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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
COMMISSION FILE NUMBER: 0-11033
MERCHANTS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0045946
(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
5005 WOODWAY, SUITE 300 77056
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 622-0042
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE N/A
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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Common Stock, Par Value $1.00
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
There is no established market for the registrant's common stock. Accordingly,
the registrant is unable to estimate the value of shares held by non-affiliates.
On March 1, 1998, there were 1,951,839 shares of common stock issued and
outstanding. See Item 5, entitled "Market for the Registrant's Common Equity and
Related Stockholder Matters" for additional information concerning the market
for the registrant's common stock.
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FORM 10-K CROSS REFERENCE INDEX
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PART I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 64
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and Management 68
Item 13. Certain Relationships and Related Transactions 69
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 70
SIGNATURES 72
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements which constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "PSLRA"). These statements are being provided
in reliance upon the "safe harbor" provisions of the PSLRA as set forth in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. There are a number of such
statements appearing in this Form 10-K, including, but not limited to, (i) the
statement regarding management's expectations with respect to the outcome of
legal proceedings included in the paragraph under Item 3, Legal Proceedings,
(ii) the statement regarding management's expectations with respect to the
increase in the provision for loan losses in 1998 included in the second
paragraph under the heading, "Provision for Losses on Loans" contained in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), (iii) the statement regarding credit risk included in the
second paragraph under the heading "Investment Securities" in the Financial
Condition Analysis section of MD&A, (iv) the statement regarding expected growth
in real estate related loans included in the second paragraph under the heading
"Loans" in the Financial Condition Analysis section of MD&A, (v) the statement
regarding volatility in shareholders' equity included in the second paragraph
under the heading "Capital and Dividends" in the Financial Condition Analysis
section of MD&A, (vi) the statement regarding capital commitments included in
the paragraph under the heading "Capital Commitments" in the Financial Condition
Analysis section of MD&A, and (vii) the statement regarding transactions with
directors and officers and their affiliates included in the paragraph under Item
13, Certain Relationships and Related Transactions. Such forward-looking
statements include statements regarding the intent, belief, outlook, plans,
strategy, estimates or expectations of the Company, its directors or its
officers primarily with respect to future events and the future financial
performance of the Company, as well as underlying assumptions and other
statements which are other than statements of historical facts.
Forward-looking statements include, without limitation, any statement that
may predict, forecast, indicate or imply future results, performance or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "project," "will be," "will continue," "will likely result" or words
or phrases of similar meaning. Readers of this Form 10-K are cautioned that any
such forward-looking statements are based on current information known to the
Company and are not guarantees of future events or performance and involve risks
and uncertainties, and that actual results may differ materially from those in
the forward-looking statements as a result of various factors. The accompanying
information contained in this Form 10-K identifies important factors that could
cause such differences. These factors include, without limitation, changes in
economic conditions, changes in interest rates, loss of deposits and loan demand
to other financial institutions, substantial changes in financial markets,
changes in real estate values and the real estate market, regulatory changes,
changes in the nature of the Company's loan portfolio, unanticipated results in
pending legal proceedings, unanticipated changes in the operations or financial
condition of the Company's borrowers, and other factors referenced in this Form
10-K. Though the Company has attempted to enumerate those factors it believes in
this Form 10-K. Though the Company has attempted to enumerate those factors it
believes to be important to its business, the Company wishes to caution
investors that other factors may prove to be important in affecting the
Company's business or operations. New factors emerge from time to time and it is
not possible for the Company to predict all of such factors, nor can it assess
the impact of each such factor on its business or the extent to which any
factor, or combination of factors, may cause the Company's actual results to
differ materially from those anticipated in the forward-looking statements. The
forward-looking statements are expressed in good faith and are believed by the
Company to have a reasonable basis, but there can be no assurance that the
expectations, beliefs or projections contained in the forward-looking statements
will result or be achieved or accomplished. In addition, the Company disclaims
any obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
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PART I.
ITEM 1. BUSINESS
GENERAL
Merchants Bancshares, Inc. ("Merchants Bancshares" or the "Company") is a
Texas corporation organized in 1982 and is also a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "Holding Company Act").
Merchants Bancshares maintains its principal offices at 5005 Woodway, Suite 300,
Houston, Texas 77056 (telephone: (713) 622-0042).
Merchants Bancshares owns all of the outstanding capital stock of Gulf
Southwest Nevada Bancorp, Inc. ("Nevada Bancorp"), a Nevada corporation and an
intermediate bank holding company (unless otherwise indicated, all references
herein to Merchants Bancshares include Nevada Bancorp). Nevada Bancorp owns
100.0% of the outstanding capital stock of Merchants Bank ("Merchants Bank" or
the "Subsidiary Bank") and 80.0% of the outstanding capital stock of Funds
Management Group, Inc. ("FMG").
Merchants Bancshares' principal activity is the ownership and management of
the Subsidiary Bank. The Subsidiary Bank is a Texas state-chartered banking
association. The Subsidiary Bank offers a full range of banking services to its
customers, including demand and time deposits and various types of commercial
and consumer loans. The Subsidiary Bank draws substantially all of its deposits
and a majority of its loans from the Houston/Galveston SMA.
As a bank holding company, Merchants Bancshares may own or control,
directly or indirectly, one or more banks and furnish services to such banks.
The banking activities of Merchants Bancshares are conducted by the Subsidiary
Bank. The officers and directors of the Subsidiary Bank direct its operations.
The principal role of Merchants Bancshares is to provide management assistance
with respect to various aspects of the Subsidiary Bank operations, including the
areas of asset and liability management, business development, loan policies and
procedures, capital planning, advertising, data processing, credit and loan
administration, accounting, auditing, financial reporting and compliance with
legal and governmental regulations.
ACQUISITION OF TEXAS GULF COAST BANCORP, INC.
On May 1, 1995, Nevada Bancorp consummated its acquisition of Texas Gulf
Coast Bancorp, Inc. ("Texas Gulf"). Texas Gulf was a holding company which owned
100% of the stock of First Bank Mainland in LaMarque, Texas and over 95% of the
stock of each of Texas City Bank in Texas City, Texas and First Bank Pearland,
Pearland, Texas. As of May 1, 1995, Texas Gulf had consolidated assets of
approximately $203 million.
On January 1, 1996, First Bank Mainland, First Bank Pearland and Texas City
Bank were merged with and into Merchants Bank, which was the surviving bank. The
banking facilities of the three merged banks operate as branch facilities of
Merchants Bank.
SUMMARY OF PENDING MERGER
On January 16, 1998, the Company entered into an Agreement and Plan of
Merger to be acquired by Union Planters Corporation ("UPC"), a publicly traded
bank holding company based in Memphis, Tennessee, in a tax-free reorganization
to be accounted for as a pooling of interests. Pursuant to the merger agreement,
UPC will exchange one (1) share of its Common Stock, or approximately 1.9
million shares, for each outstanding share of the common stock of the Company.
The merger is subject to satisfaction of certain contractual conditions to
closing, including regulatory and shareholder approvals, and is expected to be
consummated in the second quarter of 1998. For additional information, see
"--Pending Merger."
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BANKING SERVICES
Merchants Bank is a state-chartered banking association organized in 1970.
The services offered by the Subsidiary Bank are generally those offered by
commercial banks of comparable size in the Subsidiary Bank's trade area. Such
services include short-term and medium-term loans, revolving credit
arrangements, inventory and accounts receivable financing, equipment financing,
real estate lending, Small Business Administration lending, letters of credit,
installment and other consumer loans, savings accounts and various savings
programs, including individual retirement accounts, and interest and
non-interest bearing checking accounts. These services are offered to
commercial, industrial, financial and individual customers.
Other than the Subsidiary Bank's charter to operate as a bank, the business
of Merchants Bancshares is not materially dependent upon any patent, trademark,
license, franchise or concession. The business of Merchants Bancshares is not
seasonal.
SUBSIDIARY BANK
The following table sets forth certain balance sheet and operating
information at December 31, 1997, with respect to the Subsidiary Bank:
MERCHANTS BANK
(IN THOUSANDS)
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AT DECEMBER 31, 1997
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Balance Sheet:
Assets $ 544,370
Deposits 485,589
Loans 342,566
Allowance for Credit Losses 3,687
Total Equity 53,878
Results of Operations:
Interest Income $ 39,168
Interest Expense 12,220
Provision for Credit Losses 1,740
Net Earnings 7,649
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Merchants Bank's main office is at 999 North Shepherd, Houston, Texas with
thirteen branches located in Houston and the surrounding communities.
SUBSIDIARY BANK HOLDING COMPANY
Nevada Bancorp is a Nevada corporation organized in 1994, and is wholly
owned by Merchants Bancshares. The only activities of Nevada Bancorp relate to
holding the stock of the Subsidiary Bank and FMG. Nevada Bancorp currently has
no employees.
SUPERVISION AND REGULATION
MERCHANTS BANCSHARES. As a bank holding company, Merchants Bancshares is
subject to regulation by the Federal Reserve Board ("FRB") and is required to
file with the FRB an annual report and to furnish such additional information as
the FRB may require pursuant to the Holding Company Act. The FRB may conduct
examinations of Merchants Bancshares and its nonbanking subsidiary, FMG.
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Merchants Bancshares is required to obtain the prior approval of the FRB
for the acquisition of five percent or more of the voting shares or
substantially all the assets of any bank or bank holding company. In considering
proposed acquisitions, the FRB considers the expected benefits to the public,
including greater convenience, identifying and meeting the credit needs of the
applicant's entire community, increased competition or gains in efficiency,
weighed against the risks of possible adverse effects, such as undue
concentration of resources, lessening or elimination of competition, conflicts
of interest or unsound banking practices. If an application involves the
acquisition of the voting shares of a state or national bank in Texas, a copy of
such application must be submitted to the Texas Banking Commissioner
("Commissioner") pursuant to the Texas Finance Code (the "Finance Code").
Bank holding companies are prohibited by law, except in certain instances
prescribed by statute, from acquiring a direct or indirect interest in or
control of more than five percent of the voting shares of any company which is
not a bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
providing services to its subsidiaries. Bank holding companies, however, may
engage in, and may own shares of companies engaged in, certain activities found
by the FRB to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. When an application concerning these
activities is filed with the FRB, a copy of such application also must be
submitted to the Commissioner pursuant to the Finance Code for a determination
as to whether the application should be approved. The Commissioner is required
to oppose the application if the proposed activities would be detrimental to the
public's interest as the result of probable effects, such as undue concentration
of resources, competition, conflicts of interest or unsound banking practices.
Under the Holding Company Act and the FRB's regulations, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or lease or sale of
property or furnishing of services. The FRB possesses enforcement powers
intended to prevent or eliminate practices of bank holding companies and their
non-bank subsidiaries deemed to be unsafe and unsound or in violation of
applicable laws.
Since June 1, 1997, banks may merge with a bank located in another state so
long as one or both of the states have not opted out of interstate branching. A
bank whose home state opts out of interstate branching may not participate in
any interstate branching. The State of Texas has elected to opt out of
interstate branching through legislation that will expire September 2, 1999.
COMMUNITY REINVESTMENT. Merchants Bank is subject to the regulation under
the Community Reinvestment Act of 1977 ("CRA") and the federal banking agencies'
other implemented regulations promulgated thereunder. Under the CRA, all
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operation to help meet the credit needs of their entire
communities, including low-to-moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions
nor does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the federal banking regulatory
agencies, in connection with their examination of a depository institution, to
assess the institution's record in assessing and meeting the credit needs of the
community served by that institution, including low-to-moderate income
neighborhoods. The assessment of the institution's record is available to the
public. Further, such assessment is required of any institution which has
applied to: (i) charter a national bank; (ii) obtain deposit insurance coverage
for a newly chartered institution; (iii) establish a new branch office that will
accept deposits; (iv) relocate an office; or (v) merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated financial
institution. In the case of a bank holding company applying for approval to
acquire a bank or bank holding company, the FRB will assess the records of each
subsidiary depository institution of the applicant bank holding company, and
such records may be the basis for denying the application. In its most recent
CRA compliance examination, Merchants Bank received a CRA rating of
"outstanding".
SUBSIDIARY BANK. As a Texas state chartered bank, the Subsidiary Bank is
subject to regulation, supervision and periodic examination by the Texas
Department of Banking. Because the Subsidiary Bank is not a member of the
Federal Reserve System (i.e., a "non-member bank") and its deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent authorized
by law, it is also subject to supervision and regulation, as
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well as examination, by the FDIC. Various requirements of federal and Texas law
affect the operation of the Subsidiary Bank, including requirements relating to
maintenance of reserves against deposits, restrictions on the nature and the
amount of loans which may be made and the interest that may be charged thereon
and restrictions relating to investments and other activities.
Cash revenues derived from dividends paid by the Subsidiary Bank represent
the primary source of revenues for Merchants Bancshares. Under the Finance Code,
a state bank may not reduce its capital and surplus through dividends without
the prior written approval of the Commissioner. Dividends may be paid out of the
undivided profits of the Subsidiary Bank. At December 31, 1997, there was an
aggregate amount of $33,468,000 available for the payment of dividends by the
Subsidiary Bank under these restrictions. The payment of dividends is further
subject to the authority of regulatory authorities to prohibit payment of
dividends if such payment is determined to be an unsafe or unsound banking
practice or if after making such distribution, the Subsidiary Bank would be
considered "undercapitalized".
For further discussion of certain additional regulations affecting
Merchants Bancshares and the Subsidiary Bank, reference should be made to the
"Government Fiscal and Monetary Policies" discussion below.
COMPETITION
The activities in which the Subsidiary Bank engages are highly
competitive. Each activity engaged in and geographic market served involves
competition with other banks, as well as with non-banking financial institutions
and non-financial enterprises. The Subsidiary Bank actively competes with other
banks in its efforts to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and charged on loans
and in other aspects of banking. At December 31, 1997, the Subsidiary Bank had
deposits of approximately $485.6 million.
In addition to competing with other commercial banks within and outside
its primary service area, the Subsidiary Bank competes with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, industrial loan associations,
insurance companies, small loan companies, finance companies, mortgage
companies, real estate investment trusts, certain governmental agencies, credit
card organizations and other enterprises. Additional competition for deposits
comes from governmental and private issuers of debt obligations and other
investment alternatives for depositors such as money market funds and mutual
funds.
CUSTOMERS. The Subsidiary Bank is not dependent upon any single customer or
few customers, the loss of any one or more of which would have a materially
adverse effect upon its business.
GOVERNMENT FISCAL AND MONETARY POLICIES
The commercial banking business is affected not only by general economic
conditions but also by the fiscal and monetary policies of the FRB. Changes in
the discount rate on FRB borrowings, availability of borrowings at the FRB
"discount window," open market operations, the imposition of any changes in
reserve requirements against banks' deposits and assets of foreign branches, the
imposition of any changes in reserve requirements against certain borrowings by
banks and their affiliates, and the placing of limits on interest rates which
banks may pay on time and savings deposits are some of the instruments of fiscal
and monetary policy available to the FRB. Fiscal and monetary policies influence
to a significant extent the overall growth of bank loans, investments and
deposits and the interest rates charged on loans or paid on time and savings
deposits. The nature of future monetary policies and the effect of such policies
on the future business and earnings of Merchants Bancshares and the Subsidiary
Bank cannot be predicted.
The FRB has cease and desist powers over bank holding companies,
non-banking subsidiaries or any institution-affiliated party thereof to
forestall activities which represent unsafe and unsound practices or constitute
violations of law or regulations. The FRB can also require affirmative actions
to correct a violation or practice through the issuance of a cease and desist
order. In certain instances, the FRB is empowered to assess civil penalties
against companies or individuals who violate the Holding Company Act or
regulations or orders issued
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pursuant thereto in amounts up to $1,000,000 for each day's violation, to order
termination of non-banking activities of non-banking subsidiaries and to order
termination of ownership and control of a non-bank subsidiary by a bank holding
company.
Section 18(j) of the Federal Deposit Insurance Act makes applicable to
state nonmember insured banks the provisions of Section 23A of the Federal
Reserve Act among other statutes. Section 23A of the Federal Reserve Act and
related statutes impose limits and collateralization requirements with respect
to the amount of loans, extensions of credit, or investments or certain other
transactions by member banks with their "affiliates". Merchants Bancshares,
Nevada Bancorp and FMG are affiliates of the Subsidiary Bank and, therefore,
these restrictions are applicable to transactions by the Subsidiary Bank with
Merchants Bancshares, Nevada Bancorp and FMG. In addition, Section 23B of the
Federal Reserve Act prohibits a bank that is an insured depository institution
from engaging in certain transactions (including, for example, loans) with
certain affiliates unless the transactions are substantially the same or at
least as favorable to such bank or its subsidiaries as those prevailing at the
time for comparable transactions with or involving other nonaffiliated
companies. In the absence of such comparable transactions, any transaction
between a member bank and its affiliates must be on terms and under
circumstances, including credit standards, that, in good faith, would be offered
to or would apply to nonaffiliated companies. The Subsidiary Bank is also
subject to certain prohibitions against tie-in arrangements in connection with
extensions of credit and certain other transactions.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") places certain restrictions on activities of insured institutions
depending on their level of capital. An institution is categorized as either
"well capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" or "critically undercapitalized." Federal banking regulators
are authorized to take prompt corrective action against institutions which are
in one of the undercapitalized categories. The capital classification of a bank
also affects the frequency of examinations of the bank and the deposit insurance
premiums paid by the bank. Under FDICIA, the FDIC is authorized to assess
insurance premiums on a bank's deposits at a variable rate depending on the
probability that the deposit insurance fund will incur a loss with respect to
the bank. Banks which are adequately capitalized or well capitalized presently
are not assessed premiums for deposit insurance; however, all depository
institutions are assessed a nominal annual fee. Currently, Merchants Bancshares
and the Subsidiary Bank are deemed to be well capitalized. This capital category
is determined only for purposes of applying the prompt corrective action
provisions of FDICIA and may not constitute an accurate representation of the
overall financial condition of Merchants Bancshares or the Subsidiary Bank.
EFFECTS OF INTEREST RATES AND USURY LAWS. Texas usury laws limit the rate
of interest that may be charged by the Subsidiary Bank. Certain federal laws
provide a limited preemption of Texas usury laws. The maximum rate of interest
that the Subsidiary Bank may charge on business loans under Texas law varies
between 18% per annum and (i) 28% per annum for business loans above $250,000 or
(ii) 24% per annum for other loans. Texas' floating usury ceilings are tied to
the 26-week United States Treasury Bill auction rate. A 1980 federal statute
removed the interest ceiling under usury laws for loans by the Subsidiary Bank
which are secured by first liens on residential real property.
EMPLOYEES. Merchants Bancshares and its subsidiaries had 322 full-time
equivalent employees as of December 31, 1997. None of the employees are
represented by any collective bargaining unit, and management believes it has
excellent relations with its employees.
PENDING MERGER.
On January 16, 1998, Merchants Bancshares, Inc. and UPC entered into an
Agreement and Plan of Merger (the "Agreement"), pursuant to which Merchants
Bancshares will be acquired by UPC. In accordance with the terms of the
Agreement, UPC will acquire Merchants Bancshares pursuant to the merger of
Merchants Bancshares with and into Union Planters Holding Corporation, a
wholly-owned subsidiary of UPC organized under the laws of Tennessee (the
"Merger"). Union Planters Holding Corporation will be the surviving entity
resulting from the Merger.
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Upon consummation of the Merger, each share of the $1.00 par value common
stock of Merchants Bancshares ("Merchants Common Stock") (excluding shares as to
which dissenter's rights are exercised or shares held by Merchants Bancshares,
UPC, or any of their respective subsidiaries, in each case other than in a
fiduciary capacity or as a result of debts previously contracted) issued and
outstanding at the effective time of the Merger (the "Effective Time") shall
cease to be outstanding and shall be converted into and exchanged for the right
to receive one share of the $5.00 par value common stock of UPC, together with
associated preferred stock purchase rights (collectively, "UPC Common Stock")
(subject to possible adjustment as described below, the "Exchange Ratio").
The parties anticipate that the Merger will be completed in the second
quarter of 1998.
The Merger is intended to qualify as a reorganization (within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended) and for
financial accounting purposes, be accounted for as a "pooling of interests."
Consummation of the Merger is subject to various conditions, including: (i)
receipt of the approval by the shareholders of Merchants Bancshares of the
Merger; (ii) receipt of the approval by the shareholders of UPC at a meeting of
the shareholders of UPC (the "UPC Shareholders Meeting") of an amendment to the
Restated Charter of Incorporation of UPC to increase the number of authorized
shares of UPC Common Stock to a number sufficient to permit UPC to issue the
shares of UPC Common Stock contemplated by the Merger; (iii) receipt of
regulatory approval from the Board of Governors of the Federal Reserve System
and certain other applicable Regulatory Authorities (as that term is defined in
the Agreement); (iv) receipt of an opinion of legal counsel as to the tax
treatment of certain aspects of the Merger; (v) receipt of a letter from Price
Waterhouse LLP, UPC's independent public accountants, to the effect that the
Merger will qualify for pooling-of-interests accounting treatment; (vi) receipt
by Merchants Bancshares of a fairness opinion from Price Waterhouse LLP,
Merchants Bancshares' financial advisor, dated the date of the proxy statement
to be mailed to Merchants Bancshares' shareholders, concerning the fairness of
the Merger to Merchants Bancshares' shareholders, from a financial point of
view; and (vii) satisfaction of certain other conditions.
The Agreement may be terminated (i) by the mutual consent of Merchants
Bancshares and UPC, (ii) by Merchants Bancshares, if UPC breaches the Agreement
and fails to cure such breach, (iii) by UPC, if Merchants Bancshares breaches
the Agreement and fails to cure such breach, (iv) by either Merchants Bancshares
or UPC, if any consent by a Regulatory Authority required for the consummation
of the Merger is denied and is non-appealable, (v) by either Merchants
Bancshares or UPC, if the shareholders of Merchants Bancshares do not approve
the Merger, (vi) by UPC, if the shareholders of UPC do not approve the amendment
to the Restated Charter of Incorporation of UPC to increase the number of
authorized shares of UPC Common Stock, (vii) by Merchants Bancshares, if the
shareholders of UPC do not approve the amendment to the Restated Charter of
Incorporation of UPC to increase the number of authorized shares of UPC Common
Stock, unless UPC gives notice to Merchants Bancshares of its intent to proceed
with the Merger by acquiring the required shares of UPC Common Stock by some
other means, (viii) by Merchants Bancshares, if the Merger is not consummated by
September 30, 1998, provided that the failure to consummate is not caused by the
willful breach of the Agreement by Merchants Bancshares, (ix) by UPC, if the
Merger is not consummated by September 30, 1998, provided that the failure to
consummate is not caused by the willful breach of the Agreement by UPC,
provided, however, that if the shareholders of UPC do not approve the amendment
to the Restated Charter of Incorporation of UPC to increase the number of
authorized shares of UPC Common Stock, then UPC may not terminate the Agreement
pursuant to this provision, or (x) by Merchants Bancshares if the Average
Closing Price (as that term is defined in the Agreement) of UPC Common Stock (a)
is less than 85% of the Starting Price (as that term is defined in the
Agreement) and (b) reflects a decline, on the Determination Date (as defined in
the Agreement), of more than 15% below a weighted index of the stock prices of a
group of bank holding companies designated in the Agreement, provided, however,
that in the event Merchants Bancshares gives notice of its intention to
terminate the Agreement based on such provision, UPC has the right, within five
(5) days of its receipt of such notice, to elect to adjust the Exchange Ratio in
accordance with the terms of the Agreement, and the Agreement will not
terminate.
Merchants Bancshares will be obligated to pay UPC the sum of $6,200,000 if,
prior to the earlier of (i) March 31, 1999, (ii) the Effective Time, or (iii)
the date on which the Agreement is terminated pursuant to certain sections of
the Agreement, Merchants Bancshares enters into, supports or indicates its
support for a letter of intent, agreement in principle, or definitive agreement
(whether or not considered binding, non-binding, conditional or unconditional)
with
8
<PAGE> 10
any third party with respect to a tender offer, exchange offer, merger,
consolidation, share exchange, business combination or similar transaction or
the acquisition by such third party of all or a substantial equity interest in,
or all or a substantial portion of the assets of, Merchants Bancshares or any of
Merchants Bancshares' subsidiaries.
UPC will be obligated to pay Merchants Bancshares the sum of $6,200,000 if
the shareholders of UPC fail to approve an amendment to the Restated Charter of
Incorporation of UPC to increase the number of authorized shares of UPC Common
Stock and (i) UPC fails to give notice to Merchants Bancshares within 30 days
after the UPC Shareholders Meeting that it intends to proceed with the Merger by
acquiring the required shares of UPC Common Stock by some other means, (ii) UPC
gives notice to Merchants Bancshares within 30 days after the UPC Shareholders
Meeting that it does not intend to proceed with the Merger, or (iii) UPC gives
notice to Merchants Bancshares within 30 days after the UPC Shareholders Meeting
that it intends to proceed with the Merger by acquiring the required shares of
UPC Common Stock by some other means, and the Merger is not consummated by the
later of (A) September 30, 1998, or (B) the last day of the calendar month
containing the date which is sixty days after the conclusion of the UPC
Shareholders' Meeting, but no later than October 31, 1998.
The Agreement and the Merger will be submitted for approval at a meeting of
the shareholders of Merchants Bancshares. Prior to the shareholders' meeting,
UPC will file a registration statement with the Securities and Exchange
Commission registering under the Securities Act of 1933, as amended, the shares
of UPC Common Stock to be issued in exchange for the outstanding shares of
Merchants Bancshares Common Stock. Such shares of stock of UPC will be offered
to the Merchants Bancshares shareholders pursuant to a prospectus that also will
serve as a proxy statement for the meeting of the shareholders of Merchants
Bancshares to consider and vote upon the Agreement and the Merger.
ITEM 2. PROPERTIES
The executive offices of Merchants Bancshares are located at 5005 Woodway, Suite
300, Houston, Texas 77056. The building is owned by Merchants Bank and consists
of a three story building with approximately 45,000 square feet. The executive
offices occupy approximately 2,200 square feet, the branch facility utilizes
approximately 8,000 square feet and the remaining space is rentable office
space.
The principal office of the Subsidiary Bank is a leased facility located at 999
North Shepherd in Houston. In addition, the Subsidiary Bank also leases the
banking office located in Atascocita, Texas. The other twelve banking offices
are owned by Merchants Bank.
ITEM 3. LEGAL PROCEEDINGS
Neither Merchants Bancshares nor any of its subsidiaries is a party to any legal
proceedings which, in management's judgment, based upon opinions of legal
counsel, would have a material adverse effect on the consolidated financial
position of Merchants Bancshares and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since the annual shareholders' meeting held on May 20, 1997, no matters have
been submitted to a vote of the shareholders of Merchants Bancshares.
9
<PAGE> 11
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
CAPITAL STOCK
There is no established public trading market for shares of Merchant's Common
Stock. The Board of Directors of Merchants Bancshares has no present intention
to arrange for the listing of the Merchants Common Stock on any stock exchange.
Notwithstanding the foregoing, a limited market for the shares of the Merchants
Common Stock exists, and such shares are traded on a sporadic basis. During
1997, 96,494 shares of the Merchants Common Stock were presented for transfer on
the books of Merchants Bancshares.
The following table sets forth the number of shares of the Merchants Common
Stock presented for transfer on the books of Merchants Bancshares for each
quarterly period within the last two calendar years.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
First Quarter 31,790 15,249
Second Quarter 24,096 7,388
Third Quarter 28,684 15,342
Fourth Quarter 11,924 13,400
</TABLE>
Because there is no public trading market for the Merchants Common Stock, the
trading price is determined by private negotiations between the buyer and the
seller.
HOLDERS
At March 1, 1998, Merchants Common Stock was owned of record by 959
shareholders. On such date, no shares of Merchants Bancshares' preferred stock
were issued and outstanding.
DIVIDENDS
During 1997 and 1996, the Company paid quarterly dividends totaling
$2,245,000, or $1.15 per common share, and $1,597,000, or $.82 per common share,
respectively.
For information with respect to restrictions on the ability of the Company
and its subsidiaries to declare and pay dividends, see "Item 1. Business -
Supervision and Regulation."
SALES OF UNREGISTERED SECURITIES
On November 25, 1996, the Company sold 10,000 shares of Common Stock to Kim
Wheless at a price of $15.00 per share. On June 3, 1996, the Company issued
1,000 shares of Common Stock to each of Edgar Monteith and Stuart Hellmann in
connection with their service on the Development Board at the Tanglewood branch.
These shares were issued in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Loans $ 342,566 $ 294,524 $ 237,564 $ 144,459 $ 127,452
Allowance for loan losses 3,687 2,713 2,411 2,063 1,986
Investment securities 130,629 143,272 152,033 56,852 52,329
Total assets 545,951 494,570 486,649 253,027 242,005
Deposits 484,357 439,043 431,381 226,064 218,942
Long-term debt 0 0 3,083 0 0
Stockholders' equity 57,987 53,511 49,322 25,539 21,932
INCOME INFORMATION:
Interest income $ 39,228 $ 35,339 $ 29,174 $ 16,965 $ 15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
---------- ---------- ---------- ---------- ----------
Net interest income 27,032 24,170 19,597 12,169 10,858
Provision for loan losses 1,740 940 135 50 410
Noninterest income 6,253 5,677 4,655 3,238 2,979
Noninterest expense 22,320 19,888 15,878 10,393 10,494
---------- ---------- ---------- ---------- ----------
Income before income taxes 9,225 9,019 8,239 4,964 2,933
Income tax expense 2,837 2,634 2,332 999 512
---------- ---------- ---------- ---------- ----------
Net income $ 6,388 $ 6,385 $ 5,907 $ 3,965 $ 2,421
========== ========== ========== ========== ==========
PER SHARE DATA:
Weighted average number of shares
of common stock outstanding 1,952,883 1,945,178 1,718,211 1,258,636 1,261,731
========== ========== ========== ========== ==========
Net income per common share $ 3.27 $ 3.28 $ 3.44 $ 3.15 $ 1.92
========== ========== ========== ========== ==========
Dividends per common share $ 1.15 $ .82 $ 0.41 $ 0.20 $ 0.10
========== ========== ========== ========== ==========
Book value per common share $ 29.71 $ 27.37 $ 25.38 $ 20.29 $ 17.39
========== ========== ========== ========== ==========
Return on average assets 1.23% 1.32% 1.47% 1.61% 1.03%
Return on average shareholders'
equity 11.35% 12.42% 14.61% 16.93% 11.56%
Dividend payout ratio 35.17% 25.00% 11.92% 6.35% 5.21%
Average equity to average assets 10.83% 10.60% 10.04% 9.52% 8.89%
Allowance for loan losses as a
percentage of nonperforming
loans 143.74% 88.03% 60.65% 153.6% 122.4%
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995 and following reflect the acquisition of Texas Gulf Coast Bancorp,
Inc., which occurred May 1, 1995. See note 2 to the Company's Consolidated
Financial Statements.
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section provides a narrative discussion and analysis of the Company's
results of operations and financial condition. The discussion should be read
with the consolidated financial statements and accompanying notes.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the Year 2000. This
could result in a major system failure or miscalculations.
The Company expects its Year 2000 date conversion project to be completed
on a timely basis. During the execution of this project the Company will incur
internal staff costs as well as consulting and other expenses related to
enhancements necessary to prepare the systems for the Year 2000. The expense of
the Year 2000 project as well as the related potential effect on the Company's
earnings is not expected to have a material effect on its financial position or
results of operations.
1997 EARNINGS OVERVIEW
The Company reported net earnings for 1997 of $6.4 million, versus $6.4
million and $5.9 million, respectively, in 1996 and 1995. On a fully diluted
basis, earnings per common share were $3.27 in 1997 compared to $3.28 in 1996
and $3.44 in 1995. Results for 1997 were reduced $1.6 million (approximately
$1.0 million after taxes) by merger-related expenses. The "Merger-Related
Expenses" discussion which follows provides details of the components of these
charges. Excluding the impact of the above described net charges on the
Company's results, earnings for 1997 would have been approximately $7.4 million,
or $3.79 per share on a fully-diluted basis.
The growth in 1997 earnings before the merger-related expenses was due to
the continued growth of net interest income, which increased 12% between 1997
and 1996, and the continued growth of noninterest income, which increased 10%.
Partially offsetting this growth was a higher provision for losses on loans,
which increased $800,000 between 1997 and 1996. The increase in the provision
for losses on loans resulted from the 16% increase in the volume of loans.
Noninterest expenses excluding the merger-related expenses increased only 4% in
1997. The following sections provide a more detailed discussion of the Company's
financial condition and results of operations.
MERGER RELATED EXPENSES
During 1997, the Company incurred certain merger-related expenses totaling
$1.6 million. Approximately $25,000 were expenses related to the preparation of
the due diligence site and approximately $72,000 for legal and professional fees
and expenses. In contemplation of the Merger, additional items were accrued for
and expensed in 1997. These accrued expenses were: (i) $1.2 million for an
investment advisory fee, (ii) $200,000 for a "fairness" opinion letter and (iii)
$35,000 for additional legal and professional fees.
Prior to consummation, certain other items are expected to be accrued and
expensed by the Company. Currently, the Company's pension plan is underfunded by
approximately $800,000 which will be funded prior to closing, as well as a
non-competition fee to be paid to Mr. J. W. Lander, III of $400,000.
The Company will pay Price Waterhouse an investment advisory fee of one
percent (1%) of the total transaction value to be determined at closing. The
Company has accrued for the one percent (1%) fee assuming a $124 million total
transaction value.
12
<PAGE> 14
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income is the principal source of earnings for the Company.
Net interest income is comprised of interest income and loan related fees less
interest expense. Net interest income is affected by a number of factors
including the level, pricing, mix and maturity of earning assets and
interest-bearing liabilities; interest-rate fluctuations; and asset quality. For
purposes of this discussion, net interest income is presented on a
fully-taxable-equivalent basis (FTE), which restates tax-exempt income to an
amount that would yield the same pre-tax income had the income been subject to
taxation at the federal statutory income tax rate. Reference is made to Table 4
and Table 5, which present the Company's average balance sheet and rate/volume
analysis for each of the three years ended December 31, 1997.
Net interest income (FTE) was $27.5 million in 1997, an increase of $2.8
million, or 11%, over 1996. Net interest income (FTE) in 1995 was $20.0 million.
The growth over the three year period is attributable primarily to the growth of
average earning assets, higher yields on earning assets, and a higher percentage
of loans in earning assets.
The net interest margin (net interest income (FTE) as a percentage of
average earning assets) for 1997 was 5.87%, compared to 5.61% and 5.48%,
respectively, for 1996 and 1995. The interest-rate spread between earning assets
and interest-bearing liabilities increased 23 basis points between 1996 and 1997
to 4.74% following a thirteen-basis-point increase between 1995 and 1996 from
4.38% to 4.51%.
INTEREST INCOME
A breakdown of the components of average earning assets is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average earning assets
(in millions) $468.3 $439.4 $364.9
Comprised of:
Net loans 67% 59% 55%
Investment securities 28 34 32
Federal funds sold 4 6 8
Other earning assets 1 1 5
</TABLE>
Interest income (FTE) increased $3.9 million in 1997 to $39.7 million. The
increase is attributable to the growth of average earning assets which increased
interest income (FTE) by approximately $3.8 million in 1997. Average earning
assets in 1997 were $468.3 million, an increase of $28.9 million over 1996. Also
contributing to the increase in interest income (FTE) were higher yields on
average earning assets which increased interest income (FTE) approximately
$65,000. Higher loan volumes and yields, net of declines in the other earning
asset categories, accounted for all of the growth. The mix of average earning
assets has changed over the past three years due to a higher percentage of loans
to total earning assets between 1997 and 1995.
The growth of loans, which accounts for the increase in total earning
assets, is due primarily to the branch facilities opened in the latter part of
1996. The average yield on loans increased 4 basis points between 1996 and 1997
to 9.59%. Between 1996 and 1997, average investment securities decreased $17.4
million to $130.4 million and the average yield decreased 3 basis points to
6.23%.
The $6.3 million increase in interest income (FTE) from 1995 to 1996 was
attributable to the growth of average earning assets, primarily loans, partially
offset by $522,000 due to lower yields on earning assets. Average loans
increased $59.6 million between 1995 and 1996 and the average yield decreased
fourteen basis points to 9.55%.
13
<PAGE> 15
INTEREST EXPENSE
A breakdown of the components of average interest-bearing liabilities is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Average interest-bearing liabilities
(in millions) $326.8 $307.3 $257.3
Comprised of:
Deposits:
Interest-bearing demand 35% 34% 32%
Savings 16 16 18
Time 49 50 49
Borrowings 0 0 1
- ---------------------
Rate on average interest-bearing
liabilities 3.73% 3.64% 3.72%
</TABLE>
Interest expense increased $1.0 million, or 9%, in 1997 to $12.2 million.
The increase is attributable to an increase in interest-bearing liabilities
which accounted for $704,000 of the increase, and an increased rate variance of
$323,000. Interest bearing liabilities increased $19.5 million during 1997 to
$326.8 million, primarily due to the growth of interest bearing deposits. The
growth of these deposits was required to fund the growth of average earning
assets. The average rate on interest-bearing liabilities increased nine basis
points.
The increase in interest expense between 1995 and 1996 was attributable to
the growth in interest-bearing liabilities from $257.3 million to $307.3
million, or 19%. This increase was partially offset by an eight-point-basis
decrease in the rates paid on interest-bearing liabilities to 3.64% from 3.72%.
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans increased $800,000 in 1997 to $1.7
million as compared to $940,000 and $135,000, respectively, in 1996 and 1995.
The increases related primarily to the increased volume of loans. For a
discussion of the allowance for losses on loans, net charge-offs and
nonperforming assets, refer to the "Allowance for Losses on Loans" and
"Nonperforming Assets" sections which follow.
Management does not expect the provision for losses on loans to increase at
the same rate in 1998 as it did in 1997. In 1997, the provision for losses on
loans was 54 basis points of average loans compared to 36 basis points and 7
basis points, respectively, in 1996 and 1995. There are a number of factors that
impact the level of the provision for losses on loans, some of which are beyond
management's control, such as current and anticipated economic conditions and
the related impact on specific borrowers, the level of personal bankruptcies,
the level of nonperforming assets and changes in the nature of the loan
portfolio.
NONINTEREST INCOME
Noninterest income was $6.2 million in 1997, an increase of 10% over $5.7
million for 1996. Noninterest income was $4.7 million in 1995. Service charges
on deposit accounts, the largest component of noninterest income, decreased by
4% in 1997 as compared to an increase of 28% in 1996. The components of the
other service charges and fees consist of miscellaneous fees such as collection
fees, credit card fees, safe deposit rentals, check printing income and wire
transfer fees. These fees correlate to the level of transactions in each of the
referenced categories. In addition, accounting fees and commissions earned by
FMG are included in the total and account for the majority of the increase
during 1997.
14
<PAGE> 16
Other operating income increased $262,000, or 27%, from 1996 to 1997. The
majority of other operating income is derived from the operations of the
mortgage division and includes origination fees as well as fees charged for
servicing the underlying mortgages.
NONINTEREST EXPENSE
Noninterest expense was $22.3 million in 1997, an increase of $2.4 million
from 1996. Noninterest expense for 1995 was $15.9 million. In 1997, the largest
component of the increase was merger-related expenses (see Item 7. "Merger
Related Expenses"), which impacted noninterest expense by approximately $1.6
million. The merger-related charges were fees for legal, accounting and
financial advisory services.
Salaries and employee benefits expense represents the largest component of
noninterest expense. In 1997, salaries and employee benefits expense increased
$177,000, or 2%, to $11.3 million. This compared to $11.1 million in 1996 and
$8.3 million in 1995. The merger of the former data processing subsidiary into
Merchants Bank was the primary cause for the increase in salaries and employee
benefits expense from 1995 to 1996. At December 31, 1997, the Company had 322
full-time equivalent employees compared to 331 at December 31, 1996.
The Company monitors its expense levels using the expense ratio and
utilizes the efficiency ratio as a measure of its success in increasing
revenues, while controlling expenses. The expense ratio (noninterest expense
minus noninterest income, excluding significant nonrecurring revenues and
expenses and investment securities gains and losses divided by average assets)
was 2.79% in 1997 compared to 2.93% for 1996. The efficiency ratio, which is
calculated excluding the same items, divides noninterest expense by net interest
income (FTE) plus noninterest income. The efficiency ratio was 61.6% in 1997
compared to 65.6% in 1996.
TAXES
Applicable income taxes consist of provisions for federal income taxes,
totaling $2.8 million in 1997, an effective rate of 30.7%. This compares to
applicable income taxes of $2.6 million in 1996 and $2.3 million in 1995. These
amounts equate to effective tax rates of 29.2% and 28.3%, respectively, in 1996
and 1995. The variances from the statutory rate (34%) are attributable to
tax-exempt income from investment securities and loans. For additional
information regarding income taxes, see Note 10 to the consolidated financial
statements.
15
<PAGE> 17
FINANCIAL CONDITION ANALYSIS
At December 31, 1997, the Company reported $546.0 million of total assets
compared to $494.6 million at December 31, 1996. Average assets were $519.6
million for 1997, compared to $484.9 million and $402.6 million, respectively,
for 1996 and 1995.
INVESTMENT SECURITIES
The Company's investment securities portfolio of $130.6 million at December
31, 1997, consisted entirely of securities "available for sale" which are
carried on the consolidated balance sheet at fair value. These securities had
net unrealized gains at year end of $467,000. At December 31, 1996, the
investment portfolio was $143.2 million and consisted of $123.1 million of
available for sale securities and $20.2 million of held to maturity securities
which were carried on the consolidated balance sheet at amortized cost. The
decrease in the amount of securities in 1997 was due to the additional funding
required to support significant loan growth during the year. Note 4 to the
consolidated financial statements and Table 14 provide the composition of the
portfolio at December 31, 1997.
U.S. Treasury and U.S. Government agency obligations represented
approximately 79% of the investment securities portfolio at December 31, 1997.
The Company has some credit risk in the investment securities portfolio;
however, management does not consider that risk to be significant and does not
believe that cash flows will be significantly impacted.
At December 31, 1997, the Company did not hold any trading securities (as
currently defined by regulatory agencies).
LOANS
At December 31, 1997, loans, net of unearned income, were $342.6 million
compared to $294.5 million at year end 1996. Average loans for 1997 were $317.1
million compared to $260.8 million and $201.2 million, respectively, for 1996
and 1995. The Company's loan to deposit ratio was 71% at December 31,1997,
compared to 67% at the end of 1996 and 55% at the end of 1995. For 1997, loans
were 67% of the Company's average earning assets compared to 59% and 55%,
respectively, for 1996 and 1995. Table 9 provides the composition of the loan
portfolio for each of the last five years.
The largest segment of the Company's loan portfolio is real estate related
loans, which totaled $216 million, or 63% of the loan portfolio at December 31,
1997, an increase of $43.1 million over December 31, 1996. This segment is
expected to continue to be the largest segment and is expected to grow gradually
unless economic conditions change significantly.
Consumer loans, which constituted 17% of the loan portfolio at December 31,
1997, include loans to individuals for household and other consumer purposes.
Consumer loans decreased $5.0 million to $58.8 million from $63.8 million
reported at year end 1996. In 1997, the Company discontinued its practice of
purchasing indirect automobile loans, which accounts for the decrease in
consumer loans.
Commercial and industrial loans increased $10.1 million to $67.0 million at
December 31, 1997, as compared to $56.9 million at December 31, 1996. Commercial
and industrial loans accounted for 20% of the loan portfolio at December 31,
1997.
The growth of the loan portfolio in 1997 is primarily attributable to the
two branch facilities opened in the latter part of 1996.
16
<PAGE> 18
ALLOWANCE FOR LOSSES ON LOANS
The allowance for losses on loans at December 31, 1997 was $3.7 million, or
1.1% of loans, compared to $2.7 million, or .9%, at December 31, 1996.
Management's policy is to maintain the allowance at a level deemed sufficient to
absorb estimated losses in the loan portfolio. The allowance is reviewed monthly
in accordance with the methodology described in Note 1 to the consolidated
financial statements. Tables 10 and 12 provide detailed information regarding
the allowance for each of the last five years.
The provision for losses on loans charged against earnings was $1.7 million
in 1997, $940,000 in 1996 and $135,000 in 1995. Net charge-offs increased
$128,000 to $766,000, or .24% of average loans, for 1997. This compares to .24%
and .26%, respectively, for 1996 and 1995. The increases relate primarily to the
expanding loan portfolio.
To a very large extent, the Company's loan portfolio remains secured and
current reappraisals of collateral value have been received and undertaken in an
effort to further assess loss potential. Management has closely scrutinized its
loss potential on its nonperforming assets, as well as on the entire loan
portfolio, and has, to the best of its knowledge and belief, reserved for losses
accordingly.
LOAN CONCENTRATIONS
Management believes that the loan portfolio is adequately diversified. The
loan portfolio is spread over nine communities in three counties. At December
31, 1997, the Company had no concentrations of loans to a single industry
equaling 10% or more of total loans.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans 90 days or more
past due and still accruing interest, and foreclosed properties. The policy of
Merchants Bank is to continue to accrue interest on loans which are 90 days or
more past due if periodic payments are being made on the loans. If a loan is
classified as past due and payments then resume on the loan, it continues to be
classified as past due until all past due amounts are paid. As shown in Table
11, nonperforming assets totaled $3.7 million at year end 1997, compared to $4.0
million at December 31, 1996. The year end 1997 total is comprised of $2.0
million of nonaccrual loans, which decreased $175,000 from December 31, 1996,
loans past due 90 days or more and still accruing interest of $611,000 and
foreclosed properties of $1.1 million. As a percentage of loans, nonperforming
assets were 1.1% of loans and foreclosed properties at December 31, 1997,
compared to 1.3% at December 31, 1996. In management's opinion, asset-quality
ratios remain at acceptable levels. The Company had no material renegotiated or
troubled debt restructuring loans during the years 1993 through 1997.
A breakdown of nonperforming assets is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Nonaccrual loans $1,954 $2,129
Loans 90 days or more past due 611 953
------ ------
Nonperforming loans 2,565 3,082
Foreclosed properties 1,132 890
------ ------
Total $3,697 $3,972
====== ======
</TABLE>
The Company included in reported income for 1997, $68,336 of interest
received on nonaccrual loans. Had these loans paid interest at their original
rates, the Company would have reported $405,054 of interest on these nonaccrual
loans.
17
<PAGE> 19
OTHER EARNING ASSETS
Other earning assets include interest bearing deposits at financial
institutions and federal funds sold. At December 31, 1997, these assets totaled
$16.0 million, 3.3% of the Company's earning assets. This compares to $7.4
million, or 1.6% of earning assets at December 31, 1996.
The increase in other earning assets from 1996 is attributable to a $9.7
million increase in federal funds sold. This increase was due to excess
liquidity being needed to fund other earning assets, primarily loans.
DEPOSITS
The Company's deposit base is its primary source of liquidity and consists
of deposits from the communities served by the Company. Tables 4 and 7 present
the components of the Company's average deposits. Deposits were $484.4 million
at December 31, 1997 and averaged $460.8 million for the year.
The composition of average deposits over the last three years was as
follows:
<TABLE>
<CAPTION>
TYPE OF DEPOSITS 1997 1996 1995
---------------- ---- ---- ----
<S> <C> <C> <C>
Noninterest-bearing deposits 29% 29% 29%
Money market deposits 25% 24% 23%
Savings deposits 11% 12% 13%
Other time deposits 35% 35% 35%
</TABLE>
CAPITAL AND DIVIDENDS
Stockholders' equity increased $4.5 million in 1997 to $58.0 million, or
10.6% of total assets at December 31, 1997. This compares to shareholders'
equity of $53.5 million, or 10.8% of total assets at December 31, 1996 and $49.3
million, or 10.1% of total assets at December 31, 1995. The source of growth in
shareholders' equity in 1997 was the retention of net earnings of $4.1 million,
partially increased by the net change in unrealized gains on available for sale
securities of $386,000. The consolidated statement of changes in shareholders'
equity details the changes in equity for the last three years.
The fair-value adjustment of the Company's available for sale securities
portfolio, which is recorded as a component of shareholders' equity, may change
significantly as market conditions change. At December 31, 1995, the adjustment
resulted in an increase of shareholders' equity of $922,000, compared to a
decrease of $779,000 at December 31, 1996 and an increase of $386,000 at
December 31, 1997. Further volatility in shareholders' equity may occur in the
future as market conditions change. This adjustment is excluded from the
calculation of regulatory capital.
The Company and its subsidiaries must comply with the capital guidelines
established by the regulatory agencies that supervise their operations. These
agencies have adopted a system to monitor the capital adequacy of all insured
financial institutions. The system includes ratios based on the risk-weighting
of on-and off-balance-sheet transactions. If an institution's ratios fall below
certain levels, it becomes subject to regulatory action. The system adopted by
the agencies classifies institutions into five capital categories ranging from
well-capitalized to critically undercapitalized. The well-capitalized category
requires a leverage ratio of at least 5%, a Tier 1 regulatory capital to
risk-weighted assets ratio of at least 6%, and total regulatory capital to
risk-weighted assets ratio of at least 8%. Table 15 presents the Company's
regulatory capital ratios for the last three years and Note 15 to the
consolidated financial statements presents a comparison of the Company's and
Subsidiary Bank's capital levels and ratios to the minimums for an institution
to be considered well-capitalized and adequately capitalized. At December 31,
1997, the Company and Merchants Bank met the requirements for well-capitalized
institutions.
At December 31, 1997, the Company's leverage ratio was 10.82% and its Tier
1 and total regulatory capital to risk-weighted assets capital ratios were
15.76% and 16.79%, respectively, which are well above the regulatory minimums.
These ratios compare to 10.76%, 16.70% and 17.56%, respectively, at December 31,
1996.
18
<PAGE> 20
The Company declared cash dividends on its Common Stock of $2.245 million
in 1997 and $1.597 million in 1996. On a per share basis, this represented a 40%
increase to $1.15 per share for 1997 compared to $.82 per share in 1996.
The primary source for payment of dividends by the Company to its
shareholders is dividends received from its subsidiaries. Payment of dividends
by the Company's banking subsidiary is subject to various statutory limitations
and applicable banking laws.
ASSET/LIABILITY MANAGEMENT
The Company's assets and liabilities are principally financial in nature
and the resulting earnings thereon, primarily net interest income, are subject
to changes as a result of changes in market interest rates and the mix of the
various assets and liabilities. Interest rates in the financial markets affect
the Company's decisions on pricing its assets and liabilities which impacts net
interest income, the Company's primary cash flow stream. As a result, a
substantial part of the Company's risk-management activities are devoted to
managing interest-rate risk. For additional information, see "Item 7A.
Quantitative and Qualitative Disclosures about Market Risk."
LIQUIDITY
Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an ongoing
basis. In the past, the Company's liquidity needs have primarily been met by
growth in core deposits. Although access to purchased funds from correspondent
banks is available, the Company does not generally rely on these external
funding sources. Generally, the cash and federal funds sold position,
supplemented by amortizing investment and loan portfolios, have created an
adequate liquidity position.
A financial service company's activities consist primarily of financing and
investing activities. These activities result in large cash flows. The
Consolidated Statement of Cash Flows indicates the sources of these cash flows.
CAPITAL COMMITMENTS
Merchants Bancshares believes that it has sufficient capital and financial
resources to meet its current and anticipated capital commitments.
CONDENSED STATEMENTS OF EARNINGS
The following is a comparison of Merchants Bancshares' condensed statements
of earnings for the most recent five-year period (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Interest income (2) $39,228 $35,339 $29,174 $16,965 $15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
------- ------- ------- ------- -------
Net interest income (2) 27,032 24,170 19,597 12,169 10,858
Provision for loan losses 1,740 940 135 50 410
Noninterest income 6,253 5,677 4,655 3,238 2,979
Noninterest expense 22,320 19,888 15,878 10,393 10,494
------- ------- ------- ------- -------
Earnings before income
taxes 9,225 9,019 8,239 4,964 2,933
Income tax expense 2,837 2,634 2,333 999 512
------- ------- ------- ------- -------
Net earnings $ 6,388 $ 6,385 $ 5,906 $ 3,965 $ 2,421
======= ======= ======= ======= =======
</TABLE>
19
<PAGE> 21
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
(2) For the years ended December 31, 1997, 1996, 1995, 1994 and 1993, interest
income would have been $39,668, $35,820, $29,565, $17,156, and $16,071,
respectively, and net interest income would have been $27,472, $24,651,
$19,988, $12,360, and $11,128, respectively, if all such amounts were shown
using a comparable fully taxable equivalent basis (using a tax rate of
34%).
CONDENSED AVERAGE BALANCE SHEETS
Although year-end statistics present general trends, the daily average
balance sheets are more indicative of Merchants Bancshares' levels of activity
throughout the years indicated and less subject to day-to-day business activity
fluctuations. The following schedule sets forth a comparison of the most recent
five years' consolidated daily average balance sheets for Merchants Bancshares.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 28,599 $ 24,873 $ 20,745 $ 12,445 $ 12,123
Loans, net 317,058 260,794 201,248 135,077 123,605
Interest-bearing deposits 1,113 6,291 1,419 1,372 1,573
Investment securities:
Taxable 113,276 129,561 103,893 52,704 42,795
Non-taxable 17,109 18,212 14,272 5,494 7,600
-------- -------- -------- -------- --------
Total Securities 130,385 147,773 118,165 58,198 50,395
-------- -------- -------- -------- --------
Federal funds sold and interest
bearing deposits with Federal
Home Loan Bank 19,717 24,573 44,066 30,304 36,420
Other assets 22,714 20,606 17,001 8,633 11,509
-------- -------- -------- -------- --------
Total Assets $519,586 $484,910 $402,644 $246,029 $235,625
======== ======== ======== ======== ========
Liabilities and Stockholders' Equity:
Deposits
Noninterest bearing demand $133,994 $123,590 $101,883 $ 65,909 $ 59,577
Interest bearing demand 112,859 103,102 83,104 46,103 46,643
Savings 51,638 51,862 46,549 29,097 28,035
Time 162,282 152,201 125,123 79,786 78,712
-------- -------- -------- -------- --------
Total Deposits 460,773 430,755 356,659 220,895 212,967
-------- -------- -------- -------- --------
Borrowings 0 92 2,536 0 321
Other liabilities 2,548 2,646 3,011 1,716 1,394
-------- -------- -------- -------- --------
Total Liabilities 463,321 433,493 362,206 222,611 214,682
-------- -------- -------- -------- --------
Stockholders' Equity 56,265 51,417 40,438 23,418 20,943
-------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity $519,586 $484,910 $402,644 $246,029 $235,625
======== ======== ======== ======== ========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
20
<PAGE> 22
TABLE 1. SUMMARY OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
(IN THOUSANDS)
1997(1) 1996(1) 1995(1) 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income(2) $ 39,228 $ 35,339 $ 29,174 $ 16,965 $ 15,801
Interest expense 12,196 11,169 9,577 4,796 4,943
-------- -------- -------- -------- --------
Net interest income(2) 27,032 24,170 19,597 12,169 10,858
Provision for losses on loans (1,740) (940) (135) (50) (410)
-------- -------- -------- -------- --------
Net interest income after
provision for losses on loans 25,292 23,230 19,462 12,119 10,448
Noninterest income
Service charges on deposit accounts 4,240 4,436 3,472 2,353 2,387
Other service charges and fees 774 280 256 222 200
Other operating income 1,224 962 927 663 363
-------- -------- -------- -------- --------
Total noninterest income 6,238 5,678 4,655 3,238 2,950
-------- -------- -------- -------- --------
Noninterest expense
Salaries and benefits 11,294 11,117 8,317 4,825 4,770
Occupancy expense 2,253 1,915 1,666 1,154 920
Equipment expense 1,733 1,573 824 530 479
Other operating expense 5,469 5,283 5,071 3,884 4,325
-------- -------- -------- -------- --------
Total noninterest expense 20,749 19,888 15,878 10,393 10,494
-------- -------- -------- -------- --------
Earnings before other operating
items and income taxes 10,781 9,020 8,239 4,964 2,904
Other operating items
Investment securities gains (losses) 15 (1) -- -- 29
Merger-related expenses (1,571) -- -- -- --
-------- -------- -------- -------- --------
Earnings before income taxes 9,225 9,019 8,239 4,964 2,933
Applicable income taxes 2,837 2,634 2,333 999 512
-------- -------- -------- -------- --------
Net earnings $ 6,388 $ 6,385 $ 5,906 $ 3,965 $ 2,421
======== ======== ======== ======== ========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
(2) For the years ended December 31, 1997, 1996, 1995, 1994 and 1993, interest
income would have been $39,668, $35,820, $29,565, $17,156 and $16,071,
respectively, and net interest income would have been $27,472, $24,651,
$19,988, $12,360, and $11,128, respectively, if all such amounts were shown
using a comparable fully taxable equivalent basis (using a tax rate of
34%).
21
<PAGE> 23
TABLE 2. CONTRIBUTION TO FULLY DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
(IN THOUSANDS)
1997(1) 1996(1) 1995(1) 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest income $ 13.84 $ 12.42 $ 11.40 $ 9.67 $ 8.60
Provision for losses on loans (.89) (.48) (.08) (.04) (.32)
--------- --------- --------- --------- ---------
Net interest income after provision
for losses on loans 12.95 11.94 11.32 9.63 8.28
Noninterest income
Service charges on deposit accounts 2.17 2.28 2.02 1.87 1.89
Other service charges and fees .40 .14 .15 .18 .16
Other operating income .62 .50 .54 .52 .29
--------- --------- --------- --------- ---------
Total noninterest income 3.19 2.92 2.71 2.57 2.34
--------- --------- --------- --------- ---------
Noninterest expense
Salaries and benefits (5.78) (5.72) (4.84) (3.83) (3.78)
Occupancy expense (1.15) (.99) (.97) (.92) (.73)
Equipment expense (.89) (.81) (.48) (.42) (.38)
Other expense (3.60) (2.71) (2.95) (3.08) (3.43)
--------- --------- --------- --------- ---------
Total noninterest expense (11.42) (10.23) (9.24) (8.25) (8.32)
--------- --------- --------- --------- ---------
Earnings before income taxes 4.72 4.63 4.79 3.95 2.30
Applicable income taxes (1.45) (1.35) (1.35) (.80) (.38)
--------- --------- --------- --------- ---------
Net earnings $ 3.27 $ 3.28 $ 3.44 $ 3.15 $ 1.92
========= ========= ========= ========= =========
Average fully diluted shares (in thousands) 1,953 1,945 1,718 1,259 1,262
========= ========= ========= ========= =========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
22
<PAGE> 24
TABLE 3. BALANCE SHEET COMPOSITION - PERCENTAGE OF TOTAL ASSETS
<TABLE>
<CAPTION>
1997 AVERAGE BALANCES
------ ----------------
<S> <C> <C>
Investment securities:
Taxable 21.80% $ 113,276,267
Non-taxable 3.29% 17,109,101
Due from CD's 0.21% 1,112,500
Federal Funds Sold 3.80% 19,716,712
Net loans 61.02% 317,058,204
------ ----------------
Total interest earning assets 90.12% 468,272,784
Cash and due from banks 5.51% 28,598,860
Premises, equipment and other 4.37% 22,714,052
------ ----------------
Total Assets 100.00% $ 519,585,696
====== ================
PERCENTAGE OF TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits - interest bearing 62.89% $ 326,778,538
------ ---------------
Total interest bearing liabilities 62.89% 326,778,538
Deposits - non-interest bearing 25.79% 133,994,021
Other liabilities 0.49% 2,548,591
Stockholders' Equity 10.83% 56,264,546
------ ---------------
Total Liabilities and Stockholders' Equity 100.00% $ 519,585,696
====== ===============
</TABLE>
23
<PAGE> 25
TABLE 4. AVERAGE BALANCE AND AVERAGE INTEREST RATES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------------- ---------------------------------------
AVG. BAL. INTEREST AVG. RATE AVG. BAL. INTEREST AVG. RATE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Taxable $ 113,276 $ 6,829 6.03% $ 129,561 $ 7,841 6.05%
Non-taxable 17,109 1,294 7.56% 18,212 1,415 7.77%
Due from CD's 1,113 60 5.39% 1,978 107 5.41%
Interest bearing deposits with banks 0 0 0.00% 4,312 210 4.87%
Federal Funds sold 19,717 1,084 5.50% 24,573 1,332 5.42%
Net loans 317,058 30,401 9.59% 260,795 24,915 9.55%
----------- ----------- ----------- ----------- ----------- -----------
Total interest earning assets 468,273 39,668 8.47% 439,431 35,820 8.15%
----------- ----------- ----------- ----------- ----------- -----------
Cash and due from banks 28,599 24,873
Premises, equipment and other 22,714 20,606
----------- -----------
$ 519,586 $ 484,910
=========== ===========
Deposits:
Demand - interest bearing $ 112,859 2,942 2.61% $ 103,102 $ 2,594 2.52%
Savings 51,638 1,426 2.76% 51,862 1,427 2.75%
Time 162,282 7,828 4.82% 152,201 7,140 4.69%
Borrowings 0 0 0.00% 92 8 8.70%
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing liabilities 326,779 12,196 3.73% 307,257 11,169 3.64%
----------- ----------- ----------- ----------- ----------- -----------
Deposits - non-interest bearing 133,994 123,590
Other liabilities 2,548 2,646
Shareholders' equity 56,265 51,417
----------- -----------
$ 519,586 $ 484,910
=========== ===========
Net interest earnings $ 27,472 $ 24,651
=========== ===========
Net yield on interest earning assets 5.87% 5.61%
=========== ===========
Interest rate spread 4.74% 4.51%
=========== ===========
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
AVG. BAL. INTEREST AVG. RATE
----------- ----------- -----------
<S> <C> <C> <C>
Investment Securities:
Taxable $ 103,893 $ 6,266 6.03%
Non-taxable 14,272 1,149 8.05%
Due from CD's 1,419 76 5.36%
Interest bearing deposits with banks 13,515 793 5.87%
Federal Funds sold 30,551 1,780 5.83%
Net loans 201,248 19,501 9.69%
----------- ----------- -----------
Total interest earning assets 364,898 29,565 8.10%
----------- ----------- -----------
Cash and due from banks 20,745
Premises, equipment and other 17,001
-----------
$ 402,644
===========
Deposits:
Demand - interest bearing $ 83,104 $ 2,031 2.44%
Savings 46,549 1,336 2.87%
Time 125,123 5,990 4.79%
Borrowings 2,536 220 8.68%
----------- ----------- -----------
Total interest bearing liabilities 257,312 9,577 3.72%
----------- ----------- -----------
Deposits - non-interest bearing 101,883
Other liabilities 3,011
Shareholders' equity 40,438
-----------
$ 402,644
===========
Net interest earnings $ 19,988
===========
Net yield on interest earning assets 5.48%
===========
Interest rate spread 4.38%
===========
</TABLE>
Note: Average balances are based upon daily balances. The interest on
non-taxable securities has been calculated on a fully taxable equivalent
basis incorporating a tax rate of 34%. Non-accruing loans have been
included in assets for these computations, thereby reducing yields on
these investments.
24
<PAGE> 26
TABLE 5. ANALYSIS OF VOLUME AND RATE CHANGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
CHANGES FROM CHANGES IN CHANGES IN CHANGES FROM CHANGES IN CHANGES IN
PRIOR YEAR VOLUME RATES PRIOR YEAR VOLUME RATES
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Taxable securities $ (1,012) $ (986) $ (26) $ 1,575 $ 1,548 $ 27
Non-taxable securities (121) (86) (35) 266 317 (51)
Due from CD's (47) (47) (0) 31 30 1
Federal funds sold (248) (263) 15 (448) (348) (100)
Deposits with financial institutions (210) (210) 0 (583) (540) (43)
Loans 5,486 5,375 111 5,414 5,770 (356)
------------ ------------ ------------ ------------ ------------ ------------
Total interest income 3,848 3,783 65 6,255 6,777 (522)
------------ ------------ ------------ ------------ ------------ ------------
Interest expense:
Deposits:
Demand - interest bearing 348 245 103 563 489 74
Savings (1) (6) 5 91 152 (61)
Time 688 473 215 1,150 1,296 (146)
Borrowings (8) (8) 0 (212) (212) 0
------------ ------------ ------------ ------------ ------------ ------------
Total interest expense 1,027 704 323 1,592 1,725 (133)
------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 2,821 $ 3,079 $ (258) $ 4,663 $ 5,052 $ (389)
============ ============ ============ ============ ============ ============
</TABLE>
The rate/volume variance has been allocated to the changes in rates. Non-accrual
loans are included in the calculations made above. The interest on non-taxable
investment income has been calculated on a fully taxable equivalent basis
incorporating an effective tax rate of 34%.
25
<PAGE> 27
TABLE 6. NONINTEREST INCOME AND NONINTEREST EXPENSE
NONINTEREST INCOME
<TABLE>
<CAPTION>
1997 1996
BALANCE BALANCE $ CHANGE % CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 4,240 $ 4,436 $ (196) (4.42%)
Other service charges and fees 774 281 493 175.44%
Other operating income 1,224 962 262 27.24%
Securities transactions 15 (2) 17 0
------- ------- ------- ------
Total $ 6,253 $ 5,677 $ 576 10.15%
======= ======= ======= ======
</TABLE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
1997 1996
BALANCE BALANCE $ CHANGE % CHANGE
------- ------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $11,294 $11,117 $ 177 1.59%
Occupancy expense 2,253 1,915 338 17.65%
Furniture and equipment expense 1,733 1,573 160 10.17%
Other real estate expense 210 283 (73) (25.80)%
Merger related expense 1,571 0 1,571 100.00%
Other operating expense 5,259 5,000 259 5.18%
------- ------- ------- ------
$22,320 $19,888 $ 2,432 12.23%
======= ======= ======= ======
</TABLE>
TABLE 7. AVERAGE DEPOSITS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
(IN THOUSANDS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Noninterest-bearing demand $133,994 $123,590 $101,883 $ 65,909 $ 59,577
Interest-bearing demand(1) 112,859 103,102 83,104 46,103 46,643
Savings(1) 51,638 51,862 46,549 29,097 28,035
Time(1) 162,282 152,201 125,123 79,786 78,712
</TABLE>
(1) Table 4 presents the average rate paid on these deposit categories for each
of the three years ended December 31, 1997.
TABLE 8. ANALYSIS OF CERTIFICATES OF DEPOSIT EXCEEDING $100,000
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
MATURITY (IN THOUSANDS)
-------- --------------------
<S> <C>
Three (3) months or less $ 23,540
Over three (3) months through six (6) months 10,448
Over six (6) months through twelve (12) months 12,196
Over twelve (12) months 2,588
---------
$ 48,772
=========
</TABLE>
26
<PAGE> 28
TABLE 9. COMPOSITION OF THE LOAN PORTFOLIO
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 67,013 $ 56,935 $ 44,651 $ 28,593 $ 27,935
Real estate - construction 10,354 15,920 8,626 7,205 2,997
Real estate - other 205,163 156,472 123,130 80,472 68,837
Installment 58,774 63,833 59,765 27,786 27,428
Other 1,262 1,364 1,392 403 255
-------- -------- -------- -------- --------
Total loans, net of
unearned discount $342,566 $294,524 $237,564 $144,459 $127,452
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
1 YEAR 1 - 5 AFTER
DUE IN: OR LESS YEARS 5 YEARS
------- ------- -------
<S> <C> <C> <C>
Commercial and industrial loans $34,799 $27,117 $ 5,097
Real estate construction 6,320 3,978 56
------- ------- -------
Total $41,119 $31,095 $ 5,153
======= ======= =======
Loans due after 1 year which have
Predetermined interest rates $22,378
Floating or adjustable rates 13,870
-------
Total $36,248
=======
</TABLE>
LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial and industrial 19.6% 19.3% 18.8%
Real estate - construction 3.0% 5.4% 3.6%
Real estate - other 59.9% 53.1% 51.8%
Individuals for household and
other consumer purposes 17.2% 21.7% 25.2%
Other .3% .5% .6%
</TABLE>
27
<PAGE> 29
TABLE 10. ALLOCATION OF THE ALLOWANCE FOR LOSSES ON LOANS BY CATEGORY OF LOANS
AND THE PERCENTAGE OF LOANS BY CATEGORY TO TOTAL LOANS OUTSTANDING
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial $1,290 19.6% $1,350 19.3% $1,621 18.8% $ 826 19.8% $1,010 21.9%
Real estate -
construction * 3.0% * 5.4% * 3.6% * 5.0% * 2.4%
Real estate -
other 918 59.9% 139 53.1% 50 51.8% 751 55.7% 277 54.0%
Installment 1,479 17.2% 1,224 21.7% 740 25.2% 486 19.2% 699 21.5%
Other * .3% * .5% * .6% * .3% * .2%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $3,687 100.0% $2,713 100.0% $2,411 100.0% $2,063 100.0% $1,986 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
* Less than $1,000
TABLE 11. NONACCRUAL AND PAST DUE LOANS AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,954 $ 2,129 $ 3,125 $ 1,215 $ 1,455
Past due 90 days or more 611 953 850 128 168
---------- ---------- ---------- ---------- ----------
Total non-performing
loans 2,565 3,082 3,975 1,343 1,623
Other real estate owned 1,132 890 1,697 1,461 1,578
---------- ---------- ---------- ---------- ----------
Total non-performing
assets $ 3,697 $ 3,972 $ 5,672 $ 2,804 $ 3,201
========== ========== ========== ========== ==========
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
28
<PAGE> 30
TABLE 12. ALLOWANCE FOR LOSSES ON LOANS
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 317,058 $ 260,795 $ 201,248 $ 135,077 $ 125,476
========= ========= ========= ========= =========
Loans outstanding at year-end $ 342,566 $ 294,524 $ 237,564 $ 144,459 $ 127,452
========= ========= ========= ========= =========
Allowance at beginning of period $ 2,713 $ 2,411 $ 2,063 $ 1,986 $ 1,725
--------- --------- --------- --------- ---------
Allowance of acquired banks 0 0 738 0 0
Provision charged to expense 1,740 940 135 50 410
--------- --------- --------- --------- ---------
Loans charged off:
Commercial and industrial (329) (403) (499) (175) (197)
Real estate - construction 0 0 0 0 0
Real estate - other (208) (41) (14) (159) (54)
Installment (420) (347) (211) (103) (136)
Other (16) (9) (18) 0 0
--------- --------- --------- --------- ---------
Total (973) (800) (742) (437) (387)
--------- --------- --------- --------- ---------
Loans recovered:
Commercial and industrial 61 85 101 155 150
Real estate - construction 0 0 0 0 0
Real estate - other 17 19 64 296 44
Installment 126 52 50 13 44
Other 3 6 2 0 0
--------- --------- --------- --------- ---------
Total 207 162 217 464 238
--------- --------- --------- --------- ---------
Net loans (charged-off) recovered (766) (638) (525) 27 (149)
--------- --------- --------- --------- ---------
Allowance at end of period $ 3,687 $ 2,713 $ 2,411 $ 2,063 $ 1,986
========= ========= ========= ========= =========
Ratios:
Allowance as a percent of loans
outstanding at year-end 1.08% .92% 1.01% 1.43% 1.56%
Allowance as a percent of
average loans 1.16% 1.04% 1.20% 1.53% 1.58%
Net loans charged-off (recovered)
as a percent of average loans
outstanding .24% .24% .26% (.02%) 0.12%
Allowance as a percentage
of nonperforming loans 143.74% 88.03% 60.65% 153.60% 122.40%
Nonperforming loans as a percentage
of loans .75% 1.05% 1.67% .93% 1.27%
Nonperforming assets as a percentage
of loans plus foreclosed properties 1.08% 1.34% 2.39% 1.94% 2.51%
Loans 90 days or more past due and
not on nonaccrual status as a
percentage of loans .18% .32% .36% .09% .13%
</TABLE>
(1) The Company's financial statements for the fiscal year ended December 31,
1995, and following reflect the acquisition of Texas Gulf, which occurred
May 1, 1995. See note 2 to the Company's Consolidated Financial Statements.
29
<PAGE> 31
TABLE 13. RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RATE SENSITIVE WITHIN
--------------------------------------------------- NONRATE
30-DAY 90-DAY 180-DAY ONE YEAR TOTAL SENSITIVE TOTAL
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned
Discount $ 97,027 $ 13,496 $ 21,912 $ 34,116 $ 166,551 $ 176,015 $ 342,566
Investment Securities 9,784 10,428 11,275 16,633 48,120 82,509 130,629
Federal Funds Sold 16,050 0 0 0 16,050 0 16,050
--------- --------- --------- --------- --------- --------- ---------
Total Earning Assets 122,861 23,924 33,187 50,749 230,721 258,524 489,245
--------- --------- --------- --------- --------- --------- ---------
Interest Bearing Liabilities:
Interest Bearing Deposits 205,167 33,878 37,102 40,882 317,029 19,578 336,607
--------- --------- --------- --------- --------- --------- ---------
Total Interest Bearing
Liabilities 205,167 33,878 37,102 40,882 317,029 19,578 336,607
--------- --------- --------- --------- --------- --------- ---------
Interest Sensitivity Gap $ (82,306) $ (9,954) $ (3,915) $ 9,867 $ (86,308)
========= ========= ========= ========= =========
Ratio of Earning Assets to
Interest Bearing Liabilities 59.88% 70.62% 89.45% 124.14% 72.78%
========= ========= ========= ========= =========
</TABLE>
TABLE 14. INVESTMENT SECURITIES AND OTHER EARNING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
U. S. Treasury & Agencies $103,857 $117,937 $129,110
States and Political Subdivisions 20,209 20,196 21,382
Other 6,563 5,017 227
-------- -------- --------
Total investment securities 130,629 143,150 150,719
Interest-bearing deposits 0 1,000 24,427
Federal funds sold 16,050 6,375 28,175
-------- -------- --------
Total investment securities and
other earning assets $146,679 $150,525 $203,321
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
AVAILABLE FOR SALE
----------------------------------------------------------------------
STATES & POLITICAL SUBDIVISIONS
U. S. TREASURY -------------------------------
& AGENCIES TAXABLE NON-TAXABLE OTHER TOTAL
-------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Due within one year:
Amortized Cost $ 33,471 $ 300 $ 2,791 $ 0 $ 36,562
Market Value 33,439 299 2,802 0 36,540
Yield 5.58% 5.40% 7.31% 0 5.71%
Due after one but within five years:
Amortized Cost $ 66,604 $ 199 $ 10,381 $ 0 $ 77,184
Market Value 66,922 205 10,573 0 77,700
Yield 6.25% 7.70% 6.91% 0 6.34%
Due after five but within ten years:
Amortized Cost $ 3,491 $ 0 $ 3,850 $ 0 $ 7,341
Market Value 3,496 0 4,054 0 7,550
Yield 6.30% 0 7.94% 0 7.16%
Due after ten years:
Amortized Cost $ 0 $ 2,000 $ 271 $ 6,563 $ 8,834
Market Value 0 1,998 278 6,563 8,839
Yield 0 6.36% 6.97% 5.63% 5.84%
</TABLE>
Note: The interest on non-taxable securities has been calculated on a fully
taxable equivalent basis incorporating a tax rate of 34%.
30
<PAGE> 32
TABLE 15. RISK-BASED CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM
-------------------------------- REGULATORY
1997 1996 1995 REQUIREMENTS
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Risk based capital ratios:
Tier 1 15.76% 16.70% 18.85% 4.00%
Total Capital 16.79% 17.56% 19.79% 8.00%
Leverage Ratio 10.82% 10.76% 11.98% 3.00%(1)
</TABLE>
(1) The FRB may require any bank holding company to maintain a leverage
ratio of up to 200 basis points above the required minimum.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The business of the Company and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans and investment
securities) which are primarily funded by interest-bearing liabilities
(deposits). Such financial instruments have varying levels of sensitivity to
changes in market interest rates resulting in market risk. Other than loans
which are originated and held for sale, all of the financial instruments of the
Company are for other than trading purposes.
Interest rate risk results when the maturity or repricing intervals of the
interest-earning assets and interest-bearing liabilities are different, creating
a risk that changes in the level of market interest rates will result in
disproportionate changes in the value of, and the net earnings generated from,
the Company's interest-earning assets and interest-bearing liabilities. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of attempting to select the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Because the Company's primary source of interest-bearing
liabilities is customer deposits, the Company's ability to manage the types and
terms of such deposits may be somewhat limited by customer preferences in the
market areas in which the Company operates. The rates and terms of the Company's
interest-earning assets result primarily from the Company's strategy of
investing in loans and securities (a substantial portion of which have
adjustable-rate terms) which permit the Company to limit its exposure to
interest rate risk, together with credit risk, while at the same time achieving
a positive interest rate spread from the difference between the income earned on
interest-earning assets and the cost of interest-bearing liabilities (see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations Financial Condition Analysis - Asset/Liability Management" and Table
13) for a further discussion of rate sensitive assets, rate sensitive
liabilities and net interest spread).
INTEREST-RATE RISK
One of the most important aspects of management's efforts to sustain
long-term profitability for the Company is the management of interest-rate risk.
Management's goal is to maximize net interest income within acceptable levels of
interest-rate risk and liquidity. To achieve this goal, a proper balance must be
maintained between assets and liabilities with respect to size, maturity,
repricing date, rate of return, and degree of risk.
The Company uses interest-rate sensitivity (GAP) analysis to monitor the
amounts and timing of balances exposed to changes in interest rates, as shown in
Table 13. The analysis presented in Table 13 has been made at a point in time
and could change significantly on a daily basis. The GAP report is not relied
upon exclusively to evaluate the impact of, or predict how the Company is
positioned to react to, changing interest rates. Other methods such as
simulation analysis are also considered in evaluating the Company's
interest-rate risk.
At December 31, 1997, the GAP report indicated that the Company was
liability sensitive, with $86.3 million more liabilities than assets repricing
within one year.
31
<PAGE> 33
Balance sheet simulation analysis is conducted at year end to determine the
impact on net interest income for the coming twelve months under several
interest-rate scenarios. One such scenario uses rates at December 31, 1997, and
holds the rates and volumes constant for simulation. When this position is
compared to rising rates (prime rate to 11% by year-end 1998) and declining
rates (prime rate to 6%), net interest income was a negative $649,000 and
$493,000, respectively, for the year ended December 1998. Another simulation
using an "estimated" scenario (prime rate to 8%) resulted in a $63,000 pretax
decrease in net interest income. Those scenarios are within the Company's policy
limit of a 10% variation.
The actual impact of changing interest rates on net interest income is
dependent on a number of factors such as the growth of earning assets and
interest-bearing liabilities, the magnitude of the interest rate changes, the
timing of the repricing of assets and liabilities, interest-rate spreads, and
the asset/liability strategies implemented by management.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
32
<PAGE> 34
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors ......................................... 35
Merchants Bancshares, Inc. and Subsidiaries :
Consolidated Balance Sheet - December 31, 1997 and 1996 ....... 36
Consolidated Statement of Income -
For each of the three years in the period
ended December 31, 1997 .............................. 38
Consolidated Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1997 .............................. 40
Consolidated Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1997 .............................. 41
Merchants Bancshares, Inc. (Parent Company Only):
Balance Sheet - December 31, 1997 and 1996 .................... 44
Statement of Income -
For each of the three years in the period
ended December 31, 1997 .............................. 45
Statement of Stockholders' Equity -
For each of the three years in the period
ended December 31, 1997 .............................. 40
Statement of Cash Flows -
For each of the three years in the period
ended December 31, 1997 .............................. 46
Notes to Financial Statements .......................................... 47
</TABLE>
All other schedules or supplementary data are omitted as the required
information is inapplicable or the information is presented in the financial
statements or related notes.
33
<PAGE> 35
MERCHANTS BANCSHARES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 1997
34
<PAGE> 36
[HIDALGO, BANFILL, ZLOTNIK & KERMALI, P.C. LETTERHEAD]
Board of Directors and Shareholders
Merchants Bancshares, Inc.
Houston, Texas
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Merchants
Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997, and the
balance sheet of Merchants Bancshares, Inc. (parent company only) as of December
31, 1997 and 1996, and the related statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. 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 Merchants
Bancshares, Inc. and subsidiaries and the financial position of Merchants
Bancshares, Inc. (parent company only) as of December 31, 1997 and 1996, and the
respective results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Hidalgo, Banfill, Zlotnik & Kermali, P.C.
Houston, Texas
February 4, 1998
35
<PAGE> 37
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash and due from banks (Note 3) $ 37,563,149 $ 30,072,740
Time deposit with financial institution -- 1,000,000
Federal funds sold 16,050,000 6,375,000
Investment securities (Note 4):
Available-for-sale 130,628,753 123,076,038
Held-to-maturity (Market value
1996 - $ 20,650,858) -- 20,196,377
Loans (Note 5):
Loans, net of unearned income
of $ 5,369,899 in 1997 and
$ 6,285,388 in 1996 342,566,214 294,523,715
Less allowance for credit losses 3,687,351 2,712,864
------------ ------------
Total loans, net 338,878,863 291,810,851
Bank premises and equipment (Note 6) 14,733,290 14,797,074
Accrued interest receivable 3,665,261 3,662,988
Real estate and other loan related assets 1,323,432 959,347
Other assets 3,108,077 2,620,007
------------ ------------
Total Assets $545,950,825 $494,570,422
============ ============
</TABLE>
See notes to financial statements.
36
<PAGE> 38
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Deposits:
Noninterest bearing $ 147,749,156 $ 129,314,210
Interest bearing (Note 7) 336,607,429 309,728,402
------------- -------------
484,356,585 439,042,612
Accrued interest, taxes and other
liabilities 3,607,583 2,016,475
------------- -------------
Total Liabilities 487,964,168 441,059,087
------------- -------------
Commitments and Contingencies (Note 11) -- --
Stockholders' Equity (Notes 9, 12 and 15):
Preferred stock, $ 20 par value,
authorized 2,000,000 shares -- --
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1997
and 1996 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 30,096,598 25,954,348
Net unrealized gain (loss) on
investment securities available-for-sale
(net of income taxes) 467,323 81,024
------------- -------------
58,308,451 53,779,902
Less cost of stock held in treasury:
Common, 26,016 shares in 1997 and
22,885 in 1996 (321,794) (268,567)
------------- -------------
Total Stockholders' Equity 57,986,657 53,511,335
------------- -------------
Total Liabilities and
Stockholders' Equity $ 545,950,825 $ 494,570,422
============= =============
</TABLE>
See notes to financial statements.
37
<PAGE> 39
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income:
Interest and fees
on loans $ 30,401,317 $ 24,915,315 $ 19,500,532
Investment securities:
Taxable interest 6,829,289 7,841,312 6,265,941
Non-taxable interest 853,726 933,985 758,059
Interest bearing deposits with bank -- 209,595 793,023
Time deposits with financial
institutions 59,978 106,857 76,140
Federal funds sold 1,083,678 1,332,412 1,780,062
------------ ------------ ------------
Total Interest Income 39,227,988 35,339,476 29,173,757
------------ ------------ ------------
Interest Expense:
Deposits 12,196,470 11,160,623 9,356,469
Long-term borrowings -- 8,642 220,418
------------ ------------ ------------
Total Interest Expense 12,196,470 11,169,265 9,576,887
------------ ------------ ------------
Net interest income 27,031,518 24,170,211 19,596,870
Provision for credit
losses (Note 5) 1,740,000 940,000 135,000
------------ ------------ ------------
Net interest income after
provision for credit losses 25,291,518 23,230,211 19,461,870
------------ ------------ ------------
Noninterest Income:
Service charges on deposit
accounts 4,239,574 4,436,228 3,472,492
Other service charges
and fees 773,650 280,453 256,110
Other operating income 1,224,327 962,249 926,841
Securities transactions (Note 4) 14,958 (1,625) (40)
------------ ------------ ------------
Total Noninterest Income 6,252,509 5,677,305 4,655,403
------------ ------------ ------------
Noninterest Expense:
Salaries and employee
benefits 11,294,074 11,116,967 8,316,752
Occupancy expense 2,252,723 1,915,379 1,665,812
Furniture and equipment
expense 1,732,816 1,573,489 824,168
Other real estate expense 209,615 282,925 290,364
Merger related expenses (Note 2) 1,571,555 -- --
Other operating expense (Note 16) 5,258,996 4,999,688 4,780,721
------------ ------------ ------------
Total Noninterest Expense 22,319,779 19,888,448 15,877,817
------------ ------------ ------------
</TABLE>
See notes to financial statements.
38
<PAGE> 40
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income before provision for
income taxes 9,224,248 9,019,068 8,239,456
Provision for income taxes
(Note 10) 2,836,600 2,634,100 2,332,700
------------ ------------ ------------
Net Income $ 6,387,648 $ 6,384,968 $ 5,906,756
============ ============ ============
Weighted Average Number of Common
Shares Outstanding 1,952,883 1,945,178 1,718,211
============ ============ ============
Net Income per Common Share $ 3.27 $ 3.28 $ 3.44
============ ============ ============
</TABLE>
See notes to financial statements.
39
<PAGE> 41
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES (CONSOLIDATED)
AND
MERCHANT BANCSHARES, INC. (PARENT COMPANY ONLY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Preferred Common Paid-In Retained Available-for- Treasury
Stock Stock Capital Earnings Sale Stock
------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ -- $ 1,281,650 $ 8,630,862 $ 16,002,758 $ (62,728) $ (313,444)
Net income -- -- -- 5,906,756 -- --
Cash dividends declared -
common stock, $.41 per share -- -- -- (742,928) -- --
Net change in unrealized gain (loss)
on investment securities
available-for-sale -- -- -- -- 1,001,073 --
Common stock issued -- 696,205 17,135,813 -- (78,790) --
Acquired 15,328 shares of
treasury stock -- -- -- -- -- (174,256)
Sold 3,457 shares of treasury
stock -- -- -- -- -- 39,133
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 -- 1,977,855 25,766,675 21,166,586 859,555 (448,567)
Net income -- -- -- 6,384,968 -- --
Cash dividends declared -
common stock, $.82 per share -- -- -- (1,597,206) -- --
Net change in unrealized gain (loss)
on investment securities available-
for-sale -- -- -- -- (778,531) --
Sold 12,000 shares of treasury stock -- -- -- -- -- 180,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 -- 1,977,855 25,766,675 25,954,348 81,024 (268,567)
Net income -- -- -- 6,387,648 -- --
Cash dividends declared - common
stock, $1.15 per share -- -- -- (2,245,398) -- --
Net change in unrealized gain (loss)
on investment securities available-
for-sale -- -- -- -- 386,299 --
Acquired 3,131 shares of treasury
stock -- -- -- -- -- (53,227)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 $ -- $ 1,977,855 $ 25,766,675 $ 30,096,598 $ 467,323 $ (321,794)
============ ============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
40
<PAGE> 42
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income $ 6,387,648 $ 6,384,968 $ 5,906,756
------------ ------------ ------------
Adjustments to Reconcile Net
Income to Cash Flows
from Operating Activities:
Provision for credit losses 1,740,000 940,000 135,000
Discount (Accretion) amortized to
income 428,768 647,568 246,698
Loss (Gain) on sale or maturity of
investment securities (14,958) 1,625 40
Origination of mortgage loans for sale (11,859,523) (10,878,114) (7,419,281)
Proceeds from mortgage loans sold 11,697,709 10,965,560 7,336,361
Depreciation and amortization 1,561,023 1,148,126 888,835
Loss (Gain) on sale of premises
and equipment (139,161) (58,652) 24,216
Provision for losses on real
estate and other loan related
assets 152,004 176,446 109,900
Loss (Gain) on sale of real estate
and other loan related assets 40,951 (17,922) 11,528
Decrease (Increase) in accrued
interest receivable (2,273) 266,916 (164,755)
Decrease (Increase) in other
assets (837,411) 287,206 (110,580)
Increase (Decrease) in accrued
interest, taxes and other
liabilities 1,591,108 (559,638) 219,740
------------ ------------ ------------
Total Adjustments 4,358,237 2,919,121 1,277,702
------------ ------------ ------------
Net Cash Flows From
Operating Activities 10,745,885 9,304,089 7,184,458
------------ ------------ ------------
</TABLE>
See notes to financial statements.
41
<PAGE> 43
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Investing Activities:
Net decrease (increase) in time
deposits in financial institutions 1,000,000 (102,000) 1,096,000
Proceeds from the maturities of
held-to-maturity investment securities 2,785,000 2,525,000 19,036,859
Proceeds from the sales of
available-for-sale investment securities 613,402 6,989,472 --
Proceeds from the maturities of
available-for-sale investment securities 45,731,028 53,584,174 19,311,807
Purchase of held-to-maturity
investment securities (1,011,330) (1,368,028) (24,717,436)
Purchase of available-for-sale
investment securities (35,302,945) (54,811,429) (20,152,737)
Net (increase) decrease in loans (48,400,861) (56,082,964) (13,919,914)
Rebates paid to customers (1,244,264) (1,471,245) (1,033,599)
Recoveries of loans charged-off 207,855 162,295 216,986
Proceeds from sale of premises
and equipment 243,816 124,524 24,738
Capital expenditures (1,390,767) (7,192,938) (599,288)
Proceeds from sale of real
estate and other loan related assets 289,032 359,437 423,356
Excess of cost over equity in net assets
of acquired subsidiary (115,790) -- --
----------- ----------- -----------
Net Cash Flows From Investing
Activities (36,595,824) (57,283,702) (20,313,228)
----------- ----------- -----------
Cash Flows From Financing Activities:
Net increase in demand deposits,
NOW accounts and savings accounts 31,945,381 6,103,772 14,980,594
Net increase in time deposits 13,368,592 1,557,836 9,311,209
Repayment of long-term borrowings -- (3,082,960) (374,045)
Proceeds from sale of treasury stock -- 180,000 39,133
Purchase of treasury stock (53,227) -- (174,256)
Dividends paid (2,245,398) (1,597,206) (742,928)
Purchase Minority interest -- (286,697) --
Net Cash Flows From Financing Activities 43,015,348 2,874,745 23,039,707
----------- ----------- -----------
</TABLE>
See notes to financial statements.
42
<PAGE> 44
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Increase (decrease) in
Cash and Cash Equivalents 17,165,409 (45,104,868) 9,910,937
Cash and Cash Equivalents at
Beginning of Period 36,447,740 81,552,608 41,912,004
Cash Received in Acquisition of Bank -- -- 29,729,667
------------ ------------ ------------
Cash and Cash Equivalents at
End of Period $ 53,613,149 $ 36,447,740 $ 81,552,608
============ ============ ============
Interest Paid $ 12,108,196 $ 11,243,162 $ 9,489,152
============ ============ ============
Federal Income Taxes Paid $ 3,930,000 $ 2,435,309 $ 1,635,366
============ ============ ============
Non-Cash Transactions:
Bank loans for real estate and
other loan related assets sold $ 248,730 $ 1,067,492 $ 607,832
Foreclosed properties transferred to
real estate and other loan
related assets $ 892,798 $ 774,593 $ 736,956
Unrealized gain (loss) on available-
for-sale investment securities $ 708,065 $ 122,762 $ 1,313,525
Held-to-maturity investment securities
transferred to available-for-sale
investment securities $ 18,403,958 $ -- $ --
Issued 696,205 shares of common
stock for the merger with
Texas Gulf Coast Bancorp, Inc. $ -- $ -- $ 17,753,228
</TABLE>
See notes to financial statements.
43
<PAGE> 45
MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash $ 211,948 $ 609,223
Time deposit with financial institution -- 1,000,000
Due from bank subsidiary 1,646,974 1,356,268
Investment in bank subsidiary 56,931,097 50,096,619
Equipment 57,890 82,403
Excess of cost of subsidiaries over
equity in net assets acquired, net
of accumulated amortization of
$ 307,247 in 1997 and $ 292,857
in 1996 268,419 282,809
Other assets 270,579 84,330
------------ ------------
Total Assets $ 59,386,907 $ 53,511,652
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 1,400,250 $ 317
------------ ------------
Total Liabilities 1,400,250 317
------------ ------------
Commitments and Contingencies (Note 11) -- --
Stockholders' Equity (Notes 9, 12 and 15):
Preferred stock, $ 20 par value,
authorized 2,000,000 shares -- --
Common stock, $ 1 par value,
authorized 10,000,000 shares,
issued 1,977,855 shares in 1997
and 1996 1,977,855 1,977,855
Paid-in capital 25,766,675 25,766,675
Retained earnings 30,096,598 25,954,348
Net unrealized gain (loss) on investment
securities available-for-sale
(net of income taxes) 467,323 81,024
------------ ------------
58,308,451 53,779,902
Less cost of stock held in treasury:
Common, 26,016 shares in 1997 and
22,885 in 1996 (321,794) (268,567)
------------ ------------
Total Stockholders' Equity 57,986,657 53,511,335
------------ ------------
Total Liabilities and Stockholders' Equity $ 59,386,907 $ 53,511,652
============ ============
</TABLE>
See notes to financial statements.
44
<PAGE> 46
MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Cash dividend from subsidiary $ 1,000,000 $ -- $ 3,000,000
Interest income 59,978 91,736 13,072
----------- ----------- -----------
1,059,978 91,736 3,013,072
----------- ----------- -----------
Expenses:
Operating expenses 230,857 212,916 197,568
Merger related expenses (Note 2) 1,460,153 -- --
----------- ----------- -----------
1,691,010 212,916 197,568
----------- ----------- -----------
Income (loss) before
income tax benefit and
equity in undistributed
income of subsidiary (631,032) (121,180) 2,815,504
Income tax benefit 570,500 199,000 299,400
----------- ----------- -----------
Income (loss) before equity
in undistributed income
of subsidiary (60,532) 77,820 3,114,904
Equity in undistributed
income of subsidiary 6,448,180 6,307,148 2,791,852
----------- ----------- -----------
Net income $ 6,387,648 $ 6,384,968 $ 5,906,756
=========== =========== ===========
</TABLE>
See notes to financial statements.
45
<PAGE> 47
MERCHANTS BANCSHARES, INC.
(PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net Income $ 6,387,648 $ 6,384,968 $ 5,906,756
Adjustments to Reconcile Net Income to
Cash Flows From Operating Activities:
Equity in undistributed income
of subsidiary (6,448,180) (6,307,148) (2,791,852)
Amortization and depreciation 31,990 24,250 17,040
Loss on sale of equipment 6,914 -- --
Increase (Decrease) in accrued expenses 1,399,933 (19,127) (119,222)
Decrease (Increase) in due from subsidiary (290,706) 452,732 (862,944)
Decrease (Increase) in other assets (186,249) 217,349 427,000
------------ ------------ ------------
Net Cash Flows From Operating Activities 901,350 753,024 2,576,778
------------ ------------ ------------
Cash Flows From Investing Activities:
(Decrease) in due to Bank subsidiary -- -- (43,472)
Purchase of equipment -- (68,412) (26,500)
------------ ------------ ------------
Net Cash Flows From Investing Activities -- (68,412) (69,972)
------------ ------------ ------------
Cash Flows From Financing Activities:
Proceeds from sale of treasury stock -- 180,000 39,133
Purchase of treasury stock (53,227) -- (174,256)
Dividends paid (2,245,398) (1,597,206) (742,928)
------------ ------------ ------------
Net Cash Flows From Financing Activities (2,298,625) (1,417,206) (878,051)
------------ ------------ ------------
Net Increase (Decrease) in Cash
and Cash Equivalents (1,397,275) (732,594) 1,628,755
Cash and Cash Equivalents at
Beginning of Year 1,609,223 2,341,817 713,062
------------ ------------ ------------
Cash and Cash Equivalents at
End of Year $ 211,948 $ 1,609,223 $ 2,341,817
============ ============ ============
Interest Paid $ -- $ -- $ --
============ ============ ============
Taxes Paid $ 3,930,000 $ 2,435,309 $ 1,635,366
============ ============ ============
Non-Cash Transactions:
Issued 696,205 shares of common stock
for the merger with Texas Gulf
Coast Bancorp, Inc. $ -- $ -- $ 17,753,228
============ ============ ============
</TABLE>
See notes to financial statements.
46
<PAGE> 48
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Merchants Bancshares, Inc. (Company)
and its subsidiaries conform to generally accepted accounting principles and
practices within the banking industry.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period, the
most significant of which relates to the allowance for credit losses. Actual
results could differ from those estimates.
The Company and its subsidiaries offer a full range of financial services to
commercial, industrial, financial and individual customers in the greater
Houston, Texas and surrounding area, including short-term and medium-term loans,
revolving credit arrangements, inventory and accounts receivable financing,
equipment financing, real estate lending, Small Business Administration lending,
letters of credit, installment and other consumer loans, savings accounts and
various savings programs, including individual retirement accounts, and interest
and non-interest-bearing checking accounts. Other services include federal tax
depository, safe deposit and night depository services. A summary of the more
significant accounting policies follows:
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the parent company
and its wholly-owned subsidiary, Gulf Southwest Nevada Bancorp, Inc. and its
wholly-owned subsidiary Merchants Bank and majority owned subsidiary Funds
Management Group, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation. Investment in subsidiary is accounted for
on the equity method of accounting in the Parent Company Only financial
statements.
INVESTMENT SECURITIES
Investment securities are classified in three categories and accounted for as
follows: debt securities that the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and are carried at amortized cost;
debt and equity securities bought and held principally for the purpose of
reselling, of which the Company has none, are classified as trading securities
and are carried at fair value, with unrealized gains and losses included in
income; debt or equity securities not classified as either held-to-maturity or
trading securities are deemed available-for-sale and are carried at fair value,
with unrealized gains and losses, net of applicable income taxes, reported as a
separate component of stockholders' equity.
Interest income on investment securities, including amortization of premiums and
accretion of discounts, is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities, which are reported in securities transactions.
LOANS
Loans are stated at the principal amount outstanding, net of unearned income and
the allowance for credit losses. Mortgage loans held for sale are carried at the
lower of aggregate cost or fair value. Interest on commercial, real estate and
other loans is accrued over the term of the loan based on the amount of
principal outstanding except
47
<PAGE> 49
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
where serious doubt exists as to the collectibility of a loan, in which case the
accrual of interest is discontinued. Interest income on installment loans is
computed primarily on sum-of-the-months-digit method which, in the aggregate,
does not differ materially from the interest method. Net loan origination and
commitment fees are being deferred and amortized into income over the term of
the loan as an adjustment of the yield.
Nonaccrual loans are those on which the accrual of interest has ceased. Loans
are placed on nonaccrual status if in the opinion of management, principal or
interest is not likely to be paid in accordance with the terms of the loan or
when principal or interest is past due 90 days or more and collateral is
insufficient to cover principal and interest. Interest accrued but not collected
at the date a loan is placed on nonaccrual status is reversed against interest
income. All cash receipts, whether designated as principal or interest are used
to reduce the carrying value of the loan when it is in the nonaccrual status.
Loans are restored to accrual status when principal and interest payments are
brought current and future payments in accordance with loan terms are reasonably
assured.
The carrying value of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate, the loans
observable market price or the fair value of the collateral, if the loan is
collateral dependent. A loan is considered impaired when, based on current
information, it is probable that the borrower will be unable to pay contractual
interest or principle payments as scheduled in the loan agreement. The Company
considers its nonaccrual loans as impaired loans.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established by a charge to income as a
provision for credit losses. Actual credit losses or recoveries are charged or
credited directly to this allowance. The amount of the allowance is determined
based upon evaluation of the loan portfolio, a review of past loan loss
experience and management's judgment with respect to current and expected
economic conditions and their potential impact on the loan portfolio.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed on the straight-line method based upon the
estimated useful lives of the assets. Amortization of leasehold improvements is
based on the estimated useful lives of the improvements or the term of the
respective lease, whichever is shorter. At the time of a retirement or sale, the
related cost and accumulated depreciation are removed from the accounts, and any
resulting gain or loss is recorded in income. Maintenance and repairs are
charged to expense as incurred. Renewals and betterments, expenditures which
generally increase the value of the property or extend its useful life, are
capitalized.
REAL ESTATE AND OTHER LOAN RELATED ASSETS
Real estate and other loan related assets are stated at the lower of cost or
estimated fair value, less the estimated costs to sell. Any reduction from cost
(loan value) to estimated fair value at the time of foreclosure is charged to
the allowance for credit losses. Subsequent valuation adjustments are charged to
current earnings through the provision for revaluation of real estate and other
loan related assets. Losses on dispositions are recognized in the period of
occurrence while gains are not
48
<PAGE> 50
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE AND OTHER LOAN RELATED ASSETS (CONTINUED)
recognized until all criteria for income recognition have been met. Also, any
income received or expense incurred during the period the assets are owned is
recognized as income or expense during the period in which it is received or
incurred and is included in other real estate expense.
EXCESS OF COST OVER EQUITY IN NET ASSETS ACQUIRED
The fair value of the net assets acquired in transactions accounted for as
purchases is recorded as an investment by the parent company. The excess of the
cash or market value of the consideration given in the transactions over the
fair value of the net assets acquired is recorded as the excess of cost over
fair value of assets acquired, which is amortized into other operating expenses
on a straight-line basis over periods of 15 to 40 years.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The subsidiaries record income tax expense by applying the statutory tax rate to
their income as adjusted for tax exempt interest and other temporary differences
and remit the portion of Federal income taxes currently due to the parent
company. The parent company records, as a tax benefit, the difference between
total taxes reflected by the subsidiaries and the consolidated provision for
income taxes. Deferred tax assets and liabilities are recognized for balance
sheet basis differences for tax and financial reporting purposes. The deferred
taxes represent future tax return consequences of those differences. Investment
tax credits and alternative minimum tax credits are recognized as a reduction of
Federal income taxes when such credits are utilized.
EARNINGS PER SHARE
Earnings per share of common stock are computed by dividing earnings by the
weighted average number of shares outstanding during the year.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 presentation.
49
<PAGE> 51
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - ACQUISITION AND MERGERS
The Company in January 1998 signed a definitive agreement to merge with and into
Union Planters Corporation in a stock for stock exchange. The merger is subject
to shareholder and regulatory approval and certain contractual closing
conditions. Merger related expenses of $1,571,555 were paid or accrued in 1997
and consisted of fees for investment bankers, attorneys, accountants and other
related charges.
In January of 1997, the Company through its wholly owned subsidiary Gulf
Southwest Nevada Bancorp, Inc., acquired 80% of the common stock of Funds
Management Group, Inc. for $75,000. Subsequent to the acquisition, 100% of an
issue of callable preferred stock was acquired for $75,000. The excess of cost
of the acquired Company over the sum of the amounts assigned to identifiable
assets acquired less liabilities assumed of $115,790, was recorded as excess of
cost over the net equity in net assets acquired and is being amortized over 15
years. The acquisition was accounted for as a purchase transaction. The
operations of Funds Management Group, Inc. since January 1, 1997 are included in
the accompanying financial statements.
On January 1, 1996, Gulf Southwest Nevada Bancorp, Inc. a wholly owned
subsidiary of the Company merged all of its subsidiary Banks into its Merchants
Bank subsidiary and the former subsidiary Banks became branches of Merchants
Bank. In January of 1996, Merchants Bank purchased the data processing equipment
of G.S.W. Data Processing, Inc. and Central Data Processing, Inc. at net book
value. The two wholly owned subsidiaries were then liquidated into their parent,
Gulf Southwest Nevada Bancorp, Inc.
On May 1, 1995, the Company through its wholly owned subsidiary Gulf Southwest
Nevada Bancorp, Inc. acquired all of the outstanding common stock of Texas Gulf
Coast Bancorp, Inc. by issuing 696,205 shares (with a fair value of $25.50 per
share) of Merchants Bancshares, Inc. (formerly Gulf Southwest Bancorp, Inc.)
common stock plus cash of $52,231 for fractional and dissenter shares to effect
the merger. The acquisition and merger was accounted for as a purchase
transaction. The excess of cost of the acquired Company over the sum of the
amounts assigned to identifiable assets acquired less liabilities assumed of
$194,650 was recorded as excess of cost over the net equity in net assets
acquired and is being amortized over 15 years.
The operations of Texas Gulf Coast Bancorp, Inc. since May 1, 1995 are included
in the accompanying financial statements.
NOTE 3 - RESERVE REQUIREMENTS
Cash and due from banks of approximately $16,391,000 and $12,315,000 at December
31, 1997 and 1996, respectively, were maintained to satisfy regulatory reserve
and other requirements.
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of available-for-sale and
held-to-maturity investment securities were as follows:
50
<PAGE> 52
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
AVAILABLE-FOR-SALE INVESTMENT SECURITIES:
<TABLE>
<CAPTION>
December 31, 1997: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $103,566,123 $ 460,528 $ 169,093 $103,857,558
State, county and municipal
obligations 19,791,148 420,231 3,601 20,207,778
Other 6,563,417 -- -- 6,563,417
------------ ------------ ------------ ------------
$129,920,688 $ 880,759 $ 172,694 $130,628,753
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Government agencies $117,936,759 $ 652,515 $ 529,753 $118,059,521
Other 5,016,517 -- -- 5,016,517
------------ ------------ ------------ ------------
$122,953,276 $ 652,515 $ 529,753 $123,076,038
============ ============ ============ ============
</TABLE>
HELD-TO-MATURITY INVESTMENT SECURITIES:
<TABLE>
<CAPTION>
December 31, 1996: Unrealized Gross
Amortized --------------------------- Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
State, county and municipal
obligations $ 20,196,377 $ 462,085 $ 7,604 $ 20,650,858
============ ============ ============ ============
</TABLE>
Cash proceeds from the maturity of held-to-maturity investment securities during
1997, 1996 and 1995 were $2,785,000 $2,525,000 and $19,036,859, respectively.
Cash proceeds from the maturity and sales of available-for-sale investment
securities during 1997, 1996 and 1995 were $46,344,430, $60,573,646, and
$19,311,807 respectively. Net gains or losses from the sale of
available-for-sale investment securities for 1997, 1996 and 1995 amounted to
$14,958 (gross gains of $14,958 and gross losses of $0), $(1,625), (gross gains
of $13 and gross losses of $1,638) and $0, respectively. There were no sales of
held-to-maturity securities in 1997, 1996, and 1995. During 1995 early
redemption of held-to-maturity investment securities resulted in a net loss of
$40 (gross gains of $53 and gross losses of $93).
In October of 1997, the subsidiary bank changed the classification of its
taxable and non-taxable State, county and municipal investment securities from
held-to-maturity to available-for-sale. The amortized cost of these investment
securities was $18,403,958 and the unrealized gain was $405,912. This transfer
was made to provide management more flexibility in their funds management to
maximize investment yields, liquidity and control interest rate risk.
51
<PAGE> 53
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair value of investment securities at December
31, 1997 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Available-for Sale
-------------------------------
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 36,562,591 $ 36,540,788
Due after one year through
five years 77,183,540 77,699,868
Due after five years through
ten years 7,340,448 7,549,468
Due after ten years 8,834,109 8,838,629
------------ ------------
Total Investment Securities $129,920,688 $130,628,753
============ ============
</TABLE>
Investment securities with amortized costs of $40,484,033 and $61,273,539 at
December 31, 1997 and 1996, were pledged to secure public deposits and for other
purposes as required by law.
NOTE 5 - LOANS
The loan portfolio was comprised of the following categories at December 31:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Commercial and industrial $ 67,012,667 $ 56,934,963
Real estate - construction 10,354,407 15,920,334
Real estate - other 205,665,975 156,471,949
Installment loans 63,640,998 70,117,783
Mortgage loans held for sale 374,033 212,219
Other loans 888,033 1,151,855
------------- -------------
Total loans 347,936,113 300,809,103
Less:
Unearned income (5,369,899) (6,285,388)
Allowance for credit
losses (3,687,351) (2,712,864)
------------- -------------
Net Loans $ 338,878,863 $ 291,810,851
============= =============
</TABLE>
52
<PAGE> 54
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
Loans on which interest was not being accrued and past due loans (90 days or
more) amounted to $1,953,933 and $611,106, respectively at December 31, 1997,
compared to $2,129,094 and $952,700, respectively at December 31, 1996.
The allowance for credit losses related to these impaired loans was $255,570 and
$217,148 in 1997 and 1996, respectively. Interest income lost on impaired loans
and the average balance of impaired loans was as follows for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income that would have
been recorded $ 405,054 $ 318,314 $ 262,583
Interest income recognized 68,336 43,684 61,858
---------- ---------- ----------
Interest income lost $ 336,718 $ 274,630 $ 200,725
========== ========== ==========
Average balance of impaired loans $2,291,385 $2,340,463 $2,179,898
========== ========== ==========
</TABLE>
Some of the directors and executive officers of the Company and its subsidiaries
and their related parties are loan customers at the Company's subsidiary bank.
In management's judgment, such borrowings were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with others and do not involve other than normal risk of
collectibility.
An analysis of loans to these parties, exclusive of loans to such persons that
in the aggregate do not exceed $60,000, is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 8,312,918 $ 11,768,064
New loans 5,071,312 4,474,637
Amounts collected (4,268,816) (2,780,363)
Loans to customers no longer
related parties (97,171) (5,149,420)
------------ ------------
Balance at end of year $ 9,018,243 $ 8,312,918
============ ============
</TABLE>
53
<PAGE> 55
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - LOANS (CONTINUED)
Transactions in the allowance for credit losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,712,864 $ 2,410,815 $ 2,062,786
Allowance of acquired banks -- -- 737,941
Provision charged to expense 1,740,000 940,000 135,000
Loan losses:
Charge-offs (973,368) (800,245) (741,898)
Recoveries 207,855 162,294 216,986
----------- ----------- -----------
Net loan losses (765,513) (637,951) (524,912)
----------- ----------- -----------
Balance at end of year $ 3,687,351 $ 2,712,864 $ 2,410,815
=========== =========== ===========
</TABLE>
NOTE 6 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment were comprised of the following at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Land $ 3,085,009 $ 3,146,964
Bank premises and leasehold improvements 5 to 40 yrs. 13,289,544 12,536,132
Furniture and equipment 5 to 10 yrs. 7,538,386 7,337,963
Automobiles 5 yrs. 538,103 478,223
Less - accumulated depreciation
and amortization (9,717,752) (8,702,208)
------------ ------------
Net balance at end of year $ 14,733,290 $ 14,797,074
============ ============
</TABLE>
Depreciation and amortization charged to operating expense was $1,294,896 in
1997, $1,022,186 in 1996, and $814,045 in 1995.
54
<PAGE> 56
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - INTEREST BEARING DEPOSITS
Interest bearing deposits were comprised of the following categories at December
31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Interest bearing demand $118,074,553 $104,314,922
Savings 53,562,466 53,811,662
Time 116,198,489 113,424,591
------------ ------------
48,771,921 38,177,227
------------ ------------
Time over $100,000 $336,607,429 $309,728,402
============ ============
</TABLE>
NOTE 8 - BORROWINGS
In December of 1997, the subsidiary bank purchased $1,546,900 of stock in the
Federal Home Loan Bank and created a credit facility with them to provide for
borrowings if needed to fund future loan demand.
At December 31, 1997, the bank had a blanket borrowing capacity of $36,000,000
to be collateralized by their 1 to 4 family mortgage portfolio and up to
$50,000,000 of short term borrowings with the delivery of investment securities
to collateralize the loan.
The interest rates charged on borrowings vary depending on the collateral given
and the term of the loan.
At December 31,1997 the bank had no borrowings under the credit facility.
NOTE 9 - DIVIDENDS FROM SUBSIDIARIES
Dividends paid by the company's subsidiaries are the primary source of funds
available to the company for payment of dividends to stockholders and other
operating needs. Dividends paid by the company's subsidiary bank are subject to
restrictions by certain regulatory agencies.
At December 31, 1997, approximately $33,467,500 of the subsidiary banks' net
assets were available for payment of dividends under these restrictions.
55
<PAGE> 57
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - FEDERAL INCOME TAXES
Deferred income taxes result from differences between amounts of assets and
liabilities as measured for income tax and financial reporting purposes. The
significant components of Federal deferred tax assets and liabilities as of
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Carrying value of other real estate owned $ 12,600 $ 15,900
Allowance for credit losses 986,200 394,600
Accumulated depreciation 25,100 --
Loan discount 41,200 --
---------- ----------
1,065,100 410,500
---------- ----------
Deferred Tax Liabilities:
Accretion on municipal bonds 36,300 51,500
Accumulated depreciation -- 206,700
Unrealized investment securities gains 240,800 41,700
---------- ----------
277,100 299,900
---------- ----------
Net Deferred Tax $ 788,000 $ 110,600
========== ==========
</TABLE>
The consolidated provision for income taxes for the years ended December 31,
consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable $ 3,713,100 $ 2,334,800 $ 1,556,600
Deferred (876,500) 299,300 776,100
----------- ----------- -----------
$ 2,836,600 $ 2,634,100 $ 2,332,700
=========== =========== ===========
</TABLE>
The income tax expense applicable to securities gains and losses for the years
1997, 1996 and 1995 was $5,056, $(553) and $(12), respectively.
The difference between the effective tax rate on consolidated income before
income taxes and the statutory rate is attributed to the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax provision at
statutory rate $ 3,136,200 $ 3,066,500 $ 2,801,400
Tax exempt income (295,700) (334,600) (257,800)
Nondeductible (deductible) expense (3,900) 20,900 (115,100)
Tax benefits and tax rate differences -- (118,700) (95,800)
----------- ----------- -----------
$ 2,836,600 $ 2,634,100 $ 2,332,700
=========== =========== ===========
</TABLE>
56
<PAGE> 58
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - FEDERAL INCOME TAXES (CONTINUED)
Deferred income taxes result from temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes. The sources and related tax effects of these differences are as
follows:
<TABLE>
<CAPTION>
Tax effect of temporary differences: 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Other real estate owned $ 3,300 $ 196,100 $ 73,900
Allowance for credit losses (591,600) (128,400) (24,800)
Accumulated depreciation (231,800) (79,200) 36,500
Accretion on municipal bonds (15,200) 9,100 (9,500)
Loan discount (41,200) -- --
Use of net operating loss -- -- 282,900
Use of alternative minimum tax credit -- 301,700 321,300
Use of investment tax credit -- -- 95,800
--------- --------- ---------
$(876,500) $ 299,300 $ 776,100
========= ========= =========
</TABLE>
NOTE 11 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company's subsidiary bank is a party to
financial instruments with off balance sheet risk to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheet.
The Company's subsidiary bank uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Collateral is required
to support the off-balance sheet instruments when it is deemed necessary.
Collateral held varies, but may include: deposits held in financial
institutions, accounts receivable, inventory and property, plant and equipment.
Financial instruments whose contract amounts represent potential credit risk are
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $62,340,715 $50,461,880
Standby and commercial letters of credit $ 1,451,419 $ 1,061,723
Letters of guaranty $ 127,500 $ 159,579
</TABLE>
57
<PAGE> 59
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company and subsidiaries have non-cancelable operating leases covering
certain equipment and buildings. The following is a schedule of future minimum
lease payments as of December 31, 1997:
<TABLE>
<CAPTION>
Year Ending December 31, Buildings Equipment
------------------------ ---------- ----------
<S> <C> <C>
1998 $ 389,577 $ 142,616
1999 324,262 91,731
2000 323,430 --
2001 323,430 --
2002 323,430 --
2003 and after 1,778,861 --
---------- ----------
$3,462,990 $ 234,347
========== ==========
</TABLE>
Rent expense incurred under operating leases amounted to $510,758, $591,596 and
$519,882 for the years ended December 31, 1997, 1996 and 1995, respectively.
Various lawsuits are pending against the Company's subsidiary bank. Management,
after reviewing these suits with legal counsel, considers that the aggregate
liability, if any, would not have a material adverse effect on the Company's
financial position.
NOTE 12 - STOCK BASED INCENTIVE PLAN
In May of 1997, the Company adopted the 1997 Flexible Incentive Plan.
Participation in the Plan is confined to employees of the Company, or one or
more of its subsidiaries, and such consultants and non-employee directors as may
be designated by the Board of Directors.
The aggregate number of shares of Common Stock which may be issued under the
Plan shall not exceed 200,000 shares. The maximum number of shares with respect
to which stock options or stock appreciation rights may be granted in any fiscal
year to any Named Executive Officer under the Plan shall not exceed 50,000
shares. Shares issued under the plan may be either authorized and unissued
Common Stock or Common Stock held in or acquired for the treasury of the
Company.
The plan provides for the grant of any or all of the following types of awards:
(1) stock options, including incentive stock options and non-qualified stock
options; (2) stock appreciation rights, either in tandem with stock options or
freestanding; (3) restricted stock awards; (4) performance shares; (5)
performance units; (6) dividend equivalent rights; and (7) other stock based
awards.
The Board of Directors will, with regard to each stock option determine the
number of shares subject to the option, term of the option (which, for incentive
stock options, shall not exceed ten years (five years in the case of an employee
owning over 10% of the Common Stock)) the exercise price per share of stock
subject to the option (which, for incentive stock options, must be not less than
the fair market value of the Common Stock at the time of grant (110% of fair
market value in the case of an employee owning more than 10% of the Common
Stock)) the vesting schedule (if any) and the other material terms of the
option.
58
<PAGE> 60
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCK BASED INCENTIVE PLAN (CONTINUED)
The purchase price on any shares of Common Stock purchased pursuant to the
exercise of an award granted under the Plan shall be payable in full on the
exercise date in cash, by surrender to the Company of shares of Common Stock of
the Company registered in the name of the participant, by delivery to the
Company of such other lawful consideration as the Board of Directors may
determine, or by a combination of the foregoing. Any such shares so surrendered
shall be deemed to have a value per share equal to the fair market value of a
share of Common Stock on such date.
FASB Statement No. 123 establishes accounting and reporting standards for
stock-based incentive plans, and allows two alternative methods for accounting
for employee incentives: (a) the fair-value-based method, or (b) the
intrinsic-value-based method, on which Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" was based.
The Company will account for its employee stock-based compensation plans under
the intrinsic-value-method. Under this method no compensation expense is
recognized at date of grant because the exercise price of the stock option
equals the fair market value of the underlying stock.
No awards were granted under the 1997 Flexible Incentive Plan in 1997.
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan covering
substantially all full time employees. Benefits are based on an employee's years
of service and compensation. The Company makes contributions to the plan
annually based upon actuarial valuations. The plan assets are managed and
invested by a corporate trustee. The plan assets are invested in several equity,
bond and common trust investment funds managed by the trustee.
The Company's pension plan was adopted on September 1, 1994. The Texas Gulf
Coast Bancorp, Inc. noncontributory defined benefit pension plan was merged with
the Company's pension plan on December 31, 1995.
Unrecognized prior service cost of the Company's pension plan is being amortized
on a straight line basis over fifteen years.
Net periodic pension cost for the pension plan was as follows for December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefit earned during the year $ 447,280 $ 384,439 $ 400,863
Interest cost on projected benefit obligation 204,480 143,107 189,701
Actual (gain) on plan assets (229,968) (135,776) (148,629)
Net amortization and deferrals (6,738) 10,974 9,127
--------- --------- ---------
Net pension cost $ 415,054 $ 402,744 $ 451,062
========= ========= =========
</TABLE>
59
<PAGE> 61
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)
Significant assumptions used in determining pension cost for the Company are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.0% 7.5% 7.0%
Expected rate of increase in compensation 3.0% 3.0% 4.0%
Expected long-term rate of return on plan assets 8.0% 8.0% 8.0%
</TABLE>
Funded status of the pension plan at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Project benefit obligation $(2,997,409) $(2,735,566)
Plan assets at fair value 2,893,715 2,632,427
----------- -----------
Plan assets (less than) projected
benefit obligation (103,694) (103,139)
Unrecognized net (gains) loss (799,644) (680,710)
Unrecognized net (assets) obligation
being amortized over 15 years (208,398) (237,143)
Unrecognized prior service cost 552,936 602,086
----------- -----------
(Accrued) prepaid pension cost $ (558,800) $ (418,906)
=========== ===========
</TABLE>
The Company has a qualified employee benefit plan under section 401(k) of the
Internal Revenue Code. Employees can contribute up to 15% of their compensation
to the plan on a pretax basis subject to regulatory limits and the Company at
its discretion can match up to 100 percent of 6 percent of the participant's
compensation. The administrative cost of the plan is paid by the Company at no
cost to the participants.
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Cash and cash equivalents - - For cash and due from banks, time deposits in
financial institutions and federal funds sold, the carrying amount is a
reasonable estimate of fair value.
Investment securities - - Investment securities fair value equals quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. See Note One for
valuation methodologies used for investment securities.
Loans - - The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
60
<PAGE> 62
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits - - The fair value of demand deposits, savings accounts and certain
money market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
Commitments to extend credit and standby letters of credit - - The fair value of
commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
present creditworthiness of the counter parties. For fixed-rate commitments,
fair value also considers the difference between current levels of interest
rates and committed rates. The fair value of letters of credit is based on fees
currently charged for similar letters of credit.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 53,613,149 $ 53,613,149 $ 37,447,740 $ 37,447,740
Investment securities $130,628,753 $130,628,753 $143,272,415 $143,726,896
Loans, net $338,878,863 $337,276,217 $291,810,851 $290,970,172
Liabilities:
Deposits $484,356,585 $484,418,265 $439,042,612 $439,187,121
Off -balance sheet instruments:
Letters of credit fees $ -- $ 17,585 $ -- $ 6,565
</TABLE>
NOTE 15 - CAPITAL ADEQUACY
The Company and its subsidiary bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements.
Under the risk-based capital guidelines, different categories of assets are
assigned different risk weights, based upon the perceived credit risk of the
asset. These risk weights are multiplied by corresponding asset balances and
certain off-balance sheet items to determine a "risk weighted" asset base.
These quantitative measures require that banking organizations achieve minimum
ratios of total capital to risk weighted assets of 8.0%, (of which at least 4.0%
should be in the form of Tier 1 capital). Total capital is defined as the sum of
Tier 1 and Tier 2 capital elements with Tier 2 being limited to 100 percent of
Tier 1. For bank holding companies, Tier 1 capital includes with certain
restrictions, common stockholders' equity, perpetual preferred stock and
minority interest in
61
<PAGE> 63
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - CAPITAL ADEQUACY (CONTINUED)
consolidated subsidiaries. Tier 2 capital includes, with certain restrictions,
certain forms of perpetual preferred stock, maturing capital instruments and the
allowance for possible credit losses.
In addition to the risked-based capital guidelines, regulatory authorities have
adopted the use of a leverage ratio as an additional tool to evaluate the
capital adequacy of banks and bank holding companies. The leverage ratio is
defined to be a company's "Tier 1" capital divided by its adjusted average total
assets. The leverage ratio adopted by the federal banking agencies requires a
ratio of 3.0% "Tier 1" capital to adjusted average total assets for banks with a
CAMEL rating of 1 or for bank holding companies with a BOPEC rating of 1. All
other institutions will be expected to maintain a leverage ratio of 4.0% to
5.0%.
The following table summarizes the Company's Tier 1, Total Capital and leverage
ratio as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount Ratio Amount Ratio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 Capital $56,452,111 15.76% $52,298,251 16.70%
Tier 1 Capital Minimum Requirement 14,330,964 4.00% 12,530,072 4.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $42,121,147 11.76% $39,768,179 12.70%
=========== =========== =========== ===========
Total Capital $60,139,462 16.79% $55,011,115 17.56%
Total Capital Minimum Requirement 28,661,928 8.00% 25,060,144 8.00%
----------- ----------- ----------- -----------
Excess Total Capital $31,477,534 8.79% $29,950,971 9.56%
=========== =========== =========== ===========
Tier 1 Capital - Leverage Ratio $56,452,111 10.82% $52,298,251 10.76%
Tier 1 Capital Requirement 15,651,625 3.00% 14,588,204 3.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $40,800,486 7.82% $37,710,047 7.76%
=========== =========== =========== ===========
</TABLE>
The following table summarized the Company's subsidiary bank's Tier 1, Total
Capital and leverage ratio as of December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
Amount Ratio Amount Ratio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Tier 1 Capital $53,410,674 14.92% $48,789,800 15.62%
Tier 1 Capital Minimum Requirement 14,314,700 4.00% 12,490,826 4.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $39,095,974 10.92% $36,298,974 11.62%
=========== =========== =========== ===========
Total Capital $57,098,025 15.96% $51,502,664 16.49%
Total Capital Minimum Requirement 28,629,400 8.00% 24,981,652 8.00%
----------- ----------- ----------- -----------
Excess Total Capital $28,468,625 7.96% $26,521,012 8.49%
=========== =========== =========== ===========
Tier 1 Capital - Leverage Ratio $53,410,674 10.28% $48,789,800 10.10%
Tier 1 Capital Requirement 15,585,180 3.00% 14,496,664 3.00%
----------- ----------- ----------- -----------
Excess Tier 1 Capital $37,825,494 7.28% $34,293,136 7.10%
=========== =========== =========== ===========
</TABLE>
62
<PAGE> 64
MERCHANTS BANCSHARES, INC. AND SUBSIDIARIES
AND
MERCHANTS BANCSHARES, INC. (PARENT COMPANY ONLY)
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - CAPITAL ADEQUACY (CONTINUED)
As of December 31, 1997 and 1996 the most recent notification from the Federal
Reserve Bank of Dallas, as to the Company and the Texas Department of Banking,
as to the Company's subsidiary bank categorized each of them as well capitalized
under the regulatory framework for prompt corrective action. There are no
conditions or events since notification that management believes have changed
these categories.
NOTE 16 - OTHER OPERATING EXPENSE
Other operating expense for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Stationery, supplies and printing $ 658,186 $ 785,927 $ 357,924
Legal, accounting and professional 832,712 702,733 542,437
Data processing 172,149 157,701 729,121
Advertising 365,308 428,284 297,435
Insurance 175,390 113,233 418,856
Postage and freight 385,761 373,307 420,876
Other 2,669,490 2,438,503 2,014,072
---------- ---------- ----------
$5,258,996 $4,999,688 $4,780,721
========== ========== ==========
</TABLE>
63
<PAGE> 65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the executive officers and directors of the Company.
Information regarding such persons, their ages, their present positions held
with the Company and Merchants Bank, and their principal occupations for the
last five years are as follows:
<TABLE>
<CAPTION>
POSITIONS OF EXECUTIVE OFFICERS WITH
NAME THE COMPANY AND MERCHANTS BANK AGE
---- ------------------------------ ---
<S> <C> <C>
J. W. Lander, Jr. Chairman of the Board, Director 72
and Chief Executive Officer of
the Company; Chairman of the Board
and Chief Executive Officer of
Merchants Bank
J. W. Lander, III President, Treasurer, Director and Chief 46
Operating Officer of the Company;
Senior Vice President of Merchants Bank
Norman H. Bird Vice President, Director and Secretary of 53
the Company; Executive Vice President
of Merchants Bank
Donald R. Harding Director of the Company; 57
President of Merchants Bank
</TABLE>
J. W. Lander, Jr., is Chairman of the Board of the Company and has served in
this capacity since May 1988. He was President of the Company from July 1982 to
April 1988. Mr. Lander is also Chairman of the Board and a director of Merchants
Bank. He is President and a director of Nevada Bancorp, positions he has held
since April 1994. In addition, he is a director of Stewart & Stevenson, Inc., a
manufacturer of heavy equipment. He has been a director of the Company since
1982. J. W. Lander, Jr., is the father of J. W. Lander, III.
J. W. Lander, III, is President, Treasurer and Assistant Secretary of the
Company and has served in these capacities since May 1988. Mr. Lander is also
Senior Vice President and a director of Merchants Bank. He is Treasurer and a
director of Nevada Bancorp, positions he has held since April 1994. He has been
a director of the Company since 1983. J. W. Lander, III is the son of J. W.
Lander, Jr.
Norman H. Bird, is Vice President and Secretary of the Company and has held
these offices since May 1988. Mr. Bird is also Executive Vice President of
Merchants Bank, an office he has held since April 1985, and has served as a
director of Merchants Bank since April 1985. He is Secretary of Nevada Bancorp,
an office he has held since April 1994. He has been a director of the Company
since October 1989.
Donald R. Harding, is President and a director of Merchants Bank and has served
in these capacities since March 1982. He has been a director of the Company
since 1982.
64
<PAGE> 66
Each director/officer of the Company holds office until his successor is duly
elected and qualifies unless such director/officer sooner resigns or is removed
from office. Directors of the Company receive a fee of $500 for each directors
meeting attended.
BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Merchants Bancshares' directors and executive officers, and persons who
beneficially own more than ten percent of the Common Stock, to file reports of
beneficial ownership of Common Stock and changes in beneficial ownership on
Forms 3, 4 and 5 (collectively, "SEC Forms") with the Securities and Exchange
Commission ("SEC"). Directors, executive officers and ten percent beneficial
owners are required under regulations promulgated by the SEC to furnish
Merchants Bancshares with copies of all SEC Forms which they file.
Based solely on information provided to Merchants Bancshares by its directors,
executive officers and ten percent beneficial owners, Merchants Bancshares
believes that its directors, executive officers and ten percent beneficial
owners have complied with all filing requirements applicable to them with
respect to acquisitions and dispositions of shares of Merchants Common Stock
occurring during 1997.
65
<PAGE> 67
ITEM 11. EXECUTIVE COMPENSATION
The officers and directors of the Company are compensated by Merchants Bank for
services performed by them on behalf of Merchants Bank. The following table sets
forth the summary compensation of the Chairman (and CEO) and the four other most
highly compensated executive officers of the Company and its subsidiaries for
the three years ended December 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(4)
- ------------------ ---- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
J. W. Lander, Jr.
Director and
Chairman of the
Board of the
Company; Chairman 1997 $220,150 $ 25,000 $ 25,350(2) $ 2,375
of the Board of 1996 220,150 0 20,650(2) 2,477
Merchants Bank 1995 180,953 0 14,925(2) 2,240
J. W. Lander, III
Director, President,
Treasurer and Asst.
Secretary of the
Company; Senior 1997 $ 95,000 $ 25,000 $ 25,550(2) $ 1,800
Vice President- 1996 95,000 25,000 17,025(2) 1,800
Merchants Bank 1995 84,975 8,498 14,270(2) 1,416
Donald R. Harding
Director of the 1997 $100,000 $ 25,000 $ 6,500(3) $ 1,458
Company; President - 1996 100,000 25,000 5,200(3) 1,708
Merchants Bank 1995 86,880 8,688 4,800(3) 1,426
Norman H. Bird
Director, Vice
President and
Secretary of the
Company; Executive 1997 $ 98,400 $ 20,000 $ 6,500(3) $ 1,776
Vice President - 1996 98,400 18,000 5,200(3) 1,746
Merchants Bank 1995 85,300 7,725 4,400(3) 1,367
Richard Chafey
Sr. Vice President 1997 $100,000 $ 20,000 $ 0 $ 1,104
Merchants Bank 1996 100,000 17,800 0 0
</TABLE>
- ----------
(1) The aggregate amount of perquisites and other benefits is excluded since
such compensation is less than the lesser of either $50,000 or 10 percent
of the total annual salary and bonus reported for the named executive
officer.
(2) Includes fees paid in his capacity as a director of Merchants Bank, Gulf
Southwest Nevada Bancorp, and a member of the Development Boards of
Merchants Bank - League City, Texas City, Pearland, LaMarque and Dickinson.
(3) Includes fees paid in his capacity as a director of Merchants Bank.
(4) Amounts of all other compensation are amounts contributed by the Subsidiary
Bank for fiscal year 1995, 1996 and 1997 under the Company's Employee
Savings Plan.
66
<PAGE> 68
PENSION PLAN
The following table shows the approximate annual retirement benefits under the
Merchants Bancshares Pension Plan (before the reduction made for social security
benefits) to eligible employees in specified compensation and years of service
categories, assuming retirement occurs at age 65 and that benefits are payable
only during the employee's lifetime.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 125,000 $ 21,349 $ 28,465 $ 35,531 $ 42,697 $ 49,814
150,000 25,619 34,158 42,648 51,232 59,777
175,000 29,889 39,851 49,765 59,767 69,740
200,000 34,159 45,544 56,882 68,302 79,703
225,000 38,429 51,237 63,999 76,837 89,666
250,000 42,699 56,930 71,116 85,372 99,629
275,000 46,969 62,623 78,233 93,907 109,592
</TABLE>
The compensation used in computing average monthly compensation is the total of
all amounts paid by the Company as shown on the employee's Form W-2, plus
amounts electively deferred by the employee under the 401k Plan. Credited years
of service for the Named Executive Officers as of December 31, 1997 are as
follows: Mr. Bird, 12 years; Mr. Chafey, 2 years; Mr. Harding, 21 years; Mr.
Lander, Jr., 34 years; and Mr. Lander, III, 15 years.
COMPENSATION OF DIRECTORS
The members of the Board of Directors of Merchants Bancshares receive a
directors fee of $500 for each board meeting attended.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with J. W. Lander, Jr.,
J. W. Lander, III, Donald R. Harding and Norman H. Bird (the "Executives"). The
employment agreements are for the period from September 26, 1997 to the date
that is the second anniversary of a Change in Control (as defined in the
employment agreements) (the first anniversary in the case of Mr. Lander, Jr.),
with automatic extensions for an additional one-year period on each anniversary
of the Change in Control unless at least 90 days prior to such anniversary date
the Company or the Executive gives notice that it or he does not wish to have
the term extended. The employment agreements also provide for annual incentive
compensation pursuant to an incentive compensation plan adopted annually by the
Board of Directors of the Subsidiary Bank. The bonus amounts payable pursuant to
such plan are based on the achievement of (i) a specific earnings goal by the
Subsidiary Bank set by the Board of Directors of the Subsidiary Bank, and (ii)
certain other individual goals related to such Executive's job responsibilities.
Upon the termination of an Executive's employment without cause, such Executive
will be entitled to receive, among other things, his base salary and incentive
compensation through the stated term of the employment agreement.
The employment agreements provide that, in the event of a change in
control, if, within two years after the change in control, an Executive
terminates his employment because of certain specified changes in his employment
situation or if he is terminated without cause, he will be entitled to receive
(in addition to salary and incentive compensation earned prior to termination) a
single lump sum payment in an amount equal to (i) two times his annual base
salary, incentive compensation and value of the annual fringe benefits for the
year immediately preceding the year in which his employment terminates, plus
(ii) the value of the portion of his benefits under any
67
<PAGE> 69
savings, pension, profit sharing or deferred compensation plans that are
forfeited under those plans by reason of the termination of employment. The
Executive also would receive a gross-up payment for any excise tax payable under
Section 4999 of the Internal Revenue Code.
In addition, pursuant to the terms of his employment agreement, upon
consummation of a change in control, J. W. Lander, III will receive a payment of
$400,000 for his agreement not to compete with the Company (or its successor)
during his continued employment and for a period of three years after his
termination of employment.
On October 10, 1997, the Company entered into indemnification agreements
with the Executives which provide that the Company will indemnify the Executive
against judgments, penalties, fines, settlements and reasonable expenses
actually incurred if he is or is threatened to be named in an action, suit or
proceeding because he is or was a director, officer, employee or agent of the
Company or was serving at the request of the Company in such a capacity for
another entity. To be entitled to indemnification, the Executive must have acted
in good faith and in the reasonable belief that his conduct was in the best
interests of the Company and, in the case of a criminal proceeding, must have
had no reasonable cause to believe that his conduct was unlawful.
Indemnification will be limited to reasonable expenses actually incurred in
respect of a proceeding in which the Executive is found liable on the basis that
he improperly received a personal benefit or in which he is found liable to the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person who served as a member of the Compensation Committee of Merchants Bank
during 1997 (i) was an officer or employee of the Company or any of its
subsidiaries during such year, (ii) was formerly an officer of the Company or
any of its subsidiaries, or (iii) was a party to any material transaction set
forth under "Certain Relationships and Related Transactions."
No executive officer of the Company served as a member of the compensation or
similar committee or board of directors of any other entity one of whose
executive officers served on the Compensation Committee of Merchants Bank or
the Board or the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 1, 1998, 1,951,839 shares of Merchants Common Stock were
outstanding, each of which is entitled to one vote.
The following table sets forth information regarding the beneficial ownership of
the Merchants Common Stock on March 1, 1998, by each current director, each
Named Executive Officer, each beneficial owner of more than five percent (5%) of
the Merchants Common Stock and all directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESSES BENEFICIAL AND OWNERSHIP(1) COMMON STOCK
- ------------------ --------------------------- ------------
<S> <C> <C>
Norman H. Bird 820 *
Donald R. Harding 4,379(2) *
JWL/GSW, Ltd. 400,000(3) 20.5%
J. W. Lander, Jr. 400,000(3)
J. W. Lander, III 8,500 *
Vanco Trusts (4) 453,995 23.3%
All directors and officers as
a group (4 persons) 413,699 21.2%
</TABLE>
* Less than one (1) percent.
68
<PAGE> 70
- --------------------
(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed.
(2) Shares are owned jointly by Mr. Harding and his wife. Mr. Harding has sole
voting and investment power over the shares.
(3) JWL/GSW, Ltd. is a family limited partnership, for which Mr. Lander, Jr.
and Mr. Lander, III are general partners with voting and investment power
over the shares listed. Approximately 98% of JWL/GSW, Ltd. is owned by the
Lander Children's Trust for which Mr. Lander, III is Trustee. The address
for Messrs. Lander, Jr. and Lander, III and JWL/GSW, Ltd. is 5005 Woodway,
Suite 300, Houston, Texas 77056.
(4) P.O. Box 1239, McAllen, Texas 78502
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the officers and directors of Merchants Bancshares and their affiliates
are customers of Merchants Bank. Such directors, officers and affiliates have
had transactions in the ordinary course of business with Merchants Bank,
including borrowings, all of which were on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing from
time to time for comparable transactions with unaffiliated persons and did not
involve more than the normal risk of collectibility or features unfavorable to
Merchants Bank. Merchants Bancshares expects that its directors and officers and
their affiliates will continue to enter into such transactions on similar terms
and conditions in the future.
69
<PAGE> 71
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements See index to financial statements at Item 8 of
this report.
(2) Exhibits
(b) REPORTS ON FORM 8-K.
In January 1998, a Form 8-K was filed with the Securities and Exchange
Commission to report that on January 16, 1998, the Company entered
into an Agreement and Plan of Merger to be acquired by Union Planters
Corporation ("UPC"), a publicly traded bank holding company based in
Memphis, Tennessee, in a tax-free reorganization to be accounted for
as a pooling of interests. Pursuant to the merger agreement, UPC will
exchange one (1) share of its common stock for each outstanding common
share of the Company. The merger is subject to satisfaction of certain
contractual conditions to closing, regulatory and shareholder
approvals, and is expected to be consummated in the second quarter of
1998. For additional information, see "Item 1. Pending Merger."
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
(c) EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
2.1 Agreement and Plan of Merger 8K 01/16/98 0-11033 2.1
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation, together with
amendments thereto 8-K 07/19/96 0-11033 3.1
3.2 Bylaws of the Registrant 8-K 07/19/96 0-11033 3.2
(4) Instruments defining rights of security holders,
including indentures
4.1 Form of specimen certificate representing the
Common Stock, par value $1.00 per share of
the Registrant S-4 07/06/90 33-35767 4.1
(10) Material contracts
10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
</TABLE>
70
<PAGE> 72
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
10.5 Merchants Bancshares, Inc.
Flexible Incentive Plan 10-K 12/31/96 0-11033 10.5
10.6 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander Jr. N/A N/A N/A N/A
10.7 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A
10.8 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A
10.9 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A
10.10 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, Jr. N/A N/A N/A N/A
10.11 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A
10.12 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A
10.13 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A
(21) Subsidiary of the Registrant
21.1 List of subsidiaries N/A N/A N/A N/A
(27) Financial Data Schedule
27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>
71
<PAGE> 73
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERCHANTS BANCSHARES, INC.
BY: /s/ J. W. Lander, Jr.
-----------------------------------
J. W. Lander, Jr.
Chief Executive Officer
Date:
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Norman H. Bird Director, Secretary,
- ------------------------------- and Vice President
Norman H. Bird
/s/ Donald Harding Director
- -------------------------------
Donald Harding
Director, Chairman,
/s/ J. W. Lander, Jr. and Chief Executive
- ------------------------------- Officer
J. W. Lander, Jr.
Director, President and
/s/ J. W. Lander, III Principal Financial and
- ------------------------------- Accounting Officer
J. W. Lander, III
</TABLE>
72
<PAGE> 74
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 0-11033
MERCHANTS BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<PAGE> 75
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession
2.1 Agreement and Plan of Merger 8K 01/16/98 0-11033 2.1
(3) Articles of Incorporation and Bylaws
3.1 Articles of Incorporation, together with
amendments thereto 8-K 07/19/96 0-11033 3.1
3.2 Bylaws of the Registrant 8-K 07/19/96 0-11033 3.2
(4) Instruments defining rights of security holders,
including indentures
4.1 Form of specimen certificate representing the
Common Stock, par value $1.00 per share of
the Registrant S-4 07/06/90 33-35767 4.1
(10) Material contracts
10.3 Merchants Bancshares, Inc.
401 (k) Plan 10-K 12/31/89 0-11033 10.3
10.4 Merchants Bancshares, Inc.
Defined Benefit Pension Plan 10-K 12/31/94 0-11033 10.4
10.5 Merchants Bancshares, Inc.
Flexible Incentive Plan 10-K 12/31/96 0-11033 10.5
10.6 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander Jr. N/A N/A N/A N/A
10.7 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A
10.8 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A
10.9 Employment Agreement, effective as of
September 26, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A
</TABLE>
73
<PAGE> 76
<TABLE>
<CAPTION>
(IF APPLICABLE)
INCORPORATED BY REFERENCE FROM
---------------------------------------------------------
EXHIBIT NUMBER AND DESCRIPTION FORM DATE FILE NO. EXHIBIT
- ------------------------------ ---- ---- -------- -------
<S> <C> <C> <C> <C> <C>
10.10 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, Jr. N/A N/A N/A N/A
10.11 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and J. W. Lander, III N/A N/A N/A N/A
10.12 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Donald R. Harding N/A N/A N/A N/A
10.13 Indemnification Agreement, dated as of
October 10, 1997 by and between the
Registrant and Norman H. Bird N/A N/A N/A N/A
(21) Subsidiary of the Registrant
21.1 List of subsidiaries N/A N/A N/A N/A
(27) Financial Data Schedule
27.1 Financial Data Schedule N/A N/A N/A N/A
</TABLE>
74
<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), effective as of October 10,
1997, (the "Effective Date") by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and J. W. Lander, Jr. (the "Executive"), evidences
that;
WHEREAS, the Executive is a senior executive of the Company and/or one
or more of the Company's direct or indirect subsidiaries (hereinafter
individually referred to as a "Subsidiary" and collectively as the
"Subsidiaries") and has made and/or is expected to make or continue to make
significant contributions to the profitability, growth and financial strength
of the Company and/or the Subsidiaries;
WHEREAS, the Company desires to assure itself and the Subsidiaries of
both present and future continuity of management in the event of a Change in
Control (as defined hereafter) and desires to establish certain minimum
compensation rights with respect to the key senior executives of the Company
and/or the Subsidiaries, including the Executive, applicable in the event of a
Change in Control;
WHEREAS, the Company wishes to ensure that the senior executives of
the Company and/or the Subsidiaries are not practically disabled from
discharging their duties upon a Change in Control;
WHEREAS, this Agreement is not intended to alter materially the
compensation and benefits which the Executive could reasonably expect to
receive from the Company and/or the Subsidiaries absent a Change in Control;
and
WHEREAS, the Executive is willing to render services to the Company
and/or the Subsidiaries on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Operation of Agreement:
(a) Sections 1 and 7 through 20 of this Agreement shall
be effective and binding as of the Effective Date,
but, anything in this Agreement to the contrary
notwithstanding, Sections 2, 3, 4, 5 and 6 of this
Agreement shall not be effective and binding unless
and until there shall have occurred a Change in
Control. For purposes of this Agreement, a "Change
in Control" will be deemed to have occurred if at any
time during the Term (as hereinafter defined) any of
the following events shall occur:
(i) The Company is merged, consolidated or
reorganized into or with another corporation
or other legal entity, and as a result
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 1
<PAGE> 2
of such merger, consolidation or
reorganization less than a majority of the
combined voting power of the then outstanding
securities of the Company or such corporation
or other legal entity immediately after such
transaction are held in the aggregate by the
holders of Voting Stock (as hereinafter
defined) of the Company immediately prior to
such transaction and/or such voting power is
not held by substantially all of such holders
in substantially the same proportions
relative to each other;
(ii) The Company sells (directly or indirectly)
all or substantially all of its assets
(including, without limitation, by means of
the sale of the capital stock or assets of
one or more Subsidiaries) to any other
corporation or other legal entity, of which
less than a majority of the combined voting
power of the then outstanding voting
securities (entitled to vote generally in the
election of directors or persons performing
similar functions on behalf of such other
corporation or legal entity) of such other
corporation or legal entity are held in the
aggregate by the holders of Voting Stock of
the Company immediately prior to such sale
and/or such voting power is not held by
substantially all of such holders in
substantially the same proportions relative
to each other;
(iii) Any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act") becomes (subsequent to
the Effective Date) the beneficial owner (as
the term "beneficial owner" is defined in
Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange
Act) of securities representing twenty
percent (20%) or more of the combined voting
power of the then-outstanding securities
entitled to vote generally in the election of
directors of the Company ("Voting Stock");
(iv) The Company files a report or proxy statement
with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in
response to Form 8-K, Schedule 14A or
Schedule 14C (or any successor schedule, form
or report or item therein) that a change in
control of the Company has occurred;
(v) If during any one (1) year period,
individuals who at the beginning of any such
period constitute the directors of the
Company cease for any reason to constitute at
least a majority thereof, unless the
election, or the nomination for
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 2
<PAGE> 3
election by the Company's shareholders, of
each director of the Company first elected
during such period was approved by a vote of
at least two-thirds of (i) the directors of
the Company then still in office who were
directors of the Company at the beginning of
any such period or (ii) the directors of the
Company whose nomination and/or election was
approved by the directors referenced in
clause (i) immediately preceding; or
(vi) The shareholders of the Company approve a
plan contemplating the liquidation or
dissolution of the Company.
Notwithstanding the foregoing provisions of
Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in
Control" shall not be deemed to have occurred for
purposes of this Agreement solely because (i) the
Company, (ii) a corporation or other legal entity in
which the Company directly or indirectly beneficially
owns 100% of the voting securities of such entity,
(iii) any employee stock ownership plan or any other
employee benefit plan of the Company or any
wholly-owned subsidiary of the Company or (iv) any
person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) who
is the beneficial owner (as the term "beneficial
owner" is defined in Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing twenty percent (20%) or more
of the Voting Stock of the Company as of the
Effective Date, either files or becomes obligated to
file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K,
Schedule 14A or Schedule 14C (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of
twenty percent (20%) or otherwise, or because the
Company reports that a change in control of the
Company has occurred by reason of such beneficial
ownership.
(b) Upon occurrence of a Change in Control at any time
during the Term, Sections 2, 3, 4, 5 and 6 of this
Agreement shall become immediately binding and
effective.
(c) The period during which this Agreement shall be in
effect (the "Term") shall commence as of the
Effective Date and shall expire as of the later of
(i) the close of business on October 9, 1998 or (ii)
the expiration of the Period of Employment (as
hereinafter defined); provided, however, that (A)
subject to Section 8 hereof, if, prior to a Change in
Control, the Executive ceases for any reason to be an
employee of the Company, thereupon the Term shall be
deemed to
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 3
<PAGE> 4
have expired and this Agreement shall immediately
terminate and be of no further effect and (B)
commencing on December 31, 1997 and the last day of
each of the Company's fiscal years commencing
thereafter, the Term of this Agreement shall
automatically be extended for an additional year
unless, not later than the immediately preceding June
30, the Company or the Executive shall have given
notice that the Company or the Executive, as the case
may be, does not wish to have the Term of this
Agreement extended.
2. Employment; Period of Employment:
(a) Subject to the terms and conditions of this
Agreement, upon the occurrence of a Change in
Control, the Company shall continue the Executive in
its employ and shall cause the Subsidiaries of which
the Executive is an employee as of the date of a
Change in Control to continue the Executive in their
employ and the Executive shall remain in the employ
of the Company and the applicable Subsidiaries (the
"Applicable Subsidiaries") for the period set forth
in Subsection 2(b) hereof (the "Period of
Employment"), in the positions and with substantially
the same duties and responsibilities that the
Executive had immediately prior to the Change in
Control, or to which the Company and the Executive
may hereafter mutually agree in writing. Throughout
the Period of Employment, the Executive shall devote
substantially all of the Executive's time during
normal business hours (subject to vacations, sick
leave and other absences in accordance with the
policies of the Company and the Applicable
Subsidiaries as in effect for senior executives
immediately prior to the Change in Control) to the
business and affairs of the Company and the
Applicable Subsidiaries, but nothing in this
Agreement shall preclude the Executive from devoting
reasonable periods of time during normal business
hours to (i) serving as a director, trustee or member
of or participant in any organization or business so
long as such activity would not constitute
Competitive Activity (as hereinafter defined), (ii)
engaging in charitable and community activities, or
(iii) managing the Executive's personal investments
so long as such activity would not constitute
Competitive Activity. For purposes of this
Agreement, "Competitive Activity" is defined as
directly or indirectly engaging in a business that is
competitive with the business of the Company or any
Applicable Subsidiary. "Competitive Activity" shall
not include (i) the mere ownership of a de minimis
amount of securities in any enterprise and the
exercise of rights appurtenant thereto or (ii)
participation in management of any such enterprise or
business operation thereof other than in connection
with the competitive operation of such enterprise.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 4
<PAGE> 5
(b) The Period of Employment shall commence on the date
on which a Change in Control occurs and, subject only
to the provisions of Section 4 hereof, shall continue
until the earlier of (i) the expiration of the first
anniversary of the occurrence of the Change in
Control or (ii) the Executive's death; provided,
however, that commencing on each anniversary of the
Change of Control, the Period of Employment shall
automatically be extended for an additional one-year
period unless, not later than ninety (90) calendar
days prior to such anniversary date, the Company or
the Executive shall have given notice that the
Company or the Executive, as the case may be, does
not wish to have the Term extended.
3. Compensation During Period of Employment:
(a) During the Period of Employment, the Company
covenants that the Executive shall receive from the
Company and/or the Applicable Subsidiaries (i) annual
base salary at a rate not less than the Executive's
annual fixed or base compensation from the Company
and the Applicable Subsidiaries (including, without
limitation, director's fees and advisory director's
fees) prior to the Change of Control or such higher
rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or
the Compensation Committee thereof (the "Committee")
(which base salary at such rate is herein referred to
as "Base Pay") and (ii) an annual amount equal to not
less than the highest aggregate annual bonus,
incentive or other payments of cash compensation paid
to the Executive by the Company and the Applicable
Subsidiaries in addition to the amounts referred to
in clause (i) above made or to be made in or with
respect to any calendar year during the three
calendar years immediately preceding the year in
which the Change in Control occurred pursuant to any
bonus, incentive, profit-sharing, performance,
discretionary pay or similar policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries ("Incentive Pay") which contemplates
cash payments other than Employee Benefits (as
hereinafter defined); provided, however, that nothing
herein shall preclude a change in the mix between
Base Pay and Incentive Pay so long as the aggregate
cash compensation received by the Executive in any
one (1) calendar year is not reduced in connection
therewith or as a result thereof and, provided
further, however, that in no event shall any increase
in the Executive's aggregate cash compensation or any
portion thereof in any way diminish any other
obligation of the Company under this Agreement. The
Executive's Base Pay shall be payable monthly. The
Executive's Incentive Pay shall be paid annually as
soon as reasonably practicable following
determination of the amount payable
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 5
<PAGE> 6
but in no event later than the date which is ninety
(90) days following the last day of the fiscal year
during which such Incentive Pay is deemed earned.
(b) For the Executive's service pursuant to Subsection
2(a) hereof, during the Period of Employment the
Executive shall, if and on the same basis as the
Executive participated therein immediately prior to
the Change in Control, be a full participant in, and
shall be entitled to the perquisites, benefits and
service credit for benefits as provided under any and
all employee retirement income and welfare benefit
policies, plans, programs or arrangements in which
senior executives of the Company and/or the
Applicable Subsidiaries participate generally,
including without limitation any stock option, stock
purchase, stock appreciation, savings, pension,
supplemental executive retirement or other retirement
income or welfare benefit, deferred compensation,
incentive compensation, group and/or executive life,
accident, health, dental, medical/hospital or other
insurance (whether funded by actual insurance or
self-insured by the Company or any Applicable
Subsidiary), disability, salary continuation, expense
reimbursement and other employee benefit policies,
plans, programs or arrangements that may exist
immediately prior to the Change in Control or any
equivalent successor policies, plans, programs or
arrangements that may be adopted thereafter by the
Company or any Applicable Subsidiary (collectively,
"Employee Benefits"); provided, however, that the
Executive's rights thereunder shall be governed by
the terms thereof and shall not be enlarged hereunder
or otherwise affected hereby. Subject to the proviso
in the immediately preceding sentence, if and to the
extent such perquisites, benefits or service credit
for benefits are not payable or provided under any
such policy, plan, program or arrangement as a result
of the amendment or termination thereof subsequent to
a Change in Control, then the Company shall itself
pay or provide such Employee Benefits. Nothing in
this Agreement shall preclude improvement or
enhancement of any such Employee Benefits, provided
that no such improvement shall in any way diminish
any other obligation of the Company under this
Agreement.
(c) The Company has determined that the amounts payable
pursuant to this Section 3 constitute reasonable
compensation. Accordingly, anything in this
Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or
distribution by the Company to the Executive (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise,
but determined without regard to any additional
payments required under Subsections 3(c), (d), (e)
and (f)) (a "Payment") is subject to the excise tax
imposed by Section 4999 of the Code, or any interest
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 6
<PAGE> 7
or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then
the Company shall pay to the Executive an additional
payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes
(including any interest or penalties imposed with
respect to such taxes), including, without
limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
(d) Subject to the provisions of Subsection 3(e), all
determinations required to be made regarding whether
and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination
shall be made by the Company's public accounting firm
(the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the
Executive as soon as possible following a request
made by the Executive or the Company. In the event
that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting
the Change in Control, the Company shall appoint
another nationally recognized public accounting firm
to make the determinations required hereunder (which
accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment shall be paid by the
Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the
Executive with a written opinion that failure to
report the Excise Tax on the Executive's applicable
federal income tax return would not result in the
imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by
the Company should have been made ("Underpayment"),
consistent with the calculations required to be made
hereunder. In the event that the Company exhausts
its remedies pursuant to Subsection 3(e) and the
Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and
any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 7
<PAGE> 8
(e) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten
(10) business days after the Executive is informed in
writing of such claim and shall apprise the Company
of the nature of such claim and the date on which
such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of
the 30-day period following the date on which the
Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to
the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such
claim,
(ii) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and
pay directly all costs and expenses (including
additional interest and penalties) incurred in
connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a
result of such representation and payment of costs
and expenses. Without limitation on the foregoing
provisions of this Subsection 3(e), the Company shall
control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as
the Company shall determine; provided further, that
if the Company
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 8
<PAGE> 9
directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such
payment to the Executive on an interest-free basis
and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such
advance; and provided further, that any extension of
the statute of limitations relating to payment of
taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to
be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the
Internal Revenue Service or any other taxing
authority.
(f) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Subsection 3(e),
the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the
Executive shall (subject to the Company's complying
with the requirements of Subsection 3(e)) promptly
pay to the Company the amount of such refund
(together with any interest paid or credited thereon
after taxes applicable thereto). If, after the
receipt by the Executive of any amount advanced by
the Company pursuant to Subsection 3(e), a
determination is made that the Executive shall not be
entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(g) The Executive shall be entitled throughout the Term
and thereafter to indemnification by the Company in
respect of any actions or omissions as an employee,
officer or director of the Company (or any successor
pursuant to Section 10) or of any Subsidiary or
affiliate of the Company in the manner set forth in
that certain Indemnification Agreement, of even date,
by and between the Company and the Executive.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 9
<PAGE> 10
4. Termination Following a Change in Control:
(a) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Company during the Period of Employment only upon the
occurrence of one or more of the following events:
(i) If the Executive is unable to perform the
essential functions of the Executive's job
(with or without reasonable accommodation)
because the Executive has become permanently
disabled within the meaning of, and actually
begins to receive disability benefits
pursuant to, a long-term disability plan
maintained by or on behalf of the Company or
any Applicable Subsidiary for senior
executives generally or, if applicable,
employees of the Company or any Applicable
Subsidiary immediately prior to the Change in
Control; or
(ii) For "Cause," which for purposes of this
Agreement shall mean that, prior to any
termination pursuant to Subsection 4(b)
hereof, the Executive shall have committed:
(A) an intentional act of fraud,
embezzlement or theft in connection
with the Executive's duties or in
the course of the Executive's
employment with the Company or any
Applicable Subsidiary;
(B) intentional wrongful damage to
property of the Company or any
Subsidiary;
(C) intentional wrongful disclosure of
secret processes or confidential
information of the Company or any
Subsidiary; or
(D) intentional wrongful engagement in
any Competitive Activity;
and any such act shall have been materially harmful to the
Company or any Subsidiary. For purposes of this Agreement, no
act, or failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional" only
if done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company and
the Subsidiaries or not opposed to the best interest of the
Company and the Subsidiaries. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for
"Cause" hereunder unless and until there shall have been
delivered to the
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 10
<PAGE> 11
Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the Board
then in office at a meeting of the Board called and held for
such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board), finding that, in the
good faith opinion of the Board, the Executive has committed
an act set forth above in this Subsection 4(a)(ii) and
specifying the particulars thereof in detail. Nothing herein
shall limit the right of the Executive or the Executive's
beneficiaries to contest the validity or propriety of any such
determination.
(b) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Executive during the Period of Employment with the
right to benefits as provided in Section 5 hereof
upon the occurrence of one or more of the following
events:
(i) Any termination of the employment of the
Executive by the Company or any Applicable
Subsidiary for any reason other than for
Cause or as a result of the death of the
Executive or by reason of the Executive's
disability and the actual receipt of
disability benefits in accordance with
Subsection 4(a)(i) hereof; or
(ii) Termination by the Executive of the
Executive's employment by the Company or any
Applicable Subsidiary during the Period of
Employment upon the occurrence of any of the
following events:
(A) Failure to elect or reelect the
Executive to the office(s) of the
Company or any Applicable Subsidiary
which the Executive held immediately
prior to the Change in Control, or
failure to elect or reelect the
Executive as a director of the
Company or any Applicable Subsidiary
or the removal of the Executive as a
director of the Company or any
Applicable Subsidiary (or any
successor thereto), if the Executive
shall have been a director of the
Company or such Applicable
Subsidiary immediately prior to the
Change in Control;
(B) A significant adverse change in the
nature or scope of the authorities,
powers, functions, responsibilities
or duties attached to the
position(s) with the Company or any
Applicable Subsidiary which the
Executive held immediately prior to
the Change in Control, a reduction
in the aggregate of the Executive's
Base Pay and Incentive Pay received
from the Company and/or the
Applicable Subsidiaries, or the
termination of the
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 11
<PAGE> 12
Executive's rights to any Employee
Benefits to which the Executive was
entitled immediately prior to the
Change in Control or a reduction in
scope or value thereof without the
prior written consent of the
Executive, any of which is not
remedied within ten (10) calendar
days after receipt by the Company of
written notice from the Executive of
such change, reduction or
termination, as the case may be;
(C) A determination by the Executive
made in good faith that, following
the Change in Control, as a result
of a change in circumstances
significantly affecting the
Executive's position(s) held with
the Company and/or the Applicable
Subsidiaries, including, without
limitation, a change in the scope of
the business or other activities for
which the Executive was responsible
immediately prior to the Change in
Control, that the Executive has been
rendered substantially unable to
carry out, has been substantially
hindered in the performance of, or
has suffered a substantial reduction
in any of the authorities, powers,
functions, responsibilities or
duties attached to the position(s)
held with the Company and/or the
Applicable Subsidiaries by the
Executive immediately prior to the
Change in Control, which situation
is not remedied within ten (10)
calendar days after written notice
to the Company from the Executive of
such determination;
(D) The liquidation, dissolution,
merger, consolidation or
reorganization of the Company or any
Applicable Subsidiary or transfer of
all or a significant portion of its
business and/or assets, unless the
successor (by liquidation, merger,
consolidation, reorganization or
otherwise) to which all or a
significant portion of its business
and/or assets have been transferred
(directly or by operation of law)
shall have assumed all duties and
obligations of the Company under
this Agreement pursuant to Section
10 hereof;
(E) The Company or any Applicable
Subsidiary shall require that the
principal place of work of the
Executive be changed to any location
which is in excess of twenty-five
(25) miles from the location thereof
immediately prior to the Change of
Control or to travel away from the
Executive's office in the course of
discharging the Executive's
responsibilities or duties
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 12
<PAGE> 13
hereunder significantly more (in
terms of either consecutive days or
aggregate days in any calendar year)
than was required of the Executive
prior to the Change of Control
without, in either case, the
Executive's prior consent; or
(F) Any material breach of this
Agreement by the Company or any
successor thereto.
(c) A termination by the Company pursuant to Subsection
4(a) hereof or by the Executive pursuant to
Subsection 4(b) hereof shall not affect any rights
which the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of
the Company providing Employee Benefits, which rights
shall be governed by the terms thereof. If this
Agreement or the employment of the Executive is
terminated under circumstances in which the Executive
is not entitled to any payments under Sections 3 or 5
hereof, the Executive shall have no further
obligation or liability to the Company hereunder with
respect to the Executive's prior or any future
employment by the Company or any Subsidiary.
5. Severance Compensation:
(a) If, following the occurrence of a Change in Control,
the Company or any Subsidiary shall terminate the
Executive's employment during the Period of
Employment other than pursuant to Subsection 4(a)
hereof, or if the Executive shall terminate the
Executive's employment pursuant to Subsection 4(b)
hereof, the Company shall pay to the Executive the
amount specified in Subsection 5(a)(i) hereof within
five (5) business days after the date (the
"Termination Date") that the Executive's employment
is terminated (the effective date of which shall be
the date of termination, or such other date that may
be specified by the Executive if the termination is
pursuant to Subsection 4(b) hereof):
(i) In lieu of any further payments to the
Executive for periods subsequent to the
Termination Date, but without affecting the
rights of the Executive referred to in
Subsection 5(b) hereof, a lump sum payment
(the "Severance Payment") in an amount equal
to the present value (using a discount rate
required to be utilized for purposes of
computations under Section 280G of the Code
or any successor provision thereto, or if no
such rate is so required to be used, a rate
equal to the then-applicable interest rate
prescribed by the Pension Benefit Guaranty
Corporation for benefit valuations in
connection with non-multiemployer pension
plan terminations
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 13
<PAGE> 14
assuming the immediate commencement of
benefit payments (the "Discount Rate")) of
the sum of (A) the aggregate Base Pay (at the
highest rate in effect during the Term prior
to the Termination Date) for each remaining
year or fraction of the Period of Employment
which the Executive would have received had
such termination not occurred, plus (B) the
aggregate Incentive Pay (based upon the
greatest amount of Incentive Pay paid or
payable to the Executive for any year during
the Term but prior to the year in which the
Termination Date occurs), which the Executive
would have received pursuant to this
Agreement during the remainder of the Period
of Employment had the Executive's employment
continued for the remainder of the Period of
Employment.
(ii) The determination of whether any amount
payable under Subsection 5(a)(i) is subject
to the Excise Tax shall be governed by
Subsections 3(c), (d), (e) and (f) of this
Agreement. The costs of obtaining such
determination shall be borne by the Company.
Without limiting the generality of the
foregoing, upon the Executive's termination
of employment under the circumstances
described in this Section 5, the Company
shall (upon request of the Executive) pay
over to the Executive all vested benefits to
which the Executive is entitled under and in
accordance with the terms of the employee
savings, stock ownership, supplemental
executive retirement and similar plans of the
Company and the Applicable Subsidiaries in
the event such payments are not otherwise
made in accordance with the terms of such
plans.
(iii) For the remainder of the Period of
Employment, the Company shall arrange to
provide the Executive with Employee Benefits
substantially similar to those which the
Executive was receiving or entitled to
receive immediately prior to the Termination
Date (and if and to the extent that such
benefits shall not or cannot be paid or
provided under any policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries solely due to the fact that the
Executive is no longer an officer or employee
of the Company and/or the Applicable
Subsidiaries, then the Company shall itself
pay to the Executive and/or the Executive's
dependents and beneficiaries, such Employee
Benefits). Without limiting the generality
of the foregoing, the remainder of the Period
of Employment shall be considered service
with the Company and the Applicable
Subsidiaries for the purpose of service
credits under the retirement income,
supplemental executive retirement and other
benefit plans of the Company and the
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 14
<PAGE> 15
Applicable Subsidiaries applicable to the
Executive and/or the Executive's dependents
and beneficiaries immediately prior to the
Termination Date. Without otherwise limiting
the purposes or effect of Section 6 hereof,
Employee Benefits payable to the Executive
pursuant to this Subsection 5(a)(iii) by
reason of any "welfare benefit plan" of the
Company and the Applicable Subsidiaries (as
the term "welfare benefit plan" is defined in
Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended)
shall be reduced to the extent comparable
welfare benefits are actually received by the
Executive from another employer during such
period following the Executive's Termination
Date until the expiration of the Period of
Employment.
(b) Upon written notice given by the Executive to the
Company prior to the receipt of any payment pursuant
to Subsection 5(a) hereof, the Executive, at the
Executive's sole option, without reduction to reflect
the present value of such amounts as aforesaid, may
elect to have all or any of the Severance Payment
payable pursuant to Subsection 5(a)(i) hereof paid to
the Executive on a quarterly or monthly basis during
the remainder of the Period of Employment.
(c) There shall be no right of set-off or counterclaim in
respect of any claim, debt or obligation against any
payment to or benefit (including Employee Benefits)
of the Executive provided for in this Agreement.
(d) Without limiting the rights of the Executive at law
or in equity, if the Company fails to make any
payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount
thereof at an annualized rate of interest equal to
the then-applicable Discount Rate or, if lesser, the
highest rate allowed by applicable usury laws.
6. No Mitigation Obligation: The Company hereby acknowledges
that it will be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Termination Date. Accordingly,
the parties hereto expressly agree that the payment of the severance
compensation by the Company to the Executive in accordance with the terms of
this Agreement will be liquidated damages, and that the Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any mitigation,
offset, reduction or any other obligation on the part of the Executive
hereunder or otherwise, except as expressly provided in Subsection 5(a)(iii)
hereof.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 15
<PAGE> 16
7. Legal Fees and Expenses:
(a) It is the intent of the Company that the Executive
not be required to incur the expenses associated with
the enforcement of the Executive's rights under this
Agreement by litigation or other legal action because
the cost and expense thereof would substantially
detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should
appear to the Executive that the Company has failed
to comply with any of its obligations under this
Agreement or in the event that the Company or any
other person takes any action to declare this
Agreement void or unenforceable, or institutes any
litigation designed to deny, or to recover from, the
Executive the benefits intended to be provided to the
Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain
counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to represent the
Executive in connection with the litigation or
defense of any litigation or other legal action,
whether by or against the Company or any director,
officer, shareholder or other person affiliated with
the Company, in any jurisdiction. Notwithstanding
any existing or prior attorney-client relationship
between the Company and such counsel, the Company
irrevocably consents to the Executive's entering into
an attorney-client relationship with such counsel
(other than Winstead Sechrest & Minick P.C.), and in
that connection the Company and the Executive agree
that a confidential relationship shall exist between
the Executive and such counsel. The Company shall
pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related
fees and expenses incurred by the Executive as a
result of the Company's failure to perform this
Agreement or any provision thereof or as a result of
the Company or any person contesting the validity or
enforceability of this Agreement or any provision
thereof as aforesaid.
(b) To ensure the benefits intended to be provided to the
Executive under Subsection 7(a) hereof, the Company
has established an irrevocable standby Letter of
Credit in favor of the Executive and each other
person who is named an Executive under similar
agreements, drawn on Texas Commerce Bank (the "Letter
of Credit") which provides for a credit amount of
$250,000 being made available to the Executive
against presentation at any time and from time to
time of the Executive's clean sight drafts,
accompanied by statements of the Executive's counsel
for fees and expenses, in an aggregate amount not to
exceed $250,000, unless a larger amount is previously
authorized by two of the Chairman, President or Vice
President of the Company, provided that no such
person may act in two separate capacities or
authorize a larger amount for himself.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 16
<PAGE> 17
8. Employment Rights: Nothing expressed or implied in this
Agreement shall create any right or duty on the part of the Company or any
Applicable Subsidiary (on the one hand) or the Executive (on the other hand) to
have the Executive remain in the employment of the Company or any Applicable
Subsidiary prior to any Change in Control; provided, however, that any
termination of employment of the Executive or removal of the Executive as an
Officer or director of the Company or any Applicable Subsidiary following the
commencement of any discussion with a third person that ultimately results in a
Change in Control shall be deemed to be a termination or removal of the
Executive after a Change in Control for purposes of this Agreement.
9. Withholding of Taxes: The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or government regulation or ruling.
10. Successors and Binding Agreement:
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger,
consolidation, reorganization, operation of law or
otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the
same manner and to the same extent the Company would
be required to perform if no such succession had
taken place. This Agreement shall be binding upon
and inure to the benefit of the Company and any
successor to the Company, including without
limitation any persons acquiring directly or
indirectly all or substantially all of the business
and/or assets of the Company whether by purchase,
merger, consolidation, reorganization, operation of
law or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this
Agreement). This Agreement shall not otherwise be
assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the
other, assign, transfer or delegate this Agreement or
any rights or obligations hereunder except as
expressly provided in Subsection 10(a) hereof.
Without limiting the generality of the foregoing, the
Executive's right to receive payments hereunder shall
not be assignable, transferable or delegable, whether
by pledge, creation of a security interest or
otherwise, other than by a transfer by the
Executive's will or by the laws of descent and
distribution and, in the event of any attempted
assignment or transfer contrary to this Subsection
10(c), the
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 17
<PAGE> 18
Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
(d) The Company and the Executive recognize that each
Party will have no adequate remedy at law for breach
by the other of any of the agreements contained
herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent
that the other shall be entitled to a decree of
specific performance, mandamus or other appropriate
remedy to enforce performance of this Agreement.
11. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF
CONFLICTS OF LAW PRINCIPLES) AND THE LAWS OF THE UNITED STATES OF AMERICA AND
WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN
HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION
OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY,
ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE
TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE,
WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH
OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY
AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH
COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN
INCONVENIENT FORUM.
12. Notices. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, telegram or
facsimile transmission addressed as follows:
(a) If to the Company: Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 18
<PAGE> 19
with a copy (which will
not constitute notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attn: Robert E. Crawford, Jr., Esq.
(b) If to the Executive: J. W. Lander, Jr.
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
13. Gender. Words of any gender used in this Agreement will be
held and construed to include any other gender, and words in the singular
number will be held to include the plural, unless the context otherwise
requires.
14. Amendment. This Agreement may not be amended or supplemented
except pursuant to a written instrument signed by the party against whom such
amendment or supplement is to be enforced. Nothing contained in this Agreement
will be deemed to create any agency, joint venture, partnership or similar
relationship between the parties to this Agreement. Nothing contained in this
Agreement will be deemed to authorize either party to this Agreement to bind or
obligate the other party.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed to be an original and all of which
will be deemed to be a single agreement. This Agreement will be considered
fully executed when all parties have executed an identical counterpart,
notwithstanding that all signatures may not appear on the same counterpart.
16. Severability. If any of the provisions of this Agreement are
determined to be invalid or unenforceable, such invalidity or unenforceability
will not invalidate or render unenforceable the remainder of this Agreement,
but rather the entire Agreement will be construed as if not containing the
particular invalid or unenforceable provision or provisions, and the rights and
obligations of the parties will be construed and enforced accordingly. The
parties acknowledge that if any provision of this Agreement is determined to be
invalid or unenforceable, it is their desire and intention that such
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 19
<PAGE> 20
provision be reformed and construed in such manner that it will, to the maximum
extent practicable, be deemed to be valid and enforceable.
17. Third Parties. Except as expressly set forth or referred to
in this Agreement, nothing in this Agreement is intended or will be construed
to confer upon or give to any party other than the parties to this Agreement
and their successors and permitted assigns, if any, any rights or remedies
under or by reason of this Agreement.
18. Waiver. No failure or delay in exercising any right hereunder
will operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise or the exercise of any other
right.
19. Prior Agreement. This Agreement is voluntarily entered into
and upon the occurrence of a Change in Control will supersede and take the
place of any prior change in control, severance or employment agreements
between the parties hereto. The parties hereto expressly agree and hereby
declare that any and all prior change in control, severance or employment
agreements between the parties are terminated and of no force or effect.
20. Indemnity. UNDER CERTAIN CIRCUMSTANCES, THIS AGREEMENT IMPOSES
INDEMNIFICATION OBLIGATIONS ON THE PARTIES HERETO.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 20
<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
COMPANY:
MERCHANTS BANCSHARES, INC.
By:
---------------------------------------------
Name: J. W. Lander, III
Title: President
EXECUTIVE:
--------------------------------------------------
J. W. Lander, Jr.
J. W. LANDER, JR.
EMPLOYMENT AGREEMENT - PAGE 21
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), effective as of October 10,
1997, (the "Effective Date") by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and J. W. Lander, III (the "Executive"), evidences
that;
WHEREAS, the Executive is a senior executive of the Company and/or one
or more of the Company's direct or indirect subsidiaries (hereinafter
individually referred to as a "Subsidiary" and collectively as the
"Subsidiaries") and has made and/or is expected to make or continue to make
significant contributions to the profitability, growth and financial strength
of the Company and/or the Subsidiaries;
WHEREAS, the Company desires to assure itself and the Subsidiaries of
both present and future continuity of management in the event of a Change in
Control (as defined hereafter) and desires to establish certain minimum
compensation rights with respect to the key senior executives of the Company
and/or the Subsidiaries, including the Executive, applicable in the event of a
Change in Control;
WHEREAS, the Company wishes to ensure that the senior executives of
the Company and/or the Subsidiaries are not practically disabled from
discharging their duties upon a Change in Control;
WHEREAS, this Agreement is not intended to alter materially the
compensation and benefits which the Executive could reasonably expect to
receive from the Company and/or the Subsidiaries absent a Change in Control;
and
WHEREAS, the Executive is willing to render services to the Company
and/or the Subsidiaries on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Operation of Agreement:
(a) Sections 1 and 8 through 21 of this Agreement shall
be effective and binding as of the Effective Date,
but, anything in this Agreement to the contrary
notwithstanding, Sections 2, 3, 4, 5, 6 and 7of this
Agreement shall not be effective and binding unless
and until there shall have occurred a Change in
Control. For purposes of this Agreement, a "Change
in Control" will be deemed to have occurred if at any
time during the Term (as hereinafter defined) any of
the following events shall occur:
(i) The Company is merged, consolidated or
reorganized into or with another corporation
or other legal entity, and as a result
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 1
<PAGE> 2
of such merger, consolidation or
reorganization less than a majority of the
combined voting power of the then outstanding
securities of the Company or such corporation
or other legal entity immediately after such
transaction are held in the aggregate by the
holders of Voting Stock (as hereinafter
defined) of the Company immediately prior to
such transaction and/or such voting power is
not held by substantially all of such holders
in substantially the same proportions
relative to each other;
(ii) The Company sells (directly or indirectly)
all or substantially all of its assets
(including, without limitation, by means of
the sale of the capital stock or assets of
one or more Subsidiaries) to any other
corporation or other legal entity, of which
less than a majority of the combined voting
power of the then outstanding voting
securities (entitled to vote generally in the
election of directors or persons performing
similar functions on behalf of such other
corporation or legal entity) of such other
corporation or legal entity are held in the
aggregate by the holders of Voting Stock of
the Company immediately prior to such sale
and/or such voting power is not held by
substantially all of such holders in
substantially the same proportions relative
to each other;
(iii) Any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act") becomes (subsequent to
the Effective Date) the beneficial owner (as
the term "beneficial owner" is defined in
Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange
Act) of securities representing twenty
percent (20%) or more of the combined voting
power of the then-outstanding securities
entitled to vote generally in the election of
directors of the Company ("Voting Stock");
(iv) The Company files a report or proxy statement
with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in
response to Form 8-K, Schedule 14A or
Schedule 14C (or any successor schedule, form
or report or item therein) that a change in
control of the Company has occurred;
(v) If during any one (1) year period,
individuals who at the beginning of any such
period constitute the directors of the
Company cease for any reason to constitute at
least a majority thereof, unless the
election, or the nomination for
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 2
<PAGE> 3
election by the Company's shareholders, of
each director of the Company first elected
during such period was approved by a vote of
at least two-thirds of (i) the directors of
the Company then still in office who were
directors of the Company at the beginning of
any such period or (ii) the directors of the
Company whose nomination and/or election was
approved by the directors referenced in
clause (i) immediately preceding; or
(vi) The shareholders of the Company approve a
plan contemplating the liquidation or
dissolution of the Company.
Notwithstanding the foregoing provisions of
Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in
Control" shall not be deemed to have occurred for
purposes of this Agreement solely because (i) the
Company, (ii) a corporation or other legal entity in
which the Company directly or indirectly beneficially
owns 100% of the voting securities of such entity,
(iii) any employee stock ownership plan or any other
employee benefit plan of the Company or any
wholly-owned subsidiary of the Company or (iv) any
person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) who
is the beneficial owner (as the term "beneficial
owner" is defined in Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing twenty percent (20%) or more
of the Voting Stock of the Company as of the
Effective Date, either files or becomes obligated to
file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K,
Schedule 14A or Schedule 14C (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of
twenty percent (20%) or otherwise, or because the
Company reports that a change in control of the
Company has occurred by reason of such beneficial
ownership.
(b) Upon occurrence of a Change in Control at any time
during the Term, Sections 2, 3, 4, 5, 6 and 7 of this
Agreement shall become immediately binding and
effective.
(c) The period during which this Agreement shall be in
effect (the "Term") shall commence as of the
Effective Date and shall expire as of the later of
(i) the close of business on October 9, 1999 or (ii)
the expiration of the Period of Employment (as
hereinafter defined); provided, however, that (A)
subject to Section 9 hereof, if, prior to a Change in
Control, the Executive ceases for any reason to be an
employee of the Company, thereupon the Term shall be
deemed to
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 3
<PAGE> 4
have expired and this Agreement shall immediately
terminate and be of no further effect and (B)
commencing on December 31, 1997 and the last day of
each of the Company's fiscal years commencing
thereafter, the Term of this Agreement shall
automatically be extended for an additional year
unless, not later than the immediately preceding June
30, the Company or the Executive shall have given
notice that the Company or the Executive, as the case
may be, does not wish to have the Term of this
Agreement extended.
2. Employment; Period of Employment:
(a) Subject to the terms and conditions of this
Agreement, upon the occurrence of a Change in
Control, the Company shall continue the Executive in
its employ and shall cause the Subsidiaries of which
the Executive is an employee as of the date of a
Change in Control to continue the Executive in their
employ and the Executive shall remain in the employ
of the Company and the applicable Subsidiaries (the
"Applicable Subsidiaries") for the period set forth
in Subsection 2(b) hereof (the "Period of
Employment"), in the positions and with substantially
the same duties and responsibilities that the
Executive had immediately prior to the Change in
Control, or to which the Company and the Executive
may hereafter mutually agree in writing. Throughout
the Period of Employment, the Executive shall devote
substantially all of the Executive's time during
normal business hours (subject to vacations, sick
leave and other absences in accordance with the
policies of the Company and the Applicable
Subsidiaries as in effect for senior executives
immediately prior to the Change in Control) to the
business and affairs of the Company and the
Applicable Subsidiaries, but nothing in this
Agreement shall preclude the Executive from devoting
reasonable periods of time during normal business
hours to (i) serving as a director, trustee or member
of or participant in any organization or business so
long as such activity would not constitute
Competitive Activity (as hereinafter defined), (ii)
engaging in charitable and community activities, or
(iii) managing the Executive's personal investments
so long as such activity would not constitute
Competitive Activity.
(b) The Period of Employment shall commence on the date
on which a Change in Control occurs and, subject only
to the provisions of Section 4 hereof, shall continue
until the earlier of (i) the expiration of the second
anniversary of the occurrence of the Change in
Control or (ii) the Executive's death; provided,
however, that commencing on each anniversary of the
Change of Control, the Period of Employment shall
automatically be extended for an additional one-year
period unless, not later than ninety (90) calendar
days prior
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 4
<PAGE> 5
to such anniversary date, the Company or the
Executive shall have given notice that the Company or
the Executive, as the case may be, does not wish to
have the Term extended.
3. Compensation During Period of Employment:
(a) During the Period of Employment, the Company
covenants that the Executive shall receive from the
Company and/or the Applicable Subsidiaries (i) annual
base salary at a rate not less than the Executive's
annual fixed or base compensation from the Company
and the Applicable Subsidiaries (including, without
limitation, director's fees and advisory director's
fees) prior to the Change of Control or such higher
rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or
the Compensation Committee thereof (the "Committee")
(which base salary at such rate is herein referred to
as "Base Pay") and (ii) an annual amount equal to not
less than the highest aggregate annual bonus,
incentive or other payments of cash compensation paid
to the Executive by the Company and the Applicable
Subsidiaries in addition to the amounts referred to
in clause (i) above made or to be made in or with
respect to any calendar year during the three
calendar years immediately preceding the year in
which the Change in Control occurred pursuant to any
bonus, incentive, profit-sharing, performance,
discretionary pay or similar policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries ("Incentive Pay") which contemplates
cash payments other than Employee Benefits (as
hereinafter defined); provided, however, that nothing
herein shall preclude a change in the mix between
Base Pay and Incentive Pay so long as the aggregate
cash compensation received by the Executive in any
one (1) calendar year is not reduced in connection
therewith or as a result thereof and, provided
further, however, that in no event shall any increase
in the Executive's aggregate cash compensation or any
portion thereof in any way diminish any other
obligation of the Company under this Agreement. The
Executive's Base Pay shall be payable monthly. The
Executive's Incentive Pay shall be paid annually as
soon as reasonably practicable following
determination of the amount payable but in no event
later than the date which is ninety (90) days
following the last day of the fiscal year during
which such Incentive Pay is deemed earned.
(b) For the Executive's service pursuant to Subsection
2(a) hereof, during the Period of Employment the
Executive shall, if and on the same basis as the
Executive participated therein immediately prior to
the Change in Control, be a full participant in, and
shall be entitled to the perquisites, benefits and
service credit for benefits as provided
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 5
<PAGE> 6
under any and all employee retirement income and
welfare benefit policies, plans, programs or
arrangements in which senior executives of the
Company and/or the Applicable Subsidiaries
participate generally, including without limitation
any stock option, stock purchase, stock appreciation,
savings, pension, supplemental executive retirement
or other retirement income or welfare benefit,
deferred compensation, incentive compensation, group
and/or executive life, accident, health, dental,
medical/hospital or other insurance (whether funded
by actual insurance or self-insured by the Company or
any Applicable Subsidiary), disability, salary
continuation, expense reimbursement and other
employee benefit policies, plans, programs or
arrangements that may exist immediately prior to the
Change in Control or any equivalent successor
policies, plans, programs or arrangements that may be
adopted thereafter by the Company or any Applicable
Subsidiary (collectively, "Employee Benefits");
provided, however, that the Executive's rights
thereunder shall be governed by the terms thereof and
shall not be enlarged hereunder or otherwise affected
hereby. Subject to the proviso in the immediately
preceding sentence, if and to the extent such
perquisites, benefits or service credit for benefits
are not payable or provided under any such policy,
plan, program or arrangement as a result of the
amendment or termination thereof subsequent to a
Change in Control, then the Company shall itself pay
or provide such Employee Benefits. Nothing in this
Agreement shall preclude improvement or enhancement
of any such Employee Benefits, provided that no such
improvement shall in any way diminish any other
obligation of the Company under this Agreement.
(c) The Company has determined that the amounts payable
pursuant to this Section 3 constitute reasonable
compensation. Accordingly, anything in this
Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or
distribution by the Company to the Executive (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise,
but determined without regard to any additional
payments required under Subsections 3(c), (d), (e)
and (f)) (a "Payment") is subject to the excise tax
imposed by Section 4999 of the Code, or any interest
or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then
the Company shall pay to the Executive an additional
payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes
(including any interest or penalties imposed with
respect to such taxes), including, without
limitation, any income taxes (and any interest and
penalties imposed with respect thereto)
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 6
<PAGE> 7
and Excise Tax imposed upon the Gross-Up Payment, the
Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments.
(d) Subject to the provisions of Subsection 3(e), all
determinations required to be made regarding whether
and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination
shall be made by the Company's public accounting firm
(the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the
Executive as soon as possible following a request
made by the Executive or the Company. In the event
that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting
the Change in Control, the Company shall appoint
another nationally recognized public accounting firm
to make the determinations required hereunder (which
accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment shall be paid by the
Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the
Executive with a written opinion that failure to
report the Excise Tax on the Executive's applicable
federal income tax return would not result in the
imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by
the Company should have been made ("Underpayment"),
consistent with the calculations required to be made
hereunder. In the event that the Company exhausts
its remedies pursuant to Subsection 3(e) and the
Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and
any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
(e) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten
(10) business days after the Executive is informed in
writing of such claim and shall apprise the Company
of the nature of such claim and the date on which
such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of
the
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 7
<PAGE> 8
30-day period following the date on which the
Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to
the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such
claim,
(ii) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and
pay directly all costs and expenses (including
additional interest and penalties) incurred in
connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a
result of such representation and payment of costs
and expenses. Without limitation on the foregoing
provisions of this Subsection 3(e), the Company shall
control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as
the Company shall determine; provided further, that
if the Company directs the Executive to pay such
claim and sue for a refund, the Company shall advance
the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the
Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect
to such advance or with respect to any imputed income
with respect to such advance; and provided further,
that any extension of the statute of limitations
relating to payment of taxes for
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 8
<PAGE> 9
the taxable year of the Executive with respect to
which such contested amount is claimed to be due is
limited solely to such contested amount.
Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the
Internal Revenue Service or any other taxing
authority.
(f) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Subsection 3(e),
the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the
Executive shall (subject to the Company's complying
with the requirements of Subsection 3(e)) promptly
pay to the Company the amount of such refund
(together with any interest paid or credited thereon
after taxes applicable thereto). If, after the
receipt by the Executive of any amount advanced by
the Company pursuant to Subsection 3(e), a
determination is made that the Executive shall not be
entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(g) The Executive shall be entitled throughout the Term
and thereafter to indemnification by the Company in
respect of any actions or omissions as an employee,
officer or director of the Company (or any successor
pursuant to Section 11) or of any Subsidiary or
affiliate of the Company in the manner set forth in
that certain Indemnification Agreement, of even date,
by and between the Company and the Executive.
(h) In consideration for the Executive's commitments set
forth in Section 7, the Company agrees to pay to the
Executive, within five (5) days following the
occurrence of a Change in Control, the sum of
$400,000.
4. Termination Following a Change in Control:
(a) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Company during the Period of Employment only upon the
occurrence of one or more of the following events:
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 9
<PAGE> 10
(i) If the Executive is unable to perform the
essential functions of the Executive's job
(with or without reasonable accommodation)
because the Executive has become permanently
disabled within the meaning of, and actually
begins to receive disability benefits
pursuant to, a long-term disability plan
maintained by or on behalf of the Company or
any Applicable Subsidiary for senior
executives generally or, if applicable,
employees of the Company or any Applicable
Subsidiary immediately prior to the Change in
Control; or
(ii) For "Cause," which for purposes of this
Agreement shall mean that, prior to any
termination pursuant to Subsection 4(b)
hereof, the Executive shall have committed:
(A) an intentional act of fraud,
embezzlement or theft in connection
with the Executive's duties or in
the course of the Executive's
employment with the Company or any
Applicable Subsidiary;
(B) intentional wrongful damage to
property of the Company or any
Subsidiary;
(C) intentional wrongful disclosure of
secret processes or confidential
information of the Company or any
Subsidiary; or
(D) intentional wrongful engagement in
any Competitive Activity;
and any such act shall have been materially harmful to the
Company or any Subsidiary. For purposes of this Agreement, no
act, or failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional" only
if done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company and
the Subsidiaries or not opposed to the best interest of the
Company and the Subsidiaries. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for
"Cause" hereunder unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters of the
Board then in office at a meeting of the Board called and held
for such purpose (after reasonable notice to the Executive and
an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding
that, in the good faith opinion of the Board, the Executive
has committed an act set forth above in this Subsection
4(a)(ii) and specifying the particulars thereof in
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 10
<PAGE> 11
detail. Nothing herein shall limit the right of the Executive
or the Executive's beneficiaries to contest the validity or
propriety of any such determination.
(b) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Executive during the Period of Employment with the
right to benefits as provided in Section 5 hereof
upon the occurrence of one or more of the following
events:
(i) Any termination of the employment of the
Executive by the Company or any Applicable
Subsidiary for any reason other than for
Cause or as a result of the death of the
Executive or by reason of the Executive's
disability and the actual receipt of
disability benefits in accordance with
Subsection 4(a)(i) hereof; or
(ii) Termination by the Executive of the
Executive's employment by the Company or any
Applicable Subsidiary during the Period of
Employment upon the occurrence of any of the
following events:
(A) Failure to elect or reelect the
Executive to the office(s) of the
Company or any Applicable Subsidiary
which the Executive held immediately
prior to the Change in Control, or
failure to elect or reelect the
Executive as a director of the
Company or any Applicable Subsidiary
or the removal of the Executive as a
director of the Company or any
Applicable Subsidiary (or any
successor thereto), if the Executive
shall have been a director of the
Company or such Applicable
Subsidiary immediately prior to the
Change in Control;
(B) A significant adverse change in the
nature or scope of the authorities,
powers, functions, responsibilities
or duties attached to the
position(s) with the Company or any
Applicable Subsidiary which the
Executive held immediately prior to
the Change in Control, a reduction
in the aggregate of the Executive's
Base Pay and Incentive Pay received
from the Company and/or the
Applicable Subsidiaries, or the
termination of the Executive's
rights to any Employee Benefits to
which the Executive was entitled
immediately prior to the Change in
Control or a reduction in scope or
value thereof without the prior
written consent of the Executive,
any of which is not remedied within
ten (10)
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 11
<PAGE> 12
calendar days after receipt by the
Company of written notice from the
Executive of such change, reduction
or termination, as the case may be;
(C) A determination by the Executive
made in good faith that, following
the Change in Control, as a result
of a change in circumstances
significantly affecting the
Executive's position(s) held with
the Company and/or the Applicable
Subsidiaries, including, without
limitation, a change in the scope of
the business or other activities for
which the Executive was responsible
immediately prior to the Change in
Control, that the Executive has been
rendered substantially unable to
carry out, has been substantially
hindered in the performance of, or
has suffered a substantial reduction
in any of the authorities, powers,
functions, responsibilities or
duties attached to the position(s)
held with the Company and/or the
Applicable Subsidiaries by the
Executive immediately prior to the
Change in Control, which situation
is not remedied within ten (10)
calendar days after written notice
to the Company from the Executive of
such determination;
(D) The liquidation, dissolution,
merger, consolidation or
reorganization of the Company or any
Applicable Subsidiary or transfer of
all or a significant portion of its
business and/or assets, unless the
successor (by liquidation, merger,
consolidation, reorganization or
otherwise) to which all or a
significant portion of its business
and/or assets have been transferred
(directly or by operation of law)
shall have assumed all duties and
obligations of the Company under
this Agreement pursuant to Section
11 hereof;
(E) The Company or any Applicable
Subsidiary shall require that the
principal place of work of the
Executive be changed to any location
which is in excess of twenty-five
(25) miles from the location thereof
immediately prior to the Change of
Control or to travel away from the
Executive's office in the course of
discharging the Executive's
responsibilities or duties hereunder
significantly more (in terms of
either consecutive days or aggregate
days in any calendar year) than was
required of the Executive prior to
the Change of Control without, in
either case, the Executive's prior
consent; or
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 12
<PAGE> 13
(F) Any material breach of this
Agreement by the Company or any
successor thereto.
(c) A termination by the Company pursuant to Subsection
4(a) hereof or by the Executive pursuant to
Subsection 4(b) hereof shall not affect any rights
which the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of
the Company providing Employee Benefits, which rights
shall be governed by the terms thereof. If this
Agreement or the employment of the Executive is
terminated under circumstances in which the Executive
is not entitled to any payments under Sections 3 or 5
hereof, the Executive shall have no further
obligation or liability to the Company hereunder with
respect to the Executive's prior or any future
employment by the Company or any Subsidiary.
5. Severance Compensation:
(a) If, following the occurrence of a Change in Control,
the Company or any Subsidiary shall terminate the
Executive's employment during the Period of
Employment other than pursuant to Subsection 4(a)
hereof, or if the Executive shall terminate the
Executive's employment pursuant to Subsection 4(b)
hereof, the Company shall pay to the Executive the
amount specified in Subsection 5(a)(i) hereof within
five (5) business days after the date (the
"Termination Date") that the Executive's employment
is terminated (the effective date of which shall be
the date of termination, or such other date that may
be specified by the Executive if the termination is
pursuant to Subsection 4(b) hereof):
(i) In lieu of any further payments to the
Executive for periods subsequent to the
Termination Date, but without affecting the
rights of the Executive referred to in
Subsection 5(b) hereof, a lump sum payment
(the "Severance Payment") in an amount equal
to the present value (using a discount rate
required to be utilized for purposes of
computations under Section 280G of the Code
or any successor provision thereto, or if no
such rate is so required to be used, a rate
equal to the then-applicable interest rate
prescribed by the Pension Benefit Guaranty
Corporation for benefit valuations in
connection with non-multiemployer pension
plan terminations assuming the immediate
commencement of benefit payments (the
"Discount Rate")) of the sum of (A) the
aggregate Base Pay (at the highest rate in
effect during the Term prior to the
Termination Date) for each remaining year or
fraction of the Period of Employment which
the Executive would have received had such
termination not occurred, plus (B) the
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 13
<PAGE> 14
aggregate Incentive Pay (based upon the
greatest amount of Incentive Pay paid or
payable to the Executive for any year during
the Term but prior to the year in which the
Termination Date occurs), which the Executive
would have received pursuant to this
Agreement during the remainder of the Period
of Employment had the Executive's employment
continued for the remainder of the Period of
Employment.
(ii) The determination of whether any amount
payable under Subsection 5(a)(i) and/or
Section 3 is subject to the Excise Tax shall
be governed by Subsections 3(c), (d), (e) and
(f) of this Agreement. The costs of
obtaining such determination shall be borne
by the Company. Without limiting the
generality of the foregoing, upon the
Executive's termination of employment under
the circumstances described in this Section
5, the Company shall (upon request of the
Executive) pay over to the Executive all
vested benefits to which the Executive is
entitled under and in accordance with the
terms of the employee savings, stock
ownership, supplemental executive retirement
and similar plans of the Company and the
Applicable Subsidiaries in the event such
payments are not otherwise made in accordance
with the terms of such plans.
(iii) For the remainder of the Period of
Employment, the Company shall arrange to
provide the Executive with Employee Benefits
substantially similar to those which the
Executive was receiving or entitled to
receive immediately prior to the Termination
Date (and if and to the extent that such
benefits shall not or cannot be paid or
provided under any policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries solely due to the fact that the
Executive is no longer an officer or employee
of the Company and/or the Applicable
Subsidiaries, then the Company shall itself
pay to the Executive and/or the Executive's
dependents and beneficiaries, such Employee
Benefits). Without limiting the generality
of the foregoing, the remainder of the Period
of Employment shall be considered service
with the Company and the Applicable
Subsidiaries for the purpose of service
credits under the retirement income,
supplemental executive retirement and other
benefit plans of the Company and the
Applicable Subsidiaries applicable to the
Executive and/or the Executive's dependents
and beneficiaries immediately prior to the
Termination Date. Without otherwise limiting
the purposes or effect of Section 6 hereof,
Employee Benefits payable to the Executive
pursuant to this Subsection 5(a)(iii) by
reason
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 14
<PAGE> 15
of any "welfare benefit plan" of the Company
and the Applicable Subsidiaries (as the term
"welfare benefit plan" is defined in Section
3(1) of the Employee Retirement Income
Security Act of 1974, as amended) shall be
reduced to the extent comparable welfare
benefits are actually received by the
Executive from another employer during such
period following the Executive's Termination
Date until the expiration of the Period of
Employment.
(b) Upon written notice given by the Executive to the
Company prior to the receipt of any payment pursuant
to Subsection 5(a) hereof, the Executive, at the
Executive's sole option, without reduction to reflect
the present value of such amounts as aforesaid, may
elect to have all or any of the Severance Payment
payable pursuant to Subsection 5(a)(i) hereof paid to
the Executive on a quarterly or monthly basis during
the remainder of the Period of Employment.
(c) There shall be no right of set-off or counterclaim in
respect of any claim, debt or obligation against any
payment to or benefit (including Employee Benefits)
of the Executive provided for in this Agreement.
(d) Without limiting the rights of the Executive at law
or in equity, if the Company fails to make any
payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount
thereof at an annualized rate of interest equal to
the then-applicable Discount Rate or, if lesser, the
highest rate allowed by applicable usury laws.
6. No Mitigation Obligation: The Company hereby acknowledges
that it will be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Termination Date and that the
noncompetition covenant contained in Section 7 hereof will further limit the
employment opportunities for the Executive. Accordingly, the parties hereto
expressly agree that the payment of the severance compensation by the Company
to the Executive in accordance with the terms of this Agreement will be
liquidated damages, and that the Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise, nor shall any profits, income, earnings or other
benefits from any source whatsoever create any mitigation, offset, reduction or
any other obligation on the part of the Executive hereunder or otherwise,
except as expressly provided in Subsection 5(a)(iii) hereof.
7. Competitive Activity: During a period ending three (3) years
following the Termination Date, so long as the Company is in substantial
compliance with its obligations pursuant to this Agreement, the Executive shall
not, without the prior written consent by the Company, directly or indirectly
engage in a business that is competitive with the business of the Company or
any Applicable Subsidiary ("Competitive Activity") within the
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 15
<PAGE> 16
State of Texas and any other geographical area served by the Company or such
Applicable Subsidiary during the twelve (12) month period immediately preceding
termination of the Executive's employment with the Company and such Applicable
Subsidiary. The Executive acknowledges that this limited prohibition is
reasonable as to time, geographical area and scope of activities to be
restrained and that such prohibition does not impose a greater restraint than
is necessary to protect the goodwill, proprietary information and other
business interests of the Company and such Applicable Subsidiary. "Competitive
Activity" shall not include (i) the mere ownership of a de minimis amount of
securities in any such enterprise and exercise of rights appurtenant thereto or
(ii) participation in management of any such enterprise or business operation
thereof other than in connection with the competitive operation of such
enterprise.
8. Legal Fees and Expenses:
(a) It is the intent of the Company that the Executive
not be required to incur the expenses associated with
the enforcement of the Executive's rights under this
Agreement by litigation or other legal action because
the cost and expense thereof would substantially
detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should
appear to the Executive that the Company has failed
to comply with any of its obligations under this
Agreement or in the event that the Company or any
other person takes any action to declare this
Agreement void or unenforceable, or institutes any
litigation designed to deny, or to recover from, the
Executive the benefits intended to be provided to the
Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain
counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to represent the
Executive in connection with the litigation or
defense of any litigation or other legal action,
whether by or against the Company or any director,
officer, shareholder or other person affiliated with
the Company, in any jurisdiction. Notwithstanding
any existing or prior attorney-client relationship
between the Company and such counsel, the Company
irrevocably consents to the Executive's entering into
an attorney-client relationship with such counsel
(other than Winstead Sechrest & Minick P.C.), and in
that connection the Company and the Executive agree
that a confidential relationship shall exist between
the Executive and such counsel. The Company shall
pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related
fees and expenses incurred by the Executive as a
result of the Company's failure to perform this
Agreement or any provision thereof or as a result of
the Company or any person contesting the validity or
enforceability of this Agreement or any provision
thereof as aforesaid.
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 16
<PAGE> 17
(b) To ensure the benefits intended to be provided to the
Executive under Subsection 8(a) hereof, the Company
has established an irrevocable standby Letter of
Credit in favor of the Executive and each other
person who is named an Executive under similar
agreements, drawn on Texas Commerce Bank (the "Letter
of Credit") which provides for a credit amount of
$250,000 being made available to the Executive
against presentation at any time and from time to
time of the Executive's clean sight drafts,
accompanied by statements of the Executive's counsel
for fees and expenses, in an aggregate amount not to
exceed $250,000, unless a larger amount is previously
authorized by two of the Chairman, President or Vice
President of the Company, provided that no such
person may act in two separate capacities or
authorize a larger amount for himself.
9. Employment Rights: Nothing expressed or implied in this
Agreement shall create any right or duty on the part of the Company or any
Applicable Subsidiary (on the one hand) or the Executive (on the other hand) to
have the Executive remain in the employment of the Company or any Applicable
Subsidiary prior to any Change in Control; provided, however, that any
termination of employment of the Executive or removal of the Executive as an
Officer or director of the Company or any Applicable Subsidiary following the
commencement of any discussion with a third person that ultimately results in a
Change in Control shall be deemed to be a termination or removal of the
Executive after a Change in Control for purposes of this Agreement.
10. Withholding of Taxes: The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or government regulation or ruling.
11. Successors and Binding Agreement:
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger,
consolidation, reorganization, operation of law or
otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the
same manner and to the same extent the Company would
be required to perform if no such succession had
taken place. This Agreement shall be binding upon
and inure to the benefit of the Company and any
successor to the Company, including without
limitation any persons acquiring directly or
indirectly all or substantially all of the business
and/or assets of the Company whether by purchase,
merger, consolidation, reorganization, operation of
law or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this
Agreement). This Agreement shall not otherwise be
assignable, transferable or delegable by the Company.
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 17
<PAGE> 18
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the
other, assign, transfer or delegate this Agreement or
any rights or obligations hereunder except as
expressly provided in Subsection 11(a) hereof.
Without limiting the generality of the foregoing, the
Executive's right to receive payments hereunder shall
not be assignable, transferable or delegable, whether
by pledge, creation of a security interest or
otherwise, other than by a transfer by the
Executive's will or by the laws of descent and
distribution and, in the event of any attempted
assignment or transfer contrary to this Subsection
11(c), the Company shall have no liability to pay any
amount so attempted to be assigned, transferred or
delegated.
(d) The Company and the Executive recognize that each
Party will have no adequate remedy at law for breach
by the other of any of the agreements contained
herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent
that the other shall be entitled to a decree of
specific performance, mandamus or other appropriate
remedy to enforce performance of this Agreement.
12. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF
CONFLICTS OF LAW PRINCIPLES) AND THE LAWS OF THE UNITED STATES OF AMERICA AND
WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN
HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION
OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY,
ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE
TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE,
WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH
OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY
AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH
COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN
INCONVENIENT FORUM.
13. Notices. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 18
<PAGE> 19
mail, return receipt requested, postage prepaid, or transmitted by hand
delivery, telegram or facsimile transmission addressed as follows:
(a) If to the Company: Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
with a copy (which will
not constitute notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attn: Robert E. Crawford, Jr., Esq.
(b) If to the Executive: J. W. Lander, III
5311 Willers Way
Houston, Texas 77056
Facsimile No.: (713) 622-8922
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
14. Gender. Words of any gender used in this Agreement will be
held and construed to include any other gender, and words in the singular
number will be held to include the plural, unless the context otherwise
requires.
15. Amendment. This Agreement may not be amended or supplemented
except pursuant to a written instrument signed by the party against whom such
amendment or supplement is to be enforced. Nothing contained in this Agreement
will be deemed to create any agency, joint venture, partnership or similar
relationship between the parties to this Agreement. Nothing contained in this
Agreement will be deemed to authorize either party to this Agreement to bind or
obligate the other party.
16. Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed to be an original and all of which
will be deemed to be a single agreement. This Agreement will be considered
fully executed when all parties have executed an identical counterpart,
notwithstanding that all signatures may not appear on the same counterpart.
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 19
<PAGE> 20
17. Severability. If any of the provisions of this Agreement are
determined to be invalid or unenforceable, such invalidity or unenforceability
will not invalidate or render unenforceable the remainder of this Agreement,
but rather the entire Agreement will be construed as if not containing the
particular invalid or unenforceable provision or provisions, and the rights and
obligations of the parties will be construed and enforced accordingly. The
parties acknowledge that if any provision of this Agreement is determined to be
invalid or unenforceable, it is their desire and intention that such provision
be reformed and construed in such manner that it will, to the maximum extent
practicable, be deemed to be valid and enforceable.
18. Third Parties. Except as expressly set forth or referred to
in this Agreement, nothing in this Agreement is intended or will be construed
to confer upon or give to any party other than the parties to this Agreement
and their successors and permitted assigns, if any, any rights or remedies
under or by reason of this Agreement.
19. Waiver. No failure or delay in exercising any right hereunder
will operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise or the exercise of any other
right.
20. Prior Agreement. This Agreement is voluntarily entered into
and upon the occurrence of a Change in Control will supersede and take the
place of any prior change in control, severance or employment agreements
between the parties hereto. The parties hereto expressly agree and hereby
declare that any and all prior change in control, severance or employment
agreements between the parties are terminated and of no force or effect.
21. Indemnity. UNDER CERTAIN CIRCUMSTANCES, THIS AGREEMENT IMPOSES
INDEMNIFICATION OBLIGATIONS ON THE PARTIES HERETO.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 20
<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
COMPANY:
MERCHANTS BANCSHARES, INC.
By:
----------------------------------------------
Name: Norman H. Bird
Title: Vice President
EXECUTIVE:
---------------------------------------------------
J. W. Lander, III
J. W. LANDER, III
EMPLOYMENT AGREEMENT - PAGE 21
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), effective as of October 10,
1997, (the "Effective Date") by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and Donald R. Harding (the "Executive"), evidences
that;
WHEREAS, the Executive is a senior executive of the Company and/or one
or more of the Company's direct or indirect subsidiaries (hereinafter
individually referred to as a "Subsidiary" and collectively as the
"Subsidiaries") and has made and/or is expected to make or continue to make
significant contributions to the profitability, growth and financial strength
of the Company and/or the Subsidiaries;
WHEREAS, the Company desires to assure itself and the Subsidiaries of
both present and future continuity of management in the event of a Change in
Control (as defined hereafter) and desires to establish certain minimum
compensation rights with respect to the key senior executives of the Company
and/or the Subsidiaries, including the Executive, applicable in the event of a
Change in Control;
WHEREAS, the Company wishes to ensure that the senior executives of
the Company and/or the Subsidiaries are not practically disabled from
discharging their duties upon a Change in Control;
WHEREAS, this Agreement is not intended to alter materially the
compensation and benefits which the Executive could reasonably expect to
receive from the Company and/or the Subsidiaries absent a Change in Control;
and
WHEREAS, the Executive is willing to render services to the Company
and/or the Subsidiaries on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Operation of Agreement:
(a) Sections 1 and 7 through 20 of this Agreement shall
be effective and binding as of the Effective Date,
but, anything in this Agreement to the contrary
notwithstanding, Sections 2, 3, 4, 5 and 6 of this
Agreement shall not be effective and binding unless
and until there shall have occurred a Change in
Control. For purposes of this Agreement, a "Change
in Control" will be deemed to have occurred if at any
time during the Term (as hereinafter defined) any of
the following events shall occur:
(i) The Company is merged, consolidated or
reorganized into or with another corporation
or other legal entity, and as a result
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 1
<PAGE> 2
of such merger, consolidation or
reorganization less than a majority of the
combined voting power of the then outstanding
securities of the Company or such corporation
or other legal entity immediately after such
transaction are held in the aggregate by the
holders of Voting Stock (as hereinafter
defined) of the Company immediately prior to
such transaction and/or such voting power is
not held by substantially all of such holders
in substantially the same proportions
relative to each other;
(ii) The Company sells (directly or indirectly)
all or substantially all of its assets
(including, without limitation, by means of
the sale of the capital stock or assets of
one or more Subsidiaries) to any other
corporation or other legal entity, of which
less than a majority of the combined voting
power of the then outstanding voting
securities (entitled to vote generally in the
election of directors or persons performing
similar functions on behalf of such other
corporation or legal entity) of such other
corporation or legal entity are held in the
aggregate by the holders of Voting Stock of
the Company immediately prior to such sale
and/or such voting power is not held by
substantially all of such holders in
substantially the same proportions relative
to each other;
(iii) Any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act") becomes (subsequent to
the Effective Date) the beneficial owner (as
the term "beneficial owner" is defined in
Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange
Act) of securities representing twenty
percent (20%) or more of the combined voting
power of the then-outstanding securities
entitled to vote generally in the election of
directors of the Company ("Voting Stock");
(iv) The Company files a report or proxy statement
with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in
response to Form 8-K, Schedule 14A or
Schedule 14C (or any successor schedule, form
or report or item therein) that a change in
control of the Company has occurred;
(v) If during any one (1) year period,
individuals who at the beginning of any such
period constitute the directors of the
Company cease for any reason to constitute at
least a majority thereof, unless the
election, or the nomination for
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 2
<PAGE> 3
election by the Company's shareholders, of
each director of the Company first elected
during such period was approved by a vote of
at least two-thirds of (i) the directors of
the Company then still in office who were
directors of the Company at the beginning of
any such period or (ii) the directors of the
Company whose nomination and/or election was
approved by the directors referenced in
clause (i) immediately preceding; or
(vi) The shareholders of the Company approve a
plan contemplating the liquidation or
dissolution of the Company.
Notwithstanding the foregoing provisions of
Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in
Control" shall not be deemed to have occurred for
purposes of this Agreement solely because (i) the
Company, (ii) a corporation or other legal entity in
which the Company directly or indirectly beneficially
owns 100% of the voting securities of such entity,
(iii) any employee stock ownership plan or any other
employee benefit plan of the Company or any
wholly-owned subsidiary of the Company or (iv) any
person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) who
is the beneficial owner (as the term "beneficial
owner" is defined in Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing twenty percent (20%) or more
of the Voting Stock of the Company as of the
Effective Date, either files or becomes obligated to
file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K,
Schedule 14A or Schedule 14C (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of
twenty percent (20%) or otherwise, or because the
Company reports that a change in control of the
Company has occurred by reason of such beneficial
ownership.
(b) Upon occurrence of a Change in Control at any time
during the Term, Sections 2, 3, 4, 5 and 6 of this
Agreement shall become immediately binding and
effective.
(c) The period during which this Agreement shall be in
effect (the "Term") shall commence as of the
Effective Date and shall expire as of the later of
(i) the close of business on October 9, 1999 or (ii)
the expiration of the Period of Employment (as
hereinafter defined); provided, however, that (A)
subject to Section 8 hereof, if, prior to a Change in
Control, the Executive ceases for any reason to be an
employee of the Company, thereupon the Term shall be
deemed to
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 3
<PAGE> 4
have expired and this Agreement shall immediately
terminate and be of no further effect and (B)
commencing on December 31, 1997 and the last day of
each of the Company's fiscal years commencing
thereafter, the Term of this Agreement shall
automatically be extended for an additional year
unless, not later than the immediately preceding June
30, the Company or the Executive shall have given
notice that the Company or the Executive, as the case
may be, does not wish to have the Term of this
Agreement extended.
2. Employment; Period of Employment:
(a) Subject to the terms and conditions of this
Agreement, upon the occurrence of a Change in
Control, the Company shall continue the Executive in
its employ and shall cause the Subsidiaries of which
the Executive is an employee as of the date of a
Change in Control to continue the Executive in their
employ and the Executive shall remain in the employ
of the Company and the applicable Subsidiaries (the
"Applicable Subsidiaries") for the period set forth
in Subsection 2(b) hereof (the "Period of
Employment"), in the positions and with substantially
the same duties and responsibilities that the
Executive had immediately prior to the Change in
Control, or to which the Company and the Executive
may hereafter mutually agree in writing. Throughout
the Period of Employment, the Executive shall devote
substantially all of the Executive's time during
normal business hours (subject to vacations, sick
leave and other absences in accordance with the
policies of the Company and the Applicable
Subsidiaries as in effect for senior executives
immediately prior to the Change in Control) to the
business and affairs of the Company and the
Applicable Subsidiaries, but nothing in this
Agreement shall preclude the Executive from devoting
reasonable periods of time during normal business
hours to (i) serving as a director, trustee or member
of or participant in any organization or business so
long as such activity would not constitute
Competitive Activity (as hereinafter defined), (ii)
engaging in charitable and community activities, or
(iii) managing the Executive's personal investments
so long as such activity would not constitute
Competitive Activity. For purposes of this
Agreement, "Competitive Activity" is defined as
directly or indirectly engaging in a business that is
competitive with the business of the Company or any
Applicable Subsidiary. "Competitive Activity" shall
not include (i) the mere ownership of a de minimis
amount of securities in any enterprise and the
exercise of rights appurtenant thereto or (ii)
participation in management of any such enterprise or
business operation thereof other than in connection
with the competitive operation of such enterprise.
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 4
<PAGE> 5
(b) The Period of Employment shall commence on the date
on which a Change in Control occurs and, subject only
to the provisions of Section 4 hereof, shall continue
until the earlier of (i) the expiration of the second
anniversary of the occurrence of the Change in
Control or (ii) the Executive's death; provided,
however, that commencing on each anniversary of the
Change of Control, the Period of Employment shall
automatically be extended for an additional one-year
period unless, not later than ninety (90) calendar
days prior to such anniversary date, the Company or
the Executive shall have given notice that the
Company or the Executive, as the case may be, does
not wish to have the Term extended.
3. Compensation During Period of Employment:
(a) During the Period of Employment, the Company
covenants that the Executive shall receive from the
Company and/or the Applicable Subsidiaries (i) annual
base salary at a rate not less than the Executive's
annual fixed or base compensation from the Company
and the Applicable Subsidiaries (including, without
limitation, director's fees and advisory director's
fees) prior to the Change of Control or such higher
rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or
the Compensation Committee thereof (the "Committee")
(which base salary at such rate is herein referred to
as "Base Pay") and (ii) an annual amount equal to not
less than the highest aggregate annual bonus,
incentive or other payments of cash compensation paid
to the Executive by the Company and the Applicable
Subsidiaries in addition to the amounts referred to
in clause (i) above made or to be made in or with
respect to any calendar year during the three
calendar years immediately preceding the year in
which the Change in Control occurred pursuant to any
bonus, incentive, profit-sharing, performance,
discretionary pay or similar policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries ("Incentive Pay") which contemplates
cash payments other than Employee Benefits (as
hereinafter defined); provided, however, that nothing
herein shall preclude a change in the mix between
Base Pay and Incentive Pay so long as the aggregate
cash compensation received by the Executive in any
one (1) calendar year is not reduced in connection
therewith or as a result thereof and, provided
further, however, that in no event shall any increase
in the Executive's aggregate cash compensation or any
portion thereof in any way diminish any other
obligation of the Company under this Agreement. The
Executive's Base Pay shall be payable monthly. The
Executive's Incentive Pay shall be paid annually as
soon as reasonably practicable following
determination of the amount payable but in no event
later than the date which is ninety (90) days
following
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 5
<PAGE> 6
the last day of the fiscal year during which such
Incentive Pay is deemed earned.
(b) For the Executive's service pursuant to Subsection
2(a) hereof, during the Period of Employment the
Executive shall, if and on the same basis as the
Executive participated therein immediately prior to
the Change in Control, be a full participant in, and
shall be entitled to the perquisites, benefits and
service credit for benefits as provided under any and
all employee retirement income and welfare benefit
policies, plans, programs or arrangements in which
senior executives of the Company and/or the
Applicable Subsidiaries participate generally,
including without limitation any stock option, stock
purchase, stock appreciation, savings, pension,
supplemental executive retirement or other retirement
income or welfare benefit, deferred compensation,
incentive compensation, group and/or executive life,
accident, health, dental, medical/hospital or other
insurance (whether funded by actual insurance or
self-insured by the Company or any Applicable
Subsidiary), disability, salary continuation, expense
reimbursement and other employee benefit policies,
plans, programs or arrangements that may exist
immediately prior to the Change in Control or any
equivalent successor policies, plans, programs or
arrangements that may be adopted thereafter by the
Company or any Applicable Subsidiary (collectively,
"Employee Benefits"); provided, however, that the
Executive's rights thereunder shall be governed by
the terms thereof and shall not be enlarged hereunder
or otherwise affected hereby. Subject to the proviso
in the immediately preceding sentence, if and to the
extent such perquisites, benefits or service credit
for benefits are not payable or provided under any
such policy, plan, program or arrangement as a result
of the amendment or termination thereof subsequent to
a Change in Control, then the Company shall itself
pay or provide such Employee Benefits. Nothing in
this Agreement shall preclude improvement or
enhancement of any such Employee Benefits, provided
that no such improvement shall in any way diminish
any other obligation of the Company under this
Agreement.
(c) The Company has determined that the amounts payable
pursuant to this Section 3 constitute reasonable
compensation. Accordingly, anything in this
Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or
distribution by the Company to the Executive (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise,
but determined without regard to any additional
payments required under Subsections 3(c), (d), (e)
and (f)) (a "Payment") is subject to the excise tax
imposed by Section 4999 of the Code, or any interest
or penalties are incurred by the Executive with
respect to such
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 6
<PAGE> 7
excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Company
shall pay to the Executive an additional payment (a
"Gross-Up Payment") in an amount such that after
payment by the Executive of all taxes (including any
interest or penalties imposed with respect to such
taxes), including, without limitation, any income
taxes (and any interest and penalties imposed with
respect thereto) and Excise Tax imposed upon the
Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed
upon the Payments.
(d) Subject to the provisions of Subsection 3(e), all
determinations required to be made regarding whether
and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination
shall be made by the Company's public accounting firm
(the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the
Executive as soon as possible following a request
made by the Executive or the Company. In the event
that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting
the Change in Control, the Company shall appoint
another nationally recognized public accounting firm
to make the determinations required hereunder (which
accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment shall be paid by the
Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the
Executive with a written opinion that failure to
report the Excise Tax on the Executive's applicable
federal income tax return would not result in the
imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by
the Company should have been made ("Underpayment"),
consistent with the calculations required to be made
hereunder. In the event that the Company exhausts
its remedies pursuant to Subsection 3(e) and the
Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and
any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 7
<PAGE> 8
(e) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten
(10) business days after the Executive is informed in
writing of such claim and shall apprise the Company
of the nature of such claim and the date on which
such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of
the 30-day period following the date on which the
Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to
the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such
claim,
(ii) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and
pay directly all costs and expenses (including
additional interest and penalties) incurred in
connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a
result of such representation and payment of costs
and expenses. Without limitation on the foregoing
provisions of this Subsection 3(e), the Company shall
control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as
the Company shall determine; provided further, that
if the Company
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 8
<PAGE> 9
directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such
payment to the Executive on an interest-free basis
and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such
advance; and provided further, that any extension of
the statute of limitations relating to payment of
taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to
be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the
Internal Revenue Service or any other taxing
authority.
(f) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Subsection 3(e),
the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the
Executive shall (subject to the Company's complying
with the requirements of Subsection 3(e)) promptly
pay to the Company the amount of such refund
(together with any interest paid or credited thereon
after taxes applicable thereto). If, after the
receipt by the Executive of any amount advanced by
the Company pursuant to Subsection 3(e), a
determination is made that the Executive shall not be
entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(g) The Executive shall be entitled throughout the Term
and thereafter to indemnification by the Company in
respect of any actions or omissions as an employee,
officer or director of the Company (or any successor
pursuant to Section 10) or of any Subsidiary or
affiliate of the Company in the manner set forth in
that certain Indemnification Agreement, of even date,
by and between the Company and the Executive.
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 9
<PAGE> 10
4. Termination Following a Change in Control:
(a) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Company during the Period of Employment only upon the
occurrence of one or more of the following events:
(i) If the Executive is unable to perform the
essential functions of the Executive's job
(with or without reasonable accommodation)
because the Executive has become permanently
disabled within the meaning of, and actually
begins to receive disability benefits
pursuant to, a long-term disability plan
maintained by or on behalf of the Company or
any Applicable Subsidiary for senior
executives generally or, if applicable,
employees of the Company or any Applicable
Subsidiary immediately prior to the Change in
Control; or
(ii) For "Cause," which for purposes of this
Agreement shall mean that, prior to any
termination pursuant to Subsection 4(b)
hereof, the Executive shall have committed:
(A) an intentional act of fraud,
embezzlement or theft in connection
with the Executive's duties or in
the course of the Executive's
employment with the Company or any
Applicable Subsidiary;
(B) intentional wrongful damage to
property of the Company or any
Subsidiary;
(C) intentional wrongful disclosure of
secret processes or confidential
information of the Company or any
Subsidiary; or
(D) intentional wrongful engagement in
any Competitive Activity;
and any such act shall have been materially harmful to the
Company or any Subsidiary. For purposes of this Agreement, no
act, or failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional" only
if done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company and
the Subsidiaries or not opposed to the best interest of the
Company and the Subsidiaries. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for
"Cause" hereunder unless and until there shall have been
delivered to the
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 10
<PAGE> 11
Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the Board
then in office at a meeting of the Board called and held for
such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board), finding that, in the
good faith opinion of the Board, the Executive has committed
an act set forth above in this Subsection 4(a)(ii) and
specifying the particulars thereof in detail. Nothing herein
shall limit the right of the Executive or the Executive's
beneficiaries to contest the validity or propriety of any such
determination.
(b) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Executive during the Period of Employment with the
right to benefits as provided in Section 5 hereof
upon the occurrence of one or more of the following
events:
(i) Any termination of the employment of the
Executive by the Company or any Applicable
Subsidiary for any reason other than for
Cause or as a result of the death of the
Executive or by reason of the Executive's
disability and the actual receipt of
disability benefits in accordance with
Subsection 4(a)(i) hereof; or
(ii) Termination by the Executive of the
Executive's employment by the Company or any
Applicable Subsidiary during the Period of
Employment upon the occurrence of any of the
following events:
(A) Failure to elect or reelect the
Executive to the office(s) of the
Company or any Applicable Subsidiary
which the Executive held immediately
prior to the Change in Control, or
failure to elect or reelect the
Executive as a director of the
Company or any Applicable Subsidiary
or the removal of the Executive as a
director of the Company or any
Applicable Subsidiary (or any
successor thereto), if the Executive
shall have been a director of the
Company or such Applicable
Subsidiary immediately prior to the
Change in Control;
(B) A significant adverse change in the
nature or scope of the authorities,
powers, functions, responsibilities
or duties attached to the
position(s) with the Company or any
Applicable Subsidiary which the
Executive held immediately prior to
the Change in Control, a reduction
in the aggregate of the Executive's
Base Pay and Incentive Pay received
from the Company and/or the
Applicable Subsidiaries, or the
termination of the
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 11
<PAGE> 12
Executive's rights to any Employee
Benefits to which the Executive was
entitled immediately prior to the
Change in Control or a reduction in
scope or value thereof without the
prior written consent of the
Executive, any of which is not
remedied within ten (10) calendar
days after receipt by the Company of
written notice from the Executive of
such change, reduction or
termination, as the case may be;
(C) A determination by the Executive
made in good faith that, following
the Change in Control, as a result
of a change in circumstances
significantly affecting the
Executive's position(s) held with
the Company and/or the Applicable
Subsidiaries, including, without
limitation, a change in the scope of
the business or other activities for
which the Executive was responsible
immediately prior to the Change in
Control, that the Executive has been
rendered substantially unable to
carry out, has been substantially
hindered in the performance of, or
has suffered a substantial reduction
in any of the authorities, powers,
functions, responsibilities or
duties attached to the position(s)
held with the Company and/or the
Applicable Subsidiaries by the
Executive immediately prior to the
Change in Control, which situation
is not remedied within ten (10)
calendar days after written notice
to the Company from the Executive of
such determination;
(D) The liquidation, dissolution,
merger, consolidation or
reorganization of the Company or any
Applicable Subsidiary or transfer of
all or a significant portion of its
business and/or assets, unless the
successor (by liquidation, merger,
consolidation, reorganization or
otherwise) to which all or a
significant portion of its business
and/or assets have been transferred
(directly or by operation of law)
shall have assumed all duties and
obligations of the Company under
this Agreement pursuant to Section
10 hereof;
(E) The Company or any Applicable
Subsidiary shall require that the
principal place of work of the
Executive be changed to any location
which is in excess of twenty-five
(25) miles from the location thereof
immediately prior to the Change of
Control or to travel away from the
Executive's office in the course of
discharging the Executive's
responsibilities or duties
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 12
<PAGE> 13
hereunder significantly more (in
terms of either consecutive days or
aggregate days in any calendar year)
than was required of the Executive
prior to the Change of Control
without, in either case, the
Executive's prior consent; or
(F) Any material breach of this
Agreement by the Company or any
successor thereto.
(c) A termination by the Company pursuant to Subsection
4(a) hereof or by the Executive pursuant to
Subsection 4(b) hereof shall not affect any rights
which the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of
the Company providing Employee Benefits, which rights
shall be governed by the terms thereof. If this
Agreement or the employment of the Executive is
terminated under circumstances in which the Executive
is not entitled to any payments under Sections 3 or 5
hereof, the Executive shall have no further
obligation or liability to the Company hereunder with
respect to the Executive's prior or any future
employment by the Company or any Subsidiary.
5. Severance Compensation:
(a) If, following the occurrence of a Change in Control,
the Company or any Subsidiary shall terminate the
Executive's employment during the Period of
Employment other than pursuant to Subsection 4(a)
hereof, or if the Executive shall terminate the
Executive's employment pursuant to Subsection 4(b)
hereof, the Company shall pay to the Executive the
amount specified in Subsection 5(a)(i) hereof within
five (5) business days after the date (the
"Termination Date") that the Executive's employment
is terminated (the effective date of which shall be
the date of termination, or such other date that may
be specified by the Executive if the termination is
pursuant to Subsection 4(b) hereof):
(i) In lieu of any further payments to the
Executive for periods subsequent to the
Termination Date, but without affecting the
rights of the Executive referred to in
Subsection 5(b) hereof, a lump sum payment
(the "Severance Payment") in an amount equal
to the present value (using a discount rate
required to be utilized for purposes of
computations under Section 280G of the Code
or any successor provision thereto, or if no
such rate is so required to be used, a rate
equal to the then-applicable interest rate
prescribed by the Pension Benefit Guaranty
Corporation for benefit valuations in
connection with non-multiemployer pension
plan terminations
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 13
<PAGE> 14
assuming the immediate commencement of
benefit payments (the "Discount Rate")) of
the sum of (A) the aggregate Base Pay (at the
highest rate in effect during the Term prior
to the Termination Date) for each remaining
year or fraction of the Period of Employment
which the Executive would have received had
such termination not occurred, plus (B) the
aggregate Incentive Pay (based upon the
greatest amount of Incentive Pay paid or
payable to the Executive for any year during
the Term but prior to the year in which the
Termination Date occurs), which the Executive
would have received pursuant to this
Agreement during the remainder of the Period
of Employment had the Executive's employment
continued for the remainder of the Period of
Employment.
(ii) The determination of whether any amount
payable under Subsection 5(a)(i) is subject
to the Excise Tax shall be governed by
Subsections 3(c), (d), (e) and (f) of this
Agreement. The costs of obtaining such
determination shall be borne by the Company.
Without limiting the generality of the
foregoing, upon the Executive's termination
of employment under the circumstances
described in this Section 5, the Company
shall (upon request of the Executive) pay
over to the Executive all vested benefits to
which the Executive is entitled under and in
accordance with the terms of the employee
savings, stock ownership, supplemental
executive retirement and similar plans of the
Company and the Applicable Subsidiaries in
the event such payments are not otherwise
made in accordance with the terms of such
plans.
(iii) For the remainder of the Period of
Employment, the Company shall arrange to
provide the Executive with Employee Benefits
substantially similar to those which the
Executive was receiving or entitled to
receive immediately prior to the Termination
Date (and if and to the extent that such
benefits shall not or cannot be paid or
provided under any policy, plan, program or
arrangement of the Company and the
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 14
<PAGE> 15
Applicable Subsidiaries solely due to the
fact that the Executive is no longer an
officer or employee of the Company and/or the
Applicable Subsidiaries, then the Company
shall itself pay to the Executive and/or the
Executive's dependents and beneficiaries,
such Employee Benefits). Without limiting
the generality of the foregoing, the
remainder of the Period of Employment shall
be considered service with the Company and
the Applicable Subsidiaries for the purpose
of service credits under the retirement
income, supplemental executive retirement and
other benefit plans of the Company and the
Applicable Subsidiaries applicable to the
Executive and/or the Executive's dependents
and beneficiaries immediately prior to the
Termination Date. Without otherwise limiting
the purposes or effect of Section 6 hereof,
Employee Benefits payable to the Executive
pursuant to this Subsection 5(a)(iii) by
reason of any "welfare benefit plan" of the
Company and the Applicable Subsidiaries (as
the term "welfare benefit plan" is defined in
Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended)
shall be reduced to the extent comparable
welfare benefits are actually received by the
Executive from another employer during such
period following the Executive's Termination
Date until the expiration of the Period of
Employment.
(b) Upon written notice given by the Executive to the
Company prior to the receipt of any payment pursuant
to Subsection 5(a) hereof, the Executive, at the
Executive's sole option, without reduction to reflect
the present value of such amounts as aforesaid, may
elect to have all or any of the Severance Payment
payable pursuant to Subsection 5(a)(i) hereof paid to
the Executive on a quarterly or monthly basis during
the remainder of the Period of Employment.
(c) There shall be no right of set-off or counterclaim in
respect of any claim, debt or obligation against any
payment to or benefit (including Employee Benefits)
of the Executive provided for in this Agreement.
(d) Without limiting the rights of the Executive at law
or in equity, if the Company fails to make any
payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount
thereof at an annualized rate of interest equal to
the then-applicable Discount Rate or, if lesser, the
highest rate allowed by applicable usury laws.
6. No Mitigation Obligation: The Company hereby acknowledges
that it will be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Termination Date. Accordingly,
the parties hereto expressly agree that the payment of the severance
compensation by the Company to the Executive in accordance with the terms of
this Agreement will be liquidated damages, and that the Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any mitigation,
offset, reduction or any other obligation on the part of the Executive
hereunder or otherwise, except as expressly provided in Subsection 5(a)(iii)
hereof.
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 15
<PAGE> 16
7. Legal Fees and Expenses:
(a) It is the intent of the Company that the Executive
not be required to incur the expenses associated with
the enforcement of the Executive's rights under this
Agreement by litigation or other legal action because
the cost and expense thereof would substantially
detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should
appear to the Executive that the Company has failed
to comply with any of its obligations under this
Agreement or in the event that the Company or any
other person takes any action to declare this
Agreement void or unenforceable, or institutes any
litigation designed to deny, or to recover from, the
Executive the benefits intended to be provided to the
Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain
counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to represent the
Executive in connection with the litigation or
defense of any litigation or other legal action,
whether by or against the Company or any director,
officer, shareholder or other person affiliated with
the Company, in any jurisdiction. Notwithstanding
any existing or prior attorney-client relationship
between the Company and such counsel, the Company
irrevocably consents to the Executive's entering into
an attorney-client relationship with such counsel
(other than Winstead Sechrest & Minick P.C.), and in
that connection the Company and the Executive agree
that a confidential relationship shall exist between
the Executive and such counsel. The Company shall
pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related
fees and expenses incurred by the Executive as a
result of the Company's failure to perform this
Agreement or any provision thereof or as a result of
the Company or any person contesting the validity or
enforceability of this Agreement or any provision
thereof as aforesaid.
(b) To ensure the benefits intended to be provided to the
Executive under Subsection 7(a) hereof, the Company
has established an irrevocable standby Letter of
Credit in favor of the Executive and each other
person who is named an Executive under similar
agreements, drawn on Texas Commerce Bank (the "Letter
of Credit") which provides for a credit amount of
$250,000 being made available to the Executive
against presentation at any time and from time to
time of the Executive's clean sight drafts,
accompanied by statements of the Executive's counsel
for fees and expenses, in an aggregate amount not to
exceed $250,000, unless a larger amount is previously
authorized by two of the Chairman, President or Vice
President of the Company, provided that no such
person may act in two separate capacities or
authorize a larger amount for himself.
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 16
<PAGE> 17
8. Employment Rights: Nothing expressed or implied in this
Agreement shall create any right or duty on the part of the Company or any
Applicable Subsidiary (on the one hand) or the Executive (on the other hand) to
have the Executive remain in the employment of the Company or any Applicable
Subsidiary prior to any Change in Control; provided, however, that any
termination of employment of the Executive or removal of the Executive as an
Officer or director of the Company or any Applicable Subsidiary following the
commencement of any discussion with a third person that ultimately results in a
Change in Control shall be deemed to be a termination or removal of the
Executive after a Change in Control for purposes of this Agreement.
9. Withholding of Taxes: The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or government regulation or ruling.
10. Successors and Binding Agreement:
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger,
consolidation, reorganization, operation of law or
otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the
same manner and to the same extent the Company would
be required to perform if no such succession had
taken place. This Agreement shall be binding upon
and inure to the benefit of the Company and any
successor to the Company, including without
limitation any persons acquiring directly or
indirectly all or substantially all of the business
and/or assets of the Company whether by purchase,
merger, consolidation, reorganization, operation of
law or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this
Agreement). This Agreement shall not otherwise be
assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the
other, assign, transfer or delegate this Agreement or
any rights or obligations hereunder except as
expressly provided in Subsection 10(a) hereof.
Without limiting the generality of the foregoing, the
Executive's right to receive payments hereunder shall
not be assignable, transferable or delegable, whether
by pledge, creation of a security interest or
otherwise, other than by a transfer by the
Executive's will or by the laws of descent and
distribution and, in the event of any attempted
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 17
<PAGE> 18
assignment or transfer contrary to this Subsection
10(c), the Company shall have no liability to pay any
amount so attempted to be assigned, transferred or
delegated.
(d) The Company and the Executive recognize that each
Party will have no adequate remedy at law for breach
by the other of any of the agreements contained
herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent
that the other shall be entitled to a decree of
specific performance, mandamus or other appropriate
remedy to enforce performance of this Agreement.
11. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF
CONFLICTS OF LAW PRINCIPLES) AND THE LAWS OF THE UNITED STATES OF AMERICA AND
WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN
HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION
OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY,
ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE
TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE,
WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH
OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (I) SUCH PARTY
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) SUCH PARTY
AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH
COURTS OR (III) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN
INCONVENIENT FORUM.
12. Notices. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, telegram or
facsimile transmission addressed as follows:
(a) If to the Company: Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 18
<PAGE> 19
with a copy (which will
not constitute notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attn: Robert E. Crawford, Jr., Esq.
(b) If to the Executive: Donald R. Harding
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
13. Gender. Words of any gender used in this Agreement will be
held and construed to include any other gender, and words in the singular
number will be held to include the plural, unless the context otherwise
requires.
14. Amendment. This Agreement may not be amended or supplemented
except pursuant to a written instrument signed by the party against whom such
amendment or supplement is to be enforced. Nothing contained in this Agreement
will be deemed to create any agency, joint venture, partnership or similar
relationship between the parties to this Agreement. Nothing contained in this
Agreement will be deemed to authorize either party to this Agreement to bind or
obligate the other party.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed to be an original and all of which
will be deemed to be a single agreement. This Agreement will be considered
fully executed when all parties have executed an identical counterpart,
notwithstanding that all signatures may not appear on the same counterpart.
16. Severability. If any of the provisions of this Agreement are
determined to be invalid or unenforceable, such invalidity or unenforceability
will not invalidate or render unenforceable the remainder of this Agreement,
but rather the entire Agreement will be construed as if not containing the
particular invalid or unenforceable provision or provisions, and the rights and
obligations of the parties will be construed and enforced accordingly. The
parties acknowledge that if any provision of this Agreement is determined to be
invalid or unenforceable, it is their desire and intention that such
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 19
<PAGE> 20
provision be reformed and construed in such manner that it will, to the maximum
extent practicable, be deemed to be valid and enforceable.
17. Third Parties. Except as expressly set forth or referred to
in this Agreement, nothing in this Agreement is intended or will be construed
to confer upon or give to any party other than the parties to this Agreement
and their successors and permitted assigns, if any, any rights or remedies
under or by reason of this Agreement.
18. Waiver. No failure or delay in exercising any right hereunder
will operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise or the exercise of any other
right.
19. Prior Agreement. This Agreement is voluntarily entered into
and upon the occurrence of a Change in Control will supersede and take the
place of any prior change in control, severance or employment agreements
between the parties hereto. The parties hereto expressly agree and hereby
declare that any and all prior change in control, severance or employment
agreements between the parties are terminated and of no force or effect.
20. Indemnity. UNDER CERTAIN CIRCUMSTANCES, THIS AGREEMENT IMPOSES
INDEMNIFICATION OBLIGATIONS ON THE PARTIES HERETO.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 20
<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
COMPANY:
MERCHANTS BANCSHARES, INC.
By:
-----------------------------
Name: J. W. Lander, III
Title: President
EXECUTIVE:
----------------------------------
Donald R. Harding
DONALD R. HARDING
EMPLOYMENT AGREEMENT - PAGE 21
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement"), effective as of October 10,
1997, (the "Effective Date") by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and Norman H. Bird (the "Executive"), evidences
that;
WHEREAS, the Executive is a senior executive of the Company and/or one
or more of the Company's direct or indirect subsidiaries (hereinafter
individually referred to as a "Subsidiary" and collectively as the
"Subsidiaries") and has made and/or is expected to make or continue to make
significant contributions to the profitability, growth and financial strength
of the Company and/or the Subsidiaries;
WHEREAS, the Company desires to assure itself and the Subsidiaries of
both present and future continuity of management in the event of a Change in
Control (as defined hereafter) and desires to establish certain minimum
compensation rights with respect to the key senior executives of the Company
and/or the Subsidiaries, including the Executive, applicable in the event of a
Change in Control;
WHEREAS, the Company wishes to ensure that the senior executives of
the Company and/or the Subsidiaries are not practically disabled from
discharging their duties upon a Change in Control;
WHEREAS, this Agreement is not intended to alter materially the
compensation and benefits which the Executive could reasonably expect to
receive from the Company and/or the Subsidiaries absent a Change in Control;
and
WHEREAS, the Executive is willing to render services to the Company
and/or the Subsidiaries on the terms and subject to the conditions set forth in
this Agreement;
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Operation of Agreement:
(a) Sections 1 and 7 through 20 of this Agreement shall
be effective and binding as of the Effective Date,
but, anything in this Agreement to the contrary
notwithstanding, Sections 2, 3, 4, 5, and 6 of this
Agreement shall not be effective and binding unless
and until there shall have occurred a Change in
Control. For purposes of this Agreement, a "Change
in Control" will be deemed to have occurred if at any
time during the Term (as hereinafter defined) any of
the following events shall occur:
(i) The Company is merged, consolidated or
reorganized into or with another corporation
or other legal entity, and as a result
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 1
<PAGE> 2
of such merger, consolidation or
reorganization less than a majority of the
combined voting power of the then outstanding
securities of the Company or such corporation
or other legal entity immediately after such
transaction are held in the aggregate by the
holders of Voting Stock (as hereinafter
defined) of the Company immediately prior to
such transaction and/or such voting power is
not held by substantially all of such holders
in substantially the same proportions
relative to each other;
(ii) The Company sells (directly or indirectly)
all or substantially all of its assets
(including, without limitation, by means of
the sale of the capital stock or assets of
one or more Subsidiaries) to any other
corporation or other legal entity, of which
less than a majority of the combined voting
power of the then outstanding voting
securities (entitled to vote generally in the
election of directors or persons performing
similar functions on behalf of such other
corporation or legal entity) of such other
corporation or legal entity are held in the
aggregate by the holders of Voting Stock of
the Company immediately prior to such sale
and/or such voting power is not held by
substantially all of such holders in
substantially the same proportions relative
to each other;
(iii) Any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act") becomes (subsequent to
the Effective Date) the beneficial owner (as
the term "beneficial owner" is defined in
Rule 13d-3 or any successor rule or
regulation promulgated under the Exchange
Act) of securities representing twenty
percent (20%) or more of the combined voting
power of the then-outstanding securities
entitled to vote generally in the election of
directors of the Company ("Voting Stock");
(iv) The Company files a report or proxy statement
with the Securities and Exchange Commission
pursuant to the Exchange Act disclosing in
response to Form 8-K, Schedule 14A or
Schedule 14C (or any successor schedule, form
or report or item therein) that a change in
control of the Company has occurred;
(v) If during any one (1) year period,
individuals who at the beginning of any such
period constitute the directors of the
Company cease for any reason to constitute at
least a majority thereof, unless the
election, or the nomination for
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 2
<PAGE> 3
election by the Company's shareholders, of
each director of the Company first elected
during such period was approved by a vote of
at least two-thirds of (i) the directors of
the Company then still in office who were
directors of the Company at the beginning of
any such period or (ii) the directors of the
Company whose nomination and/or election was
approved by the directors referenced in
clause (i) immediately preceding; or
(vi) The shareholders of the Company approve a
plan contemplating the liquidation or
dissolution of the Company.
Notwithstanding the foregoing provisions of
Subsection 1(a)(iii) or 1(a)(iv) hereof, a "Change in
Control" shall not be deemed to have occurred for
purposes of this Agreement solely because (i) the
Company, (ii) a corporation or other legal entity in
which the Company directly or indirectly beneficially
owns 100% of the voting securities of such entity,
(iii) any employee stock ownership plan or any other
employee benefit plan of the Company or any
wholly-owned subsidiary of the Company or (iv) any
person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) who
is the beneficial owner (as the term "beneficial
owner" is defined in Rule 13d-3 or any successor rule
or regulation promulgated under the Exchange Act) of
securities representing twenty percent (20%) or more
of the Voting Stock of the Company as of the
Effective Date, either files or becomes obligated to
file a report or a proxy statement under or in
response to Schedule 13D, Schedule 14D-1, Form 8-K,
Schedule 14A or Schedule 14C (or any successor
schedule, form or report or item therein) under the
Exchange Act, disclosing beneficial ownership by it
of shares of Voting Stock, whether in excess of
twenty percent (20%) or otherwise, or because the
Company reports that a change in control of the
Company has occurred by reason of such beneficial
ownership.
(b) Upon occurrence of a Change in Control at any time
during the Term, Sections 2, 3, 4, 5, and 6 of this
Agreement shall become immediately binding and
effective.
(c) The period during which this Agreement shall be in
effect (the "Term") shall commence as of the
Effective Date and shall expire as of the later of
(i) the close of business on October 9, 1999 or (ii)
the expiration of the Period of Employment (as
hereinafter defined); provided, however, that (A)
subject to Section 8 hereof, if, prior to a Change in
Control, the Executive ceases for any reason to be an
employee of the Company, thereupon the Term shall be
deemed to
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 3
<PAGE> 4
have expired and this Agreement shall immediately
terminate and be of no further effect and (B)
commencing on December 31, 1997 and the last day of
each of the Company's fiscal years commencing
thereafter, the Term of this Agreement shall
automatically be extended for an additional year
unless, not later than the immediately preceding June
30, the Company or the Executive shall have given
notice that the Company or the Executive, as the case
may be, does not wish to have the Term of this
Agreement extended.
2. Employment; Period of Employment:
(a) Subject to the terms and conditions of this
Agreement, upon the occurrence of a Change in
Control, the Company shall continue the Executive in
its employ and shall cause the Subsidiaries of which
the Executive is an employee as of the date of a
Change in Control to continue the Executive in their
employ and the Executive shall remain in the employ
of the Company and the applicable Subsidiaries (the
"Applicable Subsidiaries") for the period set forth
in Subsection 2(b) hereof (the "Period of
Employment"), in the positions and with substantially
the same duties and responsibilities that the
Executive had immediately prior to the Change in
Control, or to which the Company and the Executive
may hereafter mutually agree in writing. Throughout
the Period of Employment, the Executive shall devote
substantially all of the Executive's time during
normal business hours (subject to vacations, sick
leave and other absences in accordance with the
policies of the Company and the Applicable
Subsidiaries as in effect for senior executives
immediately prior to the Change in Control) to the
business and affairs of the Company and the
Applicable Subsidiaries, but nothing in this
Agreement shall preclude the Executive from devoting
reasonable periods of time during normal business
hours to (i) serving as a director, trustee or member
of or participant in any organization or business so
long as such activity would not constitute
Competitive Activity (as hereinafter defined), (ii)
engaging in charitable and community activities, or
(iii) managing the Executive's personal investments
so long as such activity would not constitute
Competitive Activity. For purposes of this
Agreement, "Competitive Activity" is defined as
directly or indirectly engaging in a business that is
competitive with the business of the Company or any
Applicable Subsidiary. "Competitive Activity" shall
not include (i) the mere ownership of a de minimis
amount of securities in any enterprise and the
exercise of rights appurtenant thereto or (ii)
participation in management of any such enterprise or
business operation thereof other than in connection
with the competitive operation of such enterprise.
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 4
<PAGE> 5
(b) The Period of Employment shall commence on the date
on which a Change in Control occurs and, subject only
to the provisions of Section 4 hereof, shall continue
until the earlier of (i) the expiration of the second
anniversary of the occurrence of the Change in
Control or (ii) the Executive's death; provided,
however, that commencing on each anniversary of the
Change of Control, the Period of Employment shall
automatically be extended for an additional one-year
period unless, not later than ninety (90) calendar
days prior to such anniversary date, the Company or
the Executive shall have given notice that the
Company or the Executive, as the case may be, does
not wish to have the Term extended.
3. Compensation During Period of Employment:
(a) During the Period of Employment, the Company
covenants that the Executive shall receive from the
Company and/or the Applicable Subsidiaries (i) annual
base salary at a rate not less than the Executive's
annual fixed or base compensation from the Company
and the Applicable Subsidiaries (including, without
limitation, director's fees and advisory director's
fees) prior to the Change of Control or such higher
rate as may be determined from time to time by the
Board of Directors of the Company (the "Board") or
the Compensation Committee thereof (the "Committee")
(which base salary at such rate is herein referred to
as "Base Pay") and (ii) an annual amount equal to not
less than the highest aggregate annual bonus,
incentive or other payments of cash compensation paid
to the Executive by the Company and the Applicable
Subsidiaries in addition to the amounts referred to
in clause (i) above made or to be made in or with
respect to any calendar year during the three
calendar years immediately preceding the year in
which the Change in Control occurred pursuant to any
bonus, incentive, profit-sharing, performance,
discretionary pay or similar policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries ("Incentive Pay") which contemplates
cash payments other than Employee Benefits (as
hereinafter defined); provided, however, that nothing
herein shall preclude a change in the mix between
Base Pay and Incentive Pay so long as the aggregate
cash compensation received by the Executive in any
one (1) calendar year is not reduced in connection
therewith or as a result thereof and, provided
further, however, that in no event shall any increase
in the Executive's aggregate cash compensation or any
portion thereof in any way diminish any other
obligation of the Company under this Agreement. The
Executive's Base Pay shall be payable monthly. The
Executive's Incentive Pay shall be paid annually as
soon as reasonably practicable following
determination of the amount payable
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 5
<PAGE> 6
but in no event later than the date which is ninety
(90) days following the last day of the fiscal year
during which such Incentive Pay is deemed earned.
(b) For the Executive's service pursuant to Subsection
2(a) hereof, during the Period of Employment the
Executive shall, if and on the same basis as the
Executive participated therein immediately prior to
the Change in Control, be a full participant in, and
shall be entitled to the perquisites, benefits and
service credit for benefits as provided under any and
all employee retirement income and welfare benefit
policies, plans, programs or arrangements in which
senior executives of the Company and/or the
Applicable Subsidiaries participate generally,
including without limitation any stock option, stock
purchase, stock appreciation, savings, pension,
supplemental executive retirement or other retirement
income or welfare benefit, deferred compensation,
incentive compensation, group and/or executive life,
accident, health, dental, medical/hospital or other
insurance (whether funded by actual insurance or
self-insured by the Company or any Applicable
Subsidiary), disability, salary continuation, expense
reimbursement and other employee benefit policies,
plans, programs or arrangements that may exist
immediately prior to the Change in Control or any
equivalent successor policies, plans, programs or
arrangements that may be adopted thereafter by the
Company or any Applicable Subsidiary (collectively,
"Employee Benefits"); provided, however, that the
Executive's rights thereunder shall be governed by
the terms thereof and shall not be enlarged hereunder
or otherwise affected hereby. Subject to the proviso
in the immediately preceding sentence, if and to the
extent such perquisites, benefits or service credit
for benefits are not payable or provided under any
such policy, plan, program or arrangement as a result
of the amendment or termination thereof subsequent to
a Change in Control, then the Company shall itself
pay or provide such Employee Benefits. Nothing in
this Agreement shall preclude improvement or
enhancement of any such Employee Benefits, provided
that no such improvement shall in any way diminish
any other obligation of the Company under this
Agreement.
(c) The Company has determined that the amounts payable
pursuant to this Section 3 constitute reasonable
compensation. Accordingly, anything in this
Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or
distribution by the Company to the Executive (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise,
but determined without regard to any additional
payments required under Subsections 3(c), (d), (e)
and (f)) (a "Payment") is subject to the excise tax
imposed by Section 4999 of the Code, or any interest
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 6
<PAGE> 7
or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), then
the Company shall pay to the Executive an additional
payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes
(including any interest or penalties imposed with
respect to such taxes), including, without
limitation, any income taxes (and any interest and
penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to
the Excise Tax imposed upon the Payments.
(d) Subject to the provisions of Subsection 3(e), all
determinations required to be made regarding whether
and when a Gross-Up Payment is required and the
amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination
shall be made by the Company's public accounting firm
(the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the
Executive as soon as possible following a request
made by the Executive or the Company. In the event
that the Accounting Firm is serving as accountant or
auditor for the individual, entity or group effecting
the Change in Control, the Company shall appoint
another nationally recognized public accounting firm
to make the determinations required hereunder (which
accounting firm shall then be referred to as the
Accounting Firm hereunder). All fees and expenses of
the Accounting Firm shall be borne solely by the
Company. Any Gross-Up Payment shall be paid by the
Company to the Executive within five (5) days of the
receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the
Executive with a written opinion that failure to
report the Excise Tax on the Executive's applicable
federal income tax return would not result in the
imposition of a negligence or similar penalty. Any
determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of
the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by
the Accounting Firm hereunder, it is possible that
Gross-Up Payments which will not have been made by
the Company should have been made ("Underpayment"),
consistent with the calculations required to be made
hereunder. In the event that the Company exhausts
its remedies pursuant to Subsection 3(e) and the
Executive thereafter is required to make a payment of
any Excise Tax, the Accounting Firm shall determine
the amount of the Underpayment that has occurred and
any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive.
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 7
<PAGE> 8
(e) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten
(10) business days after the Executive is informed in
writing of such claim and shall apprise the Company
of the nature of such claim and the date on which
such claim is requested to be paid. The Executive
shall not pay such claim prior to the expiration of
the 30-day period following the date on which the
Executive gives such notice to the Company (or such
shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to
the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such
claim,
(ii) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney reasonably
selected by the Company,
(iii) cooperate with the Company in good faith to
effectively contest such claim, and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and
pay directly all costs and expenses (including
additional interest and penalties) incurred in
connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a
result of such representation and payment of costs
and expenses. Without limitation on the foregoing
provisions of this Subsection 3(e), the Company shall
control all proceedings taken in connection with such
contest and, at its sole option, may pursue or forgo
any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in
respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed
and sue for a refund or contest the claim in any
permissible manner, and the Executive agrees to
prosecute such contest to a determination before any
administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as
the Company shall determine; provided further, that
if the Company
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 8
<PAGE> 9
directs the Executive to pay such claim and sue for a
refund, the Company shall advance the amount of such
payment to the Executive on an interest-free basis
and shall indemnify and hold the Executive harmless,
on an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect
thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such
advance; and provided further, that any extension of
the statute of limitations relating to payment of
taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to
be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the
Internal Revenue Service or any other taxing
authority.
(f) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Subsection 3(e),
the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the
Executive shall (subject to the Company's complying
with the requirements of Subsection 3(e)) promptly
pay to the Company the amount of such refund
(together with any interest paid or credited thereon
after taxes applicable thereto). If, after the
receipt by the Executive of any amount advanced by
the Company pursuant to Subsection 3(e), a
determination is made that the Executive shall not be
entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior
to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount
of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.
(g) The Executive shall be entitled throughout the Term
and thereafter to indemnification by the Company in
respect of any actions or omissions as an employee,
officer or director of the Company (or any successor
pursuant to Section 10) or of any Subsidiary or
affiliate of the Company in the manner set forth in
that certain Indemnification Agreement, of even date,
by and between the Company and the Executive.
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 9
<PAGE> 10
4. Termination Following a Change in Control:
(a) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Company during the Period of Employment only upon the
occurrence of one or more of the following events:
(i) If the Executive is unable to perform the
essential functions of the Executive's job
(with or without reasonable accommodation)
because the Executive has become permanently
disabled within the meaning of, and actually
begins to receive disability benefits
pursuant to, a long-term disability plan
maintained by or on behalf of the Company or
any Applicable Subsidiary for senior
executives generally or, if applicable,
employees of the Company or any Applicable
Subsidiary immediately prior to the Change in
Control; or
(ii) For "Cause," which for purposes of this
Agreement shall mean that, prior to any
termination pursuant to Subsection 4(b)
hereof, the Executive shall have committed:
(A) an intentional act of fraud,
embezzlement or theft in connection
with the Executive's duties or in
the course of the Executive's
employment with the Company or any
Applicable Subsidiary;
(B) intentional wrongful damage to
property of the Company or any
Subsidiary;
(C) intentional wrongful disclosure of
secret processes or confidential
information of the Company or any
Subsidiary; or
(D) intentional wrongful engagement in
any Competitive Activity;
and any such act shall have been materially harmful to the
Company or any Subsidiary. For purposes of this Agreement, no
act, or failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional" only
if done, or omitted to be done, by the Executive not in good
faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company and
the Subsidiaries or not opposed to the best interest of the
Company and the Subsidiaries. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for
"Cause" hereunder unless and until there shall have been
delivered to the
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 10
<PAGE> 11
Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the Board
then in office at a meeting of the Board called and held for
such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's
counsel, to be heard before the Board), finding that, in the
good faith opinion of the Board, the Executive has committed
an act set forth above in this Subsection 4(a)(ii) and
specifying the particulars thereof in detail. Nothing herein
shall limit the right of the Executive or the Executive's
beneficiaries to contest the validity or propriety of any such
determination.
(b) In the event of the occurrence of a Change in
Control, this Agreement may be terminated by the
Executive during the Period of Employment with the
right to benefits as provided in Section 5 hereof
upon the occurrence of one or more of the following
events:
(i) Any termination of the employment of the
Executive by the Company or any Applicable
Subsidiary for any reason other than for
Cause or as a result of the death of the
Executive or by reason of the Executive's
disability and the actual receipt of
disability benefits in accordance with
Subsection 4(a)(i) hereof; or
(ii) Termination by the Executive of the
Executive's employment by the Company or any
Applicable Subsidiary during the Period of
Employment upon the occurrence of any of the
following events:
(A) Failure to elect or reelect the
Executive to the office(s) of the
Company or any Applicable Subsidiary
which the Executive held immediately
prior to the Change in Control, or
failure to elect or reelect the
Executive as a director of the
Company or any Applicable Subsidiary
or the removal of the Executive as a
director of the Company or any
Applicable Subsidiary (or any
successor thereto), if the Executive
shall have been a director of the
Company or such Applicable
Subsidiary immediately prior to the
Change in Control;
(B) A significant adverse change in the
nature or scope of the authorities,
powers, functions, responsibilities
or duties attached to the
position(s) with the Company or any
Applicable Subsidiary which the
Executive held immediately prior to
the Change in Control, a reduction
in the aggregate of the Executive's
Base Pay and Incentive Pay received
from the Company and/or the
Applicable Subsidiaries, or the
termination of the
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 11
<PAGE> 12
Executive's rights to any Employee
Benefits to which the Executive was
entitled immediately prior to the
Change in Control or a reduction in
scope or value thereof without the
prior written consent of the
Executive, any of which is not
remedied within ten (10) calendar
days after receipt by the Company of
written notice from the Executive of
such change, reduction or
termination, as the case may be;
(C) A determination by the Executive
made in good faith that, following
the Change in Control, as a result
of a change in circumstances
significantly affecting the
Executive's position(s) held with
the Company and/or the Applicable
Subsidiaries, including, without
limitation, a change in the scope of
the business or other activities for
which the Executive was responsible
immediately prior to the Change in
Control, that the Executive has been
rendered substantially unable to
carry out, has been substantially
hindered in the performance of, or
has suffered a substantial reduction
in any of the authorities, powers,
functions, responsibilities or
duties attached to the position(s)
held with the Company and/or the
Applicable Subsidiaries by the
Executive immediately prior to the
Change in Control, which situation
is not remedied within ten (10)
calendar days after written notice
to the Company from the Executive of
such determination;
(D) The liquidation, dissolution,
merger, consolidation or
reorganization of the Company or any
Applicable Subsidiary or transfer of
all or a significant portion of its
business and/or assets, unless the
successor (by liquidation, merger,
consolidation, reorganization or
otherwise) to which all or a
significant portion of its business
and/or assets have been transferred
(directly or by operation of law)
shall have assumed all duties and
obligations of the Company under
this Agreement pursuant to Section
10 hereof;
(E) The Company or any Applicable
Subsidiary shall require that the
principal place of work of the
Executive be changed to any location
which is in excess of twenty-five
(25) miles from the location thereof
immediately prior to the Change of
Control or to travel away from the
Executive's office in the course of
discharging the Executive's
responsibilities or duties
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 12
<PAGE> 13
hereunder significantly more (in
terms of either consecutive days or
aggregate days in any calendar year)
than was required of the Executive
prior to the Change of Control
without, in either case, the
Executive's prior consent; or
(F) Any material breach of this
Agreement by the Company or any
successor thereto.
(c) A termination by the Company pursuant to Subsection
4(a) hereof or by the Executive pursuant to
Subsection 4(b) hereof shall not affect any rights
which the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of
the Company providing Employee Benefits, which rights
shall be governed by the terms thereof. If this
Agreement or the employment of the Executive is
terminated under circumstances in which the Executive
is not entitled to any payments under Sections 3 or 5
hereof, the Executive shall have no further
obligation or liability to the Company hereunder with
respect to the Executive's prior or any future
employment by the Company or any Subsidiary.
5. Severance Compensation:
(a) If, following the occurrence of a Change in Control,
the Company or any Subsidiary shall terminate the
Executive's employment during the Period of
Employment other than pursuant to Subsection 4(a)
hereof, or if the Executive shall terminate the
Executive's employment pursuant to Subsection 4(b)
hereof, the Company shall pay to the Executive the
amount specified in Subsection 5(a)(i) hereof within
five (5) business days after the date (the
"Termination Date") that the Executive's employment
is terminated (the effective date of which shall be
the date of termination, or such other date that may
be specified by the Executive if the termination is
pursuant to Subsection 4(b) hereof):
(i) In lieu of any further payments to the
Executive for periods subsequent to the
Termination Date, but without affecting the
rights of the Executive referred to in
Subsection 5(b) hereof, a lump sum payment
(the "Severance Payment") in an amount equal
to the present value (using a discount rate
required to be utilized for purposes of
computations under Section 280G of the Code
or any successor provision thereto, or if no
such rate is so required to be used, a rate
equal to the then-applicable interest rate
prescribed by the Pension Benefit Guaranty
Corporation for benefit valuations in
connection with non-multiemployer pension
plan terminations
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 13
<PAGE> 14
assuming the immediate commencement of
benefit payments (the "Discount Rate")) of
the sum of (A) the aggregate Base Pay (at the
highest rate in effect during the Term prior
to the Termination Date) for each remaining
year or fraction of the Period of Employment
which the Executive would have received had
such termination not occurred, plus (B) the
aggregate Incentive Pay (based upon the
greatest amount of Incentive Pay paid or
payable to the Executive for any year during
the Term but prior to the year in which the
Termination Date occurs), which the Executive
would have received pursuant to this
Agreement during the remainder of the Period
of Employment had the Executive's employment
continued for the remainder of the Period of
Employment.
(ii) The determination of whether any amount
payable under Subsection 5(a)(i) is subject
to the Excise Tax shall be governed by
Subsections 3(c), (d), (e) and (f) of this
Agreement. The costs of obtaining such
determination shall be borne by the Company.
Without limiting the generality of the
foregoing, upon the Executive's termination
of employment under the circumstances
described in this Section 5, the Company
shall (upon request of the Executive) pay
over to the Executive all vested benefits to
which the Executive is entitled under and in
accordance with the terms of the employee
savings, stock ownership, supplemental
executive retirement and similar plans of the
Company and the Applicable Subsidiaries in
the event such payments are not otherwise
made in accordance with the terms of such
plans.
(iii) For the remainder of the Period of
Employment, the Company shall arrange to
provide the Executive with Employee Benefits
substantially similar to those which the
Executive was receiving or entitled to
receive immediately prior to the Termination
Date (and if and to the extent that such
benefits shall not or cannot be paid or
provided under any policy, plan, program or
arrangement of the Company and the Applicable
Subsidiaries solely due to the fact that the
Executive is no longer an officer or employee
of the Company and/or the Applicable
Subsidiaries, then the Company shall itself
pay to the Executive and/or the Executive's
dependents and beneficiaries, such Employee
Benefits). Without limiting the generality
of the foregoing, the remainder of the Period
of Employment shall be considered service
with the Company and the Applicable
Subsidiaries for the purpose of service
credits under the retirement income,
supplemental executive retirement and other
benefit plans of the Company and the
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 14
<PAGE> 15
Applicable Subsidiaries applicable to the
Executive and/or the Executive's dependents
and beneficiaries immediately prior to the
Termination Date. Without otherwise limiting
the purposes or effect of Section 6 hereof,
Employee Benefits payable to the Executive
pursuant to this Subsection 5(a)(iii) by
reason of any "welfare benefit plan" of the
Company and the Applicable Subsidiaries (as
the term "welfare benefit plan" is defined in
Section 3(1) of the Employee Retirement
Income Security Act of 1974, as amended)
shall be reduced to the extent comparable
welfare benefits are actually received by the
Executive from another employer during such
period following the Executive's Termination
Date until the expiration of the Period of
Employment.
(b) Upon written notice given by the Executive to the
Company prior to the receipt of any payment pursuant
to Subsection 5(a) hereof, the Executive, at the
Executive's sole option, without reduction to reflect
the present value of such amounts as aforesaid, may
elect to have all or any of the Severance Payment
payable pursuant to Subsection 5(a)(i) hereof paid to
the Executive on a quarterly or monthly basis during
the remainder of the Period of Employment.
(c) There shall be no right of set-off or counterclaim in
respect of any claim, debt or obligation against any
payment to or benefit (including Employee Benefits)
of the Executive provided for in this Agreement.
(d) Without limiting the rights of the Executive at law
or in equity, if the Company fails to make any
payment required to be made hereunder on a timely
basis, the Company shall pay interest on the amount
thereof at an annualized rate of interest equal to
the then-applicable Discount Rate or, if lesser, the
highest rate allowed by applicable usury laws.
6. No Mitigation Obligation: The Company hereby acknowledges
that it will be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Termination Date. Accordingly,
the parties hereto expressly agree that the payment of the severance
compensation by the Company to the Executive in accordance with the terms of
this Agreement will be liquidated damages, and that the Executive shall not be
required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any mitigation,
offset, reduction or any other obligation on the part of the Executive
hereunder or otherwise, except as expressly provided in Subsection 5(a)(iii)
hereof.
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 15
<PAGE> 16
7. Legal Fees and Expenses:
(a) It is the intent of the Company that the Executive
not be required to incur the expenses associated with
the enforcement of the Executive's rights under this
Agreement by litigation or other legal action because
the cost and expense thereof would substantially
detract from the benefits intended to be extended to
the Executive hereunder. Accordingly, if it should
appear to the Executive that the Company has failed
to comply with any of its obligations under this
Agreement or in the event that the Company or any
other person takes any action to declare this
Agreement void or unenforceable, or institutes any
litigation designed to deny, or to recover from, the
Executive the benefits intended to be provided to the
Executive hereunder, the Company irrevocably
authorizes the Executive from time to time to retain
counsel of the Executive's choice, at the expense of
the Company as hereafter provided, to represent the
Executive in connection with the litigation or
defense of any litigation or other legal action,
whether by or against the Company or any director,
officer, shareholder or other person affiliated with
the Company, in any jurisdiction. Notwithstanding
any existing or prior attorney-client relationship
between the Company and such counsel, the Company
irrevocably consents to the Executive's entering into
an attorney-client relationship with such counsel
(other than Winstead Sechrest & Minick P.C.), and in
that connection the Company and the Executive agree
that a confidential relationship shall exist between
the Executive and such counsel. The Company shall
pay or cause to be paid and shall be solely
responsible for any and all attorneys' and related
fees and expenses incurred by the Executive as a
result of the Company's failure to perform this
Agreement or any provision thereof or as a result of
the Company or any person contesting the validity or
enforceability of this Agreement or any provision
thereof as aforesaid.
(b) To ensure the benefits intended to be provided to the
Executive under Subsection 7(a) hereof, the Company
has established an irrevocable standby Letter of
Credit in favor of the Executive and each other
person who is named an Executive under similar
agreements, drawn on Texas Commerce Bank (the "Letter
of Credit") which provides for a credit amount of
$250,000 being made available to the Executive
against presentation at any time and from time to
time of the Executive's clean sight drafts,
accompanied by statements of the Executive's counsel
for fees and expenses, in an aggregate amount not to
exceed $250,000, unless a larger amount is previously
authorized by two of the Chairman, President or Vice
President of the Company, provided that no such
person may act in two separate capacities or
authorize a larger amount for himself.
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 16
<PAGE> 17
8. Employment Rights: Nothing expressed or implied in this
Agreement shall create any right or duty on the part of the Company or any
Applicable Subsidiary (on the one hand) or the Executive (on the other hand) to
have the Executive remain in the employment of the Company or any Applicable
Subsidiary prior to any Change in Control; provided, however, that any
termination of employment of the Executive or removal of the Executive as an
Officer or director of the Company or any Applicable Subsidiary following the
commencement of any discussion with a third person that ultimately results in a
Change in Control shall be deemed to be a termination or removal of the
Executive after a Change in Control for purposes of this Agreement.
9. Withholding of Taxes: The Company may withhold from any
amounts payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or government regulation or ruling.
10. Successors and Binding Agreement:
(a) The Company shall require any successor (whether
direct or indirect, by purchase, merger,
consolidation, reorganization, operation of law or
otherwise) to all or substantially all of the
business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the
same manner and to the same extent the Company would
be required to perform if no such succession had
taken place. This Agreement shall be binding upon
and inure to the benefit of the Company and any
successor to the Company, including without
limitation any persons acquiring directly or
indirectly all or substantially all of the business
and/or assets of the Company whether by purchase,
merger, consolidation, reorganization, operation of
law or otherwise (and such successor shall thereafter
be deemed the "Company" for the purposes of this
Agreement). This Agreement shall not otherwise be
assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators,
successors, heirs, distributees and/or legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the
other, assign, transfer or delegate this Agreement or
any rights or obligations hereunder except as
expressly provided in Subsection 10(a) hereof.
Without limiting the generality of the foregoing, the
Executive's right to receive payments hereunder shall
not be assignable, transferable or delegable, whether
by pledge, creation of a security interest or
otherwise, other than by a transfer by the
Executive's will or by the laws of descent and
distribution and, in the event of any attempted
assignment or transfer contrary to this Subsection
10(c), the
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 17
<PAGE> 18
Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.
(d) The Company and the Executive recognize that each
Party will have no adequate remedy at law for breach
by the other of any of the agreements contained
herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent
that the other shall be entitled to a decree of
specific performance, mandamus or other appropriate
remedy to enforce performance of this Agreement.
11. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF
CONFLICTS OF LAW PRINCIPLES) AND THE LAWS OF THE UNITED STATES OF AMERICA AND
WILL, TO THE MAXIMUM EXTENT PRACTICABLE, BE DEEMED TO CALL FOR PERFORMANCE IN
HARRIS COUNTY, TEXAS. COURTS WITHIN THE STATE OF TEXAS WILL HAVE JURISDICTION
OVER ANY AND ALL DISPUTES BETWEEN THE PARTIES HERETO, WHETHER IN LAW OR EQUITY,
ARISING OUT OF OR RELATING TO THIS AGREEMENT. THE PARTIES CONSENT TO AND AGREE
TO SUBMIT TO THE JURISDICTION OF SUCH COURTS. VENUE IN ANY SUCH DISPUTE,
WHETHER IN FEDERAL OR STATE COURT, WILL BE LAID IN HARRIS COUNTY, TEXAS. EACH
OF THE PARTIES HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH DISPUTE, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT (i) SUCH PARTY
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (ii) SUCH PARTY
AND SUCH PARTY'S PROPERTY IS IMMUNE FROM ANY LEGAL PROCESS ISSUED BY SUCH
COURTS OR (iii) ANY LITIGATION COMMENCED IN SUCH COURTS IS BROUGHT IN AN
INCONVENIENT FORUM.
12. Notices. All notices, demands, requests or other
communications that may be or are required to be given, served or sent by
either party to the other party pursuant to this Agreement will be in writing
and will be mailed by first-class, registered or certified mail, return receipt
requested, postage prepaid, or transmitted by hand delivery, telegram or
facsimile transmission addressed as follows:
(a) If to the Company: Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 18
<PAGE> 19
with a copy (which will
not constitute notice) to: Winstead Sechrest & Minick P.C.
5400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Facsimile No.: (214) 745-5390
Attn: Robert E. Crawford, Jr., Esq.
(b) If to the Executive: Norman H. Bird
5005 Woodway, Suite 300
Houston, Texas 77056
Facsimile No.: (713) 622-8922
Either party may designate by written notice a new address to which any notice,
demand, request or communication may thereafter be given, served or sent. Each
notice, demand, request or communication that is mailed, delivered or
transmitted in the manner described above will be deemed sufficiently given,
served, sent and received for all purposes at such time as it is delivered to
the addressee with the return receipt, the delivery receipt, the affidavit of
messenger or (with respect to a facsimile transmission) the answer back being
deemed conclusive evidence of such delivery or at such time as delivery is
refused by the addressee upon presentation.
13. Gender. Words of any gender used in this Agreement will be
held and construed to include any other gender, and words in the singular
number will be held to include the plural, unless the context otherwise
requires.
14. Amendment. This Agreement may not be amended or supplemented
except pursuant to a written instrument signed by the party against whom such
amendment or supplement is to be enforced. Nothing contained in this Agreement
will be deemed to create any agency, joint venture, partnership or similar
relationship between the parties to this Agreement. Nothing contained in this
Agreement will be deemed to authorize either party to this Agreement to bind or
obligate the other party.
15. Counterparts. This Agreement may be executed in multiple
counterparts, each of which will be deemed to be an original and all of which
will be deemed to be a single agreement. This Agreement will be considered
fully executed when all parties have executed an identical counterpart,
notwithstanding that all signatures may not appear on the same counterpart.
16. Severability. If any of the provisions of this Agreement are
determined to be invalid or unenforceable, such invalidity or unenforceability
will not invalidate or render unenforceable the remainder of this Agreement,
but rather the entire Agreement will be construed as if not containing the
particular invalid or unenforceable provision or provisions, and the rights and
obligations of the parties will be construed and enforced accordingly. The
parties acknowledge that if any provision of this Agreement is determined to be
invalid or unenforceable, it is their desire and intention that such
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 19
<PAGE> 20
provision be reformed and construed in such manner that it will, to the maximum
extent practicable, be deemed to be valid and enforceable.
17. Third Parties. Except as expressly set forth or referred to
in this Agreement, nothing in this Agreement is intended or will be construed
to confer upon or give to any party other than the parties to this Agreement
and their successors and permitted assigns, if any, any rights or remedies
under or by reason of this Agreement.
18. Waiver. No failure or delay in exercising any right hereunder
will operate as a waiver thereof, nor will any single or partial exercise
thereof preclude any other or further exercise or the exercise of any other
right.
19. Prior Agreement. This Agreement is voluntarily entered into
and upon the occurrence of a Change in Control will supersede and take the
place of any prior change in control, severance or employment agreements
between the parties hereto. The parties hereto expressly agree and hereby
declare that any and all prior change in control, severance or employment
agreements between the parties are terminated and of no force or effect.
20. Indemnity. UNDER CERTAIN CIRCUMSTANCES, THIS AGREEMENT IMPOSES
INDEMNIFICATION OBLIGATIONS ON THE PARTIES HERETO.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 20
<PAGE> 21
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.
COMPANY:
MERCHANTS BANCSHARES, INC.
By:
------------------------------
Name: J. W. Lander, III
Title: President
EXECUTIVE:
----------------------------
Norman H. Bird
NORMAN H. BIRD
EMPLOYMENT AGREEMENT - PAGE 21
<PAGE> 1
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 10th
day of October, 1997, by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and J.W. Lander, Jr. ("Indemnitee"), a director
and officer of the Company.
WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting officers and directors to expensive
litigation risks; and
WHEREAS, Indemnitee does not regard the current protection available
as adequate given the present circumstances, and Indemnitee and/or other
officers and directors of the Company may not be willing to serve as officers
and/or directors without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and/or
directors of the Company and to indemnify its officers and/or directors so as
to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Generally. The Company shall indemnify Indemnitee if
Indemnitee is or is threatened to be made a named defendant or respondent in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, or any inquiry or investigation that could lead to
such an action, suit or proceeding, because Indemnitee (i) is or was a
director, officer, employee or agent of the Company, (ii) is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, employee benefit plan, other enterprise or other
entity, or (iii) any action or inaction by Indemnitee while acting in any
capacity described in clauses (i) and (ii) of this Section 1(a), if, and only
if, it is determined that Indemnitee met the standard of conduct required in
Section 1(b) hereof, such determination to be made in accordance with Section
1(c) hereof.
(b) Standard of Conduct. The Company shall indemnify
Indemnitee pursuant to Section 1(a) hereof if, and only if, it is determined in
accordance with Section 1(c) hereof that Indemnitee (i) acted in good faith;
(ii) reasonably believed (A) in the case of conduct in Indemnitee's official
capacity as a director of the Company, that Indemnitee's conduct was in the
best interests of the Company and (B) in all other cases, that Indemnitee's
conduct was at least not opposed to the best interests of the Company;
<PAGE> 2
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of a proceeding by
judgment, order, settlement, or conviction, or on a plea of nolo contendere or
its equivalent is not of itself determinative that Indemnitee did not meet the
requirements set forth in this Section 1(b).
(c) Indemnification Procedure. Within thirty (30) days
following receipt of a request for indemnification to be provided pursuant to
Section 1(a) hereof, a determination shall be made whether Indemnitee has met
the standard of conduct required for indemnification, as set forth in Section
1(b) hereof. Such determination shall be made (i) by the Board of Directors by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding, (ii) if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors, designated to act in the matter by a majority vote of all directors,
such committee consisting solely of two (2) or more directors who at the time
of the vote are not named defendants or respondents in the proceeding, (iii) by
special legal counsel selected by the Board of Directors or a committee of the
Board of Directors by vote as set forth in clause (i) or (ii) of this Section
1(c), or, if such quorum cannot be obtained and such a committee cannot be
established, by the Board of Directors by a majority vote of all directors or
(iv) by the Company's shareholders in a vote that excludes the shares held by
persons/entities who/which are named defendants or respondents in the
proceeding. Promptly upon determination that Indemnitee has met the standard
of conduct required for indemnification, payment will be made to Indemnitee.
Indemnitee may contest a determination that Indemnitee has not met the relevant
standard of conduct for indemnification by petitioning a court of appropriate
jurisdiction to make an independent determination respecting the right of
indemnification, in accordance with the terms of Section 3 hereof.
(d) Limitation on Indemnification. Except to the extent
permitted by Section 1(e) hereof, Indemnitee may not be indemnified under
Section 1(a) hereof in respect of a proceeding (i) in which Indemnitee is found
liable on the basis that personal benefit was improperly received by
Indemnitee, whether or not the benefit resulted from an action taken in
Indemnitee's official capacity, or (ii) in which Indemnitee is found liable to
the Company. Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after Indemnitee shall have been so adjudged
by a court of competent jurisdiction after exhaustion of all appeals therefrom.
(e) Scope of Indemnification. The Company shall
indemnify Indemnitee under Section 1(a) hereof against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by Indemnitee in connection with the proceeding
(including court costs and attorneys' fees); but if Indemnitee is found liable
to the Company or is found liable on the basis that personal benefit was
improperly received by Indemnitee, the indemnification (i) will be limited to
reasonable expenses actually incurred by Indemnitee in connection with the
proceeding and (ii) shall not be made in respect of any proceeding in which
Indemnitee shall have
-2-
<PAGE> 3
been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company.
2. Expenses.
(a) Mandatory Indemnification of Expenses. The Company
shall indemnify Indemnitee against reasonable expenses incurred by Indemnitee
in connection with a proceeding in which Indemnitee is a named defendant or
respondent because Indemnitee is or was a director, or was serving in such
other capacity described in clauses (i) and (ii) of Section 1(a) hereof, if
Indemnitee has been wholly successful, on the merits or otherwise (including a
settlement), in the defense of the proceeding.
(b) Reasonable Expense Determination. Authorization of
indemnification and determination as to reasonableness of expenses must be made
in the same manner as the determination that indemnification is permissible
under Section 1(c) hereof, except that if the determination that
indemnification is permissible is made by special legal counsel under clause
(iii) of Section 1(c) hereof, authorization of indemnification and
determination as to reasonableness of expenses must be made in the manner
specified by clause (iii) of Section 1(c) hereof for the selection of special
legal counsel.
(c) Advancement of Expenses. Reasonable expenses
incurred by Indemnitee who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without the
determination specified in Section 1(c) hereof or the authorization or
determination specified in Section 2(b) hereof, after the Company receives (i)
a written affirmation by Indemnitee of Indemnitee's good faith belief that
Indemnitee has met the standard of conduct necessary for indemnification under
Section 1(b) hereof and (ii) a written undertaking by or on behalf of
Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1(e)
hereof.
3. Enforcement of Rights. The right to indemnification or
advances as provided by this Agreement shall be enforceable by Indemnitee in
any court of competent jurisdiction. The burden of proving that
indemnification or advances are appropriate shall be on Indemnitee. Neither
the failure of the Company (including its Board of Directors, a committee of
its Board of Directors, independent legal counsel or shareholders) to have made
a determination prior to the commencement of such action that indemnification
or advances are proper under the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the
-3-
<PAGE> 4
applicable standard of conduct. The Company agrees to indemnify Indemnitee
against and hold Indemnitee harmless from any judgments, fines, losses, claims,
costs (including, without limitation, costs of settlement actually and
reasonably incurred by Indemnitee) and expenses (including, without limitation,
attorney's fees and court costs) sustained or incurred by Indemnitee in
connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.
4. Additional Rights; Non-Exclusivity.
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law with respect to Indemnitee's actions and omissions in
the capacities described in clauses (i) and (ii) of Section 1(a) hereof,
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation,
the Company's Bylaws or by statute. In the event of any change, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such change will be, ipso facto, within the purview of
Indemnitee's rights, and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute, or rule which narrows the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee
may be entitled under the Company's Articles of Incorporation, the Company's
Bylaws, any agreement, any vote of shareholders or disinterested Directors, the
Texas Business Corporation Act, or otherwise, with respect to Indemnitee's
actions and omissions in the capacities described in clauses (i) and (ii) of
Section 1(a) hereof. The indemnification provided under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company or to act in the capacities described in
clauses (i) and (ii) of Section 1(a) hereof.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Officer and Director Liability Insurance. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company
-4-
<PAGE> 5
to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.
7. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
fullest extent permitted by any applicable portion of this Agreement that shall
not have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms. Furthermore, to the extent
any provision of this Agreement is deemed unenforceable, it is the intent of
the parties hereto that this Agreement be deemed amended to cause, to the
maximum extent permissible, such unenforceable provision to be enforceable.
8. Choice of Law. This Agreement is made and entered into
pursuant to Section 2.02-1(G) of the Texas Business Corporation Act and this
Agreement shall be governed by and its provisions construed in accordance with
the laws of the State of Texas.
9. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to
Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Notice shall be deemed received three (3) days after the date postmarked if
sent by certified or registered mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
10. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original.
-5-
<PAGE> 6
11. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.
13. Miscellaneous. For purposes of this Agreement, references to
"the Company" shall include, in addition to the Company, any domestic or
foreign predecessor entity of the Company in a merger, conversion,
consolidation or other transaction in which some or all of the liabilities of
the predecessor are transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
matter of this Agreement. In addition, references contained in this Agreement
to "official capacity" shall mean (i) when used with respect to a director, the
office of director in the Company, (ii) when used with respect to a person
other than a director, the elective or appointive office in the Company held by
Indemnitee or the employment or agency relationship undertaken by Indemnitee on
behalf of the Company, but (iii) in both of the preceding clauses (i) and (ii)
does not include service for any other foreign or domestic corporation or any
employee benefit plan, other enterprise or other entity.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MERCHANTS BANCSHARES, INC.
By:
-----------------------
Its:
----------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- --------------------------
-7-
<PAGE> 1
EXHIBIT 10.11
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 10th
day of October, 1997, by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and J.W. Lander, III ("Indemnitee"), a director
and officer of the Company.
WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting officers and directors to expensive
litigation risks; and
WHEREAS, Indemnitee does not regard the current protection available
as adequate given the present circumstances, and Indemnitee and/or other
officers and directors of the Company may not be willing to serve as officers
and/or directors without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and/or
directors of the Company and to indemnify its officers and/or directors so as
to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Generally. The Company shall indemnify Indemnitee if
Indemnitee is or is threatened to be made a named defendant or respondent in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, or any inquiry or investigation that could lead to
such an action, suit or proceeding, because Indemnitee (i) is or was a
director, officer, employee or agent of the Company, (ii) is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, employee benefit plan, other enterprise or other
entity, or (iii) any action or inaction by Indemnitee while acting in any
capacity described in clauses (i) and (ii) of this Section 1(a), if, and only
if, it is determined that Indemnitee met the standard of conduct required in
Section 1(b) hereof, such determination to be made in accordance with Section
1(c) hereof.
(b) Standard of Conduct. The Company shall indemnify
Indemnitee pursuant to Section 1(a) hereof if, and only if, it is determined in
accordance with Section 1(c) hereof that Indemnitee (i) acted in good faith;
(ii) reasonably believed (A) in the case of conduct in Indemnitee's official
capacity as a director of the Company, that Indemnitee's conduct was in the
best interests of the Company and (B) in all other cases, that Indemnitee's
conduct was at least not opposed to the best interests of the Company;
<PAGE> 2
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of a proceeding by
judgment, order, settlement, or conviction, or on a plea of nolo contendere or
its equivalent is not of itself determinative that Indemnitee did not meet the
requirements set forth in this Section 1(b).
(c) Indemnification Procedure. Within thirty (30) days
following receipt of a request for indemnification to be provided pursuant to
Section 1(a) hereof, a determination shall be made whether Indemnitee has met
the standard of conduct required for indemnification, as set forth in Section
1(b) hereof. Such determination shall be made (i) by the Board of Directors by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding, (ii) if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors, designated to act in the matter by a majority vote of all directors,
such committee consisting solely of two (2) or more directors who at the time
of the vote are not named defendants or respondents in the proceeding, (iii) by
special legal counsel selected by the Board of Directors or a committee of the
Board of Directors by vote as set forth in clause (i) or (ii) of this Section
1(c), or, if such quorum cannot be obtained and such a committee cannot be
established, by the Board of Directors by a majority vote of all directors or
(iv) by the Company's shareholders in a vote that excludes the shares held by
persons/entities who/which are named defendants or respondents in the
proceeding. Promptly upon determination that Indemnitee has met the standard
of conduct required for indemnification, payment will be made to Indemnitee.
Indemnitee may contest a determination that Indemnitee has not met the relevant
standard of conduct for indemnification by petitioning a court of appropriate
jurisdiction to make an independent determination respecting the right of
indemnification, in accordance with the terms of Section 3 hereof.
(d) Limitation on Indemnification. Except to the extent
permitted by Section 1(e) hereof, Indemnitee may not be indemnified under
Section 1(a) hereof in respect of a proceeding (i) in which Indemnitee is found
liable on the basis that personal benefit was improperly received by
Indemnitee, whether or not the benefit resulted from an action taken in
Indemnitee's official capacity, or (ii) in which Indemnitee is found liable to
the Company. Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after Indemnitee shall have been so adjudged
by a court of competent jurisdiction after exhaustion of all appeals therefrom.
(e) Scope of Indemnification. The Company shall
indemnify Indemnitee under Section 1(a) hereof against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by Indemnitee in connection with the proceeding
(including court costs and attorneys' fees); but if Indemnitee is found liable
to the Company or is found liable on the basis that personal benefit was
improperly received by Indemnitee, the indemnification (i) will be limited to
reasonable expenses actually incurred by Indemnitee in connection with the
proceeding and (ii) shall not be made in respect of any proceeding in which
Indemnitee shall have
-2-
<PAGE> 3
been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company.
2. Expenses.
(a) Mandatory Indemnification of Expenses. The Company
shall indemnify Indemnitee against reasonable expenses incurred by Indemnitee
in connection with a proceeding in which Indemnitee is a named defendant or
respondent because Indemnitee is or was a director, or was serving in such
other capacity described in clauses (i) and (ii) of Section 1(a) hereof, if
Indemnitee has been wholly successful, on the merits or otherwise (including a
settlement), in the defense of the proceeding.
(b) Reasonable Expense Determination. Authorization of
indemnification and determination as to reasonableness of expenses must be made
in the same manner as the determination that indemnification is permissible
under Section 1(c) hereof, except that if the determination that
indemnification is permissible is made by special legal counsel under clause
(iii) of Section 1(c) hereof, authorization of indemnification and
determination as to reasonableness of expenses must be made in the manner
specified by clause (iii) of Section 1(c) hereof for the selection of special
legal counsel.
(c) Advancement of Expenses. Reasonable expenses
incurred by Indemnitee who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without the
determination specified in Section 1(c) hereof or the authorization or
determination specified in Section 2(b) hereof, after the Company receives (i)
a written affirmation by Indemnitee of Indemnitee's good faith belief that
Indemnitee has met the standard of conduct necessary for indemnification under
Section 1(b) hereof and (ii) a written undertaking by or on behalf of
Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1(e)
hereof.
3. Enforcement of Rights. The right to indemnification or
advances as provided by this Agreement shall be enforceable by Indemnitee in
any court of competent jurisdiction. The burden of proving that
indemnification or advances are appropriate shall be on Indemnitee. Neither
the failure of the Company (including its Board of Directors, a committee of
its Board of Directors, independent legal counsel or shareholders) to have made
a determination prior to the commencement of such action that indemnification
or advances are proper under the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the
-3-
<PAGE> 4
applicable standard of conduct. The Company agrees to indemnify Indemnitee
against and hold Indemnitee harmless from any judgments, fines, losses, claims,
costs (including, without limitation, costs of settlement actually and
reasonably incurred by Indemnitee) and expenses (including, without limitation,
attorney's fees and court costs) sustained or incurred by Indemnitee in
connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.
4. Additional Rights; Non-Exclusivity.
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law with respect to Indemnitee's actions and omissions in
the capacities described in clauses (i) and (ii) of Section 1(a) hereof,
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation,
the Company's Bylaws or by statute. In the event of any change, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such change will be, ipso facto, within the purview of
Indemnitee's rights, and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute, or rule which narrows the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee
may be entitled under the Company's Articles of Incorporation, the Company's
Bylaws, any agreement, any vote of shareholders or disinterested Directors, the
Texas Business Corporation Act, or otherwise, with respect to Indemnitee's
actions and omissions in the capacities described in clauses (i) and (ii) of
Section 1(a) hereof. The indemnification provided under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company or to act in the capacities described in
clauses (i) and (ii) of Section 1(a) hereof.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Officer and Director Liability Insurance. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company
-4-
<PAGE> 5
to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.
7. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
fullest extent permitted by any applicable portion of this Agreement that shall
not have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms. Furthermore, to the extent
any provision of this Agreement is deemed unenforceable, it is the intent of
the parties hereto that this Agreement be deemed amended to cause, to the
maximum extent permissible, such unenforceable provision to be enforceable.
8. Choice of Law. This Agreement is made and entered into
pursuant to Section 2.02-1(G) of the Texas Business Corporation Act and this
Agreement shall be governed by and its provisions construed in accordance with
the laws of the State of Texas.
9. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to
Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Notice shall be deemed received three (3) days after the date postmarked if
sent by certified or registered mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
10. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original.
-5-
<PAGE> 6
11. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.
13. Miscellaneous. For purposes of this Agreement, references to
"the Company" shall include, in addition to the Company, any domestic or
foreign predecessor entity of the Company in a merger, conversion,
consolidation or other transaction in which some or all of the liabilities of
the predecessor are transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
matter of this Agreement. In addition, references contained in this Agreement
to "official capacity" shall mean (i) when used with respect to a director, the
office of director in the Company, (ii) when used with respect to a person
other than a director, the elective or appointive office in the Company held by
Indemnitee or the employment or agency relationship undertaken by Indemnitee on
behalf of the Company, but (iii) in both of the preceding clauses (i) and (ii)
does not include service for any other foreign or domestic corporation or any
employee benefit plan, other enterprise or other entity.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MERCHANTS BANCSHARES, INC.
By:
----------------------------
Its:
---------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ----------------------------
-7-
<PAGE> 1
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 10th
day of October, 1997, by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and Donald R. Harding ("Indemnitee"), a director
of the Company.
WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting officers and directors to expensive
litigation risks; and
WHEREAS, Indemnitee does not regard the current protection available
as adequate given the present circumstances, and Indemnitee and/or other
officers and directors of the Company may not be willing to serve as officers
and/or directors without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and/or
directors of the Company and to indemnify its officers and/or directors so as
to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Generally. The Company shall indemnify Indemnitee if
Indemnitee is or is threatened to be made a named defendant or respondent in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, or any inquiry or investigation that could lead to
such an action, suit or proceeding, because Indemnitee (i) is or was a
director, officer, employee or agent of the Company, (ii) is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, employee benefit plan, other enterprise or other
entity, or (iii) any action or inaction by Indemnitee while acting in any
capacity described in clauses (i) and (ii) of this Section 1(a), if, and only
if, it is determined that Indemnitee met the standard of conduct required in
Section 1(b) hereof, such determination to be made in accordance with Section
1(c) hereof.
(b) Standard of Conduct. The Company shall indemnify
Indemnitee pursuant to Section 1(a) hereof if, and only if, it is determined in
accordance with Section 1(c) hereof that Indemnitee (i) acted in good faith;
(ii) reasonably believed (A) in the case of conduct in Indemnitee's official
capacity as a director of the Company, that Indemnitee's conduct was in the
best interests of the Company and (B) in all other cases, that Indemnitee's
conduct was at least not opposed to the best interests of the Company;
<PAGE> 2
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of a proceeding by
judgment, order, settlement, or conviction, or on a plea of nolo contendere or
its equivalent is not of itself determinative that Indemnitee did not meet the
requirements set forth in this Section 1(b).
(c) Indemnification Procedure. Within thirty (30) days
following receipt of a request for indemnification to be provided pursuant to
Section 1(a) hereof, a determination shall be made whether Indemnitee has met
the standard of conduct required for indemnification, as set forth in Section
1(b) hereof. Such determination shall be made (i) by the Board of Directors by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding, (ii) if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors, designated to act in the matter by a majority vote of all directors,
such committee consisting solely of two (2) or more directors who at the time
of the vote are not named defendants or respondents in the proceeding, (iii) by
special legal counsel selected by the Board of Directors or a committee of the
Board of Directors by vote as set forth in clause (i) or (ii) of this Section
1(c), or, if such quorum cannot be obtained and such a committee cannot be
established, by the Board of Directors by a majority vote of all directors or
(iv) by the Company's shareholders in a vote that excludes the shares held by
persons/entities who/which are named defendants or respondents in the
proceeding. Promptly upon determination that Indemnitee has met the standard
of conduct required for indemnification, payment will be made to Indemnitee.
Indemnitee may contest a determination that Indemnitee has not met the relevant
standard of conduct for indemnification by petitioning a court of appropriate
jurisdiction to make an independent determination respecting the right of
indemnification, in accordance with the terms of Section 3 hereof.
(d) Limitation on Indemnification. Except to the extent
permitted by Section 1(e) hereof, Indemnitee may not be indemnified under
Section 1(a) hereof in respect of a proceeding (i) in which Indemnitee is found
liable on the basis that personal benefit was improperly received by
Indemnitee, whether or not the benefit resulted from an action taken in
Indemnitee's official capacity, or (ii) in which Indemnitee is found liable to
the Company. Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after Indemnitee shall have been so adjudged
by a court of competent jurisdiction after exhaustion of all appeals therefrom.
(e) Scope of Indemnification. The Company shall
indemnify Indemnitee under Section 1(a) hereof against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by Indemnitee in connection with the proceeding
(including court costs and attorneys' fees); but if Indemnitee is found liable
to the Company or is found liable on the basis that personal benefit was
improperly received by Indemnitee, the indemnification (i) will be limited to
reasonable expenses actually incurred by Indemnitee in connection with the
proceeding and (ii) shall not be made in respect of any proceeding in which
Indemnitee shall have
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<PAGE> 3
been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company.
2. Expenses.
(a) Mandatory Indemnification of Expenses. The Company
shall indemnify Indemnitee against reasonable expenses incurred by Indemnitee
in connection with a proceeding in which Indemnitee is a named defendant or
respondent because Indemnitee is or was a director, or was serving in such
other capacity described in clauses (i) and (ii) of Section 1(a) hereof, if
Indemnitee has been wholly successful, on the merits or otherwise (including a
settlement), in the defense of the proceeding.
(b) Reasonable Expense Determination. Authorization of
indemnification and determination as to reasonableness of expenses must be made
in the same manner as the determination that indemnification is permissible
under Section 1(c) hereof, except that if the determination that
indemnification is permissible is made by special legal counsel under clause
(iii) of Section 1(c) hereof, authorization of indemnification and
determination as to reasonableness of expenses must be made in the manner
specified by clause (iii) of Section 1(c) hereof for the selection of special
legal counsel.
(c) Advancement of Expenses. Reasonable expenses
incurred by Indemnitee who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without the
determination specified in Section 1(c) hereof or the authorization or
determination specified in Section 2(b) hereof, after the Company receives (i)
a written affirmation by Indemnitee of Indemnitee's good faith belief that
Indemnitee has met the standard of conduct necessary for indemnification under
Section 1(b) hereof and (ii) a written undertaking by or on behalf of
Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1(e)
hereof.
3. Enforcement of Rights. The right to indemnification or
advances as provided by this Agreement shall be enforceable by Indemnitee in
any court of competent jurisdiction. The burden of proving that
indemnification or advances are appropriate shall be on Indemnitee. Neither
the failure of the Company (including its Board of Directors, a committee of
its Board of Directors, independent legal counsel or shareholders) to have made
a determination prior to the commencement of such action that indemnification
or advances are proper under the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the
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<PAGE> 4
applicable standard of conduct. The Company agrees to indemnify Indemnitee
against and hold Indemnitee harmless from any judgments, fines, losses, claims,
costs (including, without limitation, costs of settlement actually and
reasonably incurred by Indemnitee) and expenses (including, without limitation,
attorney's fees and court costs) sustained or incurred by Indemnitee in
connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.
4. Additional Rights; Non-Exclusivity.
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law with respect to Indemnitee's actions and omissions in
the capacities described in clauses (i) and (ii) of Section 1(a) hereof,
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation,
the Company's Bylaws or by statute. In the event of any change, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such change will be, ipso facto, within the purview of
Indemnitee's rights, and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute, or rule which narrows the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee
may be entitled under the Company's Articles of Incorporation, the Company's
Bylaws, any agreement, any vote of shareholders or disinterested Directors, the
Texas Business Corporation Act, or otherwise, with respect to Indemnitee's
actions and omissions in the capacities described in clauses (i) and (ii) of
Section 1(a) hereof. The indemnification provided under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company or to act in the capacities described in
clauses (i) and (ii) of Section 1(a) hereof.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Officer and Director Liability Insurance. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company
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<PAGE> 5
to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.
7. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
fullest extent permitted by any applicable portion of this Agreement that shall
not have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms. Furthermore, to the extent
any provision of this Agreement is deemed unenforceable, it is the intent of
the parties hereto that this Agreement be deemed amended to cause, to the
maximum extent permissible, such unenforceable provision to be enforceable.
8. Choice of Law. This Agreement is made and entered into
pursuant to Section 2.02-1(G) of the Texas Business Corporation Act and this
Agreement shall be governed by and its provisions construed in accordance with
the laws of the State of Texas.
9. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to
Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Notice shall be deemed received three (3) days after the date postmarked if
sent by certified or registered mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
10. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original.
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<PAGE> 6
11. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.
13. Miscellaneous. For purposes of this Agreement, references to
"the Company" shall include, in addition to the Company, any domestic or
foreign predecessor entity of the Company in a merger, conversion,
consolidation or other transaction in which some or all of the liabilities of
the predecessor are transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
matter of this Agreement. In addition, references contained in this Agreement
to "official capacity" shall mean (i) when used with respect to a director, the
office of director in the Company, (ii) when used with respect to a person
other than a director, the elective or appointive office in the Company held by
Indemnitee or the employment or agency relationship undertaken by Indemnitee on
behalf of the Company, but (iii) in both of the preceding clauses (i) and (ii)
does not include service for any other foreign or domestic corporation or any
employee benefit plan, other enterprise or other entity.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
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<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MERCHANTS BANCSHARES, INC.
By:
---------------------------
Its:
--------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- ------------------------------
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<PAGE> 1
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 10th
day of October, 1997, by and between Merchants Bancshares, Inc., a Texas
corporation (the "Company"), and Norman H. Bird ("Indemnitee"), a director and
officer of the Company.
WHEREAS, the Company and Indemnitee recognize the substantial increase
in corporate litigation subjecting officers and directors to expensive
litigation risks; and
WHEREAS, Indemnitee does not regard the current protection available
as adequate given the present circumstances, and Indemnitee and/or other
officers and directors of the Company may not be willing to serve as officers
and/or directors without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and/or
directors of the Company and to indemnify its officers and/or directors so as
to provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Generally. The Company shall indemnify Indemnitee if
Indemnitee is or is threatened to be made a named defendant or respondent in
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, any appeal in such an
action, suit or proceeding, or any inquiry or investigation that could lead to
such an action, suit or proceeding, because Indemnitee (i) is or was a
director, officer, employee or agent of the Company, (ii) is or was serving at
the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, employee benefit plan, other enterprise or other
entity, or (iii) any action or inaction by Indemnitee while acting in any
capacity described in clauses (i) and (ii) of this Section 1(a), if, and only
if, it is determined that Indemnitee met the standard of conduct required in
Section 1(b) hereof, such determination to be made in accordance with Section
1(c) hereof.
(b) Standard of Conduct. The Company shall indemnify
Indemnitee pursuant to Section 1(a) hereof if, and only if, it is determined in
accordance with Section 1(c) hereof that Indemnitee (i) acted in good faith;
(ii) reasonably believed (A) in the case of conduct in Indemnitee's official
capacity as a director of the Company, that Indemnitee's conduct was in the
best interests of the Company and (B) in all other cases, that Indemnitee's
conduct was at least not opposed to the best interests of the Company;
<PAGE> 2
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe Indemnitee's conduct was unlawful. The termination of a proceeding by
judgment, order, settlement, or conviction, or on a plea of nolo contendere or
its equivalent is not of itself determinative that Indemnitee did not meet the
requirements set forth in this Section 1(b).
(c) Indemnification Procedure. Within thirty (30) days
following receipt of a request for indemnification to be provided pursuant to
Section 1(a) hereof, a determination shall be made whether Indemnitee has met
the standard of conduct required for indemnification, as set forth in Section
1(b) hereof. Such determination shall be made (i) by the Board of Directors by
a majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the proceeding, (ii) if such a
quorum cannot be obtained, by a majority vote of a committee of the Board of
Directors, designated to act in the matter by a majority vote of all directors,
such committee consisting solely of two (2) or more directors who at the time
of the vote are not named defendants or respondents in the proceeding, (iii) by
special legal counsel selected by the Board of Directors or a committee of the
Board of Directors by vote as set forth in clause (i) or (ii) of this Section
1(c), or, if such quorum cannot be obtained and such a committee cannot be
established, by the Board of Directors by a majority vote of all directors or
(iv) by the Company's shareholders in a vote that excludes the shares held by
persons/entities who/which are named defendants or respondents in the
proceeding. Promptly upon determination that Indemnitee has met the standard
of conduct required for indemnification, payment will be made to Indemnitee.
Indemnitee may contest a determination that Indemnitee has not met the relevant
standard of conduct for indemnification by petitioning a court of appropriate
jurisdiction to make an independent determination respecting the right of
indemnification, in accordance with the terms of Section 3 hereof.
(d) Limitation on Indemnification. Except to the extent
permitted by Section 1(e) hereof, Indemnitee may not be indemnified under
Section 1(a) hereof in respect of a proceeding (i) in which Indemnitee is found
liable on the basis that personal benefit was improperly received by
Indemnitee, whether or not the benefit resulted from an action taken in
Indemnitee's official capacity, or (ii) in which Indemnitee is found liable to
the Company. Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after Indemnitee shall have been so adjudged
by a court of competent jurisdiction after exhaustion of all appeals therefrom.
(e) Scope of Indemnification. The Company shall
indemnify Indemnitee under Section 1(a) hereof against judgments, penalties
(including excise and similar taxes), fines, settlements, and reasonable
expenses actually incurred by Indemnitee in connection with the proceeding
(including court costs and attorneys' fees); but if Indemnitee is found liable
to the Company or is found liable on the basis that personal benefit was
improperly received by Indemnitee, the indemnification (i) will be limited to
reasonable expenses actually incurred by Indemnitee in connection with the
proceeding and (ii) shall not be made in respect of any proceeding in which
Indemnitee shall have
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<PAGE> 3
been found liable for willful or intentional misconduct in the performance of
Indemnitee's duty to the Company.
2. Expenses.
(a) Mandatory Indemnification of Expenses. The Company
shall indemnify Indemnitee against reasonable expenses incurred by Indemnitee
in connection with a proceeding in which Indemnitee is a named defendant or
respondent because Indemnitee is or was a director, or was serving in such
other capacity described in clauses (i) and (ii) of Section 1(a) hereof, if
Indemnitee has been wholly successful, on the merits or otherwise (including a
settlement), in the defense of the proceeding.
(b) Reasonable Expense Determination. Authorization of
indemnification and determination as to reasonableness of expenses must be made
in the same manner as the determination that indemnification is permissible
under Section 1(c) hereof, except that if the determination that
indemnification is permissible is made by special legal counsel under clause
(iii) of Section 1(c) hereof, authorization of indemnification and
determination as to reasonableness of expenses must be made in the manner
specified by clause (iii) of Section 1(c) hereof for the selection of special
legal counsel.
(c) Advancement of Expenses. Reasonable expenses
incurred by Indemnitee who was, is, or is threatened to be made a named
defendant or respondent in a proceeding shall be paid or reimbursed by the
Company, in advance of the final disposition of the proceeding and without the
determination specified in Section 1(c) hereof or the authorization or
determination specified in Section 2(b) hereof, after the Company receives (i)
a written affirmation by Indemnitee of Indemnitee's good faith belief that
Indemnitee has met the standard of conduct necessary for indemnification under
Section 1(b) hereof and (ii) a written undertaking by or on behalf of
Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1(e)
hereof.
3. Enforcement of Rights. The right to indemnification or
advances as provided by this Agreement shall be enforceable by Indemnitee in
any court of competent jurisdiction. The burden of proving that
indemnification or advances are appropriate shall be on Indemnitee. Neither
the failure of the Company (including its Board of Directors, a committee of
its Board of Directors, independent legal counsel or shareholders) to have made
a determination prior to the commencement of such action that indemnification
or advances are proper under the circumstances because Indemnitee has met the
applicable standard of conduct, nor an actual determination by the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) that Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that Indemnitee has not met the
-3-
<PAGE> 4
applicable standard of conduct. The Company agrees to indemnify Indemnitee
against and hold Indemnitee harmless from any judgments, fines, losses, claims,
costs (including, without limitation, costs of settlement actually and
reasonably incurred by Indemnitee) and expenses (including, without limitation,
attorney's fees and court costs) sustained or incurred by Indemnitee in
connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.
4. Additional Rights; Non-Exclusivity.
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify Indemnitee to the fullest
extent permitted by law with respect to Indemnitee's actions and omissions in
the capacities described in clauses (i) and (ii) of Section 1(a) hereof,
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation,
the Company's Bylaws or by statute. In the event of any change, after the date
of this Agreement, in any applicable law, statute, or rule which expands the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such change will be, ipso facto, within the purview of
Indemnitee's rights, and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute, or rule which narrows the
right of a Texas corporation to indemnify a member of its Board of Directors or
its officers, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which an Indemnitee
may be entitled under the Company's Articles of Incorporation, the Company's
Bylaws, any agreement, any vote of shareholders or disinterested Directors, the
Texas Business Corporation Act, or otherwise, with respect to Indemnitee's
actions and omissions in the capacities described in clauses (i) and (ii) of
Section 1(a) hereof. The indemnification provided under this Agreement shall
continue as to Indemnitee even though Indemnitee may have ceased to be a
director or officer of the Company or to act in the capacities described in
clauses (i) and (ii) of Section 1(a) hereof.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by Indemnitee in the investigation, defense, appeal or settlement of
any civil or criminal action, suit or proceeding, but not, however, for the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such expenses, judgments, fines or penalties to which Indemnitee
is entitled.
6. Officer and Director Liability Insurance. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company
-4-
<PAGE> 5
to obtain and maintain a policy or policies of insurance with reputable
insurance companies providing the officers and directors of the Company with
coverage for losses from wrongful acts, or to ensure the Company's performance
of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.
7. Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
fullest extent permitted by any applicable portion of this Agreement that shall
not have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms. Furthermore, to the extent
any provision of this Agreement is deemed unenforceable, it is the intent of
the parties hereto that this Agreement be deemed amended to cause, to the
maximum extent permissible, such unenforceable provision to be enforceable.
8. Choice of Law. This Agreement is made and entered into
pursuant to Section 2.02-1(G) of the Texas Business Corporation Act and this
Agreement shall be governed by and its provisions construed in accordance with
the laws of the State of Texas.
9. Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to
Merchants Bancshares, Inc.
5005 Woodway, Suite 300
Houston, Texas 77056
Notice shall be deemed received three (3) days after the date postmarked if
sent by certified or registered mail, properly addressed. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
10. Counterparts. This Agreement may be executed in counterparts,
each of which shall constitute an original.
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<PAGE> 6
11. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement or
to enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that each of Indemnitee's material
defenses to such action were made in bad faith or were frivolous.
13. Miscellaneous. For purposes of this Agreement, references to
"the Company" shall include, in addition to the Company, any domestic or
foreign predecessor entity of the Company in a merger, conversion,
consolidation or other transaction in which some or all of the liabilities of
the predecessor are transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities of the
predecessor but does not specifically exclude liabilities that are the subject
matter of this Agreement. In addition, references contained in this Agreement
to "official capacity" shall mean (i) when used with respect to a director, the
office of director in the Company, (ii) when used with respect to a person
other than a director, the elective or appointive office in the Company held by
Indemnitee or the employment or agency relationship undertaken by Indemnitee on
behalf of the Company, but (iii) in both of the preceding clauses (i) and (ii)
does not include service for any other foreign or domestic corporation or any
employee benefit plan, other enterprise or other entity.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
MERCHANTS BANCSHARES, INC.
By:
---------------------------
Its:
--------------------------
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -----------------------
-7-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF JURISDICTION
NAME OF SUBSIDIARY STOCK OWNED OF INCORPORATION
------------------ ------------- ----------------
<S> <C> <C>
1. Gulf Southwest Nevada Bancorp, Inc. 100.0% Nevada
</TABLE>
<TABLE>
<CAPTION>
SUBSIDIARIES OF GULF SOUTHWEST PERCENTAGE OF JURISDICTION
NEVADA BANCORP, INC. STOCK OWNED OF INCORPORATION
------------------------------ ------------- ----------------
<S> <C> <C>
1. Merchants Bank 100.0% Texas
2. Funds Management Group, Inc. 80.0% Texas
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 37,563,149
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,050,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,628,753
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 342,566,214
<ALLOWANCE> 3,687,351
<TOTAL-ASSETS> 545,950,825
<DEPOSITS> 484,356,585
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,607,583
<LONG-TERM> 0
0
0
<COMMON> 1,977,855
<OTHER-SE> 56,008,802
<TOTAL-LIABILITIES-AND-EQUITY> 545,950,825
<INTEREST-LOAN> 30,401,317
<INTEREST-INVEST> 7,683,015
<INTEREST-OTHER> 1,143,656
<INTEREST-TOTAL> 39,227,988
<INTEREST-DEPOSIT> 12,196,470
<INTEREST-EXPENSE> 12,196,470
<INTEREST-INCOME-NET> 27,031,518
<LOAN-LOSSES> 1,740,000
<SECURITIES-GAINS> 14,958
<EXPENSE-OTHER> 22,319,779
<INCOME-PRETAX> 9,224,248
<INCOME-PRE-EXTRAORDINARY> 9,224,248
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,387,648
<EPS-PRIMARY> 3.27
<EPS-DILUTED> 3.27
<YIELD-ACTUAL> 5.87
<LOANS-NON> 1,953,933
<LOANS-PAST> 611,106
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,712,864
<CHARGE-OFFS> 973,368
<RECOVERIES> 207,855
<ALLOWANCE-CLOSE> 3,687,351
<ALLOWANCE-DOMESTIC> 3,687,351
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
