLE
DISCRETION OF THE PROXYHOLDERS.
Signature: ____________________ Date: ________
Signature: ____________________ Date: ________
Please insert date of signing. Sign exactly as name appears on this card. Where
stock is issued in two or more names, all should sign. If signing as attorney,
administrator, executor, trustee or guardian, give full title as such. A
corporation should sign by an authorized officer and affix seal.
