<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement [_]CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
COLE TAYLOR FINANCIAL GROUP, INC.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[_]$125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_]$500 per each party to the controversy pursuant to Exchange Act Rule 14a-
6(i)(3).
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.01 per share, of Cole Taylor Financial Group, Inc.
and Common Stock, par value $0.01 per share, of Cole Taylor Bank
(2) Aggregate number of securities to which transaction applies: Not less
than 4,000,000 nor more than 4,500,000 shares of common stock of Cole
Taylor Financial Group, Inc. and 1,500,000 shares of common stock of
Cole Taylor Bank
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): Pursuant to
Rule 0-11(c)(2), the underlying value of the transaction is determined
based upon the value of cash and property to be received by Registrant
as follows: $81,750,000 in cash and used automobile receivables;
$1,052,905 for the Mortgage Company; and $147,233 for the interest in
Alpha Capital Fund
(4) Proposed maximum aggregate value of transaction: $82,950,138
(5) Fee paid: $16,591
[X]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
(Bulletin No. 164, 08-11-95)
<PAGE>
[LOGO OF COLE TAYLOR FINANCIAL GROUP]
Dear Stockholder:
You are cordially invited to the Annual Meeting of Stockholders (the "Annual
Meeting"), of Cole Taylor Financial Group, Inc. (the "Company"). The Annual
Meeting will be held at The Standard Club, 320 South Plymouth Court, Chicago,
Illinois, on November 12, 1996, at 9:00 a.m., Chicago time.
At the Annual Meeting, you will be asked to consider and vote upon a
proposal to approve (1) the Share Exchange Agreement, dated as of June 12,
1996 and amended and restated as of June 12, 1996 (as amended and restated,
the "Share Exchange Agreement"), by and among the Company and Jeffrey W.
Taylor, Sidney J Taylor, Bruce W. Taylor and certain other members of the
Taylor family (collectively, the "Taylor Family"), and (2) the transactions
contemplated by the Share Exchange Agreement. These transactions, which are
collectively referred to as the "Split-Off Transactions," include the
Company's exchange (the "Split-Off") of (A) all of the capital stock of a
newly formed subsidiary of the Company (the "New Holding Company") holding,
among other things, all of the capital stock of Cole Taylor Bank (the "Bank")
for (B) the shares of common stock, par value $.01 per share, of the Company
(the "Common Stock") owned by the Taylor Family and, possibly, certain other
parties. The Bank is an Illinois state-chartered bank and is a wholly owned
subsidiary of the Company. Additionally, as part of the Split-Off
Transactions, the Bank will contribute its used automobile receivables
business, including agreements with automobile dealers to purchase sales
finance contracts and used automobile receivables, and cash in amounts
determined as described in the attached Proxy Statement, to a newly formed
wholly owned subsidiary of the Bank ("New Reliance"). Immediately prior to the
Split-Off, the Bank will distribute the capital stock of New Reliance to the
Company, and Reliance Acceptance Corporation (f/k/a Cole Taylor Finance Co.),
a Delaware corporation and wholly owned subsidiary of the Company (the
"Finance Company"), will merge into New Reliance. In addition, prior to the
Split-Off, the Company will form the New Holding Company and will transfer to
the New Holding Company all of the capital stock of the Bank, all of the
capital stock of the Mortgage Company and all of the Company's investment in
Alpha Capital Fund in exchange for all of the capital stock of the New Holding
Company. If the Share Exchange Agreement and Split-Off Transactions are
approved by the stockholders of the Company and are consummated, New Reliance
will be the only remaining directly owned subsidiary of the Company.
The closing of the Split-Off Transactions is dependent upon the satisfaction
of a number of conditions, including the approval of the Share Exchange
Agreement and the Split-Off Transactions by the Company's stockholders at the
Annual Meeting and the receipt of all necessary regulatory approvals. The
Company currently anticipates that all such conditions will have been
satisfied, and that consequently the Split-Off Transactions will be
consummated, no later than the first quarter of 1997. However, there is no
assurance that these conditions will be satisfied or that they will be
satisfied by any particular date.
The Split-Off Transactions, if approved and consummated, will effect a
fundamental change in the nature of the Company's business. They will remove
from the Company its traditional commercial and consumer banking business,
which has historically provided the substantial majority of the Company's
revenues and income. The Company will retain the consumer finance business of
the Finance Company, which commenced operations in January 1993, and certain
related used automobile finance operations of the Bank. After the Split-Off,
the Company's business will focus almost entirely on the automobile finance
market.
AFTER CAREFUL CONSIDERATION, THE BOARD HAS UNANIMOUSLY APPROVED THE SHARE
EXCHANGE AGREEMENT AND THE SPLIT-OFF TRANSACTIONS AND RECOMMENDS THAT THE
COMPANY'S STOCKHOLDERS VOTE FOR THE SHARE EXCHANGE AGREEMENT AND THE SPLIT-OFF
TRANSACTIONS.
<PAGE>
At the Annual Meeting, you will also be asked to consider and vote upon two
other proposals: (i) to approve an amendment to the Company's Certificate of
Incorporation to change the name of the Company from "Cole Taylor Financial
Group, Inc." to "Reliance Acceptance Group, Inc." (the "Name Change"), to take
effect upon consummation of the Split-Off Transactions, and (ii) to elect five
Class II directors to serve for a term of three years or until their
successors have been elected and qualified.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR
THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION TO CHANGE THE NAME
OF THE COMPANY AND FOR ALL OF THE NOMINEES FOR ELECTION AS DIRECTORS AT THE
ANNUAL MEETING.
Pursuant to the Share Exchange Agreement, the members of the Taylor Family
have agreed to vote all of the shares of Common Stock owned or controlled by
them in favor of the Share Exchange Agreement and the Split-Off Transactions,
and they have advised the Company that they intend to vote in favor of the
amendment to the Company's Certificate of Incorporation to effect the Name
Change. The members of the Cole Family, represented by Lori Cole, have
indicated their intent to vote or direct the vote of all shares of Common
Stock over which they have voting control, for approval of (i) the Share
Exchange Agreement and the Split-Off Transactions and (ii) the amendment to
the Company's Certificate of Incorporation to effect the Name Change.
Additionally, each of the other executive officers and directors of the
Company (excluding members of the Taylor Family and the Cole Family) has
advised the Company that he or she intends to vote or direct the vote of all
shares of Common Stock over which he or she has voting control, subject to and
consistent with any fiduciary obligations in the case of shares held as a
fiduciary, for approval of (i) the Share Exchange Agreement and the Split-Off
Transactions and (ii) the amendment to the Company's Certificate of
Incorporation to effect the Name Change. The affirmative votes of the Taylor
Family, the Cole Family and the other executive officers and directors of the
Company will, collectively, be sufficient to approve the Share Exchange
Agreement and the Split-Off Transactions and the amendment to the Company's
Certificate of Incorporation to effect the Name Change, regardless of the
votes of any other stockholders.
In the materials accompanying this letter, you will find a Notice of Annual
Meeting of Stockholders, a Proxy Statement relating to the actions to be taken
at the Annual Meeting and a proxy. The Proxy Statement more fully describes
the Share Exchange Agreement and the Split-Off Transactions and includes
certain information about the Company and additional matters for consideration
at the Annual Meeting. Also included, along with the proxy materials, are
copies of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 and the Company's Current Report on Form 8-K dated October 10,
1996 and, if not previously mailed to you, the Company's 1995 Annual Report to
Stockholders and Annual Report on Form 10-K for the year ended December 31,
1995.
All stockholders are invited to attend the Annual Meeting in person.
However, whether or not you plan to attend the Annual Meeting, please
complete, sign, date and return your proxy in the enclosed envelope. If you
attend the Annual Meeting, you may vote in person if you wish, even though you
have previously returned your proxy. It is important that your shares be
represented and voted at the Annual Meeting.
Sincerely,
LOGO
Jeffrey W. Taylor
Chairman and Chief Executive Officer
<PAGE>
[LOGO OF COLE TAYLOR FINANCIAL GROUP]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 12, 1996
----------------
To the Stockholders of
Cole Taylor Financial Group, Inc.
The Annual Meeting of the Stockholders of Cole Taylor Financial Group, Inc.,
a Delaware corporation (the "Company"), will be held at 9:00 a.m., Chicago
time on November 12, 1996, at The Standard Club, 320 South Plymouth Court,
Chicago, Illinois, for the following purposes:
1. To consider and vote upon a proposal to approve (1) the Share Exchange
Agreement, dated as of June 12, 1996 and amended and restated as of June
12, 1996 (as amended and restated, the "Share Exchange Agreement"), by
and among the Company and Jeffrey W. Taylor, Sidney J Taylor, Bruce W.
Taylor and certain other members of the Taylor family (collectively, the
"Taylor Family"), and (2) the transactions contemplated by the Share
Exchange Agreement. These transactions include (i) the Company's
exchange of (A) all of the stock of a newly formed subsidiary of the
Company holding all of the capital stock of Cole Taylor Bank and certain
other assets for (B) shares of the Company's common stock held by the
Taylor Family and, possibly, certain other parties, and (ii) the
transfer by Cole Taylor Bank of certain assets to the Company, all as
more fully disclosed in the attached Proxy Statement.
2. To consider and vote upon a proposal to approve an amendment to the
Company's Certificate of Incorporation to change the name of the Company
from "Cole Taylor Financial Group, Inc." to "Reliance Acceptance Group,
Inc.," to take effect upon consummation of the Split-Off Transactions.
3. To elect five Class II directors to serve for a term of three years or
until their successors have been elected and qualified.
4. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
The Board of Directors of the Company (the "Board of Directors") has fixed
the close of business on September 20, 1996 as the record date for determining
stockholders entitled to notice of, and to vote at, the Annual Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
James I. Kaplan
Secretary
October 11, 1996
ALL STOCKHOLDERS ARE URGED TO ATTEND THE MEETING IN PERSON OR BY PROXY.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE PAID ENVELOPE FURNISHED FOR THAT PURPOSE. YOUR PROXY CAN BE WITHDRAWN
AT ANY TIME BEFORE IT IS VOTED.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY.................................................................... 1
General.................................................................. 1
The Bank................................................................. 2
The Finance Company...................................................... 3
The Mortgage Company..................................................... 4
The Annual Meeting....................................................... 4
The Split-Off Transactions............................................... 5
The Share Exchange Agreement............................................. 10
The Stock Repurchase..................................................... 11
The Company After the Split-Off Transactions............................. 12
Election of Directors.................................................... 12
Recommendations of the Board of Directors................................ 12
Opinions of Financial Advisors........................................... 13
Accounting Treatment..................................................... 13
Certain Federal Income Tax Consequences.................................. 13
Appraisal Rights......................................................... 13
Regulatory Requirements.................................................. 14
Market Price and Dividend Data........................................... 14
Selected Financial Data.................................................. 15
RISK FACTORS............................................................... 17
Loss of Banking Operations which have Historically Accounted for the
Substantial Majority of the Company's Earnings and Comprise Over 80% of
the Company's Assets.................................................... 17
Management of the Company................................................ 17
Certain Relationships.................................................... 17
Certain Tax Considerations............................................... 18
Need for Funds; Possible Downgrade of Debt Ratings; Potential Increase in
Cost of Capital......................................................... 18
Uncertainty and Volatility of Stock Price................................ 19
Regulatory Matters; Additional Capital Requirements of the Bank.......... 19
Risks Regarding Non-Consummation of the Split-Off Transactions........... 19
No Assurance of Acquisitions or Expansion................................ 20
Concentration in Automobile Loans........................................ 20
Limited Operating History................................................ 20
Risk of Default on Sales Finance Contracts............................... 20
Ability of the Company to Continue its Growth Strategy................... 21
Relationships with Dealers............................................... 21
Competition.............................................................. 21
Control By Current Stockholders.......................................... 21
No Assurance of Dividends................................................ 22
Vesting of Options....................................................... 22
FORWARD-LOOKING INFORMATION................................................ 22
THE ANNUAL MEETING......................................................... 23
Record Date and Outstanding Shares....................................... 23
Voting of Proxies........................................................ 23
Votes Required........................................................... 23
Quorum; Abstentions and Broker Non Votes................................. 24
PROPOSAL NO. 1--APPROVAL OF THE SHARE EXCHANGE AGREEMENT AND THE SPLIT-OFF
TRANSACTIONS.............................................................. 25
General.................................................................. 25
The Split-Off Transactions............................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Reasons for the Split-Off Transactions................................... 27
Background of the Split-Off Transactions................................. 28
Recommendation of the Board of Directors................................. 34
Opinion of the Financial Advisor to Cole Taylor Financial Group, Inc..... 34
Selection and Compensation of the Financial Advisors..................... 37
The Share Exchange Agreement............................................. 38
The Escrow Agreement..................................................... 47
The Stock Repurchase..................................................... 48
Interests of Certain Persons in the Split-Off Transactions............... 48
Accounting Treatment..................................................... 50
Certain U.S. Federal Income Tax Considerations........................... 50
Appraisal Rights......................................................... 51
Regulatory Requirements.................................................. 51
THE COMPANY AFTER THE SPLIT-OFF TRANSACTIONS............................... 52
Business of the Company After the Split-Off.............................. 52
Management of the Company After the Split-Off............................ 55
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS...................... 56
Notes to Unaudited Pro Forma Consolidated Financial Statements........... 61
PROPOSAL NO. 2--APPROVAL OF AN AMENDMENT TO THE COMPANY'S CERTIFICATE OF
INCORPORATION TO CHANGE THE NAME OF THE COMPANY........................... 62
Recommendation of the Board of Directors................................. 62
PROPOSAL NO. 3--ELECTION OF DIRECTORS...................................... 63
Nominees for Election as Directors....................................... 63
Recommendation of the Board of Directors................................. 64
OTHER DIRECTORS............................................................ 65
Director Compensation.................................................... 66
Meetings................................................................. 67
Standing Committees of the Board of Directors............................ 67
OTHER EXECUTIVE OFFICERS................................................... 68
Section 16(a) Compliance................................................. 68
RESIGNATIONS OF DIRECTORS AND EXECUTIVE OFFICERS........................... 68
EXECUTIVE COMPENSATION..................................................... 69
Employment and Severance Agreements...................................... 72
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.................... 73
Compensation Strategy.................................................... 73
Compensation Committee Authority......................................... 73
Compensation Committee Membership........................................ 73
Independent Consultant................................................... 73
Base Compensation........................................................ 73
Bonuses.................................................................. 74
Stock Options............................................................ 74
Section 162(m)........................................................... 74
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION................ 75
PERFORMANCE GRAPH.......................................................... 76
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
CERTAIN TRANSACTIONS........................................................ 76
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS.............. 77
ACCOUNTANTS................................................................. 78
PROPOSALS OF SECURITY HOLDERS............................................... 78
SOLICITATION................................................................ 79
AVAILABLE INFORMATION....................................................... 79
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................. 79
APPENDICES.
A--SHARE EXCHANGE AGREEMENT............................................... A-1
B--ESCROW AGREEMENT....................................................... B-1
C--FAIRNESS OPINION OF THE CHICAGO CORPORATION............................ C-1
D--FAIRNESS OPINION OF SANDLER O'NEILL & PARTNERS, L.P.................... D-1
E--TAX RULING............................................................. E-1
</TABLE>
iii
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
350 EAST DUNDEE ROAD
WHEELING, ILLINOIS 60090
(708) 459-1111
----------------
PROXY STATEMENT
----------------
ANNUAL MEETING OF STOCKHOLDERS
NOVEMBER 12, 1996
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Cole Taylor Financial Group, Inc. (the
"Company") to be used at the Annual Meeting of Stockholders and any
adjournment or postponement thereof (the "Annual Meeting"), to be held at 9:00
a.m., Chicago time, on November 12, 1996 at The Standard Club, 320 South
Plymouth Court, Chicago, Illinois. Cole Taylor Financial Group, Inc. is the
parent company of Cole Taylor Bank, Reliance Acceptance Corporation (f/k/a
Cole Taylor Finance Co.) and CT Mortgage Company, Inc. This Proxy Statement,
the foregoing Notice of Annual Meeting and the accompanying form of proxy are
first being mailed to stockholders on or about October 11, 1996.
At the Annual Meeting, stockholders of the Company will be asked to consider
and vote upon a proposal to approve (1) the Share Exchange Agreement, dated as
of June 12, 1996 and amended and restated as of June 12, 1996 (as amended and
restated, the "Share Exchange Agreement"), by and among the Company and
Jeffrey W. Taylor, Sidney J Taylor, Bruce W. Taylor and certain other members
of the Taylor family (collectively, the "Taylor Family"), and (2) the
transactions contemplated by the Share Exchange Agreement. These transactions,
which are collectively referred to as the "Split-Off Transactions," include
the Company's exchange (the "Split-Off") of (A) all of the stock of a newly
formed subsidiary of the Company (the "New Holding Company") holding all of
the capital stock of Cole Taylor Bank (the "Bank") for (B) shares of the
common stock, par value $.01 per share, of the Company (the "Common Stock")
owned by the Taylor Family and, possibly, certain other parties. The Company
will receive not less than 4,000,000 nor more than 4,500,000 shares of Common
Stock in the Split-Off (such number of shares being referred to as the "Stock
Amount"). As part of the Split-Off Transactions, the Bank will form a new
wholly owned subsidiary ("New Reliance") to which the Bank will contribute (i)
its used automobile receivables business, consisting of (A) substantially all
of the assets used in its used automobile receivables business, including
agreements with automobile dealers to purchase sales finance contracts and (B)
the Bank's rights and obligations pursuant to automobile loans, notes or the
Bank's securities which are collateralized primarily with used automobiles
(the "Automobile Receivables"), (ii) an amount in cash which is dependent upon
the Stock Amount and the fair value of the Automobile Receivables (the "First
Cash Component") and (iii) an amount in cash based on the Company's
investments in Alpha Capital Fund II, L.P., a small business investment
company ("Alpha Capital Fund") and CT Mortgage Company, Inc. a wholly owned
subsidiary of the Company (the "Mortgage Company") (the "Second Cash
Component"). The Automobile Receivables must have a fair market value of not
less than $30,000,000 and not more than $31,000,000. If the Automobile
Receivables have a fair market value of $30,000,000 and the Stock Amount is
4,250,000 shares, the First Cash Component will be $60,000,000. If the Stock
Amount is more or less than 4,250,000 shares of Common Stock, the First Cash
Component will be decreased or increased, respectively, by $33.00 for each
share more or less than 4,250,000. Similarly, the First Cash Component will be
decreased by the amount (if any) by which the fair market value of the
Automobile Receivables exceeds $30,000,000. Immediately prior to the Split-
Off, the Bank will distribute the capital stock of New Reliance to the
Company, and Reliance Acceptance Corporation (f/k/a Cole Taylor Finance Co.),
a Delaware corporation and wholly owned subsidiary of the Company, will merge
into New Reliance. In addition, prior to the Split-Off, the Company will form
the New Holding Company and will transfer to the New Holding Company all of
the capital stock of the Bank, all of the capital stock of the Mortgage
Company and all of the Company's investment in Alpha Capital Fund in exchange
for all of the capital stock of the New Holding Company.
(cover continued on following page)
<PAGE>
The closing of the Split-Off Transactions (the "Closing") is dependent upon
the satisfaction of a number of conditions, including the approval by
stockholders of the proposal to approve the Share Exchange Agreement and the
Split-Off Transactions and the receipt of all necessary regulatory approvals,
including the approval of the Board of Governors of the Federal Reserve
System. The Share Exchange Agreement may be terminated at any time prior to
the closing of the Split-Off Transactions by the mutual written consent of the
Taylor Family and the Company and by either the Taylor Family or the Company
under certain circumstances described in this Proxy Statement; provided,
however, that only in the circumstances discussed below shall either the
Company or the Taylor Family be entitled to any liquidated damages as a result
of such termination. If the Share Exchange Agreement is terminated (i) by the
Company, prior to the Annual Meeting, after the Company's receipt of another
offer or proposal for the acquisition of the capital stock or assets of, or a
merger or combination with, the Company, the Bank or the Finance Company or
for a similar transaction (in any case, an "Acquisition Proposal"), and the
determination by the Company's Board of Directors that such termination is
required for its discharge of its fiduciary duties, or (ii) by the Taylor
Family after the Board withdraws or adversely modifies its approval of, or its
recommendation that stockholders approve, the Share Exchange Agreement and the
Split-Off Transactions or the Company enters or resolves to enter into an
agreement providing for an Acquisition Proposal, then the Company will be
obligated to pay the Taylor Family an amount equal to (a) the Taylor Family's
out-of-pocket expenses paid to lawyers, accountants, investment bankers or
other experts, plus (b) three percent of the fair market value of the
Acquisition Proposal. If the Share Exchange Agreement is terminated by the
Taylor Family due to a material, uncured breach by the Company of the Share
Exchange Agreement, the Company will be obligated to pay $15,000,000 to the
Taylor Family. If the Share Exchange Agreement is terminated by the Company
due to a Triggering Termination (as defined below), the Taylor Family will be
obligated to pay $15,000,000 to the Company, which amount will be subject to
reduction as described in this Proxy Statement. A "Triggering Termination"
means termination of the Share Exchange Agreement due to any of the following
reasons: (i) the approval of any applicable governmental authority has been
denied (other than because of a failure to comply with the Community
Reinvestment Act or fair lending statutes) or contains terms or conditions
that are materially burdensome; or (ii) the Closing has not occurred prior to
June 30, 1997 due to (A) the failure to obtain new financing for the Bank, or
(B) the failure to obtain the approval of any applicable governmental
authority (other than because of a failure to comply with the Community
Reinvestment Act or fair lending statutes). Neither the Taylor Family nor the
Company will be entitled to any liquidated damages if the Share Exchange
Agreement is terminated solely because the stockholders do not approve the
Share Exchange Agreement and the Split-Off Transactions at the Annual Meeting.
At the Annual Meeting, stockholders will also be asked to consider and vote
upon the following additional proposals: (i) to approve an amendment to the
Company's Certificate of Incorporation to change the name of the Company from
"Cole Taylor Financial Group, Inc." to "Reliance Acceptance Group, Inc.," to
take effect upon consummation of the Split-Off Transactions (the "Name
Change"), and (ii) to elect five Class II directors to serve for a term of
three years or until their successors have been elected and qualified.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT. THE SHARE
EXCHANGE AGREEMENT AND THE SPLIT-OFF TRANSACTIONS ARE COMPLEX AND REQUIRE
CAREFUL REVIEW AND EVALUATION. STOCKHOLDERS ARE STRONGLY URGED TO READ
AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN ITS ENTIRETY,
PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS" COMMENCING
ON PAGE 17.
The date of this Proxy Statement is October 11, 1996
<PAGE>
SUMMARY
The following is a Summary of certain information contained elsewhere in this
Proxy Statement. Reference is made to, and this Summary is qualified in its
entirety by reference to, the more detailed information (including the
appendices hereto and financial information and notes thereto) set forth
elsewhere or incorporated by reference in this Proxy Statement, which should be
read in its entirety.
GENERAL
Cole Taylor Financial Group, Inc. (the "Company") is a holding company
engaged in the banking and consumer loan acceptance business through its three
wholly owned subsidiaries: Cole Taylor Bank (the "Bank"), Reliance Acceptance
Corporation (f/k/a Cole Taylor Finance Co.) (the "Finance Company") and CT
Mortgage Company, Inc. (the "Mortgage Company"). The Company was formed in 1981
and in 1984 became the holding company for what was then the Main State Bank
(which had been acquired by the Company's founders, Irwin H. Cole and Sidney J
Taylor, in 1969) and Drovers National Bank (which had been acquired by Messrs.
Cole and Taylor in 1978). Until 1994, the Company was a private company, owned
primarily by members of the families of Irwin H. Cole and Sidney J Taylor, the
Company's two founders. In 1994, the Company made an initial public offering of
its common stock, par value $.01 per share (the "Common Stock"). As of
September 30, 1996, the family of Irwin H. Cole (the "Cole Family") and the
family of Sidney J Taylor (the "Taylor Family") each owned approximately 25% of
the Common Stock.
To maximize stockholder value and to resolve substantial disagreements
between the Cole Family and certain other members of the Board of Directors of
the Company (the "Board of Directors" or "Board") and the Taylor Family
regarding the strategic direction of the Company (as more fully described under
"--Reasons for the Split-Off Transactions" and "--Background of the Split-Off
Transactions") and after careful consideration of alternatives, the Company and
the Taylor Family entered into the Share Exchange Agreement dated as of June
12, 1996 and amended and restated as of June 12, 1996 (as amended and restated,
the "Share Exchange Agreement"). Pursuant to the Share Exchange Agreement, the
Company will exchange (A) all of the capital stock of a newly formed subsidiary
of the Company (the "New Holding Company") holding, among other things, all of
the capital stock of the Bank (the "Bank Stock") for (B) the shares of Common
Stock owned by the Taylor Family and, possibly, certain other parties (together
with the Taylor Family, the "Taylor Group"). In this transaction, which is
referred to as the "Split-Off," the Company will receive not less than
4,000,000 nor more than 4,500,000 shares of Common Stock (such number of shares
being referred to as the "Stock Amount"). In addition, pursuant to the Share
Exchange Agreement, prior to the Split-Off, the Bank will organize a new wholly
owned subsidiary ("New Reliance") to which the Bank will contribute (i) its
used automobile receivables business, consisting of (A) substantially all of
the assets used in its used automobile receivables business, including
agreements with automobile dealers to purchase sales finance contracts (the
"Dealer Agreements") and (B) the Bank's rights and obligations pursuant to
automobile loans, notes or the Bank's securities which are collateralized
primarily with used automobiles (the "Automobile Receivables"); (ii) an amount
in cash which is dependent upon the Stock Amount and the fair value of the
Automobile Receivables (the "First Cash Component"); and (iii) an amount in
cash based on the Company's investments in Alpha Capital Fund II, L.P., a small
business investment company ("Alpha Capital Fund") and CT Mortgage Company,
Inc. a wholly owned subsidiary of the Company (the "Mortgage Company") (the
"Second Cash Component" and, together with the First Cash Component, the "Cash
Component"). The Automobile Receivables must have a fair market value of not
less than $30,000,000 and not more than $31,000,000. If the Automobile
Receivables have a fair market value of $30,000,000 and the Stock Amount is
equal to 4,250,000 shares, the First Cash Component will be $60,000,000. If the
Stock Amount is more or less than 4,250,000 shares, the First Cash Component
will be decreased or increased, respectively, by $33.00 for each share more or
less than 4,250,000. Similarly, the First Cash Component will be decreased by
the amount (if any) by which the
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fair market value of the Automobile Receivables exceeds $30,000,000. Also
pursuant to the Share Exchange Agreement, prior to the Split-Off: (i) the Bank
will form New Reliance, a new wholly owned subsidiary, to which the Bank will
contribute its used automobile business; (ii) the Bank will distribute the
capital stock of New Reliance to the Company, and the Finance Company will
merge into New Reliance, which will be renamed Reliance Acceptance Corporation;
and (iii) the Company will form the New Holding Company and transfer to it all
of the Bank Stock, all of the capital stock of the Mortgage Company and all of
the Company's rights, obligations and interest in Alpha Capital Fund II, L.P.,
a small business investment company ("Alpha Capital Fund"), in exchange for all
of the capital stock of the New Holding Company. Transactions (i)-(iii)
referred to in the immediately preceding sentence, along with the organization
of New Reliance and the Bank's contribution of its used automobile receivables
business and the Cash Component to New Reliance, are collectively referred to
as the "Pre-Closing Transactions." The Split-Off and the Pre-Closing
Transactions are together referred to as the "Split-Off Transactions." A copy
of the Share Exchange Agreement, as amended and restated, is attached as
Appendix A to this Proxy Statement.
The Taylor Family has the ability, in its discretion, to expand the Taylor
Group to include other stockholders of the Company who are not members of the
Taylor Family ("Other Taylor Group Members"). Any Other Taylor Group Members
would be given the opportunity to exchange their Common Stock for capital stock
of the New Holding Company on the same basis as the Taylor Family, subject to
the limitation that the Taylor Group as a whole may exchange no more than
4,500,000 shares of Common Stock.
Although the number and identities of the Other Taylor Group Members (if any)
have not been determined, it is expected that the opportunity to exchange may
be offered to certain persons who have a pre-existing relationship with the
Taylor Family, the Company or the Bank, to a new employee stock ownership plan
and to participants in a new 401(k) plan to be established by the Bank or the
New Holding Company. The members of the Taylor Family who are directors of the
Company (the "Taylor Directors") anticipate that the New Holding Company will
file a registration statement with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, on or about October 15, 1996, and,
thereafter, with the applicable state securities authorities with respect to
the exchange offer to the potential Other Taylor Group Members. It is expected
that the registration statement also will cover the exchange offer to the
members of the Taylor Family.
In connection with the Split-Off Transactions, the Company will change its
name to Reliance Acceptance Group, Inc., subject to approval of the amendment
to the Company's Certificate of Incorporation by the stockholders of the
Company at the Annual Meeting. See "Proposal No. 2--Approval of the Amendment
to the Company's Certificate of Incorporation to Change the Name of the
Company."
THE BANK
The Bank commenced operations over sixty years ago in Chicago as Main State
Bank, which was acquired by Irwin Cole and Sidney Taylor in 1969. In 1978,
Drovers National Bank was purchased and in 1984 the Company became the holding
company owning and operating these two banks. Subsequently, four additional
suburban Illinois banks were acquired, and by 1992, these banks had all been
merged into the Bank. Currently operating through ten branch offices, the Bank
provides a full range of commercial and consumer banking services, primarily to
individuals and small and mid-size companies with sales of up to $50,000,000
located in the Chicago metropolitan area.
Since 1982, the Bank has also been in the business of purchasing sales
finance contracts collateralized by new and used automobiles. The sales finance
contracts are purchased from large automobile dealerships, primarily in the
Chicago metropolitan area. These contracts generally provide yields ranging
from 7-10% and are typically purchased from dealerships at premiums ranging
from 3% to 5% because they bear a higher rate of
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interest than the Bank's required yield for profitability. The Bank operates
this automobile finance contract business through its branch office in Burbank,
Illinois, which employs eight employees whose functions, in addition to their
Bank responsibilities, include underwriting, collecting and processing the
contracts. As of August 31, 1996, the Bank held approximately $115,000,000 face
amount of sales finance contracts, of which approximately 31% was
collateralized by used automobiles and the remainder by new automobiles.
THE FINANCE COMPANY
The Finance Company is engaged in the acquisition and servicing of sales
finance contracts, primarily in connection with the sale of used automobiles.
The vast majority of the sales finance contracts acquired by the Finance
Company are classified as subprime, because the borrowers have some derogatory
credit history, although such borrowers generally have performed satisfactorily
in previous automobile financing transactions. As protection against possible
credit losses, the Finance Company purchases these sales finance contracts at
an average discount of 8% and credits a nonrefundable dealer discount account
in the amount of such discount for the purpose of absorbing credit losses. The
Finance Company purchases sales finance contracts at a discount, whereas the
Bank typically purchases sales finance contracts at a premium, because of the
significantly greater credit risk generally associated with the sales finance
contracts acquired by the Finance Company.
The Finance Company was incorporated as a wholly owned subsidiary of the
Company in November 1992 and commenced operations in January 1993. As of
September 30, 1996, the Finance Company, through its subsidiaries, operated a
network of 47 branch offices in 16 states under the name "Reliance Acceptance
Corp." In the remainder of 1996, the Finance Company plans to open
approximately two additional offices in these and other states. The Finance
Company is headquartered in San Antonio, Texas and has approximately 450
employees.
The Finance Company's purchases of sales finance contracts are primarily
financed with funds drawn from three sources: (1) a $200,000,000 commercial
paper facility which is guaranteed by the Company and supported by a
$275,000,000 secured debt revolving credit agreement (the "Credit Agreement"),
(2) the Credit Agreement, which is due to be reduced to $250,000,000 by
November 15, 1996, expires on July 12, 1997 and is secured by the finance
receivables of the Finance Company, and (3) borrowings from the Company, as
needed, at market interest rates.
There are certain material risks associated with the automobile finance
business conducted by the Finance Company. There is an inherent risk that a
portion of the sales finance contracts purchased by the Finance Company will
become defaulted contracts or be subject to certain claims or defenses which
automobile buyers may assert against automobile dealers or the Finance Company
as the holder of the contracts. Additionally, the business of financing
automobiles is highly competitive and is substantially dependent upon sales of
automobiles and related demand by consumers for financing. Moreover, the
Finance Company's automobile finance operations are of relatively recent
origin, particularly as compared to the Bank's traditional consumer and
commercial banking business, which commenced over 60 years ago. The growth and
success of these automobile finance operations are dependent upon a number of
factors, including the Company's continued ability: (a) to obtain new sources
of funds, through securitizations of automobile loans, public or private
offerings of debt securities or otherwise; (b) to establish and maintain
relationships with automobile dealers; (c) to purchase an increased number of
loans meeting the Company's underwriting standards; and (d) to find expansion
opportunities and to successfully implement the Finance Company's expansion
strategy.
After the Split-Off, the Company will focus almost entirely on, and will
depend almost entirely upon the financial performance and growth of, this
automobile finance business. Consequently, the Company will be affected to a
much greater extent by the risks described above. Furthermore, the loss of the
earnings strength and assets of the Bank in the Split-Off could increase the
Company's or the Finance Company's cost of capital, which
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could adversely impact the Company's operating results and ability to grow.
Additionally, after the Split-Off, there may be an increase in volatility of
the Company's stock price due, at least in part, to the Company's dependence on
a single business segment. See "Risk Factors--Loss of Banking Operations which
have Historically Accounted for the Substantial Majority of the Company's
Earnings and Comprise over 80% of the Company's Assets," "--Need for Funds;
Possible Downgrade of Debt Ratings; Potential Increase in Cost of Capital," "--
Uncertainty and Volatility of Stock Price," "--No Assurance of Acquisitions or
Expansion," "--Concentration in Automobile Loans," "--Limited Operating
History," "--Risk of Default on Sales Finance Contracts," "--Ability of the
Company to Continue its Growth Strategy," "--Relationships with Dealers," and
"--Competition."
THE MORTGAGE COMPANY
The Mortgage Company, a wholly owned subsidiary of the Company, was formed in
late 1995 to enter the subprime market for residential loans on a brokered
basis. These wholesale originated loans are funded with the underwriting
criteria for selected institutional lenders and placed with these lenders after
a pooling occurs for price maximization. The operations of the Mortgage Company
commenced in the first quarter of 1996.
THE ANNUAL MEETING
Date, Time and Place.
The Annual Meeting will be held on November 12, 1996, at 9:00 a.m., Chicago
time, at The Standard Club, 320 South Plymouth Court, Chicago, Illinois. Only
holders of record of the Common Stock at the close of business on September 20,
1996 (the "Record Date") will be entitled to vote at the Annual Meeting. As of
the close of business on the Record Date, there were outstanding and entitled
to vote 14,758,569 shares of Common Stock. Each issued and outstanding share of
Common Stock is entitled to one vote on each matter to be considered at the
Annual Meeting.
Votes Required.
Approval of (i) the Share Exchange Agreement and the Split-Off Transactions
and (ii) the amendment to the Company's Certificate of Incorporation to effect
a change in the Company's name from Cole Taylor Financial Group, Inc. to
Reliance Acceptance Group, Inc. (the "Name Change") will require the
affirmative vote of a majority of the outstanding shares of Common Stock
entitled to vote thereon. The vote of a plurality of the shares voted in person
or by proxy will be required to elect the nominees for directors. Stockholders
will not be allowed to cumulate their votes in the election of directors.
As of the Record Date, members of the Taylor Family beneficially owned an
aggregate of 3,647,582 shares (not including shares which may be acquired
pursuant to the exercise of stock options) of Common Stock (approximately 25%
of the shares of Common Stock then outstanding). Pursuant to the Share Exchange
Agreement, the members of the Taylor Family have agreed to vote all of the
shares of Common Stock owned or controlled by them in favor of the Share
Exchange Agreement and the Split-Off Transactions, and they have advised the
Company that they intend to vote in favor of the amendment to the Company's
Certificate of Incorporation to effect the Name Change. As of the Record Date,
the members of the Cole Family beneficially owned an aggregate of 3,651,936
shares of Common Stock (approximately 25% of the shares of Common Stock then
outstanding). The members of the Cole Family, represented by Lori Cole, have
indicated their intent to vote or direct the vote of all shares of Common Stock
over which they have voting control for approval of (i) the Share Exchange
Agreement and the Split-Off Transactions and (ii) the amendment to the
Company's Certificate of Incorporation to effect the Name Change. As of the
Record Date, the other executive officers and directors of the Company
(excluding members of the Taylor Family and the Cole Family) as a group
beneficially owned
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700,197 shares (not including shares which may be acquired pursuant to the
exercise of stock options) of Common Stock (approximately 4.7% of the shares of
Common Stock then outstanding). Each of such executive officers and directors
of the Company has advised the Company that he or she intends to vote or direct
the vote of all shares of Common Stock over which he or she has voting control,
subject to and consistent with any fiduciary obligations in the case of shares
held as a fiduciary, for approval of (i) the Share Exchange Agreement and the
Split-Off Transactions and (ii) the amendment to the Company's Certificate of
Incorporation to effect the Name Change. The affirmative votes of the Taylor
Family, the Cole Family and the other executive officers and directors of the
Company will, collectively, be sufficient to approve the Share Exchange
Agreement and the Split-Off Transactions and the amendment to the Company's
Certificate of Incorporation to effect the Name Change, regardless of the votes
of any other stockholders.
Quorum; Abstentions and Broker Non-Votes.
The presence at the Annual Meeting, in person or by proxy, of the holders of
a majority of the shares of Common Stock outstanding on the Record Date is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in determining the presence of a quorum. Abstentions and broker non-
votes will have the same effect as votes cast against the proposals to approve
the Share Exchange Agreement and the Split-Off Transactions and to approve the
amendment to the Company's Certificate of Incorporation to effect the Name
Change. Neither abstentions nor broker non-votes will have any effect on the
proposal to elect directors.
THE SPLIT-OFF TRANSACTIONS
Pre-Closing Transactions
Formation of New Reliance. Prior to the Split-Off, the Bank will form New
Reliance, a new wholly owned subsidiary, to which the Bank will contribute (i)
its used automobile receivables business, consisting of (A) substantially all
of the assets used in its used automobile receivables business, including the
Dealer Agreements and (B) the Automobile Receivables, which will have a fair
market value of between $30,000,000 and $31,000,000; (ii) the First Cash
Component; and (iii) the Second Cash Component. The First Cash Component will
be equal to: (1) if the Stock Amount (i.e., the number of shares of Common
Stock to be exchanged by the Taylor Group for the Bank Stock) is less than
4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the amount, if
any, by which the fair market value of the Automobile Receivables exceeds
$30,000,000 plus (C) the product of $33.00 and the difference between 4,250,000
and the Stock Amount; (2) if the Stock Amount is equal to 4,250,000, cash in an
amount equal to (A) $60,000,000 minus (B) the amount, if any, by which the fair
market value of the Automobile Receivables exceeds $30,000,000; or (3) if the
Stock Amount is greater than 4,250,000, cash in an amount equal to (A)
$60,000,000 minus (B) the amount, if any, by which the fair market value of the
Automobile Receivables exceeds $30,000,000 minus (C) the product of $33.00 and
the difference between the Stock Amount and 4,250,000. The Second Cash
Component will be equal to (i) the amount of the Company's cash investment in
Alpha Capital Fund, net of all partner distributions, return of capital and
like payments, made from time to time prior to June 12, 1996 plus any
additional cash investment made by the Company in Alpha Capital Fund thereafter
if made with the Taylor Family's consent (which investment totalled $155,921 as
of September 30, 1996), plus interest on the total amount invested beginning,
as to each portion of such amount invested at different times, on the date of
such investment, at the rate of 9% per annum, compounded annually (which
interest was $10,683 as of September 30, 1996); plus (ii) the amount of the
Company's aggregate cash investments in the Mortgage Company, net of all
distributions to stockholders, return of capital and like payments, made from
time to time prior to June 12, 1996 plus any additional cash investment made by
the Company in the Mortgage Company thereafter if made with the Taylor Family's
consent (which investments totalled $1,007,000 as of September 30, 1996), plus
interest on the total amount invested at different times, on the date of such
investment, at the rate of 9% per annum, compounded annually (which interest
was
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$68,687 as of September 30, 1996). The following diagram illustrates the
structure of the Company after the formation of New Reliance:
LOGO
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Transfer of New Reliance to the Company and Merger of the Finance Company
into New Reliance. Immediately prior to the Split-Off, the Bank will distribute
all of the capital stock of New Reliance to the Company, following which the
Company will cause the Finance Company to be merged with and into New Reliance.
The surviving corporation in that merger will retain the name "Reliance
Acceptance Corporation." The distribution of the stock of New Reliance to the
Company (followed by the merger of the Finance Company into New Reliance) is
intended to qualify as a tax-free "pro rata" spin-off. Thereafter, New Reliance
will conduct directly the used automobile receivables business acquired from
the Bank and will own all of the subsidiaries previously owned by the Finance
Company. The following diagram illustrates the structure of the Company after
the transfer of New Reliance to the Company and the merger of the Finance
Company into New Reliance:
LOGO
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Formation of the New Holding Company.
Immediately prior to the Split-Off, the Company will form the New Holding
Company and transfer to it all of the Bank Stock, all of the capital stock of
the Mortgage Company and all of the Company's rights, obligations and interests
in Alpha Capital Fund, in exchange for all of the capital stock of the New
Holding Company. The following diagram illustrates the structure of the Company
after the formation of the New Holding Company:
LOGO
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Split-Off of the Bank to the Taylor Family.
On the Closing Date, the Company will transfer all of the Bank Stock to the
Taylor Group in exchange for the transfer by the Taylor Group to the Company of
the Stock Amount; provided, however, that the Stock Amount, which will not
consist of more than 4,500,000 shares or less than the greater of (i) 4,000,000
shares and (ii) all of the shares of Common Stock held by the Taylor Family
immediately prior to the Split-Off (including any shares of Common Stock owned
after the exercise of any options and shares in the Company's Employee Stock
Ownership Plan and the Company's 401(k) Plan allocated to members of the Taylor
Family), will be transferred to the Company. The Company will change its name
to Reliance Acceptance Group, Inc., to take effect upon consummation of the
Split-Off Transactions, subject to approval by the stockholders of the
amendment to the Company's Certificate of Incorporation at the Annual Meeting.
The following diagram illustrates the structure of the Company and the Bank
immediately after the Split-Off (assuming the Stock Amount equals 4,250,000
shares of Common Stock and such shares are retired by the Company):
LOGO
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THE SHARE EXCHANGE AGREEMENT
On June 12, 1996, the Company and the Taylor Family entered into the Share
Exchange Agreement, which sets forth the terms and conditions of the Split-Off
Transactions. The Share Exchange Agreement was amended and restated as of June
12, 1996. A copy of the Share Exchange Agreement, as amended and restated, is
attached hereto as Appendix A. See "Proposal No. 1--Approval of the Share
Exchange Agreement and the Split-Off Transactions--The Share Exchange
Agreement" for a summary of certain provisions of the Share Exchange Agreement,
including the following: (a) representations and covenants of the parties, (b)
conduct of business prior to the consummation of the Split-Off Transactions,
(c) conditions to closing and (d) termination.
Under the Share Exchange Agreement, the obligations of the Taylor Family to
effect the Split-Off Transactions are subject to the fulfillment or waiver of
the following conditions: (i) the representations and warranties of the Company
set forth in the Share Exchange Agreement are true in all material respects and
the Company has performed and satisfied in all material respects all covenants
and agreements required by the Share Exchange Agreement, and (ii) all action
required to be taken by or on the part of the Company or the Bank to authorize
the execution, delivery and performance of the Share Exchange Agreement and the
consummation of the Split-Off Transactions has been duly and validly taken by
the Boards of Directors of the Company and the Bank. The obligations of the
Company to effect the Split-Off Transactions are subject to the fulfillment or
waiver of the following conditions: (i) the representations and warranties of
the Taylor Family set forth in the Share Exchange Agreement are true in all
material respects and the Taylor Family has performed and satisfied all
covenants and agreements required by the Share Exchange Agreement, and (ii) all
action required to be taken by or on the part of the Taylor Family to authorize
the execution, delivery and performance of the Share Exchange Agreement and the
consummation of the Split-Off Transactions has been duly and validly taken by
the Taylor Family.
In addition, under the Share Exchange Agreement, the obligations of the
Company and the Taylor Family to effect the Split-Off Transactions are subject
to the fulfillment or waiver of additional conditions, including the following:
(i) the expiration or termination of any applicable waiting periods and the
approval of the transactions by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), (ii) the issuance of the Tax Ruling (as
defined under "--Certain Federal Income Tax Consequences") by the Internal
Revenue Service (the "IRS"), (iii) the absence of any order, injunction or
decree by any court, governmental agency, department or regulatory board
prohibiting the consummation of the Split-Off Transactions, (iv) the absence of
any statute, rule, regulation or policy which prevents or restricts the
consummation of the Split-Off Transactions, (v) the consummation of the Pre-
Closing Transactions and (vi) the approval of the Split-Off Transactions by the
holders of at least a majority of the shares of Common Stock. On September 3,
1996, the IRS issued the Tax Ruling. See "--Certain Federal Income Tax
Consequences." The Taylor Directors have applied to the Federal Reserve Board
for approval of the acquisition of the Bank and the Mortgage Company, and this
application is still pending. The approval of the Federal Reserve Board is
substantially dependent upon the Taylor Family's demonstration that it will be
able to raise additional Bank capital to allow the Bank to continue as a "well
capitalized institution" for the purposes of the relevant regulatory capital
guidelines. It is likely that, if the Federal Reserve Board approves the
application, it will do so only on the condition that the additional required
capital be raised. Accordingly, if the additional capital were not raised, the
approval of the Federal Reserve Board would be withdrawn, and the Taylor Family
would be unable to consummate the Split-Off Transactions. See "--Regulatory
Requirements."
The Company currently anticipates that all of the conditions described above
will have been satisfied, and that the Split-Off Transactions will be
consummated, no later than the first quarter of 1997. However, there can be no
assurance that these conditions will be satisfied or that they will be
satisfied by any particular date.
The Share Exchange Agreement may be terminated at any time prior to the
closing of the Split-Off Transactions by the mutual written consent of the
Taylor Family and the Company and by either the Taylor
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Family or the Company under certain circumstances described in this Proxy
Statement; provided, however, that only in the circumstances discussed below
shall either the Company or the Taylor Family be entitled to any liquidated
damages as a result of such termination. If the Share Exchange Agreement is
terminated (i) by the Company, prior to the Annual Meeting, after the Company's
receipt of another offer or proposal for the acquisition of the capital stock
or assets of, or a merger or combination with, the Company, the Bank or the
Finance Company or for a similar transaction (in any case, an "Acquisition
Proposal"), and the determination by the Company's Board of Directors that such
termination is required for its discharge of its fiduciary duties, or (ii) by
the Taylor Family after the Board withdraws or adversely modifies its approval
of, or its recommendation that stockholders approve, the Share Exchange
Agreement and the Split-Off Transactions or the Company enters or resolves to
enter into an agreement providing for an Acquisition Proposal, then the Company
will be obligated to pay the Taylor Family an amount equal to (a) the Taylor
Family's out-of-pocket expenses paid to lawyers, accountants, investment
bankers or other experts, plus (b) three percent of the fair market value of
the Acquisition Proposal. If the Share Exchange Agreement is terminated by the
Taylor Family due to a material, uncured breach by the Company of the Share
Exchange Agreement, the Company will be obligated to pay $15,000,000 to the
Taylor Family. If the Share Exchange Agreement is terminated by the Company due
to a Triggering Termination (as defined below), the Taylor Family will be
obligated to pay $15,000,000 to the Company, which amount will be subject to
reduction as described in this Proxy Statement. A "Triggering Termination"
means termination of the Share Exchange Agreement due to any of the following
reasons: (i) the approval of any applicable governmental authority has been
denied or contains terms or conditions that are materially burdensome; (ii) the
Closing has not occurred prior to June 30, 1997 due to (A) the failure to
obtain new financing for the Bank, or (B) the failure to obtain the approval of
any applicable governmental authority (other than because of a failure to
comply with the Community Reinvestment Act or fair lending statutes). Neither
the Taylor Family nor the Company will be entitled to any liquidated damages if
the Share Exchange Agreement is terminated solely because the stockholders do
not approve the Share Exchange Agreement and the Split-Off Transactions at the
Annual Meeting.
ALL STOCKHOLDERS OF THE COMPANY ARE URGED TO READ THE SHARE EXCHANGE
AGREEMENT, AS AMENDED AND RESTATED, IN ITS ENTIRETY.
THE STOCK REPURCHASE
Although no decision has been made, after consummation of the Split-Off
Transactions, the Company may repurchase from its then existing stockholders
outstanding shares of Common Stock (the "Stock Repurchase"). The Company would
fund the Stock Repurchase with some or all of the Cash Component that it
receives from the Bank in the Split-Off Transactions, provided that the Company
does not expect to expend more than $60,000,000 for the Stock Repurchase, if
the Stock Repurchase is effected. If commenced, it is possible that the Stock
Repurchase may be effected through one or more tender offers, open market
purchases, private purchases or otherwise. Alternatively, the Company may
utilize some of the Cash Component to reduce existing debt, buy out
compensatory stock options or pay dividends. To the extent cash is utilized to
reduce existing debt, buy out compensatory stock options or pay dividends, the
amount of cash available for the Stock Repurchase would be reduced.
The Stock Repurchase would only be effected, if at all, after consummation of
the Split-Off Transactions. After consummation of the Split-Off Transactions,
the Company may determine not to effect the Stock Repurchase or any of the
other transactions described in the preceding paragraph. Consequently,
regardless of whether the Split-Off Transactions are consummated, there can be
no assurance as to when, if ever, the Stock Repurchase or any of such other
transactions will be consummated or, if effected, the size, manner or duration
of such Stock Repurchase or other transactions. Due to its contingent nature,
the Stock Repurchase is not reflected in the pro forma financial statements
included herein.
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THE COMPANY AFTER THE SPLIT-OFF TRANSACTIONS
Business of the Company After the Split-Off Transactions.
The Split-Off Transactions, if approved and consummated, will effect a
fundamental change in the nature of the Company's business. The Company will
cease its traditional commercial and consumer banking business, which has
historically provided the substantial majority of the Company's revenues and
income. The Company will retain the consumer finance business of the Finance
Company, which commenced operations in January 1993, and the Bank's used
automobile receivables business, which commenced operations in 1982. After the
Split-Off, the Company's business will focus almost entirely on the automobile
finance market. See "Risk Factors--Loss of Banking Operations which have
Historically Accounted for the Substantial Majority of the Company's Earnings
and Comprise Over 80% of the Company's Assets."
Management of the Company After the Split-Off Transactions.
Two of the directors nominated for election at the Annual Meeting, Bruce W.
Taylor and Richard W. Tinberg, will resign from the Board upon consummation of
the Split-Off Transactions. At such time, Jeffrey W. Taylor, Sidney J Taylor,
Melvin E. Pearl and Adelyn Dougherty will also resign from the Board and Sidney
J Taylor and Jeffrey W. Taylor will resign from the Board of Directors of the
Finance Company. Furthermore, Jeffrey W. Taylor will resign as Chairman and
Chief Executive Officer of the Company, Bruce W. Taylor will resign as
President of the Company and John Christopher Alstrin will resign as Chief
Financial Officer of the Company.
After the Split-Off, Thomas L. Barlow, President and Chief Executive Officer
of the Finance Company, Howard B. Silverman, Chairman of the Finance Company,
and Michael D. Bernick, Chief Financial Officer of the Finance Company, are
expected to become the principal executive officers of the Company. The Company
has entered into employment agreements with Messrs. Barlow and Silverman
providing that, on the Closing Date of the Share Exchange Agreement, Mr. Barlow
will become President and Chief Executive Officer of the Company and Mr.
Silverman will become Chairman of the Board of Directors of the Company. In
addition, the following directors are expected to continue to serve as
directors of the Company after the Split-Off: Irwin Cole, Dean Griffith, Solway
F. Firestone, Lori Cole and (if elected at the Annual Meeting) Howard B.
Silverman, William S. Race and Ross J. Mangano. It is also expected that Thomas
L. Barlow will be elected by the Board to serve as a director of the Company
following the consummation of the Split-Off Transactions. See "Proposal No. 1--
Approval of the Share Exchange Agreement and the Split-Off Transactions--
Interests of Certain Persons in the Share Exchange Agreement" and "Resignations
of Directors and Executive Officers."
ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will be asked to consider and vote upon a
proposal to elect the following five Class II directors to serve for a term of
three years or until their successors have been elected or qualified: Bruce W.
Taylor, Howard B. Silverman, William S. Race, Ross J. Mangano and Richard W.
Tinberg. Two of the nominees, Bruce W. Taylor and Richard W. Tinberg, if
elected, will resign from the Board upon consummation of the Split-Off
Transactions.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors has unanimously approved the Share Exchange Agreement
and the Split-Off Transactions pursuant thereto and unanimously recommends that
the stockholders of the Company vote FOR the Share Exchange Agreement and the
Split-Off Transactions. The Board of Directors also unanimously recommends that
stockholders vote FOR the amendment to the Company's Certificate of
Incorporation to effect the Name Change and FOR the election of the five
nominees named in this Proxy Statement to serve as Class II directors of the
Company.
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OPINIONS OF FINANCIAL ADVISORS
The Board of Directors has received opinions from The Chicago Corporation
("Chicago Corp.") and Sandler O'Neill Corporate Strategies, a division of
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill" and, together with Chicago
Corp., the "Financial Advisors"), each dated June 12, 1996, and each stating
that, as of that date and on the basis of and subject to the assumptions,
limitations and other matters set forth therein, the consideration to be
received by the Company pursuant to the Share Exchange Agreement is fair, from
a financial point of view, to the non-Taylor Family stockholders of the
Company. The opinion of Chicago Corp. (the "Chicago Opinion"), which sets forth
the assumptions made, the matters considered and the limits on the review
undertaken by Chicago Corp., is attached as Appendix C to this Proxy Statement.
The opinion of Sandler O'Neill (the "Sandler Opinion"), which sets forth the
assumptions made, the matters considered and the limits on the review
undertaken by Sandler O'Neill, is attached as Appendix D to this Proxy
Statement. The Chicago Opinion and the Sandler Opinion should be read in their
entirety.
ACCOUNTING TREATMENT
The Split-Off represents a non-reciprocal transfer of non-monetary assets of
the Company and will be accounted for based upon the fair value of the non-
monetary assets distributed. An accounting gain or loss will be recognized by
the Company at the date of the Split-Off to the extent the fair value of the
Bank exceeds or is less than the Company's basis in the Bank. The Company
currently estimates that it will recognize a gain of $78,800,000.
As of June 12, 1996, the Company's banking segment, consisting of the Bank
and the Mortgage Company, qualifies as discontinued operations as defined in
Accounting Principles Board Opinion No. 30 ("APB 30"), and financial statements
for all subsequent periods prior to the Split-Off the Company will reflect the
banking segment as discontinued operations. Financial statements for prior
periods that include results of operations prior to June 12, 1996 have been
reclassified to disclose the results of operations of the disposed segment,
less applicable income taxes, as a separate component of income.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
There will be no direct U.S. federal income tax consequences to non-Taylor
Group stockholders of the Company as a result of the Split-Off Transactions.
On September 3, 1996, the Company received from the IRS a tax ruling (the
"Tax Ruling") to the effect that the Split-Off will be treated as a tax-free
transaction under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"). Pursuant to the Tax Ruling, for U.S. federal income tax purposes:
(i) no gain or loss will be recognized by the Company upon the exchange of the
capital stock of the New Holding Company for Common Stock held by the Taylor
Group, and (ii) no gain or loss will be recognized by (and no amount will be
included in the income of) the Taylor Group upon their receipt of the capital
stock of the New Holding Company in exchange for the Common Stock owned by
them. The Tax Ruling was issued based upon certain factual representations and
assumptions which if incorrect or untrue in any material respect may invalidate
the Tax Ruling.
There will be no material U.S. federal income tax consequences to the Company
as a result of the Pre-Closing Transactions.
APPRAISAL RIGHTS
Stockholders of the Company who dissent from the Split-Off Transactions will
not be entitled to rights of appraisal under Section 262 of the Delaware
General Corporation Law (the "DGCL").
13
<PAGE>
REGULATORY REQUIREMENTS
The Split-Off Transactions are subject to approval by the Federal Reserve
Board under the Bank Holding Company Act ("BHCA"). On August 30, 1996, the
Taylor Directors submitted an application to the Federal Reserve Board for
approval of the transaction and, on September 13, 1996, the Federal Reserve
Board requested additional information. The Taylor Directors filed the
additional information in response to this request and on September 26, 1996
were informed by letter that the application had been accepted as
informationally complete and was being processed by the Federal Reserve Bank of
Chicago under delegated authority. The Taylor Directors were also informed
that, in accordance with regulations, the application was forwarded to the
State of Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation for comment, and that the U.S. Department of Justice had
also been notified.
Regulations under the BHCA provide that actions processed under delegated
authority normally will be acted upon within a 30-calendar day period after
acceptance, although the applicable Federal Reserve Bank may at any time during
that period determine to refer the application to the Federal Reserve Board, in
which case the processing of the application could be extended an additional 30
days or longer. Assuming the application is to be acted upon under delegated
authority, the Federal Reserve Bank of Chicago should act upon the Taylor
Director's application by October 26, 1996. If the application is approved, the
Federal Reserve Board is required to immediately notify the U.S. Department of
Justice. In accordance with BHCA requirements, the Split-Off Transactions may
not be consummated until 15 calendar days after receipt of this approval,
assuming no objection is raised by the U.S. Department of Justice.
The Taylor Family intends to raise additional Bank capital to adequately
capitalize the Bank to allow it to continue as a "well capitalized institution"
for the purpose of the relevant regulatory capital guidelines. It is likely
that, if the Federal Reserve Board approves the application, it will do so only
on the condition that the additional required capital will be raised.
Accordingly, if the additional capital were not raised, the approval of the
Federal Reserve Board would be withdrawn and the Taylor Family would be unable
to consummate the Split-Off Transactions. Although the Taylor Directors have
agreed to use reasonable best efforts to obtain financing sufficient to satisfy
these requirements, there can be no assurance that such financing will be
obtained.
MARKET PRICE AND DIVIDEND DATA
The following table sets forth the high and low sales prices of the Common
Stock, as reported on the Nasdaq National Market, and the dividends paid per
share for the fiscal periods indicated. The Company completed its initial
public offering in May 1994.
<TABLE>
<CAPTION>
1994
-----------------------
STOCK PRICES
------------- DIVIDENDS
HIGH LOW PAID
------ ------ ---------
<S> <C> <C> <C>
QUARTER
First............................................. -- -- $.03125
Second*........................................... 14 1/4 13 1/4 $.03125
Third............................................. 19 1/4 13 1/4 $.05
Fourth............................................ 22 7/8 17 1/2 $.05
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
1995
-----------------------
STOCK PRICES
------------- DIVIDENDS
HIGH LOW PAID
------ ------ ---------
<S> <C> <C> <C>
QUARTER
First............................................. 21 16 1/2 $.07
Second............................................ 20 3/4 16 1/2 $.07
Third............................................. 24 1/4 17 $.07
Fourth............................................ 31 1/4 23 1/4 $.07
<CAPTION>
1996
-----------------------
STOCK PRICES
------------- DIVIDENDS
HIGH LOW PAID
------ ------ ---------
<S> <C> <C> <C>
QUARTER
First............................................. 29 7/8 22 $0.09
Second............................................ 31 1/4 23 $0.09
Third............................................. 30 3/4 26 1/4 **
Fourth (through October 8, 1996).................. 31 1/4 30 **
</TABLE>
- - -------
*Trading of the Common Stock on the Nasdaq National Market commenced on May
28, 1994.
** As of October 8, 1996, the Company had not yet paid dividends for the third
or fourth quarters of 1996.
On June 12, 1996, the last trading day before the public announcement of the
proposed Split-Off Transactions, and on October 8, 1996, the closing sales
prices of the Common Stock, as reported on the Nasdaq National Market, were
$25.25 and $31.00, respectively.
SELECTED FINANCIAL DATA
The historical selected financial data for and as of the end of each of the
fiscal years 1991 through 1995 and the six months ended June 30, 1996 were
derived from the consolidated financial statements of the Company restated to
reflect the banking segment, consisting of the Bank and the Mortgage Company,
as discontinued operations. The pro forma selected financial data as of June
30, 1996 and December 31, 1995, and for the periods then ended, present the
restated historical results of the Company, adjusted to reflect the exchange of
cash and shares to effect the Split-Off, and are based on the pro forma
consolidated financial statements included in this Proxy Statement. This data
should be read in conjunction with the related consolidated financial
statements, and the notes thereto, included in the Company's Current Report on
Form 8-K dated October 10, 1996 and the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
15
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX AS OF AND FOR THE YEARS ENDED DECEMBER, 31
MONTH PERIOD ENDED -------------------------------------------------------------------
JUNE 30, 1996 PRO FORMA HISTORICAL(1)
--------------------- ---------- --------------------------------------------------------
PRO FORMA HISTORICAL 1995 1995 1994 1993(2) 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Interest and fee
income................ $ 34,348 $ 32,937 $ 39,230 $ 36,419 $ 14,199 $ 2,109 -- --
Interest expense....... 6,038 9,020 5,759 11,594 3,314 1,892 -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income.... 28,310 23,917 33,471 24,825 10,885 217 -- --
Provision for credit
losses................ 181 -- 298 -- (363) 375 -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
credit losses......... 28,129 23,917 33,173 24,825 11,248 (158) -- --
Other income........... 707 707 1,250 1,250 509 110 -- --
Operating expenses..... 14,019 13,672 15,315 14,574 6,352 1,625 -- --
Income tax provision... 5,702 4,233 7,330 4,439 2,133 (551) -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income from
continuing operations. 9,115 6,719 11,778 7,062 3,272 (1,122) -- --
Income from
discontinued
operations............ -- 8,219 -- 16,610 14,487 12,355 8,245 6,462
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income............. $ 9,115 $ 14,938 $ 11,778 $ 23,672 $ 17,759 $ 11,233 $ 8,245 $ 6,462
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share from
continuing operations. $ 0.81 $ 0.44 $ 1.06 $ 0.47 $ 0.23 $ (0.09) -- --
Earnings per share from
discontinued
operations............ -- $ 0.53 -- $ 1.09 $ 1.03 $ 1.00 $ 0.67 $ 0.61
Earnings per share..... $ 0.81 $ 0.97 $ 1.06 $ 1.56 $ 1.26 $ 0.91 $ 0.67 $ 0.61
Weighted average number
of shares outstanding. 11,195,707 15,342,155 11,070,700 15,222,426 14,077,776 12,360,560 12,217,680 10,627,480
Cash dividends declared
per common share(3)... $ 0.18 $ 0.28 $ 0.18 $ 0.13 $ 0.13 --
Cash dividends declared
per Class A common
share................. -- -- $ 0.13 $ 0.13 $ 0.13 $ 0.13
BALANCE SHEET DATA
Cash and cash
equivalents........... $ 1,453 $ 1,453 $ 4,829 $ 4,829 $ 5,630 $ 406 -- --
Finance receivables,
net(4)................ 348,547 318,547 261,726 231,726 93,653 18,723 -- --
Nonrefundable dealer
discounts and
allowance for credit
losses................ 12,255 12,255 12,655 12,655 5,351 1,532 -- --
Net assets of
discontinued
operations............ -- 143,520 -- 138,653 125,838 104,743 80,191 73,430
Total assets........... 351,463 465,533 263,359 372,562 222,435 122,930 80,191 73,430
Commercial paper
borrowings............ 184,129 184,129 117,871 127,268 -- -- -- --
Long-term debt......... 33,467 103,668 25,000 82,657 83,343 31,679 -- --
Stockholders' equity... 122,532 169,088 109,787 154,617 134,317 90,102 80,191 73,430
Book value per
share(5).............. $ 11.38 $ 11.50 $ 10.36 $ 10.61 $ 9.26 $ 7.48 $ 6.62 $ 6.06
Net tangible book value
per share(5).......... $ 11.38 $ 11.13 $ 10.36 $ 10.23 $ 8.87 $ 6.98 $ 6.17 $ 5.56
</TABLE>
- - --------
(1) The historical financial data has been restated to reflect the banking
segment as a discontinued operation effective as of June 12, 1996.
(2) The Finance Company commenced operations January 1, 1993.
(3) Cash dividends presented are historical dividends declared per common
share. Based on the reduced number of shares outstanding on a pro forma
basis, assuming the surrender of 4,250,000 shares by the Taylor Group, the
Company would have saved approximately $700,000 in dividends paid out for
the first six months of 1996 and $1,100,000 for 1995.
(4) Net of unearned finance charges, insurance commissions and processing fees.
(5) Computed based upon the pro forma number of outstanding shares of Common
Stock, Class A Common Stock and other series of common stock outstanding at
the end of each period.
16
<PAGE>
RISK FACTORS
In addition to the other information set forth in this Proxy Statement,
stockholders should carefully consider the following factors before acting on
the proposal to approve the Share Exchange Agreement and the Split-Off
Transactions.
LOSS OF BANKING OPERATIONS WHICH HAVE HISTORICALLY ACCOUNTED FOR THE
SUBSTANTIAL MAJORITY OF THE COMPANY'S EARNINGS AND COMPRISE OVER 80% OF THE
COMPANY'S ASSETS
The Split-Off Transactions, if approved and consummated, will effect a
fundamental change in the nature of the Company's business. The Bank, with its
commercial and consumer banking business, will no longer be part of the
Company, and New Reliance will be the sole directly owned operating subsidiary
of the Company. The business of New Reliance will consist primarily of the
consumer finance business of the Finance Company and also of certain related
used automobile finance operations of the Bank. Consequently, after the Split-
Off, the Company's business will focus almost entirely on the automobile
finance market. As a result, the success of the Company for the foreseeable
future will depend almost entirely upon the financial performance and growth
of this automobile finance business. See "The Company After the Split-Off
Transactions--Business of the Company after the Split-Off Transactions."
Historically, the substantial majority of the Company's earnings have been
derived from operations of the Bank. In 1993, 1994, 1995 and the first six
months of 1996, earnings of the Bank were $12.7 million, $15.9 million, $18.2
million and $9.3 million, respectively, compared to earnings of the Finance
Company of $198,000, $4.3 million, $9.6 million and $8.0 million,
respectively. Additionally, the Bank had total assets of approximately $1.77
billion and $1.85 billion as of December 31, 1995 and June 30, 1996,
respectively, compared to total assets of $230 million and $318 million for
the Finance Company. Dividends paid by the Bank to the Company have been used
by the Company to fund the growth of the Finance Company, and the earnings
strength and assets of the Bank have supported the Company's ability to
provide credit support to the Finance Company. See "--Need for Funds; Possible
Downgrade of Debt Rating; Potential Increase in Cost of Capital."
MANAGEMENT OF THE COMPANY
The Company's future success and achievement of its growth plans will depend
in large part upon the efforts of Thomas L. Barlow, currently President and
Chief Executive Officer of the Finance Company, Howard B. Silverman, currently
Chairman of the Finance Company, and Michael D. Bernick, currently Chief
Financial Officer of the Finance Company, who are expected to become the
principal executive officers of the Company following the Split-Off. Each of
Messrs. Barlow and Silverman has an employment agreement with the Company, and
the Company has issued stock options to Messrs. Barlow, Silverman and Bernick
which vest only upon their continued employment with the Company. The Company
maintains "key man" life insurance on Mr. Barlow in the amount of $5,000,000,
but does not maintain "key man" life insurance on any other officers. The
Company's continued growth and profitability will also depend upon its ability
to attract and retain other skilled managerial personnel. See "The Company
after the Split-Off Transactions--Management of the Company after the Split-
Off Transactions" and "Resignations of Directors and Executive Officers."
CERTAIN RELATIONSHIPS
The Taylor Family has played a very important role on the Board and in the
management of the Company. Members of the Taylor Family collectively
beneficially own approximately 25% of the outstanding Common Stock. In
addition, Jeffrey W. Taylor is the Chairman of the Board and Chief Executive
Officer of the Company, Bruce W. Taylor is the President of the Company and
the Chief Executive Officer of the Bank and Sidney J Taylor is the Chairman of
the Company's Executive Committee. Sidney J Taylor is one of the co-founders
of the Bank. Jeffrey W. Taylor and Bruce W. Taylor are members of the
Executive Committee and both were members of the Second Special Committee
which, among other things, initiated the Company's exploration of its
strategic options.
17
<PAGE>
The interests of the Taylor Family are different from the interests of the
Company and the remaining stockholders with respect to the Split-Off
Transactions. Consequently, the Board retained independent financial and legal
advisors and negotiated with the Taylor Family at arm's length. The Board
considered and approved the Share Exchange Agreement without the participation
of members of the Taylor Family.
CERTAIN TAX CONSIDERATIONS
The Tax Ruling to the effect that the Split-Off will be treated as a tax-
free transaction under Section 355 of the Code was issued on September 3,
1996. Although the Tax Ruling will generally be binding upon the IRS, the Tax
Ruling was based upon certain factual representations and assumptions. If any
such factual representations or assumptions are incorrect or untrue in any
material respect, the Tax Ruling may be invalidated. If the Split-Off were not
to qualify under Section 355 of the Code, then the Company would be required
to recognize a gain for U.S. federal income tax purposes, which could have a
material adverse effect on the results of operations of the Company. In
addition, members of the Taylor Group could be required to recognize
substantial gain. See "Proposal No. 1--Approval of the Share Exchange
Agreement and the Split-Off Transactions--Certain U.S. Federal Income Tax
Considerations."
NEED FOR FUNDS; POSSIBLE DOWNGRADE OF DEBT RATINGS; POTENTIAL INCREASE IN COST
OF CAPITAL
The Finance Company's success and growth depends upon its continued ability
to obtain new funds to finance purchases of automobile loans. The Finance
Company has financed its operations to date primarily through intercompany
loans, bank loans and commercial paper sources. After the Split-Off, the
Company's current sources of funds may not be adequate to fully support the
Company's growth plans. Consequently, the Company is actively pursuing new
sources of funds, such as securitizations of automobile loans or public or
private offerings of debt securities.
As a subsidiary of a bank holding company, the Finance Company is subject to
many regulatory restrictions that hinder the ability of the Finance Company to
compete with non-bank holding company-owned and independent finance companies
and that management believes reduce the Finance Company's profitability. As a
result of these regulatory restrictions, among other things, the Finance
Company currently lacks the flexibility to pursue the most appropriate funding
strategies to support its operations. In particular, current regulations limit
the ability of bank holding company-owned finance companies to maximize the
use of commercial paper to fund their operations, the principal method of
funding for non-bank holding company-owned and independent finance companies.
The rate of interest charged on commercial paper is significantly lower than
the cost of financing through other sources currently available to the Finance
Company. The Split-Off will free the Company's consumer finance operations
from these regulatory burdens. There can be no assurance, however, that the
Finance Company will be able to realize the potential benefits of greater
funding flexibility resulting from relief from Federal Reserve Board
regulations. Citing its wish to evaluate the effect of the Split-Off
Transactions, Duff & Phelps Credit Rating Co. has placed the Company's
subordinated debt rating and the Finance Company's commercial paper rating on
watch for a possible downgrade. In addition, Fitch Investor Services has
placed the Finance Company's commercial paper rating on FitchAlert with an
evolving status. Any downgrading of the Company's credit rating could have the
effect of increasing the Company's borrowing rates and the interest rates on
the Finance Company's commercial paper and could negatively impact the
marketability of the Finance Company's commercial paper. Additionally, the
Company's relatively short-term operating history and relatively smaller size,
after the Split-Off, as compared to prior thereto, may negatively affect the
Company's ability to access the capital markets. Any increase in the Company's
or the Finance Company's cost of capital would have a negative impact upon the
Company's results of operations and could detrimentally affect the Company's
ability to pursue its growth plans.
The Company is actively pursuing securitizations of pools of its subprime
automobile loans to fund operations,with an initial securitization targeted
for the fourth quarter of 1996. The Finance Company has not securitized
subprime automobile loans to date, and there is no assurance that it will
attempt to do so or be able
18
<PAGE>
to do so on favorable terms. The Company's access to the asset backed
securities markets will be dependent in part upon its financial condition and
results of operations, which could be affected negatively by cyclical swings
or other adverse developments in the demand for or collectibility of subprime
automobile receivables. Market and other considerations, including the
conformity of automobile receivables contracts to rating agency requirements,
could also affect the Company's ability to successfully access the
securitization market.
UNCERTAINTY AND VOLATILITY OF STOCK PRICE
There can be no certainty as to the market price of Common Stock immediately
after the Split-Off or as to the price at which the Common Stock will trade in
the future. The trading value of each share of Common Stock after the Split-
Off could be influenced by many factors, including, without limitation, the
terms and conditions of the Split-Off Transactions, the growth and expansion
of the Company's subprime automobile finance business, market expectations for
the prospects of the Company, competition in the subprime automobile finance
industry, and general business and economic conditions. There can be no
assurance as to the impact of the separation of the Bank from the Finance
Company on the price of the Common Stock.
The Company believes factors such as quarterly variations in operating
results, major public announcements by the Company or its competitors, changes
in earnings estimates by analysts, changes in accounting principles or other
factors may cause the market price of the Common Stock to fluctuate, perhaps
substantially. The market price for the Common Stock may also be affected by
the Company's ability to meet analysts' expectations, and any failure to meet
such expectations, even if minor, could have a material adverse effect on the
market price of the Common Stock. In addition, the stock market has
experienced significant price and volume fluctuations that have particularly
affected the market prices of equity securities of many companies and that
have often been unrelated to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of the
Common Stock. After the Split-Off, there may be an increase in volatility in
the Company's stock price, because of, among other things, the dependence of
the Company on a single business segment.
REGULATORY MATTERS; ADDITIONAL CAPITAL REQUIREMENTS OF THE BANK
The consummation of the Split-Off Transactions is dependent upon the
approval of the Federal Reserve Board. There can be no assurance as to when,
or if, such approval will be granted, particularly because the Bank will
require additional capital upon the consummation of the Split-Off Transactions
in order to continue as a "well capitalized institution" for the purposes of
the relevant regulatory capital guidelines. It is likely that, if the Federal
Reserve Board approves the application, it will do so only on the condition
that the additional required capital be raised. Accordingly, if the additional
capital were not raised, the approval of the Federal Reserve Board would be
withdrawn and the Taylor Family would be unable to consummate the Split-Off
Transactions. Although under the Share Exchange Agreement the Taylor Directors
have agreed to use reasonable best efforts to obtain financing sufficient to
satisfy these requirements, there can be no assurance that such financing will
be obtained. See "Proposal No. 1--Approval of the Share Exchange Agreement and
the Split-Off Transactions--Regulatory Requirements."
RISKS REGARDING NON-CONSUMMATION OF THE SPLIT-OFF TRANSACTIONS
The Split-Off Transactions are intended to maximize stockholder value and to
resolve substantial disagreements between members of the Taylor Family and
members of the Cole Family and certain other directors regarding the strategic
direction of the Company and maximization of stockholder value. If the Split-
Off Transactions are not consummated, the Board will need to consider
alternative means of addressing these conflicts. There can be no assurance
that the Board will be able to address these conflicts in a manner that will
not have an adverse effect on the business, results of operations or financial
condition of the Company or on the market price of the Common Stock. See
"Proposal No. 1--Approval of the Share Exchange Agreement and the Split-Off
Transactions--Background of the Split-Off Transactions" and "--Reasons for the
Split-Off Transactions."
19
<PAGE>
NO ASSURANCE OF ACQUISITIONS OR EXPANSION
The Company intends to continue the Finance Company's strategy of expanding
its operations in existing markets and in new markets within the United States
as a means of increasing its volume of finance receivables and related finance
income. There can be no assurance, however, that the Company will continue to
be able to find expansion opportunities and to continue to successfully
implement its expansion strategy. See "--Need for Funds; Possible Downgrade of
Debt Rating; Potential Increase in Cost of Capital."
CONCENTRATION IN AUTOMOBILE LOANS
The Finance Company's gross finance receivables portfolio at September 30,
1996 consisted of automobile sales finance contracts, most of which were
collateralized by used automobiles ranging in age from current year models to
those that are five years old. After the Split-Off, the Company's business
will also include the Bank's used automobile receivables business: purchasing
sales finance contracts collateralized by used automobiles. The Company's
success and ability to expand after the Split-Off will be substantially
dependent upon sales of used and, to a much lesser extent, new automobiles in
those areas in which the Company operates and into which the Company intends
to expand and upon the demand by consumers for financing in connection with
their purchases of such automobiles.
LIMITED OPERATING HISTORY
The operations of the Finance Company, which will constitute the core of the
Company's business after the Split-Off, commenced in January 1993. The Bank
commenced its used automobile receivables business, which will be transferred
to New Reliance, in 1982. In contrast, the Bank, which will be separated from
the Company pursuant to the Split-Off, commenced operations over 60 years ago
in Chicago as Main State Bank. After the Split-Off, the entire business of the
Company will be of relatively recent origin, and the Company's automobile
finance business will lose the benefits of being associated with the much more
established, traditional banking business of the Bank. Although the results of
operations for the Finance Company have met or exceeded management's
expectations to date, management has relatively limited operating results on
which to base any expectations regarding future performance.
RISK OF DEFAULT ON SALES FINANCE CONTRACTS
While the Finance Company has attempted to employ prudent credit standards
in purchasing sales finance contracts, there is an inherent risk that a
portion of such sales finance contracts will become defaulted contracts or be
subject to certain claims or defenses which automobile buyers may assert
against automobile dealers or the Finance Company as the holder of the
contracts. The Finance Company now faces, and after the Split-Off New Reliance
will face, the risk that if high unemployment or adverse economic developments
occur in one or more of the areas serviced by the Finance Company or New
Reliance, a large number of sales finance contracts may become defaulted.
In addition, the Finance Company's business has focused primarily on the
subprime automobile finance market. The subprime automobile finance market is
comprised of customers who are deemed to be relatively high credit risks due
to various factors, including, among other things, the manner in which they
have handled previous credit, the absence or limited extent of their prior
credit history or their limited financial resources. Consequently, the
automobile loans acquired by the Finance Company, relative to prime consumer
credit contracts, bear finance charges at a higher rate but also involve a
higher probability of default and greater servicing costs. There can be no
assurance that the credit performance of its customers will be maintained,
that the Finance Company's systems and controls will continue to be adequate
or that the rate of future defaults and/or losses will be consistent with
prior experience or at levels that will maintain the Company's profitability.
In light of these risks, the Finance Company currently maintains a reserve
that is established by purchasing sales finance contracts from the dealers at
a discount and setting aside a portion of such discounts against which
20
<PAGE>
losses are charged. Because the Finance Company has limited operating results
on which to base any expectations regarding future credit losses, there can be
no assurance that the dealer reserves will prove sufficient to cover the
actual losses experienced by the Finance Company.
ABILITY OF THE COMPANY TO CONTINUE ITS GROWTH STRATEGY
The Finance Company's growth strategy is principally dependent upon its
ability to purchase an increased number of automobile loans meeting its
underwriting standards. The Finance Company's ability to increase its
purchases of loans will depend in large part upon: (i) the attractiveness of
its financing program to automobile dealers; (ii) its ability to attract and
retain qualified employees; and (iii) its ability to successfully establish
and maintain relationships with automobile dealers, both in states where the
Finance Company is currently active and in additional states. After the
consummation of the Split-Off Transactions, the Company's ability to maintain
or improve its profitability will be dependent upon, among other things, its
ability to (i) maintain appropriate procedures, policies and systems to ensure
that it purchases loans with an acceptable level of credit risk; (ii) locate
sufficient financing, with acceptable terms, to fund the purchase of
automobile loans; (iii) manage the costs associated with hiring additional
personnel and opening additional branch offices; and (iv) continue operating
in competitive, economic, regulatory and judicial environments which are
conducive to the Company's business activities. Changes in the Company's
ability to obtain, maintain or enhance any or all of these factors or to
successfully implement its growth strategy for the Finance Company could have
a material adverse effect on the Company's operations and profitability.
RELATIONSHIPS WITH DEALERS
The success and growth of the Company's business depends, in large part,
upon its ability to establish and maintain relationships with automobile
dealers. While the Company believes that the Finance Company has been
successful in developing and maintaining relationships with automobile
dealers, these relationships are non-exclusive and there can be no assurance
that (i) the Company will be successful in maintaining such relationships or
increasing the number of automobile dealers with which it does business or
(ii) that its existing automobile dealer base will continue to generate a
volume of automobile loans comparable to the volume of such loans historically
generated by such dealers.
COMPETITION
The business of financing automobiles is highly competitive. Principal
competitors in the subprime automobile finance business include similar
finance companies which purchase sales finance contracts relating to used
automobiles. Other potential competitors include well-established financial
institutions, such as banks, savings and loans, small loan companies, credit
unions, leasing companies and captive finance companies owned by automobile
manufacturers. Many of these competitors have greater financial, technical and
marketing resources than the Company has now or will have after the Split-Off.
The Company does not possess any internal or external studies regarding its
competitors or the Company's competitive position in the subprime automobile
finance market. However, according to publicly available information from
financial analysts, the subprime automobile finance market is believed to be a
$70 billion market, with no one company having more than a 2% market share.
CONTROL BY CURRENT STOCKHOLDERS
As of September 30, 1996, the Cole Family and the Taylor Family each
beneficially owned approximately 25% of the shares of Common Stock then
outstanding. After giving effect to the Split-Off Transactions, the Cole
Family will beneficially own or control approximately 35% of the outstanding
shares of Common Stock (assuming the Stock Amount equals 4,250,000 shares of
Common Stock and such shares are retired by the Company). As a result, the
Cole Family may be able effectively to control virtually all matters requiring
approval by the stockholders of the Company, including the amendment of the
Company's Certificate of Incorporation and Bylaws, the approval of mergers or
similar transactions and the election of all directors. See "Security
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Ownership of Management and Certain Beneficial Owners." In addition, certain
provisions of the Company's Certificate of Incorporation and Bylaws could have
the effect of delaying or preventing any change in control of the Company.
Conversely, a decision by the Cole Family to sell or liquidate their position
in the Company, for whatever reason, would have the effect of altering the
balance of effective stockholder control of the Company, and could have the
effect of altering the composition of the Board of Directors.
NO ASSURANCE OF DIVIDENDS
Since 1994, the Company has paid quarterly cash dividends to its
stockholders in the amounts shown in the table under "Summary--Market Price
Data." Although the Company currently anticipates continuing the Company's
policy of paying regular cash dividends, there can be no assurance that after
the Split-Off is consummated, the Company will continue to pay dividends or,
if dividends are paid by the Company, that the amounts of such dividends will
be comparable to the dividends historically paid by the Company.
VESTING OF OPTIONS
As a result of the Split-Off Transactions, all outstanding options to
purchase Common Stock under the Company's 1991 Stock Option Plan (the "1991
Plan") will automatically become vested and, therefore, will be exercisable in
full after the closing of the Split-Off Transactions. The Compensation
Committee of the Board is considering proposals to accelerate the date for
vesting of options under the 1991 Plan in order to facilitate more orderly
sales of the shares of Common Stock issuable upon exercise of such options.
Options held by persons who will no longer be employees of the Company as a
result of the Split-Off Transactions (i.e., employees who will be remaining
with the Bank) will expire unless exercised within 60 days after the
consummation of the Split-Off. As of September 30, 1996, options to purchase
1,418,738 shares of Common Stock were outstanding under the 1991 Plan,
including options to purchase 1,030,527 shares of Common Stock held by
employees who are expected to remain with the Bank after the Split-Off. The
shares issuable upon exercise of these options have been registered by the
Company under the Securities Act of 1933, as amended (the "Act"), and, after
issuance, will be freely tradeable in the public markets without restriction
(except, in the case of affiliates of the Company, subject to the volume and
other restrictions, but not the holding period requirement, imposed by Rule
144 under the Act). The sale of a substantial number of shares of Common
Stock, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock. See "Proposal No. 1--Approval
of The Share Exchange Agreement and the Split-Off Transactions--Interests of
Certain Persons in the Split-Off Transactions."
FORWARD-LOOKING INFORMATION
This Proxy Statement contains, and incorporates by reference, certain
forward-looking statements that are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. Such forward-looking statements are subject to
the safe harbor created by the Private Securities Litigation Reform Act of
1996. When used in this document and in the documents incorporated herein by
reference, the words "anticipate," "believe," "estimate," "expect" and similar
expressions, as they relate to the Company, the Finance Company, the Bank, New
Reliance or the New Holding Company or their respective management, are
intended to identify such forward-looking statements. Such statements reflect
the current views of the Company with respect to future events and are subject
to certain risks, uncertainties and assumptions, including the factors
described above under "Risk Factors." Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's, the Finance Company's, New Reliance's, the Bank's or the New
Holding Company's results in 1996, 1997 and beyond could differ materially
from those expressed in any such forward-looking statements.
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THE ANNUAL MEETING
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors has fixed the close of business on September 20, 1996
as the record date (the "Record Date") for determining stockholders entitled
to notice of, and to vote at, the Annual Meeting. As of the close of business
on the Record Date, there were 14,758,569 shares of Common Stock outstanding
and entitled to vote, held of record by 649 stockholders (although the Company
has been informed that there are in excess of 6,500 beneficial owners). The
outstanding shares of Common Stock constitute the only outstanding voting
securities of the Company entitled to vote at the Annual Meeting. Each holder
of Common Stock is entitled to one vote for each share held by such person
with respect to each matter (including election of directors) to be voted on
at the Annual Meeting.
VOTING OF PROXIES
The Proxy accompanying this Proxy Statement is solicited on behalf of the
Board of Directors of the Company for use at the Annual Meeting. Stockholders
are requested to complete, sign and date the accompanying proxy and promptly
return it in the accompanying postage paid envelope or otherwise mail it to
the Company. Howard B. Silverman, James I. Kaplan and Solway F. Firestone, the
persons named as proxies on the proxy accompanying this Proxy Statement, were
selected by the Board of Directors to serve in such capacity. The shares
represented by a proxy which is properly signed, dated, returned and not
revoked will be voted in accordance with the instructions contained therein,
or, if no direction is indicated, will be voted to approve all of the
proposals recommended by the Board as indicated herein. Unless authority to
vote for the election of directors (or for any one or more nominees) is
withheld, proxies will be voted for the slate of five directors proposed by
the Board of Directors. The Board of Directors presently does not intend to
bring any matter before the Annual Meeting except those referred to in this
Proxy Statement and specified in the Notice of Annual Meeting, nor does the
Board of Directors know of any matters which anyone else proposes to present
for action at the Annual Meeting. However, if any other matters properly come
before the Annual Meeting, the persons named in the accompanying proxy, or
their duly constituted substitutes acting at the Annual Meeting, will be
authorized to vote or otherwise act thereon in accordance with their judgment
and discretion; provided, however, that proxies directing a vote against a
proposal may not be voted, pursuant to such discretionary authority, for a
proposal to adjourn the Annual Meeting in order to permit further solicitation
with respect to such proposal.
Each stockholder giving a proxy has the power to revoke it at any time
before the shares it represents are voted. Revocation of a proxy is effective
upon receipt by the Secretary of the Company, at 350 East Dundee Road,
Wheeling, Illinois 60090, of either (i) a written notice, duly executed by the
stockholder, stating that the proxy is revoked or (ii) a duly executed proxy
bearing a later date. Additionally, a stockholder may revoke a previously
executed proxy by voting in person at the Annual Meeting (although attendance
at the Annual Meeting will not, by itself, revoke a proxy).
VOTES REQUIRED
The approval of (i) the Share Exchange Agreement and the Split-Off
Transactions and (ii) the amendment to the Company's Certificate of
Incorporation to effect the Name Change will require the affirmative vote of a
majority of the outstanding shares of Common Stock entitled to vote thereon.
The vote of a plurality of the shares voted in person or by proxy will be
required to elect the nominees for directors. Stockholders will not be allowed
to cumulate their votes in the election of directors.
As of the Record Date, members of the Taylor Family beneficially owned an
aggregate of 3,647,582 shares (not including shares which may be acquired
pursuant to the exercise of stock options) of Common Stock (approximately 25%
of the shares of Common Stock then outstanding). Pursuant to the Share
Exchange Agreement, the members of the Taylor Family have agreed to vote all
of the shares of Common Stock owned or
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controlled by them in favor of the Share Exchange Agreement and the Split-Off
Transactions, and they have advised the Company that they intend to vote in
favor of the amendment to the Company's Certificate of Incorporation to effect
the Name Change. As of the Record Date, members of the Cole Family
beneficially owned an aggregate of 3,651,936 shares of Common Stock
(approximately 25% of the shares of Common Stock then outstanding). The
members of the Cole Family, represented by Lori Cole, have indicated their
intent to vote or direct the vote of all shares of Common Stock over which
they have voting control, for approval of (i) the Share Exchange Agreement and
the Split-Off Transactions and (ii) the amendment to the Company's Certificate
of Incorporation to effect the Name Change. As of the Record Date, the other
executive officers and directors of the Company (excluding members of the
Taylor Family and the Cole Family) as a group beneficially owned 700,197
shares (not including shares which may be acquired pursuant to the exercise of
stock options) of Common Stock (approximately 4.7% of the shares of Common
Stock then outstanding). Each of such executive officers and directors of the
Company has advised the Company that he or she intends to vote or direct the
vote of all shares of Common Stock over which he or she has voting control,
subject to and consistent with any fiduciary obligations in the case of shares
held as a fiduciary, for approval of (i) the Share Exchange Agreement and the
Split-Off Transactions and (ii) the amendment to the Company's Certificate of
Incorporation to effect the Name Change. The affirmative votes of the Taylor
Family, the Cole Family and the other executive officers and directors of the
Company will, collectively, be sufficient to approve the Share Exchange
Agreement and the Split-Off Transactions and the amendment to the Company's
Certificate of Incorporation to effect the Name Change, regardless of the
votes of any other stockholders.
QUORUM; ABSTENTIONS AND BROKER NON VOTES
The presence at the Annual Meeting, in person or by proxy, of the holders of
a majority of the shares of Common Stock outstanding on the Record Date is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in determining the presence of a quorum. Abstentions and broker non-
votes will have the same effect as votes cast against the proposals to approve
(i) the Share Exchange Agreement and the Split-Off Transactions and (ii) the
amendment to the Company's Certificate of Incorporation to effect the Name
Change. Neither abstentions nor broker non-votes will have any effect on the
proposal to elect directors.
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PROPOSAL NO. 1--APPROVAL OF THE SHARE EXCHANGE AGREEMENT
AND THE SPLIT-OFF TRANSACTIONS
GENERAL
The stockholders of the Company are being asked to approve the Split-Off
Transactions and the Share Exchange Agreement pursuant to which the Split-Off
Transactions will be accomplished. Pursuant to the Share Exchange Agreement,
the Company will exchange all of the capital stock of the New Holding Company
for the Stock Amount, which is to consist of not more than 4,500,000 shares of
Common Stock and not less than the greater of (i) 4,000,000 shares of Common
Stock and (ii) all of the shares of Common Stock owned by the Taylor Family
immediately prior to the Split-Off. In addition, pursuant to the Share
Exchange Agreement, prior to the Split-Off, the following Pre-Closing
Transactions will occur: (i) the Bank will organize New Reliance as its wholly
owned subsidiary to which the Bank will contribute its automobile receivables
business, primarily consisting of the Dealer Agreements (as defined below) and
the Automobile Receivables (as defined below), and the Cash Component (as
defined below); (ii) the Bank will distribute the capital stock of New
Reliance to the Company and the Finance Company will merge into New Reliance;
and (iii) the Company will form the New Holding Company and transfer to it all
of the Bank Stock, all of the Company's interest in Alpha Capital Fund and all
of the capital stock of the Mortgage Company in exchange for all of the
capital stock of the New Holding Company. THE DESCRIPTION OF THE SHARE
EXCHANGE AGREEMENT AND THE SPLIT-OFF TRANSACTIONS SET FORTH HEREIN DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
SHARE EXCHANGE AGREEMENT, AS AMENDED AND RESTATED, A COPY OF WHICH IS ATTACHED
AS APPENDIX A TO THIS PROXY STATEMENT AND INCORPORATED HEREIN BY REFERENCE.
THE SPLIT-OFF TRANSACTIONS
Pre-Closing Transactions
Formation of New Reliance. Prior to the Split-Off, the Bank will form New
Reliance, a new wholly owned subsidiary, to which the Bank will contribute (i)
its used automobile receivables business, consisting of (A) substantially all
of the assets used in the Bank's automobile receivables business, including
agreements with automobile dealers to purchase sales finance contracts (the
"Dealer Agreements") and (B) the Automobile Receivables (as defined below)
having a fair market value of between $30,000,000 and $31,000,000; (ii) the
First Cash Component (as defined below); and (iii) the Second Cash Component
(as defined below). The term "Automobile Receivables" means all of the Bank's
rights and obligations pursuant to automobile loans, notes or the Bank's
securities which as of the Closing Date are collateralized primarily with used
automobiles. The term "First Cash Component" means: (1) if the Stock Amount is
less than 4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the
amount, if any, by which the fair market value of the Automobile Receivables
exceeds $30,000,000 plus (C) the product of $33.00 and the difference between
4,250,000 and the Stock Amount; (2) if the Stock Amount is equal to 4,250,000,
cash in an amount equal to (A) $60,000,000 minus (B) the amount, if any, by
which the fair market value of the Automobile Receivables exceeds $30,000,000;
or (3) if the Stock Amount is greater than 4,250,000, cash in an amount equal
to (A) $60,000,000 minus (B) the amount, if any, by which the fair market
value of the Automobile Receivables exceeds $30,000,000 minus (C) the product
of $33.00 and the difference between the Stock Amount and 4,250,000. The term
"Second Cash Component" means cash in an amount equal to (i) the amount of the
Company's cash investment in Alpha Capital Fund, net of all partner
distributions, return of capital and like payments, made from time to time
prior to June 12, 1996, plus any additional cash investment made by the
Company in Alpha Capital Fund thereafter if made with the Taylor Family's
consent (which investment totalled $155,921 as of September 30, 1996), plus
interest on the total amount invested beginning, as to each portion of such
amount invested at different times, on the date of such investment, at the
rate of 9% per annum, compounded annually (which interest was $10,683 as of
September 30, 1996); plus (ii) the amount of the Company's aggregate cash
investments in the Mortgage Company, net of all distributions to stockholders,
return of capital and like payments, made from time to time prior to June 12,
1996, plus any additional cash investment made by the Company in the Mortgage
Company thereafter if made with the Taylor Family's consent (which investment
totalled $1,007,000 as of September 30, 1996), plus interest on the total
amount invested at different times, on the date of such investment, at the
rate of 9% per annum,
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compounded annually (which interest was $68,687 as of September 30, 1996). The
First Cash Component and the Second Cash Component are together referred to as
the "Cash Component." The diagram on page 6 illustrates the structure of the
Company after the formation of New Reliance.
Transfer of New Reliance to the Company and the Merger of the Finance
Company into New Reliance. Immediately prior to the Split-Off, the Bank will
distribute all of the capital stock of New Reliance to the Company, following
which the Company will cause the Finance Company to be merged with and into
New Reliance. The surviving corporation in that merger will retain the name
"Reliance Acceptance Corporation." The distribution of the New Reliance stock
to the Company (followed by the merger of the Finance Company into New
Reliance) is intended to qualify as a tax-free "pro rata" spin-off.
Thereafter, New Reliance will conduct directly the used automobile receivables
business acquired from the Bank and will own all of the subsidiaries
previously owned by the Finance Company. The diagram on page 7 illustrates the
structure of the Company after the transfer of New Reliance to the Company and
the merger of the Finance Company into New Reliance.
Formation of the New Holding Company. Prior to the Split-Off, the Company,
subject to certain conditions, will form the New Holding Company and will
transfer to the New Holding Company all of the capital stock of the Bank, all
of the capital stock of the Mortgage Company and all of the Company's rights,
obligations and interest in Alpha Capital Fund in exchange for all of the
capital stock of the New Holding Company.
All intercompany indebtedness between the Company and the Mortgage Company
will have been repaid on the Closing Date. The parties have agreed that no
intercompany indebtedness will be incurred after the date of the Share
Exchange Agreement except in accordance with the Share Exchange Agreement. The
diagram on page 8 illustrates the structure of the Company after the formation
of the New Holding Company.
The Split-Off
At the Closing, the Company will transfer all of the capital stock of the
New Holding Company to the Taylor Group in exchange for the transfer by the
Taylor Group to the Company of the shares of Common Stock owned by the Taylor
Group; provided, however, that the Stock Amount will not consist of more than
4,500,000 shares of Company Common Stock or less than the greater of (i)
4,000,000 shares or (ii) all of the shares of Common Stock owned by the Taylor
Family immediately prior to the Split-Off (including any shares of Common
Stock owned after the exercise of any options and shares in the Company's
Employee Stock Ownership Plan (the "ESOP") and the Company's 401(k) Plan (the
"401(k) Plan") allocated to the Taylor Family). If, prior to Closing, the
Company subdivides its Common Stock into a greater number of shares, combines
its Common Stock into a smaller number of shares, effects a reclassification
of its Common Stock or pays a dividend in shares of its Common Stock, the
Stock Amount will be adjusted such that the aggregate value received is not
increased or decreased as a result of such subdivision, combination,
reclassification or dividend. The diagram on page 9 illustrates the structure
of the Company and the New Holding Company immediately after the Split-Off
(assuming the Stock Amount equals 4,250,000 shares of Common Stock and such
shares are retired by the Company). In connection with the Split-Off
Transactions, the Company will change its name to Reliance Acceptance Group,
Inc., subject to approval of the amendment to the Company's Certificate of
Incorporation by the stockholders of the Company at the Annual Meeting. See
"Proposal No. 2--Approval of an Amendment to the Company's Certificate of
Incorporation to Change the Name of the Company."
The Taylor Family has the ability, in its discretion, to expand the Taylor
Group to include other stockholders of the Company who are not members of the
Taylor Family ("Other Taylor Group Members"). Any Other Taylor Group Members
would be given the opportunity to exchange their Common Stock for capital
stock of the New Holding Company on the same basis as the Taylor Family,
subject to the limitation that the Taylor Group as a whole may exchange no
more than 4,500,000 shares of Common Stock.
Although the number and identities of the Other Taylor Group Members (if
any) have not been determined, it is expected that the opportunity to exchange
may be offered to certain persons who have a pre-existing relationship with
the Taylor Family, the Company or the Bank, to a new employee stock ownership
plan and to participants in a new 401(k) plan to be established by the Bank or
the New Holding Company. The members of
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the Taylor Family who are directors of the Company (the "Taylor Directors")
anticipate that the New Holding Company will file a registration statement
with the Securities and Exchange Commission under the Securities Act of 1933,
as amended, on or about October 15, 1996, and, thereafter, with the applicable
state securities authorities with respect to the exchange offer to the
potential Other Taylor Group Members. It is expected that the registration
statement also will cover the exchange offer to the members of the Taylor
Family.
REASONS FOR THE SPLIT-OFF TRANSACTIONS
The Split-Off Transactions are intended to maximize stockholder value and to
resolve substantial disagreements that have arisen among members of the Taylor
Family and the Cole Family and certain other directors regarding the strategic
direction of the Company. In particular, members of the Cole Family and
certain other directors had expressed a desire to explore a possible strategic
transaction involving the Bank, the Finance Company or the Company as a whole,
while members of the Taylor Family and certain other directors had expressed
their opposition to any such strategic proposals. The Split-Off Transactions
are intended to address these issues in a manner that is beneficial for all
stockholders of the Company. In addition, the Split-Off Transactions will
allow a greater management focus on the automobile finance business.
If the Split-Off Transactions are not consummated, the Board will need to
consider alternative means of addressing the conflicts regarding the strategic
direction of the Company. There can be no assurance that the Board will be
able to address these conflicts in a manner that will not have an adverse
effect on the business, results of operations or financial condition of the
Company or on the market price of the Common Stock. See
"--Background of the Split-Off Transactions."
As a subsidiary of a bank holding company, the Finance Company is subject to
many regulatory restrictions that hinder the ability of the Finance Company to
compete with non-bank holding company-owned and independent finance companies
and that management believes reduce the Finance Company's profitability. As a
result of these regulatory restrictions, among other things, the Finance
Company currently lacks the flexibility to pursue the most appropriate funding
strategies to support its operations. In particular, current regulations limit
the ability of bank holding company-owned finance companies to maximize the
use of commercial paper to fund their operations, the principal method of
funding for non-bank holding company-owned and independent finance companies.
While the Finance Company's operations are currently funded in part by
commercial paper borrowings, the bank regulatory restrictions under which the
Company operates at the present time prevent the Finance Company from funding
its operations through commercial paper borrowings to the fullest extent that
otherwise would be possible. The rate of interest charged on commercial paper
is significantly lower than the cost of financing through other sources
currently available to the Finance Company. The Split-Off will free the
Company's consumer finance operations from these regulatory burdens. There can
be no assurance, however, that the Finance Company will be able to realize the
potential benefits of greater funding flexibility resulting from relief from
Federal Reserve Board regulations. In this regard, Duff & Phelps Credit Rating
Co. has placed the Company's subordinated debt rating and the Finance
Company's commercial paper rating on watch for a possible downgrade. In
addition, Fitch Investor Services has placed the Finance Company's commercial
paper rating on FitchAlert with an evolving status. Any downgrading of the
Company's or the Finance Company's credit ratings could adversely affect their
respective cost of capital or ability to borrow funds. See "Risk Factors--Need
for Funds; Possible Downgrade of Debt Rating; Potential Increase in Cost of
Capital."
There has been significant consolidation in the banking industry in general
and in the Chicago market in particular. The Bank competes in what is
perceived by some as a mature market against many competitors with
substantially greater resources and market share. As a result of these and
other factors, future growth opportunities for the Bank may be limited. The
Finance Company has realized substantial and rapid growth since it was
established as a separate subsidiary in 1992 and may have greater potential
for growth than the Bank. The Bank's revenues and earnings have not grown as
rapidly as the Finance Company's over the same period. The Split-Off
Transactions will allow the Company's stockholders to hold a direct investment
in the Finance Company without also having an investment in the Bank.
The Split-Off Transactions also involve certain risks, including the risks
associated with the automobile finance business of the Finance Company, the
limited operating history of the Finance Company, the risk that
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the Split-Off Transactions will not be consummated and the other risks
described under "Risk Factors." The Board of Directors considered these risks
but determined that they were substantially outweighed by the benefits of the
Split-Off Transactions. Consequently, the Board unanimously approved the Share
Exchange Agreement and the Split-Off Transactions pursuant thereto and
unanimously recommends that the stockholders of the Company vote FOR the Share
Exchange Agreement and the Split-Off Transactions. Nevertheless, stockholders
are urged to carefully read the discussion above under the heading "Risk
Factors" before returning any proxy or voting at the Annual Meeting.
BACKGROUND OF THE SPLIT-OFF TRANSACTIONS
During the first half of 1995, substantial disagreements between the Cole
Family and certain other directors, on the one hand, and the Taylor Family and
certain other directors, on the other hand, regarding the strategic direction
of the Company and other matters began to develop. At a regular meeting of the
Board of Directors of the Company (the "Board") on May 2, 1995, Irwin H. Cole,
a director of the Company and one of the Company's two principal co-founders,
expressed concerns about the Company's management and policies, including his
views regarding the need to involve the Board in important business decisions
at the Bank. Members of the Taylor Family disagreed with many of Mr. Cole's
views and had their own concerns regarding the manner in which Mr. Cole's
concerns would be addressed by the Board. Members of the Taylor Family and the
Cole Family and certain other directors disagreed as to the Company's best
future course for the maximization of stockholder value. In particular,
members of the Cole Family and certain other directors had expressed a desire
to explore a possible strategic transaction involving the Bank, the Finance
Company or the Company as a whole, while members of the Taylor Family and
certain other directors had expressed their opposition to any such strategic
proposals. In addition, there were differences of opinion regarding the
selection and nomination of persons to stand for election as directors and,
among members of the Board, regarding the performance of the Company's and the
Bank's top management. In order to address all of these concerns, the Board
designated Solway F. Firestone and Ross J. Mangano to discuss these matters
with Mr. Cole, Sidney J Taylor, a director of the Company and the Company's
other principal co-founder, and the Company's senior managers in an effort to
resolve the disagreements. These efforts were not successful.
At a regular meeting of the Board on July 18, 1995, the Board was increased
from 10 to 11 members and Lori Cole, the daughter of Mr. Cole, was elected to
the Board. The Board of Directors took this action in part because Mr. Cole,
as a result of illness, could no longer travel to attend Board meetings and
the Board believed that the Cole Family, in light of its significant share
ownership, should have active representation at meetings of the Board of
Directors. At that meeting, Ms. Cole informed the Board that the Cole Family
had, at its own expense, engaged the investment banking firm of Sandler
O'Neill to evaluate the Company and to advise the Cole Family on the options
available to the Company to maximize value for all stockholders. The Board
unanimously voted to provide certain non-public information about the Company
to Sandler O'Neill in order to allow it to do its evaluation, subject to
Sandler O'Neill executing a satisfactory confidentiality agreement.
At a special meeting of the Board on August 16, 1995, the Board was
increased to 13 members and, in a substantially divided vote, Adelyn Dougherty
and Richard Tinberg were elected to fill the two newly created vacancies. The
directors who supported Mr. Tinberg's and Ms. Dougherty's election believed
the increase in the Board was necessary to realize the Company's long-standing
desire to increase the number of independent directors on the Board. Although
there was no substantial disagreement as to the qualifications of Ms.
Dougherty and Mr. Tinberg, several members of the Board objected to their
selection because they believed that the addition of new members at that time
would alter the Board's closely divided balance of viewpoints regarding
maximization of stockholder value. The voting on these actions and the
discussions among the directors at that meeting continued to reflect
substantial disagreements concerning the Company's direction and management.
In light of these disagreements and continuing disputes concerning these
issues, the Board created a special committee (the "First Special Committee")
consisting of Ms. Dougherty, Mr. Firestone, Dean L. Griffith and Mr. Mangano.
Mr. Firestone was designated as the Chairman of the First Special Committee.
The First Special Committee determined that it should investigate and report
to the Board on questions which had been raised concerning executive
management. This investigation by the First Special Committee included
discussions with
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members of the Company's management, in addition to Jeffrey W. Taylor, the
Company's Chairman and Chief Executive Officer and the son of Sidney J Taylor,
and Bruce W. Taylor, the Company's President and Chief Operating Officer and
the son of Sidney J Taylor.
In August 1995, the First Special Committee retained independent legal
counsel and began interviewing members of the Company's management. At a
regular meeting of the Board on September 19, 1995, the First Special
Committee presented to the Board its findings that the dispute between the
Coles and the Taylors was affecting the Company's management and the
performance of the Company, that a strong effort should be made by the Board
to attempt to reconcile the dispute, that, in light of the serious and
continuing nature of the dispute and its possible consequences, it appeared
desirable to discreetly test the market for a possible sale of the Company and
that another special committee should be formed to pursue the process of
testing the market.
An assistant vice president of the Federal Reserve Bank of Chicago made a
presentation to the Board at the September 19, 1995 Board meeting in
connection with a recent examination of the Company and the Bank. In his
presentation, the assistant vice president noted that he was aware of the
difference of opinion between the Coles and the Taylors and certain members of
the Board, expressed his concern that the dispute could affect the Company's
operations and urged the Board to take action to resolve the problem.
At the September 19, 1995 Board meeting, the Board formed a second special
committee (the "Second Special Committee") consisting of Mr. Firestone as
Chairman, Ms. Cole, Mr. Mangano, Mr. Silverman and Mr. Jeffrey Taylor. The
Second Special Committee was formed for the initial purpose of exploring and
reporting to the Board on possible methods for determining the market value of
the Company. The Second Special Committee retained the same independent
counsel that the First Special Committee had retained.
At a meeting of the Second Special Committee on September 28, 1995, the
Second Special Committee, selected Chicago Corp. and Sandler O'Neill to be
financial advisors to the Second Special Committee. Chicago Corp. was chosen
because of its long-standing relationship with the Company. Sandler O'Neill
was chosen because it previously had been retained by the Cole Family to
provide advice regarding the Company's strategic options. The Second Special
Committee believed that the services of both Financial Advisors would be
valuable to the Second Special Committee. At that meeting, Jeffrey Taylor
expressed various reasons for his opposition to that action and his concerns
regarding testing the market for a possible disposition of all or part of the
Company including the following: (i) the Company could be damaged by rumors of
sale, (ii) customers and employees could be lost because of the uncertainty of
the future ownership of the Company, (iii) instability could significantly
damage the Bank and stockholder value of the Company, (iv) the Taylor Family
did not want to sell, (v) the Taylor Family believed that stockholder value
would best be enhanced by a strategy to stay independent and pursue its
business plan, (vi) the Taylor Family believed that a forced sale would be
unfair to them and other stockholders who did not want to sell their interest
in the Company, and (vii) Jeffrey Taylor had been advised that there was no
legal obligation of the Board to seek a purchaser of the Company.
At a meeting of the Second Special Committee on October 18, 1995, the
Financial Advisors made a presentation in which they recommended that the
Company test the market for a possible disposition of all or part of the
Company. The Second Special Committee adopted a resolution to recommend to the
Board that it (i) retain the Financial Advisors to explore further the
Company's strategic alternatives, including a merger or sale of the Company,
and that in furtherance of this goal the Board instruct the Financial Advisors
to contact a select number of prospective purchasers and (ii) delegate to the
Second Special Committee the power and authority of the Board to manage the
foregoing process, provided that the Company would not enter into a binding
arrangement to merge or sell the Company without a presentation of that
arrangement to the full Board and the Board's prior approval of that
arrangement (collectively, the "Committee Recommendations"). Although Jeffrey
Taylor voted against this resolution of the Second Committee, after explaining
his reasons and concerns, Mr. Taylor stated that he and Bruce Taylor would
cooperate if the Board's decision was to test the market.
At the regular Board meeting on October 24, 1995, the Second Special
Committee presented the Board with the Committee Recommendations. Jeffrey
Taylor presented his alternative view as to why the Committee Recommendations
were not in the best interests of the Company. Representatives of the
Financial Advisors made
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presentations to the Board regarding various alternatives available to the
Board, including maintaining the status quo, selling the entire Company,
selling the Bank or the Finance Company, spinning off either the Bank or the
Finance Company to the Company's stockholders, effecting an initial public
offering of Finance Company stock, acquiring another financial institution,
and pursuing an underwritten public offering of shares on behalf of
stockholders who might wish to sell their shares. Following these
presentations, the Board, in a substantially divided vote, adopted the
Committee Recommendations. The divided vote reflected the fact that the Taylor
Family and certain other directors continued to be opposed to a strategic
transaction and to the delegation of the consideration of a possible strategic
transaction to a committee, as opposed to the Board as a whole, while a
majority of the directors were in favor of exploring the Company's strategic
options. The Board also appointed Bruce Taylor as an additional member of the
Second Special Committee.
The Financial Advisors were retained by the Company by engagement letters
dated October 31, 1995 for Chicago Corp. and November 3, 1995 for Sandler
O'Neill. The Company publicly announced their retention on November 3, 1995.
Following their retention, the Financial Advisors began contacting candidates
that the Financial Advisors believed might be interested in acquiring all or
part of the Company.
On January 31, 1996, the Second Special Committee held a meeting at which
the Taylor Family proposed a split-off transaction in which, immediately after
the transfer of certain automobile loan assets and cash from the Bank to
another subsidiary of the Company, the Taylor Family would exchange its
existing shares of Common Stock, as well as certain additional shares of
Common Stock, for all of the outstanding common stock of the Bank. After the
members of the Taylor Family had left the meeting, the Second Special
Committee received a progress report from the Financial Advisors regarding
potential bidders for all or part of the Company and conducted a discussion of
these potential bids and the Taylor Family's proposal.
Between January 31 and February 19, 1996, Jeffrey Taylor and Bruce Taylor
agreed that they would not participate in future deliberations of the Second
Special Committee as long as the Taylor Family's proposal was still under
consideration. During that same period, Lori Cole agreed that she also would
not participate in those deliberations.
On February 19, 1996, the Second Special Committee held a meeting at which
the Financial Advisors presented an analysis of the Taylor Family proposal as
well as an assessment of the Company's other possible alternatives.
On February 20, 1996, the Board conducted a meeting at which Mr. Firestone
presented a report on the Second Special Committee's work on strategic
alternatives. The Board also discussed whether Mr. Silverman's status as
Chairman of the Finance Company made it unwise for him to continue on the
Second Special Committee and concluded that he should continue to serve on the
Second Special Committee.
On March 8, 1996, the Second Special Committee held a meeting at which it
discussed the possibility of (1) the sale of the entire Company; (2) the sale
of the Bank, combined with the use of cash proceeds to reduce the number of
outstanding shares of the Company; (3) the Taylor Family proposal; and (4) the
sale of the Finance Company, either alone or in connection with the sale of
the Bank. The Second Special Committee also received a report from the
Financial Advisors on discussions with third parties.
On March 15, 1996, the Second Special Committee held a meeting at which it
discussed a planned presentation of the Taylor Family's proposal to be made to
the Board the following week. The Financial Advisors reviewed the leading
strategic alternatives, including a sale of the entire Company for the stock
of the acquiror, a cash sale of the Bank only, a split-off of the Bank and a
cash sale of the Finance Company only. The Financial Advisors noted that
maintaining the status quo did not appear to be acceptable to the Board. The
Second Special Committee expressed the preliminary view that the sale of the
entire Company for stock of the acquiror and a cash sale of the Bank only were
acceptable, while the split-off proposal needed development by the Second
Special Committee's advisors and by the Taylor Family and the sale of the
Finance Company alone was not acceptable at that time.
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On March 25, 1996, the Second Special Committee conducted a meeting in
preparation for the Board meeting to be held later that day. The Second
Special Committee discussed whether Mr. Silverman, because of his status as
Chairman of the Finance Company, and Melvin Pearl, because of his close
relationship with the Taylor Family, had conflicts of interest that should
preclude them from participating in Board discussions about strategic
alternatives for the Company. The Second Special Committee concluded that
neither Mr. Silverman nor Mr. Pearl had disqualifying conflicts of interest.
On March 25, 1996, the Board conducted a special meeting. Because the
purpose of the meeting was to discuss strategic alternatives, Sidney Taylor,
Jeffrey Taylor and Bruce Taylor did not attend the meeting, which was chaired
by Mr. Firestone. The Board concluded that it would hold a series of special
meetings until the issues surrounding the Company's strategic alternatives had
been decided, that the Board would be advised by the Financial Advisors and
counsel to the Special Committee at these meetings and that these special
Board meetings would replace future meetings of the Second Special Committee.
The Board also discussed, but reached no conclusions regarding, whether it
should request that Sidney Taylor, Jeffrey Taylor and Bruce Taylor not
participate in those meetings (except as the Board deemed appropriate) until
their proposal was either decided upon by the Board or withdrawn.
At the meeting, the Board heard a presentation from the Financial Advisors
describing their efforts to attract potential bidders for all or part of the
Company since November 1995. The Financial Advisors noted that they had
contacted 41 potential third party candidates and had received five proposals,
all of which were subject to further review by the bidders. One of these
proposals (the "Stock Merger Proposal") was to acquire all of the outstanding
Common Stock for stock of the acquiror at a fixed exchange ratio; the value on
the New York Stock Exchange as of March 25, 1996 of the acquiror's stock that
the Company's stockholders would receive under such a transaction was
approximately $416 million (or approximately $28.55 per share of Common Stock
based on the number of shares of Common Stock outstanding on December 31,
1995). Two of these proposals were from third parties interested in acquiring
only the Bank; one proposed a cash price of $240 million (although, based on
discussions with that party, the Financial Advisors believed the party making
that proposal might be willing to pay $250 million), while the other proposed
a cash price in the range of $230 million to $250 million. The fourth and
fifth proposals were to acquire the Finance Company; one proposed a cash price
of $100 million to $125 million, while the other proposed a cash price of $200
million to $225 million with warrants and management stock options. The Board
received a presentation from Mr. Silverman evaluating these proposals and held
a general discussion of the available alternatives. The Taylors, along with
their advisors, then joined the meeting and answered questions about the
Taylor Family proposal.
At a special meeting on March 27, 1996, the Board, with the Taylors present,
heard a presentation from the party making the Stock Merger Proposal.
Following that presentation, the Board discussed generally that party's
proposal. The Taylors then left the meeting and the Financial Advisors
reported on their valuation of the strategic alternatives in front of the
Board. The Financial Advisors told the Board that, in their judgment, the
Stock Merger Proposal was best for the Company's stockholders, with either of
the third party proposals to acquire the Bank and the Taylor Family proposal
being approximately equivalent in value if each were consummated but that the
Taylor Family proposal was not as likely as the third party proposals to be
consummated. Mr. Silverman agreed that the two proposals to acquire the Bank
and the Taylor Family proposal were approximately equivalent in value if each
were consummated, but believed that all three would provide greater value to
the Company's stockholders than the Stock Merger Proposal if each were
consummated. Both the Financial Advisors and Mr. Silverman agreed that the
proposals to acquire only the Finance Company were too low or too uncertain to
be worth pursuing.
The Board and the Financial Advisors agreed that factors other than the
consideration offered by each bidder were very important. One of these factors
was whether the transaction could be consummated; since the Taylor Family
proposal required a private letter ruling from the IRS that the transaction
was tax-free, the raising of additional capital and regulatory approval of the
transactions contemplated, it was the view of the Financial Advisors that the
probability that the Taylor Family proposal might not be consummated was
significantly higher than that probability for the competing transactions.
However, it was noted that, unlike the other proposals, the
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Taylor proposal was not subject to due diligence review. Another of these
factors was whether the proposed transaction resolved the disagreements that
had driven the Board to examine strategic alternatives in the first place; the
Taylor Family proposal would accomplish this goal by creating two separate
companies, while the proposals to acquire the Bank would leave each of the
Cole Family and the Taylor Family owning approximately one-quarter of the
remaining Company, with a significant potential for future disagreements. The
Stock Merger Proposal was very likely to be consummated and would resolve the
Board's internal disagreements because the entire Company would be acquired,
but a number of directors believed the consideration offered was less valuable
than the consideration offered in the competing transactions.
At a special meeting of the Board held on April 1, 1996, the Taylor Family
made a revised proposal in which they increased the number of Company shares
to be exchanged for the shares of the Bank, increased the amount of cash to be
transferred from the Bank, and agreed to a payment if the transaction did not
close because of their failure to obtain financing. The Taylors then left the
meeting, and the Board conducted a discussion of the revised Taylor Family
proposal and the other proposals.
On April 2, 1996, the Board held a special meeting at which, with the
Taylors present, the Board's tax advisors discussed the likelihood of
obtaining an IRS private letter ruling that the Taylor Family proposal would
be tax-free. Those advisors told the Board that, while it was likely that such
a private letter ruling could be obtained, there could be no assurance of
doing so. The Taylors then left the meeting, and the Board discussed the
various possible strategic alternatives with the Financial Advisors. Following
those discussions, the Board decided to seek best and final proposals from
third parties and to obtain more information about the probability of
obtaining a private letter ruling through a prefiling conference with the IRS.
On April 19, 1996, the Taylor Family submitted an improved written proposal
for a "split-off" of the Bank from the Company. The improved proposal
increased the number of shares of the Common Stock that would be exchanged for
Bank Stock and changed the assets that would be transferred from the Bank to
cash and accounts receivable.
At a special Board meeting held on April 23, 1996, the Taylors made a
presentation of a revised proposal and the Taylors then left the Board
meeting. The Board was advised that the party making the Stock Merger Proposal
had withdrawn that proposal because of technical difficulties related to the
ability to use pooling of interests accounting treatment for the transaction.
Nevertheless, the party making the Stock Merger Proposal requested additional
time to prepare a possible new proposal. The Board discussed the remaining
proposals, received a presentation from the Financial Advisors evaluating each
of the proposals under consideration, decided to set a deadline of April 29,
1996 for receiving final written proposals for the purchase of the Company
and/or the Bank and decided to make a choice between any proposals received at
its May 1, 1996 meeting. The Financial Advisors were instructed to obtain the
best possible proposals from third parties and the Taylor Family in advance of
that meeting.
Prior to the April 29, 1996 deadline, the party making the Stock Merger
Proposal indicated that it would not make a new proposal and another party,
which had previously indicated an interest in acquiring the Bank, decided not
to pursue an acquisition of the Bank.
After the remaining party that had previously made a proposal to acquire the
Bank (the "Interested Third Party") had withdrawn that proposal, the Financial
Advisors and the Second Special Committee attempted to solicit another
proposal from the Interested Third Party. To that end, the Financial Advisors
and Jeffrey and Bruce Taylor met with the chief executive of the Interested
Third Party on April 25, 1996. At that meeting, the chief executive expressed
a continuing interest in a potential acquisition of the Bank, but only if the
transaction was supported by all of the directors of the Company and both the
Cole and Taylor Families. He stated that until he was assured of such support,
the Interested Third Party would not make another proposal to acquire the
Bank. He went on to say that in a purchase of a Bank such as Cole Taylor, the
goodwill associated with the relationships between the Bank's customers and
management was a critical part of the purchase. Jeffrey Taylor stated in
response that speaking as a stockholder only, he did not support a sale of the
Bank to a third party.
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The Financial Advisors and special counsel had other conversations with the
chief executive without the Taylors' participation. The chief executive also
separately told members of the Taylor Family that he was not interested in
purchasing the Bank without the support of the Taylor Family and that in light
of the long-standing business and personal relationships among the Interested
Third Party, the chief executive and the Taylor Family, the chief executive
had no intention of bidding against the Taylor Family should it desire to
purchase the Bank.
In a special meeting conducted on May 1, 1996, the Board, without the
Taylors present, was advised by special counsel that, on April 29, 1996, the
chief executive of the Interested Third Party had stated that his company had
a strong interest in acquiring the Bank and was prepared to submit a bid,
subject to a due diligence condition, only if the Taylor Proposal was no
longer under consideration. The executive stated that he had given his word to
the Taylors that he would not submit a bid as long as the Taylors' bid was
under consideration and explained that, because the Bank is a wholesale bank
co-founded by the Taylor Family, and the Taylors' goodwill and relationships
are very important for any purchaser, in his opinion, the support of the
Taylors in the sale of the Bank would be essential. In response to a statement
by special counsel that a winning bid would probably have to be at least $250
million or more, the chief executive indicated that he understood that and
noted that his company's initial bid had been for $240 million with the
statement that it could be increased.
The Board was also advised by counsel that the Taylors were willing to
include in their proposal a term by which they would make a $15 million
payment (subject to reduction under some circumstances) if a transaction with
them could not be consummated under certain circumstances. Those circumstances
would include not only a failure to obtain the required new financing for the
Bank or a failure to obtain regulatory approval for the transaction, each of
which the Taylors had already proposed, but also because of a failure to
obtain a favorable private letter ruling from the IRS.
The Board then discussed what course it should take. It was noted that, as
of the meeting, the Taylor Family proposal was the only proposal pending
before the Board. While certain board members expressed concern that in their
view the Taylors' pursuit of their own proposal had the effect of eliminating
some competing bids for the Bank, it was also pointed out that the Taylors, as
stockholders, had no obligations to support proposals they did not favor and
that the efforts of the marketing process during the past several months had
demonstrated that as a business matter it would be difficult to sell the Bank
without the Taylors' support. It was also pointed out that the Taylor Family
proposal would resolve the problem of disagreements among Board members while
a sale of the Bank to a third party would not and that the Taylors' new
willingness to make a payment if a favorable private letter ruling from the
IRS could not be obtained ameliorated, to some extent, the risk to the Company
that a transaction with the Taylors could not be consummated. The Financial
Advisors reaffirmed to the Board that the value of the consideration to be
received under the Taylor Family proposal was approximately equal to the
consideration discussed by the two third parties who earlier had proposed
acquiring the Bank. It was noted that the risk that the transaction with the
Taylor Family would not be consummated was greater than the corresponding risk
for the transactions which had been proposed by the two third parties,
principally because of the need, before the Taylor Family proposal could be
consummated, to obtain the Tax Ruling and for the Taylor Family to raise the
additional financing for the Bank in order to comply with certain minimum
capital requirements required by applicable banking laws and regulations.
However, it was also noted that the Taylor proposal was not subject to due
diligence and now included a provision requiring up to a $15 million payment
if the transaction could not be consummated under certain circumstances and
that those other transactions were no longer being proposed by the two third
parties.
Following the discussion, during a portion of the May 1 Board meeting at
which the Taylors were present, and in response to an inquiry from the Board,
the Taylors confirmed that, although it was their view that the Taylor Family
proposal was in the best interest of all of the stockholders of the Company,
if the Taylor Family proposal could not be effectuated, they, as directors and
officers of the Company, would have an obligation to carry out any decision
made by the Board.
The Board decided to attempt to negotiate a definitive agreement with the
Taylor Family. Between May 1, 1996 and June 12, 1996, representatives of the
Board and legal counsel exchanged drafts and negotiated the terms of the Share
Exchange Agreement with the Taylor Family and their legal counsel.
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On June 12, 1996, the Board held a special meeting for the purpose of
considering the proposed transaction with the Taylor Family. Sidney Taylor,
Jeffrey Taylor and Bruce Taylor were present at the meeting initially. After a
brief statement by Jeffrey Taylor, Sidney Taylor, Jeffrey Taylor and Bruce
Taylor excused themselves from the meeting. The Board received presentations
from its financial and legal advisors about the proposed transaction. The
Board also received a copy of a letter dated June 11, 1996 from Piper Jaffray
Inc. ("Piper Jaffray"), financial advisor to the Taylor Family, to Jeffrey
Taylor stating that Piper Jaffray was "highly confident" of its ability to
raise the required new financing for the Bank.
Chicago Corp. delivered to the Board its written opinion dated June 12, 1996
that, based upon and subject to various considerations set forth in the
opinion and such other factors as it deemed relevant, as of the date of such
opinion, the consideration to be received by the Company pursuant to the Share
Exchange Agreement was fair from a financial point of view, to the non-Taylor
Family stockholders of the Company.
Sandler O'Neill delivered to the Board its written opinion dated June 12,
1996 that, based upon and subject to various considerations set forth in the
opinion and such other factors as it deemed relevant, as of the date of such
opinion, the consideration to be received by the Company pursuant to the Share
Exchange Agreement was fair from a financial point of view, to the non-Taylor
Family stockholders of the Company.
The Board discussed the presentations and the advisability of entering into
the proposed transaction. Following those presentations and discussions, the
Board approved the terms of the Share Exchange Agreement and authorized its
execution and delivery by a unanimous vote of the directors present. The Share
Exchange Agreement was executed and delivered by the Company and the Taylor
Family promptly after receipt of such approval.
On June 19, 1996, an escrow account was established with The Northern Trust
Company pursuant to the terms of the Share Exchange Agreement. The Taylor
Family deposited 750,000 shares of Common Stock into the escrow account
pursuant to an escrow agreement dated June 19, 1996 among the Company, the
Taylor Family and The Northern Trust Company. The escrowed shares of Common
Stock secure the payment by the Taylor Family of up to $15 million to the
Company under certain circumstances pursuant to the Share Exchange Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE FOR APPROVAL OF THE SHARE EXCHANGE AGREEMENT AND THE SPLIT-
OFF TRANSACTIONS.
OPINION OF THE FINANCIAL ADVISOR TO COLE TAYLOR FINANCIAL GROUP, INC.
Pursuant to the terms of an engagement letter with each of Sandler O'Neill
and Chicago Corp. (collectively, the "Engagement Letters"), Sandler O'Neill
and Chicago Corp. acted as financial advisors to the Company in connection
with the Split-Off. In connection therewith, at the June 12, 1996 meeting at
which the Board approved and adopted the Share Exchange Agreement, the
Financial Advisors delivered written opinions (collectively, the "Fairness
Opinions") to the Company's Board that, as of June 12, 1996, the consideration
to the Company of (a) Common Stock of the Company in an amount equal to at
least 4,000,000 shares and no more than 4,500,000 shares, and (b) the Cash
Component and the Bank's automobile receivables business which will be spun-
off from the Bank pursuant to the Share Exchange Agreement was fair, from a
financial point of view, to the non-Taylor Family stockholders of the Company.
THE FAIRNESS OPINIONS, WHICH SET FORTH THE PROCEDURES FOLLOWED, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, ARE ATTACHED AS APPENDICES C AND D TO THIS PROXY STATEMENT AND ARE
INCORPORATED HEREIN BY REFERENCE. THE DESCRIPTION OF SUCH OPINIONS SET FORTH
HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO APPENDICES C AND D.
HOLDERS OF THE COMPANY'S COMMON STOCK ARE URGED TO READ THE FAIRNESS OPINIONS
IN THEIR ENTIRETY IN CONNECTION WITH THEIR CONSIDERATION OF THE PROPOSED
SPLIT-OFF TRANSACTIONS. NEITHER OF THE FAIRNESS OPINIONS SHOULD BE CONSTRUED
BY THE HOLDERS OF SHARES OF COMMON STOCK AS A RECOMMENDATION AS TO HOW THEY
SHOULD VOTE AT THE ANNUAL MEETING.
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In connection with rendering the Fairness Opinions, the Financial Advisors
performed a variety of financial analyses. The following is a summary of such
analyses, but does not purport to be a complete description of the Financial
Advisors' analyses. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to a partial
analysis or summary description. Each of the analyses conducted by the
Financial Advisors was carried out in order to provide a different perspective
on the transaction and add to the total mix of information available. The
Financial Advisors did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion
as to fairness. Rather, in reaching their conclusion, the Financial Advisors
considered the results of the analyses in light of each other and ultimately
reached their opinion based on the results of all analyses taken as a whole.
The Financial Advisors did not place particular reliance or weight on any
individual analysis, but instead concluded that their analyses, taken as a
whole, supported their determination. Accordingly, each of the Financial
Advisors believes that its analyses must be considered as a whole and that
selecting portions of such analyses and the factors considered therein,
without considering all factors and analyses, could create an incomplete view
of the analyses and processes underlying the Fairness Opinions.
In performing its analyses, each of the Financial Advisors made numerous
assumptions with respect to industry performance, business and economic
conditions and various other matters, many of which cannot be predicted and
are beyond the control of the Company, the Taylor Group and the Financial
Advisors. Any estimates contained in the Financial Advisors' analyses are not
necessarily indicative of future results or values, which may be significantly
more or less favorable than such estimates. Estimates of the values of
companies do not purport to be appraisals or necessarily reflect the prices at
which companies or their securities may actually be sold. Because such
estimates are inherently subject to uncertainty, neither the Company nor the
Financial Advisors assume responsibility for their accuracy.
Stock Trading History
The Financial Advisors examined the history of the trading prices and the
volume of the Common Stock, and the relationship of the movements in the
prices of the Common Stock to movements in certain stock indices, including
the Standard & Poor's 500 Index, the NASDAQ Banking Index and a composite
group of publicly traded commercial banks in geographic proximity and of
similar asset size.
Analysis of Selected Publicly Traded Companies
In preparing its presentation, the Financial Advisors used publicly
available information to compare selected financial and market trading
information, including book value, tangible book value, earnings,
profitability and capital adequacy, for the Finance Company and certain other
institutions. The 16 publicly traded automobile finance companies, each with a
market capitalization below $250 million (the "Small Cap Group"), to which the
Financial Advisors compared the Finance Company were ACC Consumer Finance
Corporation, Aegis Consumer Funding Group, Asta Funding, Inc., AutoLend Group,
Inc., Consumer Portfolio Services, Inc., Eagle Finance Corp., First Investors
Financial Services, First Merchants Acceptance Corporation, Monaco Finance,
Inc., MS Financial, NAL Financial Group, Inc., Onyx Acceptance Corporation,
Search Capital Group, Inc., TFC Enterprises, Inc., Union Acceptance
Corporation and Western Fidelity Funding, Inc. The Financial Advisors also
compared the Finance Company to the following seven publicly traded automobile
finance companies, each with a market capitalization over $250 million (the
"Large Cap Group"): AmeriCredit Corporation, Credit Acceptance Corporation,
Jayhawk Acceptance, Mercury Finance Company, National Auto Credit, Inc.,
Olympic Financial Ltd. and WFS Financial Inc. The analysis compared publicly
available quarter-end financial information for the period ending March 31,
1996. The following comparisons are based upon the March 31, 1996 financial
information. The data described below with respect to the Small Cap Group and
the Large Cap Group consist of the mean (or average) data for such groups.
The equity market capitalization for the Small Cap Group was approximately
$72.7 million, and approximately $815.9 million for the Large Cap Group. The
total equity to total assets ratio was 9.9% for the Company, compared to
approximately 29.2% for the Small Cap Group and approximately 34.7% for the
Large
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Cap Group. The 5-year growth rate on assets was 24.1% for the Small Cap Group
and 28.6% for the Large Cap Group. For the quarter ended March 31, 1996, the
annualized return on average assets was 5.8% for the Company, compared to 6.8%
for the Small Cap Group and 8.1% for the Large Cap Group. For the quarter
ended March 31, 1996, the annualized return on average equity was 57.6% for
the Company, compared to the latest 12 months' return on average equity of
23.4% for the Small Cap Group and 29.5% for the Large Cap Group. The latest 12
months' stock price to earnings multiples were 17.2 for the Small Cap Group
and approximately 26.6 for the Large Cap Group. The stock price to earnings
multiples based on calendar year 1996 estimates were approximately 11.8 for
the Small Cap Group and approximately 18.1 for the Large Cap Group. The stock
price to earnings multiples based on calendar year 1997 estimates were
approximately 9.4 for the Small Cap Group, and approximately 13.8 for the
Large Cap Group. The current stock price to book value for the Small Cap Group
was approximately 2.7 and 4.7 for the Large Cap Group. The total
capitalization to asset ratio was approximately 52.8% for the Small Cap Group
and 54.6% for the Large Cap Group. The net debt to capital ratio was 47.6% for
the Small Cap Group and 14.2% for the Large Cap Group. The calendar year 1996
price to earnings multiple to growth ratio was approximately 52.3% for the
Small Cap Group and 62.4% for the Large Cap Group.
Analysis of Selected Merger Transactions
The Financial Advisors reviewed 30 transactions announced from January 1,
1990 to June 11, 1996 involving public commercial banks in the Chicago
metropolitan area as targets with transaction values over $10 million
("Chicago Transactions") and 26 transactions completed from January 1, 1990 to
June 11, 1996, involving midwestern commercial bank sellers with total assets
between $1.0 and $3.0 billion and transaction values greater than $60 million
("Midwest Transactions"). The Financial Advisors reviewed the ratios of price
to earnings, price to book value, price to tangible book value, deposit
premium paid and type of consideration used in each such transaction and
computed mean and median ratios and premiums for the respective groups of
transactions. Based upon the median multiples for Chicago Transactions, the
Financial Advisors derived an imputed range of values of the Bank of $228
million to $234 million. Based upon the median multiples for Midwest
Transactions, the Financial Advisors derived an imputed range of values of the
Bank of $224 million to $250 million.
Discounted Dividend Stream and Terminal Value Analysis
The Financial Advisors also performed an analysis which estimated the future
stream of after-tax dividend flows of the Company through the year 2000 under
various circumstances, assuming the Company performed in accordance with the
earnings forecasts of its management and certain variations thereof (including
variation with respect to the growth rate of assets, net interest spread, non-
interest income, non-interest expense and dividend payout ratio). To
approximate the terminal value of the Common Stock at the end of the five-year
period, the Financial Advisors applied price to earnings multiples ranging
from 10 to 12. The dividend income streams and terminal values were then
discounted to present values using a discount rate of 14%, chosen to reflect
required rates of return of alternative investments. This analysis, assuming
the current dividend payout ratio, indicated an imputed range of values of the
Bank between $201 million and $230 million when applying different earnings
multiples. In connection with their analysis, the Financial Advisors
extensively used sensitivity analyses to illustrate the effects changes in the
underlying assumptions would have on the resulting present value, and
discussed these changes with the Company's Board of Directors.
In addition, the Financial Advisors performed an analysis which estimated
the future value of the Bank while varying annual asset growth rate. The asset
growth assumptions ranged from 4.0% to 10.0%. The range of values arrived at
using a 14% discount rate for the Bank were between $177 million and $188
million, assuming a return on assets ("ROA") of 1.0%. When varying the ROAs
between 0.80% and 1.20%, keeping the asset growth rate constant at 8.0% and
using a discount rate of 14%, the range of values was $142 million to $228
million.
In connection with rendering the Fairness Opinions, the Financial Advisors
reviewed, among other things: (i) the Share Exchange Agreement and exhibits
thereto; (ii) the Company's audited consolidated financial statements and
management's discussion and analysis of the financial condition and results of
operations
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contained in its annual report to stockholders for the year ended December 31,
1995; (iii) certain financial analyses and forecasts of the Company prepared
by and reviewed with management of the Company and the views of senior
management of the Company regarding the Company's past and current business
operations, results thereof, financial condition and future prospects; (iv)
the impact of the Split-Off on the continuing operations of the Finance
Company; (v) the historical reported price and trading activity for the Common
Stock, including a comparison of certain financial and stock market
information for the Company with similar information for certain other
companies the securities of which are publicly traded; (vi) the financial
terms of recent business combinations in the banking and finance company
industries; (vii) the current market environment generally and the banking
environment in particular; and (viii) such other information, financial
studies, analyses and investigations and financial, economic and market
criteria as the Financial Advisors considered relevant.
In performing their review, the Financial Advisors assumed and relied upon,
without independent verification, the accuracy and completeness of all the
financial information, analyses and other information reviewed by and
discussed with them, and the Financial Advisors did not make an independent
evaluation or appraisal of the specific assets, the collateral securing assets
or the liabilities of the Company or any of its subsidiaries, or the
collectibility of any such assets (relying, where relevant, on the analyses
and estimates of the Company). With respect to the financial projections
reviewed with the Company's management, the Financial Advisors assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of management regarding the respective
future financial performances of the Bank and the Company after the Split-Off
and that such performances will be achieved. The Financial Advisors also
assumed that there has been no material change in the Company's assets,
financial condition, results of operations, business or prospects since the
date of the last financial statements noted above. The Financial Advisors
assumed that the Split-Off will qualify as a tax-free transaction, and have
further assumed that the Finance Company will remain as a going concern for
all periods relevant to their analyses and that the conditions precedent in
the Share Exchange Agreement are not waived.
Completion of the Split-Off is dependent on the successful resolution of a
number of critical conditions (the "Conditions"), including the following: (1)
the Taylor Group's ability to raise sufficient Tier 1 capital to adequately
capitalize the restructured Bank; and (2) the receipt of all necessary
regulatory approvals including, but not limited to, the approval of the
Federal Reserve Board. Representatives of the Taylor Group have communicated
to the Company and its representatives their high level of confidence that the
Conditions can be satisfied in a manner which will ensure the successful
completion of the Split-Off. Although the Financial Advisors have participated
in such communications with representatives of the Taylor Group, the Financial
Advisors have neither verified nor confirmed the representations of the Taylor
Group's representatives as to the Taylor Group's ability to meet the
Conditions. Although this opinion is based on the assumption that the
Conditions can be met, and takes into account the establishment of an escrow
arrangement with the Taylor Group which provides for certain payments to the
Company under certain circumstances, this opinion in no way implies or should
be interpreted to imply that the Conditions can, in fact, be met.
SELECTION AND COMPENSATION OF THE FINANCIAL ADVISORS
The Company retained the Financial Advisors as independent financial
advisors in connection with the Split-Off because Chicago Corp. had a long-
standing relationship with the Company and Sandler O'Neill had been retained
previously by the Cole Family to provide advice regarding the Company's
strategic options. The Financial Advisors were also chosen because they are
nationally recognized investment banking firms which are regularly engaged in
the valuation of financial institutions and their securities in connection
with mergers and acquisitions and other corporate transactions.
Pursuant to the Engagement Letters, the Company will pay the Financial
Advisors a transaction fee in connection with the Split-Off, a substantial
portion of which is contingent upon the consummation of the Split-Off. Under
the terms of the Agreement, the Company will pay each of the Financial
Advisors a transaction fee equal to 0.5% of the value of the transaction, or
approximately $1.1 million, of which 70% is payable on the day
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of closing of the transaction. To date the Company has paid to each of the
Financial Advisors $110,000. The sum of $220,000 will be payable to each of
the Financial Advisors upon approval of the Share Exchange Agreement and the
Split-Off Transactions by the stockholders of the Company. The Company has
also agreed to reimburse each of the Financial Advisors for its reasonable
out-of-pocket expenses incurred in connection with its engagement and to
indemnify the Financial Advisors and their affiliates and their respective
partners, directors, officers, employees, agents, and controlling persons
against certain expenses and liabilities, including liabilities under
securities laws.
THE SHARE EXCHANGE AGREEMENT
On June 12, 1996, the Company and the Taylor Family entered into the Share
Exchange Agreement, which sets forth the terms and conditions of the Split-Off
Transactions. The Share Exchange Agreement was amended and restated as of June
12, 1996. The following is a brief summary of certain provisions of the Share
Exchange Agreement, as amended and restated, a copy of which is attached
hereto as Appendix A and is incorporated herein by reference. This summary
does not purport to be complete and is qualified in its entirety by reference
to the Share Exchange Agreement. ALL STOCKHOLDERS OF THE COMPANY ARE URGED TO
READ THE SHARE EXCHANGE AGREEMENT, AS AMENDED AND RESTATED, IN ITS ENTIRETY.
The Split-Off
At the Closing, in exchange for the transfer of either the Bank Stock or the
capital stock of the New Holding Company to the Taylor Family, the Taylor
Family will assign and deliver or cause to be assigned and delivered to the
Company a certain number of shares of Common Stock to be determined at the
discretion of the Taylor Family (the "Stock Amount"); provided that, in no
event will the Stock Amount consist of more than 4,500,000 shares of Common
Stock or less than the greater of (i) 4,000,000 shares of Common Stock or (ii)
all of the shares of Common Stock which are owned beneficially or of record by
the Taylor Family (including any shares of Common Stock owned after the
exercise of any options to purchase shares of Common Stock (the "Options") and
any shares of Common Stock in the ESOP and the 401(k) Plan allocated to
members of the Taylor Family). All outstanding Options will become vested and
exercisable prior to the Closing and each Taylor Family member holding any
Options will exercise such Options at or prior to the Closing.
Pre-Closing Transactions
Formation of New Reliance. Prior to the Split-Off, the Bank will form New
Reliance, a new wholly owned subsidiary, to which the Bank will contribute (i)
its used automobile receivables business, consisting of (A) substantially all
of the assets used in the Bank's automobile receivables business, including
agreements with automobile dealers to purchase sales finance contracts (the
"Dealer Agreements") and (B) the Automobile Receivables (as defined below)
having a fair market value of between $30,000,000 and $31,000,000; (ii) the
First Cash Component (as defined below); and (iii) the Second Cash Component
(as defined below). The term "Automobile Receivables" means all of the Bank's
rights and obligations pursuant to automobile loans, notes or the Bank's
securities which as of the Closing Date are collateralized primarily with used
automobiles. The term "First Cash Component" means: (1) if the Stock Amount is
less than 4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the
amount, if any, by which the fair market value of the Automobile Receivables
(as defined below) exceeds $30,000,000 plus (C) the product of $33.00 and the
difference between 4,250,000 and the Stock Amount; (2) if the Stock Amount is
equal to 4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the
amount, if any, by which the fair market value of the Automobile Receivables
exceeds $30,000,000; or (3) if the Stock Amount is greater than 4,250,000,
cash in an amount equal to (A) $60,000,000 minus (B) the amount, if any, by
which the fair market value of the Automobile Receivables exceeds $30,000,000
minus (C) the product of $33.00 and the difference between the Stock Amount
and 4,250,000. The term "Second Cash Component" means cash in an amount equal
to (i) the amount of the Company's cash investment in Alpha Capital Fund, net
of all partner distributions, return of capital
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and like payments, made from time to time prior to June 12, 1996, plus any
additional cash investment made by the Company in Alpha Capital Fund
thereafter if made with the Taylor Family's consent (which investment totalled
$155,921 as of September 30, 1996), plus interest on the total amount invested
beginning, as to each portion of such amount invested at different times, on
the date of such investment, at the rate of 9% per annum, compounded annually
(which interest was $10,683 as of September 30, 1996); plus (ii) the amount of
the Company's aggregate cash investments in the Mortgage Company, net of all
distributions to stockholders, return of capital and like payments, made from
time to time prior to June 12, 1996 plus any additional cash investment made
by the Company in the Mortgage Company thereafter if made with the Taylor
Family's consent (which investments totalled $1,007,000 as of September 30,
1996), plus interest on the total amount invested at different times, on the
date of such investment, at the rate of 9% per annum, compounded annually
(which interest was $68,687 as of September 30, 1996). The First Cash
Component and the Second Cash Component are together referred to as the "Cash
Component."
Transfer of New Reliance to the Company and the Merger of the Finance
Company into New Reliance. Immediately prior to the Closing Date, the Company
will cause the Bank to distribute all of the capital stock of New Reliance to
the Company, and, thereafter, the Company will cause the Finance Company to be
merged with and into New Reliance.
Formation of the New Holding Company. Prior to the Closing, the Company will
form the New Holding Company and will transfer to the New Holding Company all
of the capital stock of the Bank, all of the capital stock of the Mortgage
Company and all of the Company's rights, obligations and interest in Alpha
Capital Fund in exchange for all of the capital stock of the New Holding
Company. The Company is not, however, required to effectuate this transfer
unless the Taylor Family has applied for and obtained appropriate regulatory
approval for the New Holding Company.
All intercompany indebtedness between the Company and the Mortgage Company
on the Closing Date will be repaid, together with interest thereon at the
interest rate specified by such indebtedness, and no intercompany indebtedness
will be incurred subsequent to the date of the Share Exchange Agreement,
except for such debt incurred in accordance with usual intercompany
relationships and practices to support the ongoing business activities of the
Finance Company in accordance with existing practices, including funding usual
working capital contributions and normal budgeted expenditures and making
reimbursements for services rendered in accordance with existing practices,
budgets and plans.
Additional Capital Required by the Bank after the Split-Off
The Bank will require additional capital upon consummation of the Split-Off
Transactions in order to comply with certain minimum capital requirements of
applicable banking laws and regulations and requirements of any regulatory
agencies. Under the Share Exchange Agreement, the Taylor Family has agreed to
use its reasonable best efforts to obtain sufficient funds to satisfy these
requirements (the "New Bank Financing"). The Taylor Family currently intends
to obtain some or all of such financing from debt borrowed from an
unaffiliated bank and from the net proceeds of a sale of securities of the
Bank (or the New Holding Company, as the case may be) (the "New Bank
Securities"). The terms of the New Bank Securities must be consistent with the
Tax Ruling. The Tax Ruling provides that the New Bank Securities will be
preferred stock and will have certain voting rights that will entitle the
holders to elect, as a class, at least one, but less than 20% of the New
Holding Company directors.
Representations and Covenants
Under the Share Exchange Agreement, each member of the Taylor Family,
jointly and severally, made certain representations and warranties, including
the following: (a) that the Share Exchange Agreement and the consummation of
the Split-Off Transactions have been duly authorized and that the Share
Exchange Agreement constitutes a legal, valid and binding obligation of each
member of the Taylor Family; (b) representations and warranties regarding the
number of shares of Common Stock and options to purchase Common Stock owned
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and that such shares and options will be free and clear of any security
interests, liens or other encumbrances ("Liens"); (c) that they will cooperate
with the Company in taking all necessary action to form the New Holding
Company and cause the New Holding Company to enter into, ratify and approve
the Share Exchange Agreement; (d) that the assets of the Bank's used
automobile receivables business to be transferred to New Reliance are
substantially all of the assets used exclusively in or necessary for the
conduct of such business; and (e) that the transfer of the Stock Amount will
transfer to the Company good and valid title to the shares of Common Stock
constituting the Stock Amount, free and clear of any Liens, except for Liens
the Company has permitted to attach.
The Company made certain representations and warranties, including the
following: (a) that the consummation of the Split-Off Transactions has been
duly authorized and that the Share Exchange Agreement constitutes the legal,
valid and binding obligation of the Company; (b) representations regarding the
capital structure of the Bank and the Mortgage Company; (c) representations
regarding the amounts and dates of its investments in the Mortgage Company and
the Alpha Capital Fund; (d) that the Company will, at the Closing, have good
and valid title to all of the Bank Stock, the capital stock of the Mortgage
Company and the Alpha Interest, free and clear of any Liens; (e) that the
transfer of the Bank Stock, the capital stock of the Mortgage Company and the
interest in the Alpha Capital Fund to the Taylor Family, the Bank or the New
Holding Company, as the case may be, will transfer to such person or persons
good and valid title to the Bank Stock, the capital stock of the Mortgage
Company and the interest in the Alpha Capital Fund, free and clear of any
Liens, except for Liens the Taylor Family has permitted to attach; and (f)
that the Company has not received since September 1, 1995 any Acquisition
Proposal, except as previously disclosed.
The covenants of the parties include, without limitation, the following: (a)
the members of the Taylor Family who are directors of the Company (the "Taylor
Directors") will submit, no later than August 31, 1996, any necessary
applications to the applicable governmental authorities for approval of the
Split-Off Transactions (including but not limited to the Federal Reserve
Board) and the Bank and the Company will assist in such filings; (b) at the
Annual Meeting, the members of the Taylor Family will vote all shares of
Common Stock owned or controlled by them in favor of the Share Exchange
Agreement and the Split-Off Transactions; (c) the Company and the Taylor
Family will comply with any covenants made in connection with the Tax Ruling
or with any applicable governmental authority to ensure the tax-free nature of
the Split-Off Transactions; and (d) for the two-year period following the
Closing Date, the parties agreed to take, or refrain from taking, certain
actions which may affect the qualification of the Split-Off under Section 355
of the Code or the validity of the Tax Ruling (unless the party wishing to
take such action provides the other party with a written opinion from
nationally recognized tax counsel that the desired transaction will not affect
the qualification of the Split-Off under Section 355 of the Code or the
validity of the Tax Ruling).
Conduct of Business Prior to the Consummation of the Split-Off Transactions
The Bank and Mortgage Company. Under the Share Exchange Agreement, except as
otherwise agreed to in writing by the Board and the Taylor Directors and
except to the extent necessary to consummate the Pre-Closing Transactions, the
Company and the Taylor Directors have agreed, prior to the earlier of the
Closing Date and the termination of the Share Exchange Agreement, not to
terminate or change the terms of the employment of Jeffrey W. Taylor or Bruce
W. Taylor at the Company. In addition, the Company and the Taylor Directors
have agreed that, prior to the later of the Closing Date and the termination
of the Taylor Sale Period, they will not terminate or change the terms or
conditions of employment of any employees of the Company having an annual
salary of $100,000 or more (other than Jeffrey W. Taylor or Bruce W. Taylor),
the Bank (including Jeffrey W. Taylor and Bruce W. Taylor) or the Mortgage
Company. The "Taylor Sale Period," which is defined under""--Termination," is
generally the period of time beginning with the termination of the Share
Exchange Agreement for specified reasons and ending on the earliest of (a)
nine months; (b) the date the Company decides not to pursue or terminate the
sale of the Bank; or (c) the date the Taylor Directors present to the Board a
bona fide offer by a third party to purchase the Bank. The foregoing does not
apply to employees of the Finance Company or its subsidiaries in their
capacities as such.
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The Company and the Taylor Directors also agreed that, during the period
from the date of the Share Exchange Agreement and continuing until the later
of the Closing Date and the termination of the Taylor Sale Period, except to
the extent necessary to consummate the Pre-Closing Transactions, to use their
reasonable best efforts to cause each of the Bank and the Mortgage Company:
(a) to carry on its business in the ordinary course in substantially the same
manner as previously conducted; (b) to keep in full force and effect any
material contracts; (c) to keep in full force and effect the insurance
coverage in effect on the date of the Share Exchange Agreement; (d) to use its
best efforts to keep in full force and effect and preserve its business
organization and material rights and franchises and to retain its present
employee force; (e) to continue all usual intercompany relationships and
practices to support the ongoing business activities of the Bank and the
Mortgage Company in accordance with existing practices; and (f) to take such
action as may be necessary to maintain, preserve, renew and keep in full force
and effect its corporate existence and material rights and franchises.
The Finance Company. Except as otherwise agreed to by the Board (with the
participation of the Taylor Directors) and except to the extent required to
consummate the Pre-Closing Transactions, the Company has agreed to use its
reasonable best efforts to cause each of the Finance Company and the Finance
Company's subsidiaries, from and after the date of the Share Exchange
Agreement and until the earlier of the Closing Date or the termination of the
Share Exchange Agreement, to: (a) carry on its business only in the ordinary
course and consistent with past practices; (b) keep in full force and effect
any material contracts except as they may terminate in accordance with their
terms or in accordance with the terms of the Share Exchange Agreement; (c)
keep in full force and effect the insurance coverage in effect on the date of
the Share Exchange Agreement; (d) use its best efforts to maintain and
preserve its business organization and material rights and franchises and to
retain its present employee force and general customer relationships; (e)
continue all usual intercompany relationships and practices to support the
ongoing business activities of the Finance Company in accordance with existing
practices; and (f) take such action as may be necessary to maintain and keep
in full force and effect its corporate existence and material rights and
franchises.
Prohibited Transactions Without Approval. From and after the date of the
Share Exchange Agreement and until the earlier of the Closing or the
termination of the Share Exchange Agreement, the Company and the Taylor
Directors have agreed to use their reasonable best efforts to cause the Bank
and the Mortgage Company not to take certain actions, including the following
(unless agreed to by the Board with the participation of the Taylor
Directors): (a) except in the ordinary course of business and consistent with
prior practice, (1) incur any obligation or liability, (2) assume, guaranty or
endorse the obligations of any other person, (3) mortgage or pledge any of its
assets or create or suffer to exist any Lien thereupon, or (4) obligate the
Bank or the Mortgage Company to an intercompany charge; (b) amend or terminate
any material contract which would materially adversely affect its rights
thereunder; (c) acquire any corporation, partnership or other business or
substantial part thereof; (d) sell or otherwise dispose of any substantial
part of its assets; (e) enter into, dispose or divest itself of any joint
venture or partnership or cause any business entity to become a subsidiary or
affiliate; (f) sell or otherwise dispose of any real property owned or
operated by it except for the sale of real estate held for sale in the
ordinary course of business; (g) enhance, expand, modify, replace or alter any
computer or data processing system owned, leased or licensed by it (including
any software associated with any such computer or system); (h) authorize any
expenditures in excess of $50,000, individually or in the aggregate; (i) make,
originate or otherwise acquire any loans or loan commitments for any loans or
lines of credit; (j) authorize for issuance, issue, sell, redeem or acquire
any debt securities, shares of capital stock or other equity securities, or
declare, issue or pay any dividend or other distribution of assets other than
as set forth in the Share Exchange Agreement; (k) split, combine or reclassify
any shares of its capital stock; (l) sell, pledge or otherwise encumber any
stock owned by it in any subsidiary; (m) amend or permit the amendment of the
certificate of incorporation, charter, bylaws or similar document of any
subsidiary; (n) split, combine or reclassify any shares of capital stock; (o)
enter into, adopt or (except as may be required by law) amend or terminate any
bonus, compensation or any other benefit plan for the benefit or welfare of
any director, officer or employee, increase in any manner the compensation or
benefits of any director, officer or employee or pay any benefit not required
by any plan or arrangement in effect as of June 12, 1996 or hire any employee
with a salary in excess of $150,000 per year or hire, terminate or change the
terms of employment of any employee who would be entitled to any payment upon
change of control of the Bank or the Mortgage Company; (p) acquire or dispose
of any securities or interests for investment
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purposes or sell or purchase mortgage servicing rights; (q) open any new
office or close any current office of the Bank, any of the Bank's subsidiaries
or the Mortgage Company; or (r) enter into any transactions other than in the
ordinary course of business.
From and after the date of the Share Exchange Agreement and until the
earlier of the Closing or the termination of the Share Exchange Agreement, the
Company has agreed to use its reasonable best efforts to cause the Finance
Company not to take certain actions, including the following (unless agreed to
by the Board with the participation of the Taylor Directors): (a) except in
the ordinary course of business and consistent with prior practice, (1)
assume, guarantee or endorse the obligations of any other person, (2) mortgage
or pledge any of its assets or create or suffer to exist any Lien thereupon,
or (3) obligate the Finance Company to an intercompany charge; (b) amend or
terminate any material contract which would materially adversely affect its
rights thereunder; (c) acquire any corporation, partnership or other business
or substantial part thereof; (d) sell or otherwise dispose of any substantial
part of its assets; (e) enter into, dispose or divest itself of any joint
venture or partnership or cause any business entity to become a subsidiary or
affiliate; (f) sell or otherwise dispose of any real property owned or
operated by it, except for the sale of real estate held for sale in the
ordinary course of business; (g) enhance, expand, modify, replace or alter any
computer or data processing system owned, leased or licensed by it (including
any software associated with any such computer or system); (h) authorize any
expenditures in excess of $50,000, individually or in the aggregate; (i) make,
originate or otherwise acquire any loans or loan commitments for any loans or
lines of credit; (j) authorize for issuance, issue, sell, redeem or acquire
any debt securities or equity securities, or declare, issue or pay any
dividend or other distribution of assets other than as set forth in the Share
Exchange Agreement; (k) split, combine or reclassify any shares of its capital
stock; (l) sell, pledge or otherwise encumber any stock owned by it in any
subsidiary; (m) amend or permit the amendment of the certificate of
incorporation, charter, bylaws or similar document of any subsidiary; (n)
split, combine or reclassify any shares of capital stock of any of its
subsidiaries; (o) enter into, adopt or (except as may be required by law)
amend or terminate any bonus, compensation or any other benefit plan for the
benefit or welfare of any director, officer or employee, increase in any
manner the compensation or benefits of any director, officer or employee or
pay any benefit not required by any plan or arrangement in effect as of June
12, 1996 or hire any employee with a salary in excess of $150,000 per year or
hire, terminate or change the terms of employment of any employee who would be
entitled to any payment upon change of control of the Bank or the Mortgage
Company; (p) acquire or dispose of any securities or interests for investment
purposes or sell or purchase mortgage servicing rights; or (q) enter into any
transactions other than in the ordinary course of business.
The parties also agreed that between the date of the Share Exchange
Agreement and the Closing Date, the Bank will pay monthly dividends to the
Company in such amounts that the cumulative dividends for calendar year 1996
are equal to $10,100,000. If the Closing Date occurs prior to January 1, 1997,
such amount shall be reduced by $27,671.23 for each day after the Closing Date
and prior to January 1, 1997. If the Closing Date has not occurred prior to
December 31, 1996, such dividends will be $880,000 per month of calendar year
1997.
In addition, after the date of the Share Exchange Agreement and prior to the
Closing Date, the Company and the Taylor Directors agreed to use their
reasonable best efforts to cause the Company, the Bank and the Finance Company
to obtain any waivers, consents, amendments or approvals required to prevent
any default, acceleration or other adverse effect upon the Company, the Bank
or the Finance Company under any indenture, credit agreement, note or other
indebtedness.
No Solicitation
The Company has agreed to immediately cease any existing discussion or
negotiations with any third parties with respect to any Acquisition Proposal.
Subject to certain exceptions described below, the Company also agreed that it
will not (i) solicit or encourage any inquiries, proposals or offers, (ii)
solicit or engage in negotiations or discussions concerning, or provide any
non-public information or data to, any person or entity relating to any
Acquisition Proposal, or (iii) agree to approve or recommend any Acquisition
Proposal. However, the Company is not prevented from furnishing non-public
information to, or entering into discussions or
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negotiations with, any person in connection with an unsolicited Acquisition
Proposal or recommending such Acquisition Proposal to the stockholders if the
directors determine in good faith that such action is required to discharge
their fiduciary duties and the Company advises the Taylor Family of all non-
public information delivered to such third-party.
Additional Agreements
The Taylor Family and the Company made certain additional agreements under
the Share Exchange Agreement, including the following:
Notification of Change. The parties agreed to notify each other of
certain events, including (a) any material change in the ordinary course of
business or operation of the Bank, its subsidiaries, or the Mortgage
Company; and (b) any governmental complaints, investigations or hearings or
the institution or threat of litigation involving the Bank, its
subsidiaries or the Mortgage Company which is material or might have a
material adverse effect.
Regulatory Filings. The Company agreed to furnish the Taylor Directors,
and the Taylor Directors agreed to furnish the Board, with any information
relating to the Company, the Bank, its subsidiaries or the Mortgage Company
required to be included in any filing that the Company, on the one hand, or
the Taylor Family, on the other, is required to file in order to consummate
the Split-Off Transactions.
Compliance with Tax and Regulatory Representations. Each party agreed to
comply with any covenants it made in connection with the Tax Ruling or with
any applicable governmental authority to ensure the tax-free nature of the
Split-Off Transactions. The Company agreed that, for the two-year period
following the Closing Date, it will cause New Reliance to continue the
operation of the used automobile receivables business previously operated
by the Bank by taking certain actions including: (a) purchasing the same
type of automobile receivables previously purchased by the Bank (except
that such receivables may be collateralized by used automobiles only), (b)
maintaining a portfolio of at least $30,000,000 in face amount value of
such receivables (net of unearned finance charge), and (c) to the extent
practicable, purchasing receivables from the same dealerships from which
the Bank previously purchased such receivables.
For two years following the Closing Date, unless the Taylor Family has
obtained a tax opinion (a "Tax Opinion") satisfactory to the Company that
the desired transaction will affect neither the tax-free qualification of
the Split-Off nor the validity of the Tax Ruling: (a) no Taylor Family
member will sell or enter into any transaction reducing economic risk with
respect to the Bank Stock received in the Split-Off; (b) the Taylor Family
will cause the Bank to continue the active conduct of its banking business;
and (c) the Taylor Family will not permit either the Bank or the New
Holding Company to merge with any other corporation, liquidate in whole or
in part, sell or transfer any significant part of its assets, redeem or
otherwise purchase any of its capital stock or, except as specifically
provided by the Tax Ruling, issue additional shares of its capital stock.
Regardless of whether the Taylor Family has obtained a Tax Opinion, the
Taylor Family will not enter into any agreement for transfer of control of
the Bank or the New Holding Company for one year following the Closing
Date.
For two years following the Closing Date, unless the Company obtains a
tax opinion satisfactory to the Taylor Family that the desired transaction
will affect neither the tax-free qualification of the Split-Off nor the
validity of the Tax Ruling: the Company will not (a) sell or otherwise
transfer the capital stock of New Reliance; or (b) permit New Reliance to
merge with any other corporation, liquidate in whole or in part, sell or
transfer any significant part of its assets, or redeem or otherwise
purchase any of its capital stock (except in accordance with the Share
Exchange Agreement or the Tax Ruling).
The Company and the Bank have agreed to amend their tax allocation
agreement so that the allocation through the Closing between the Company
and its subsidiaries, on the one hand, and the Bank, on the other, will
continue in a matter consistent with past practice. From the date of the
Share Exchange Agreement, all tax benefits associated with the exercise or
buyout of all compensatory options of Common Stock will inure solely to the
Company and any audit claims or liabilities shall be borne by the party to
whom the adjustment is attributable.
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Lease Arrangements. If requested by the Company, the Bank will sublease
to the Company for 90 days after the Closing Date, the space currently
utilized by the Company on terms reasonably acceptable to the parties. On
the Closing Date, the Company will assign to the Bank any leases, licenses,
and property used by, or adjacent to, the Bank properties but owned by the
Company or the Finance Company, for no additional consideration. All
property owned by the Bank as of June 12, 1996 will remain the property of
the Bank on and after the Closing Date.
Employees. The Company will assume all liability (and will indemnify the
Bank and the Taylor Family for such liability) for any payments owed as a
result of the Closing to persons specified in the Share Exchange Agreement
or full-time employees of the Finance Company or its subsidiaries. The
Taylor Family will cause the Bank to assume all liability (and the Bank
will indemnify the Company and its subsidiaries) for any severance or
change in control payments owed as a result of the Closing to employees of
the Company, the Bank or its affiliates, other than persons specified in
the Share Exchange Agreement or full-time employees of the Finance Company
or its subsidiaries.
Employee Benefit Plans. The Taylor Family agreed to cause the Bank or the
New Holding Company to establish a new employee stock ownership plan and a
new 401(k) plan, and the Company agreed to transfer to the new plans from
the ESOP and the 401(k) Plan the account balances of employees who are or
will become employees of the Bank at Closing and former employees of the
Bank (the "Bank Employees"). Before the Closing Date, the Company will
cause contributions to be made to the ESOP sufficient to prepay the
outstanding ESOP loan and will cause the allocation to the accounts of
participants of the shares of Common Stock that are released from the
suspense account by reason of such loan prepayment. The trustee of the
Bank's or the New Holding Company's new employee stock ownership plan may
participate in the Split-Off as part of the Taylor Group as long as the
trustee making the determination on the exchange of shares is an
independent financial institution and retains an independent financial
advisor. Members of the Taylor Family hold, and other members of the Taylor
Group may hold, beneficial interests under the ESOP and the 401(k) Plan.
Insurance Policies. The Bank may purchase from the Company, and the
Company may purchase from the Bank, any insurance policies owned by the
other party and providing coverage with respect to the purchasing party or
any of its officers at the greater of the book value or the cash value of
such policies.
Conditions to Closing
Under the Share Exchange Agreement, the obligations of the Taylor Family to
effect the Split-Off Transactions are subject to the fulfillment or waiver of
certain conditions, including the following: (i) the representations and
warranties of the Company set forth in the Share Exchange Agreement are true
in all material respects and the Company has performed and satisfied in all
material respects all covenants and agreements required by the Share Exchange
Agreement, (ii) all action required to be taken by or on the part of the
Company or the Bank to authorize the execution, delivery and performance of
the Share Exchange Agreement and the consummation of the Split-Off
Transactions has been duly and validly taken by the Boards of Directors of
Company and the Bank, (iii) the expiration or termination of any applicable
waiting periods and the approval of the transactions by all applicable
governmental authorities, (iv) the absence of any order, injunction or decree
by any court, governmental agency, department or regulatory body prohibiting
the consummation of the transactions, (v) the absence of any material new
litigation which could reasonably be expected to have a material adverse
effect on the business and financial condition of the Bank and its
subsidiaries, (vi) the absence of any statute, rule, regulation or policy
which prevents or restricts the consummation of the Split-Off Transactions,
(vii) the consummation of the Pre-Closing Transactions, (viii) the approval of
the Split-Off Transactions by the holders of at least a majority of the
outstanding shares of Common Stock and (ix) the receipt of all required
approvals, consents and authorizations of any third parties in connection with
the transactions, except for such approvals, consents and authorizations which
if not obtained would not have a material adverse effect on the Bank and its
subsidiaries.
The obligations of the Company to effect the Split-Off Transactions are
subject to the fulfillment or waiver of certain conditions, including the
following: (i) the representations and warranties of the Taylor Family set
forth in the Share Exchange Agreement are true in all material respects and
the Taylor Family shall have
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performed and satisfied all covenants and agreements required by the Share
Exchange Agreement, (ii) all action required to be taken by or on the part of
the Taylor Family to authorize the execution, delivery and performance of the
Share Exchange Agreement and the consummation of the Split-Off Transactions
has been duly and validly taken by the Taylor Family, (iii) the expiration or
termination of any applicable waiting periods and the approval of the
transactions by all applicable governmental authorities, (iv) the absence of
any order, injunction or decree by any court, governmental agency, department
or regulatory body prohibiting the consummation of the transactions, (v) the
absence of any material new litigation which could reasonably be expected to
have a material adverse effect on Company and its subsidiaries (other than the
Bank), (vi) the absence of any statute, rule, regulation or policy which
prevents or restricts the consummation of the transactions, (vii) the
consummation of the Pre-Closing Transactions; (viii) the approval of the
Split-Off Transactions by the holders of at least a majority of the
outstanding shares of Common Stock and (ix) the receipt of all required
approvals, consents and authorizations of any third parties in connection with
the transactions, except for such approvals, consents and authorizations which
if not obtained would not have a material adverse effect on Company and its
subsidiaries (other than the Bank), taken as a whole.
Closing
The Closing and the delivery of the certificates and acknowledgements
required under the Share Exchange Agreement will take place on the Closing
Date, which date will be fixed by mutual agreement of the Taylor Family and
the Company as promptly as practicable following the satisfaction or waiver of
the conditions to Closing set forth in the Share Exchange Agreement.
Termination
The Share Exchange Agreement may be terminated at any time prior to the
Closing: (i) by mutual written consent of the Taylor Family and the Company,
(ii) by the Taylor Family or the Company if any court of competent
jurisdiction within the United States issues any order, decree or ruling or
action restraining, enjoining or prohibiting the consummation of the Split-Off
Transactions, (iii) by the Taylor Family or the Company in the event any
approval of any applicable governmental authority has been denied or contains
or is subject to terms or conditions which either party reasonably deems to be
materially burdensome, (iv) provided the party seeking termination has
satisfied in all material respects all covenants and agreements to be
performed and satisfied by it on or prior to the date of termination under the
Share Exchange Agreement, by the Taylor Family or the Company upon material
breach by the other party of any of its covenants or agreements, subject to a
30-day right to cure following the receipt of written notice of such breach,
(v) by the Taylor Family or the Company if the Closing has not occurred prior
to June 30, 1997 (provided the terminating party has not caused the closing
not to occur in breach of the Share Exchange Agreement), (vi) by the Company,
prior to the Annual Meeting, after the Company's receipt of an Acquisition
Proposal if the Board determines, based on the advice of independent counsel,
that such action is required for the discharge of the Board's fiduciary
duties, (vii) by the Taylor Family if the Board withdraws or modifies in a
manner adverse to the Taylor Family its approval of the Share Exchange
Agreement, the Split-Off Transactions or its recommendation to the Company's
stockholders or if the Company enters into an agreement providing for an
Acquisition Proposal or the Board resolves to do any of the foregoing, (viii)
by the Taylor Family if the Annual Meeting has not occurred prior to November
28, 1996 (unless the Taylor Family has caused the Annual Meeting not to occur
prior to such date), or (ix) by either the Company or the Taylor Family if the
stockholders of the Company do not approve the Split-Off Transactions at the
Annual Meeting.
If the Share Exchange Agreement is terminated due to a Triggering
Termination (as defined below), the Company will be entitled to receive as an
exclusive remedy, liquidated damages equal to $15,000,000 from the Taylor
Family, which amount is subject to reduction depending on the result of the
Bank Sale Process. A "Triggering Termination" means termination of the Share
Exchange Agreement due to the following reasons: (i) failure to obtain the
approval of any applicable governmental authority (other than because of a
failure to comply with the Community Reinvestment Act or fair lending
statutes); or (ii) if the Closing has not occurred prior to June 30, 1997 due
to (A) the failure to obtain New Bank Financing, or (B) the failure to obtain
the
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approval of any applicable governmental authority (other than because of a
failure to comply with the Community Reinvestment Act or fair lending
statutes).
If the Share Exchange Agreement is terminated as a result of a Triggering
Termination, the Company will use its reasonable best efforts to solicit bids
from third parties for the sale of all of the equity interest in the Bank (the
"Bank Sale Process"). The Taylor Family has agreed to use its best efforts to
support the Bank Sale Process, and the Taylor Directors will direct such
process. If, during the nine-month period after a Triggering Termination, the
Company receives a Sufficient Bona Fide Offer (as defined below) to acquire
all of the equity interest in the Bank that the Taylor Family wishes the Board
to consider, the obligation of the Taylor Family to pay the Company
$15,000,000 will be reduced (provided the obligation will never be less than
zero) by the amount by which the Sufficient Bona Fide Offer would provide the
Company with gross proceeds with a fair market value in excess of
$235,000,000. A "Sufficient Bona Fide Offer" means an offer for all of the
equity interest in the Bank from a financially reliable third party (or
parties) that, if accepted, would be likely to be consummated and that, if
consummated, would provide the Company with gross proceeds with a fair market
value in excess of $235,000,000. The Board is under no obligation to accept a
Sufficient Bona Fide Offer that the Taylor Family wishes the Board to
consider, provided, however, that in the event the Board rejects a Sufficient
Bona Fide Offer, the obligation of the Taylor Family to pay the Company
$15,000,000 will be reduced in the same manner as is set forth in the
preceding sentence. If no Sufficient Bona Fide Offer is received during the
nine months after a Triggering Termination, the Taylor Family will pay the
full $15,000,000 to the Company. The Company may, without the participation of
any member of the Taylor Family, resolve not to pursue the Bank Sale Process
or to enter into an agreement providing for the merger or disposition of the
stock or assets of the Company prior to the expiration of the nine-month
period following a Triggering Termination, in which case the obligation of the
Taylor Family to pay the $15,000,000 to the Company will be extinguished. The
Taylor Family deposited 750,000 shares of Common Stock into escrow to ensure
payment of any liquidated damages required to be paid by the Taylor Family
under the Share Exchange Agreement. See "--The Escrow Agreement."
If the Share Exchange Agreement is terminated (i) by the Company after the
receipt of an Acquisition Proposal if such action was necessary to discharge
the Board's fiduciary duties or (ii) by the Taylor Family if the Board
withdraws or modifies its approval of the Share Exchange Agreement or the
Split-Off Transactions or if the Company has entered into an agreement
providing for an Acquisition Proposal or the Board resolves to do any of the
foregoing, the Company is obligated to pay the Taylor Family as an exclusive
remedy, liquidated damages in an amount equal to (A) the Taylor Family's out
of pocket expenses paid to lawyers, accountants, investment bankers or other
experts plus (B) three percent of the fair market value as of the date of the
Share Exchange Agreement of the Acquisition Proposal that gave rise to such
termination. If the Share Exchange Agreement is terminated by the Taylor
Family upon material breach of any of the Company's covenants or agreements
contained in the Share Exchange Agreement which has not been cured within 30
days of written notice thereof by the Company, the Company is obligated to pay
the Taylor Family as an exclusive remedy, liquidated damages equal to
$15,000,000.
Indemnification
The Share Exchange Agreement provides that the Taylor Family will indemnify
and hold harmless the Company and its affiliates from and against any and all
losses, damages, claims, liabilities or obligations (including attorneys' fees
and interest) ("Losses") with respect to (i) any breach of any representation,
warranty or agreement of the Taylor Family contained in the Share Exchange
Agreement and (ii) any brokerage fees, commissions or finders' fees payable on
the basis of any action taken or caused to be taken by the Taylor Family.
After the Closing, the Taylor Family is obligated to cause the Bank to
indemnify and hold harmless the Company and its affiliates from and against
any and all Losses (i) whenever incurred, arising or accrued, relating to the
Bank, the Mortgage Company or the Company's ownership of securities in the
Bank, the Mortgage Company or Alpha Capital Fund or (ii) incurred, arising or
accrued prior to the Closing and relating to New Reliance. In addition, after
the Closing, the Taylor Family is obligated to indemnify and hold harmless the
Company from and against 25% of any Losses, including, without limitation, any
costs or expenses of defense or settlement of
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any suits, actions or proceedings initiated by third parties and any judgments
in such suits, actions or proceedings relating to the Split-Off Transactions
and any Losses relating to disputes regarding terminations or limitations of
the Options.
The Company is obligated to indemnify and hold harmless the Taylor Family,
its affiliates and the Bank from and against any and all Losses with respect
to (i) any breach of any representation, warranty or agreement of the Company
contained in the Share Exchange Agreement and (ii) any brokerage fees,
commissions or finders' fees payable on the basis of any action taken or
caused to be taken by the Company. In addition, after the Closing, the Company
is obligated to indemnify and hold harmless the Taylor Family from and against
any and all Losses (x) whenever incurred, arising or accrued, relating to the
Company (except for matters for which the Taylor Family is indemnifying the
Company pursuant to the Share Exchange Agreement) or the Finance Company or
(y) incurred, arising or accrued after the Closing and relating to New
Reliance.
Unless the Share Exchange Agreement has been terminated by the Taylor Family
due to a material breach by the Company of any of its covenants or agreements
contained in the Share Exchange Agreement which has not been cured within 30
days of notice of such breach, the Taylor Family will indemnify and hold
harmless the Company against all costs and liabilities related to the sale of
the New Bank Securities, including, without limitation, all underwriting,
accounting, legal, printing, filing fees and other expenses of a public or
private offering and any liabilities relating to misstatements or omissions in
the registration statement or other offering documents or any part thereof.
The Bank will assume such indemnity and hold harmless agreement after the
Split-Off.
Amendment
The Share Exchange Agreement may be amended or modified, and the terms
thereof waived, at any time before or after the receipt of any approvals, by a
writing executed by the Company and representatives of the Taylor Family.
However, after stockholder approval of the Share Exchange Agreement and the
Split-Off Transactions, no amendment may be made which by applicable law
requires the further approval of the Company's stockholders unless such
approval is obtained. If the Company determines that an amendment made after
approval by its stockholders requires the further approval of its
stockholders, it will call a special meeting of its stockholders for voting on
such amendment and will resolicit proxies for use at such special meeting. Any
such resolicitation will be made in substantially the same manner as the
solicitation of proxies made pursuant to this Proxy Statement. From and after
the date of the Share Exchange Agreement, any amendment of the Share Exchange
Agreement, any action or inaction of the Company or any or its subsidiaries
relating to the Share Exchange Agreement (other than as specifically set forth
in the Share Exchange Agreement), including any termination of the Share
Exchange Agreement by the Company, will require the concurrence of the Board
or a duly authorized committee thereof by a majority of those voting, without
the vote of any member of the Taylor Family.
Expenses
Except as otherwise specifically set forth in the Share Exchange Agreement
(see "--Termination"), each party will pay its own fees and expenses incident
to preparing for, entering into, and carrying out the Share Exchange Agreement
and the Split-Off Transactions. The fees and expenses of the Company and the
Finance Company, including any brokers', finders', investment bankers',
attorneys', filing, accountants' or tax advisors' fees (collectively, "Fees")
are to be borne by the Company, and the Fees of the Bank and the Taylor Family
are to be borne by the Taylor Family. The Company expects that it will pay an
aggregate of approximately $6,000,000 for Fees and special payments to certain
employees as a result of the Split-Off Transactions.
THE ESCROW AGREEMENT
Pursuant to an escrow agreement between the Taylor Family, the Company and
The Northern Trust Company dated June 19, 1996 (the "Escrow Agreement"), the
Taylor Family deposited 750,000 shares of Common Stock (the "Escrow Amount")
into escrow to ensure payment of any liquidated damages required to
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be paid by the Taylor Family under the Share Exchange Agreement. The Northern
Trust Company, as escrow agent, will hold the Escrow Amount in escrow until it
receives (i) a final order or judgment of a court of competent jurisdiction
directing the disposition of the Escrow Amount or any part thereof, together
with an opinion of counsel to the Company or the Taylor Family that such order
or judgment is final, or (ii) joint written notice from the Company and the
Taylor Family, in which case the Escrow Amount will be distributed in
accordance with such order or judgment or the joint written notice, as the
case may be. A copy of the Escrow Agreement is attached hereto as Appendix B
and is incorporated herein by reference. THE FOREGOING SUMMARY DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ESCROW AGREEMENT.
THE STOCK REPURCHASE
Although no decision has been made, after consummation of the Split-Off
Transactions, the Company may repurchase from its then existing stockholders
outstanding shares of its Common Stock (the "Stock Repurchase"). The Company
would fund the Stock Repurchase with some or all of the Cash Component that it
receives from the Bank in the Split-Off Transactions, provided that the
Company does not expect to expend more than $60,000,000 for the Stock
Repurchase, if the Stock Repurchase is effected. If commenced, it is possible
that the Stock Repurchase may be effected through one or more tender offers,
open market purchases, private purchases or otherwise. Alternatively, the
Company may utilize some of the cash it receives from the Bank in the Split-
Off Transactions to reduce existing debt, buy out compensatory stock options
or pay dividends.
The Stock Repurchase would only be effected, if at all, after consummation
of the Split-Off Transactions. After consummation of the Split-Off
Transactions, the Company may determine not to effect the Stock Repurchase or
any of the other transactions described in the preceding paragraph.
Consequently, regardless of whether the Split-Off Transactions are
consummated, there can be no assurance as to when, if ever, the Stock
Repurchase or any of such other transactions will be consummated or, if
effected, the size, manner or duration of such Stock Repurchase or other
transactions. Due to its contingent nature, the Stock Repurchase is not
reflected in the pro forma financial statements included herein. STOCKHOLDERS
OF THE COMPANY WILL NOT BE ASKED TO CONSIDER OR VOTE UPON THE STOCK
REPURCHASE.
INTERESTS OF CERTAIN PERSONS IN THE SPLIT-OFF TRANSACTIONS
The Taylor Family has played a very important role on the Board and in the
management of the Company. Members of the Taylor Family collectively
beneficially own approximately 25% of the outstanding Common Stock. In
addition, Jeffrey W. Taylor is the Chairman of the Board and Chief Executive
Officer of the Company, Bruce W. Taylor is the President of the Company and
the Chief Executive Officer of the Bank and Sidney J Taylor is the Chairman of
the Company's Executive Committee. Sidney J Taylor is one of the co-founders
of the Bank. Jeffrey W. Taylor and Bruce W. Taylor are members of the
Executive Committee and both were members of the Second Special Committee
which, among other things, initiated the Company's exploration of its
strategic options. The interests of the Taylor Family are different from the
interests of the Company and the remaining stockholders with respect to the
Split-Off Transactions. Consequently, the Board retained independent financial
and legal advisors and negotiated with the Taylor Family at arm's length. The
Board considered and approved the Share Exchange Agreement without the
participation of members of the Taylor Family.
Pursuant to the Share Exchange Agreement, all outstanding options to
purchase Common Stock of the Company held by members of the Taylor Family will
become vested and exercisable in full prior to the Closing. Each Taylor Family
member holding any such options is obligated to exercise them at or prior to
the Closing. As of September 30, 1996, members of the Taylor Family held
options to purchase 280,540 shares of Common Stock, having an aggregate value
of $5,971,816 (calculated by subtracting the exercise prices from the closing
price of the Company's Common Stock of $30.00, as reported on the Nasdaq
National Market). Additionally, as a result of the Split-Off Transactions, all
outstanding options ("Employee Stock Options") to purchase Common Stock under
the Company's 1991 Stock Option Plan (the "1991 Plan") will automatically
become vested and, therefore, will be exercisable in full after the Closing.
The Compensation Committee of the Board is considering proposals to accelerate
the date for vesting of Employee Stock Options under the 1991 Plan in order to
facilitate more orderly sales of the shares of Common Stock issuable upon
exercise of such Employee Stock Options.
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Employee Stock Options held by persons who will no longer be employees of the
Company as a result of the Split-off Transactions (i.e., employees who will be
remaining with the Bank) will expire unless exercised within 60 days after the
consummation of the Split-Off. As of September 30, 1996, Employee Stock
Options to purchase 1,413,738 shares of Common Stock were outstanding under
the 1991 Plan, including Employee Stock Options to purchase 1,030,527 shares
of Common Stock held by employees who are expected to remain with the Bank
after the Split-Off. As of September 30, 1996, the following executive
officers and directors of the Company held Employee Stock Options (having
aggregate values calculated by the method stated above): (i) Howard B.
Silverman, a director of the Company and Chairman and a director of the
Finance Company held Employee Stock Options to purchase 40,000 shares, having
an aggregate value of $768,000, (ii) Thomas L. Barlow, President, Chief
Executive Officer and a director of the Finance Company, held Employee Stock
Options to purchase 48,400 shares of Common Stock, having an aggregate value
of $731,700, (iii) John Christopher Alstrin, Chief Financial Officer of the
Company and the Bank, held Employee Stock Options to purchase 41,800 shares,
having an aggregate value of $227,392, (iv) Melvin E. Pearl, a director of the
Company, held Employee Stock Options to purchase 35,000 shares, having an
aggregate value of $672,000, and (v) William S. Race, a director of the
Company, held Employee Stock Options to purchase 102,235 shares, having an
aggregate value of $2,410,800. As of September 30, 1996, the other employees
who the Company considers to be members of its senior management team held
Employee Stock Options to purchase an aggregate of 310,815 shares of Common
Stock, having an aggregate value of $4,959,200.
Pursuant to the Share Exchange Agreement, the Taylor Family has agreed to
cause the Bank or the New Holding Company to establish a new employee stock
ownership plan and a new 401(k) plan, and the Company has agreed to transfer
to the new plans from the ESOP and the 401(k) Plan the account balances of
employees who are or will become employees of the Bank at Closing and former
employees of the Bank (the "Bank Employees"). Before the Closing Date, the
Company will cause contributions to be made to the ESOP sufficient to prepay
the outstanding ESOP loan and will cause the allocation to the accounts of
participants of the shares of Common Stock that are released from the suspense
account by reason of such loan prepayment. The trustee of the Bank's or the
New Holding Company's new employee stock ownership plan may participate in the
Split-Off as part of the Taylor Group as long as the trustee making the
determination on the exchange of shares is an independent financial
institution and retains an independent financial advisor. Members of the
Taylor Family hold, and other members of the Taylor Group may hold, beneficial
interests under the ESOP and the 401(k) Plan.
Pursuant to a letter agreement approved by the Board of Directors on October
24, 1995 between the Finance Company and Mr. Barlow, upon the Closing, Mr.
Barlow will be entitled to a cash payment equal to 250% of Mr. Barlow's annual
base rate salary and incentive bonus for the then most recently completed
calendar year, which cash payment will be equal to approximately $2.3 million
plus any amounts necessary to pay federal excise taxes due to the
classification of certain amounts as excess "parachute payments."
On July 31, 1996, the Company entered into employment agreements with
Messrs. Barlow and Silverman, which provide for Mr. Barlow's employment as the
Company's President and Chief Executive Officer and Mr. Silverman's employment
as the Chairman of the Board of Directors commencing upon consummation of the
Split-off Transactions. The terms of employment for Messrs. Barlow and
Silverman will begin on the Closing Date and end on December 31, 1999. Messrs.
Barlow and Silverman will be entitled to yearly compensation at their annual
base rate salaries, which are currently $325,000 and $250,000, respectively.
The base rate salary will be subject to periodic review by the Board of
Directors, which may increase but not decrease the amount. Messrs. Barlow and
Silverman are also entitled to 45% and 10%, respectively, of the total
incentive compensation pool for any incentive compensation program of the
Company in effect in any year. These payments are required to be not less than
that which would have been paid using the formula provided under the incentive
compensation program that was in effect for fiscal 1995. Messrs. Barlow and
Silverman will also be entitled to certain benefits, including, but not
limited to, group health and life insurance, matching contributions to the
Company's 401(k) plan, deferred compensation program, stock options and
executive key man life insurance. Upon termination other than for "Cause" as
provided in the employment agreements, Messrs. Barlow and Silverman will be
entitled to receive lump sum payments amounting to all future salary and
incentive compensation payable under the agreements.
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Pursuant to an agreement dated June 12, 1996, the Bank has agreed to pay
Louis Joseph a severance payment of $200,000 upon the Closing, subject to Mr.
Joseph's resigning from employment with the Bank at the Closing. Mr. Joseph is
currently the Chief Administrative Officer of the Bank and, after the Split-
Off, will hold an executive position with the Company. These arrangements were
negotiated at arm's length between the Taylor Family and Mr. Joseph.
Pursuant to an agreement dated June 12, 1996, the Bank has agreed to pay
James I. Kaplan a severance payment of $200,000 upon the Closing, subject to
Mr. Kaplan's resigning from employment with the Bank at Closing. Mr. Kaplan is
currently the General Counsel for the Company and the Bank and, after the
Split-Off, will continue to serve as the General Counsel of the Company. These
arrangements were negotiated at arm's length between the Taylor Family and Mr.
Kaplan.
ACCOUNTING TREATMENT
The Split-Off represents a non-reciprocal transfer of non-monetary assets of
the Company and will be accounted for based upon the fair value of the non-
monetary assets distributed. An accounting gain or loss will be recognized at
the date of the Split-Off to the extent the fair value of the Bank exceeds or
is less than the Company's basis in the Bank. The Company currently estimates
that it will recognize a gain of $78,800,000.
As of June 12, 1996, the Company's banking segment, consisting of the Bank
and the Mortgage Company, qualifies as discontinued operations as defined in
APB 30, and financial statements for all subsequent periods prior to the
Split-Off the Company will reflect the banking segment as discontinued
operations. Financial statements of prior periods that include results of
operations prior to June 12, 1996 will be reclassified to disclose the results
of operations of the disposed segment, less applicable income taxes, as a
separate component of income.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes those U.S. federal income tax
considerations resulting from the Split-Off Transactions which are material to
the Company and its stockholders. This discussion is based on currently
existing provisions of the Code, existing and proposed Treasury Regulations
thereunder and current administrative rulings and court decisions, all of
which are subject to change. Any such change, which may or may not be
retroactive, could alter the tax consequences to the Company or its
stockholders as described herein. The following discussion does not address
the tax consequences of the Split-Off Transactions under state or local and
non-U.S. tax laws or the tax consequences of transactions (if any) effectuated
prior to or after the Split-Off Transactions (whether or not such transactions
are undertaken in connection with the Split-Off Transactions).
There will be no direct U.S. federal income tax consequences to non-Taylor
Group stockholders of the Company as a result of the Split-Off Transactions.
On September 3, 1996, the Company received from the IRS a Tax Ruling to the
effect that the Split-Off will be treated as a tax-free transaction under
Section 355 of the Code. Pursuant to the Tax Ruling, for U.S. federal income
tax purposes: (i) no gain or loss will be recognized by the Company upon the
exchange of the capital stock of the New Holding Company for Common Stock held
by the Taylor Group, and (ii) no gain or loss will be recognized by (and no
amount will be included in the income of) the Taylor Group upon their receipt
of capital stock of the New Holding Company in exchange for the Common Stock
owned by them. The Tax Ruling was issued based upon certain factual
representations and assumptions, which if incorrect or untrue in any material
respect, may invalidate the Tax Ruling. A copy of the Tax Ruling is attached
hereto as Appendix E and is incorporated herein by reference. THE FOREGOING
SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE TAX RULING.
There will be no material U.S. federal income tax consequences to the
Company as a result of the Pre-Closing Transactions.
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APPRAISAL RIGHTS
Stockholders of the Company who dissent from the Split-Off Transactions will
not be entitled to rights of appraisal under Section 262 of the DGCL.
REGULATORY REQUIREMENTS
The Split-Off Transactions are subject to approval by the Federal Reserve
Board under the Bank Holding Company Act ("BHCA"). On August 30, 1996, the
Taylor Directors submitted an application to the Federal Reserve Board for
approval of the transaction and, on September 13, 1996, the Federal Reserve
Board requested additional information. The Taylor Directors filed the
additional information in response to this request and on September 26, 1996
were informed by letter that the application had been accepted as
informationally complete and was being processed by the Federal Reserve Bank
of Chicago under delegated authority. The Taylor Directors were also informed
that, in accordance with regulations, the application was forwarded to the
State of Illinois Office of Banks and Real Estate and the Federal Deposit
Insurance Corporation for comment, and that the U.S. Department of Justice had
also been notified.
Regulations under the BHCA provide that actions processed under delegated
authority normally will be acted upon within a 30-calendar day period after
acceptance, although the applicable Federal Reserve Bank may at any time
during that period determine to refer the application to the Federal Reserve
Board, in which case the processing of the application could be extended an
additional 30 days or longer. Assuming the application is to be acted upon
under delegated authority, the Federal Reserve Bank of Chicago should act upon
the Taylor Director's application by October 26, 1996. If the application is
approved, the Federal Reserve Board is required to immediately notify the U.S.
Department of Justice. In accordance with BHCA requirements, the Split-Off
Transactions may not be consummated until 15 calendar days after receipt of
this approval, assuming no objection is raised by the U.S. Department of
Justice.
As stated under "The Share Exchange Agreement--Additional Capital Required
by the Bank after the Split-Off," the Taylor Family intends to raise
additional Bank capital through the sale of New Bank Securities to adequately
capitalize the Bank to allow it to continue as a "well capitalized
institution" for the purpose of the relevant regulatory capital guidelines. It
is likely that, if the Federal Reserve Board approves the application, it will
do so only on the condition that the additional required capital will be
raised. Accordingly, if the additional capital were not raised, the approval
of the Federal Reserve Board would be withdrawn and the Taylor Family would be
unable to consummate the Split-Off Transactions.
Although the Taylor Directors have agreed to use reasonable best efforts to
obtain financing sufficient to satisfy these requirements, there can be no
assurance that such financing will be obtained. Piper Jaffray, the financial
advisor to the Taylor Family, issued a letter, dated June 11, 1996, stating
that Piper Jaffray was "highly confident" of its ability to raise the required
new financing for the Bank. If the Taylor Family is unable to consummate the
sale of the New Bank Securities, the Taylor Family will need to find other
financing or will be unable to consummate the Split-Off Transactions.
Although, under the terms of the Share Exchange Agreement, the Taylor Family
and the Company each have agreed to use their reasonable best efforts to
obtain all necessary regulatory approvals, there can be no assurance as to
when, or if, such approvals will be granted.
The Company and the Taylor Family are not aware of any other governmental
approvals or actions that are required for the consummation of the Split-Off
Transactions. Should any such approvals or actions be required, it is
currently contemplated that such approvals or actions would be sought, but
there can be no assurance that such other approvals, if any, would be
received. Moreover, if other required approvals, if any, are received, there
can be no assurance as to the date of such approvals or that such approvals
will not be conditioned in a manner that would cause either of the parties to
abandon the Split-Off Transactions. See "Risk Factors--Regulatory Matters;
Additional Capital Required by the Bank."
51
<PAGE>
THE COMPANY AFTER THE SPLIT-OFF TRANSACTIONS
BUSINESS OF THE COMPANY AFTER THE SPLIT-OFF
The Split-Off Transactions, if approved and consummated, will effect a
fundamental change in the nature of the Company's business. The Company will
cease its traditional commercial and consumer banking business, which has
historically provided the substantial majority of the Company's revenues and
income. The Company will retain the consumer finance business of the Finance
Company, which commenced operations in January 1993, and the Bank's used
automobile receivables business, which commenced operations in 1982. After the
Split-Off, the Company's business will focus almost entirely on the automobile
finance market. In connection with the Split-Off Transactions, the Company
will change its name to Reliance Acceptance Group, Inc., subject to approval
of the amendment to the Company's Certificate of Incorporation by the
stockholders of the Company at the Annual Meeting. See "Proposal No. 2--
Approval of an Amendment to the Company's Certificate of Incorporation to
Change the Name of the Company."
The Finance Company
The Finance Company commenced operations as a separate subsidiary of the
Company in January 1993 and, at September 30, 1996, operated 47 Reliance
Acceptance Corp. offices, with 16 offices in Texas, five offices in Georgia,
four offices in Ohio, three offices in Florida, three offices in Colorado, two
offices in Indiana, three offices in Tennessee, two offices in Nevada, one
office in New Mexico, one office in Kentucky, one office in South Carolina,
one office in Arizona, one office in Illinois, one office in North Carolina,
one office in Washington and one office in Missouri. The Finance Company's
headquarters are located in San Antonio, Texas. In the remainder of 1996, the
Finance Company plans on opening approximately two additional offices in these
and other states. To date, the Finance Company's operations have focused on
purchasing closed-end retail sales finance contracts, primarily in connection
with sales of used automobiles.
The Finance Company operates through a network of decentralized branch
offices under the name of Reliance Acceptance Corp., each staffed with a
branch manager who reports to an experienced regional director. A typical
Reliance Acceptance Corp. branch is located in an office building that is
reasonably close to the new and used car automobile dealers that send sales
finance contracts to the Finance Company's branch offices for purchase
approval. Having no direct loans, but only sales finance contracts in their
portfolio, permits branch offices to operate efficiently with a small staff
and control their overhead expenses.
Dealer Loan Organization. Each branch office of the Finance Company
purchases sales finance contracts from dealers located in its local market
area. Relationships are established with automobile dealers by each branch
after performing credit reviews on the dealer. Approved dealers enter into
contractual relationships with the Finance Company. This contract specifies,
among other things, the percentage of dealer discount for possible credit loss
that will be deducted from the purchase proceeds of sales finance contracts
and the processing fees to be paid by the dealer for each contract purchased
by the Finance Company. The Finance Company competes for business on the basis
of service, namely in short response times for approval or disapproval of
credit applications, consistent application of the Finance Company's
underwriting standards, and immediate funding of sales finance contract
purchases upon delivery of all required documents. Pursuant to this business
strategy, the Finance Company has significantly increased the number of
dealers with which it contracts to over 1,200 as of December 31, 1995 from
approximately 1,000 as of December 31, 1994 and from approximately 300 as of
December 31, 1993.
Underwriting. The Finance Company purchases each sales finance contract in
accordance with its underwriting standards and procedures, which are intended
to assess the applicant's ability to repay the amounts due on the loan and the
adequacy of the financed vehicle as collateral. The majority of automobiles
financed by the Finance Company range in age from used current year models to
those that are five years old with less than 100,000 miles. Most of the
Finance Company's customers have some derogatory credit history, but have
performed satisfactorily in previous automobile financing transactions.
52
<PAGE>
Nonrefundable Dealer Discounts. As protection to the Finance Company for
possible credit losses, the Finance Company purchases sales finance contracts
at an average discount of 8% and credits a nonrefundable dealer discount
account in the amount of such discount for the purpose of absorbing credit
losses. Amounts in this account are not refundable to dealers, nor are dealers
required to fund losses in excess of the reserves. The applicable discount is
negotiated with each dealer. These dealer discounts, net of charges to dealer
discount for loan losses, are accreted to income over the terms of the loans
using the level yield method. Under the Finance Company's revolving credit
agreement, the ratio of the allowance for loan losses and nonrefundable dealer
discounts to net finance receivables must equal the greater of four percent or
the preceding twelve-month net charge-off percentage (as defined in the
revolving credit agreement discussed below). In addition to the loss
protection provided by the unamortized, nonrefundable dealer discounts, in the
event of a significant rise in interest rates, the Finance Company would
likely attempt to negotiate a larger discount with its dealers.
Internal Reviews. Finance Company policy provides that each branch office be
formally examined at least every three months by a regional director. This
examination includes a review of the quality of the sales finance contracts
that were purchased by the branch, business development activities and
internal operating procedures to ensure compliance with established policies.
Sources of Funds. The Finance Company's purchases of sales finance contracts
are primarily financed with funds drawn from three principal sources. First,
there is a $200 million commercial paper facility which is guaranteed by the
Company and supported by a $295 million secured senior debt revolving credit
agreement discussed below. The commercial paper was rated D-2 by Duff & Phelps
Credit Rating Service and F-2 by Fitch Investor Services until the Split-Off
Transactions were announced. Second, there is the $295 million secured senior
debt revolving credit agreement, which backs up the commercial paper facility
and is secured by the finance receivables of the Finance Company. The
revolving credit agreement (which is due to be reduced to $250 million on
November 15, 1996) expires on July 12, 1997. Outstanding borrowings bear
interest at floating rates, at the Finance Company's option, either equal to a
reference rate plus .5% or adjusted LIBOR plus 2.25%. The revolving credit
agreement includes financial covenants relating to the ratio of debt to
adjusted tangible net worth (as defined), the ratio of the allowance for loan
losses and nonrefundable dealer discounts to finance receivables, the ratio of
unsubordinated debt to borrowing base (as defined), the ratio of adjusted net
income (as defined) to interest expense and to fixed charges (as defined), and
the charge-off policy. It also contains restrictions, among others, as to
dividend payments, merger or disposal of assets, and creation of liens on
assets owned or acquired. This facility is subject to a "keep well" agreement
with the Company. The Finance Company is presently attempting to negotiate a
permanent increase in the revolving credit agreement and an extension of the
maturity date. Third, the Finance Company borrows funds from the Company as
needed at market interest rates.
Duff & Phelps Credit Rating Co. has placed the Company's subordinated debt
rating and the Finance Company's commercial paper rating on watch for a
possible downgrade. In addition, Fitch Investor Services has placed the
Finance Company's commercial paper rating on FitchAlert with an evolving
status. Any downgrading of the Company's credit rating could have the effect
of increasing the Company's borrowing rates and the interest rates on the
Finance Company's commercial paper and could negatively impact the
marketability of the Finance Company's commercial paper.
As indicated above, the Finance Company has financed its operations to date
primarily through intercompany loans, bank loans and commercial paper sources.
After the Split-Off, the Company's current sources of funds may not be
adequate to fully support the Company's growth plans. Consequently, the
Company is actively pursuing new sources of funds, such as securitizations of
automobile loans or public or private offerings of debt securities.
The Company is actively pursuing securitizations of pools of its subprime
automobile loans to fund operations, with an initial securitization targeted
for the fourth quarter of 1996. The Finance Company has not securitized
subprime automobile loans to date, and there is no assurance that it will
attempt to do so or be able to do so on favorable terms. The Company's access
to the asset backed securities markets will be dependent in part upon its
financial condition and results of operations, which could be affected
negatively by cyclical swings or other adverse developments in the demand for
or collectibility of subprime automobile receivables. Market
53
<PAGE>
and other considerations, including the conformity of automobile receivables
contracts to rating agency requirements, could also affect the Company's
ability to successfully access the securitization market.
Competition. The consumer finance business is highly competitive. The
Finance Company's principal competitors are similar finance companies which
purchase sales finance contracts relating to used automobiles. Other
competitors of the Finance Company include well-established financial
institutions, such as banks, savings and loans, small loan companies, credit
unions, a variety of local, regional and national consumer financing
institutions and captive finance companies of automobile manufacturers. Many
of these competitors have greater financial, technical and marketing resources
than the Company and offer other forms of financing to automobile dealers,
including, but not limited to, vehicle floor plan financing and leasing. The
Company does not possess any internal or external studies regarding its
competitors or the Company's competitive position in this market. However,
according to publicly available information from financial analysts, the
subprime automobile finance market is believed to be a $70 billion market,
with no one company having more than a 2% market share.
Other Risks Associated with Operations. There are certain material risks
associated with the automobile finance business conducted by the Finance
Company in addition to the risks described under "--Sources of Funds" and "--
Competition." There is an inherent risk that a portion of the sales finance
contracts purchased by the Finance Company will become defaulted contracts or
be subject to certain claims or defenses which automobile buyers may assert
against automobile dealers or the Finance Company as the holder of the
contracts. Additionally, the business of financing automobiles is
substantially dependent upon sales of automobiles and related demand by
consumers for financing. Moreover, the Finance Company's automobile finance
operations are of relatively recent origin, particularly as compared to the
Bank's traditional consumer and commercial banking business, which commenced
over 60 years ago. The growth and success of these automobile finance
operations are dependent upon a number of factors, including the Company's
continued ability: (a) to establish and maintain relationships with automobile
dealers; (b) to purchase an increased number of loans meeting the Company's
underwriting standards; and (c) to find expansion opportunities and to
successfully implement the Finance Company's expansion strategy.
After the Split-Off, the Company will focus almost entirely on, and will
depend almost entirely upon the financial performance and growth of, this
automobile finance business. Consequently, the Company will be affected to a
much greater extent by the risks described above. Furthermore, the loss of the
earnings strength and assets of the Bank in the Split-Off could increase the
Company's or the Finance Company's cost of capital, which could adversely
impact the Company's operating results and ability to grow. Additionally,
after the Split-Off, there may be an increase in volatility of the Company's
stock price due, at least in part, to the Company's dependence on a single
business segment. See "Risk Factors--Loss of Banking Operations which have
Historically Accounted for the Substantial Majority of the Company's Earnings
and Comprise Over 80% of the Company's Assets," "--Need for Funds; Possible
Downgrade of Debt Ratings; Potential Increase in Cost of Capital," "--
Uncertain and Volatility of Stock Price," "--No Assurance of Acquisitions or
Expansion," "--Concentration in Automobile Loans," "--Limited Operating
History," "--Risk of Default on Sales Finance Contracts," "--Ability of the
Company to Continue its Growth Strategy" and "--Relationship with Dealers."
Employees. As of September 30, 1996, the Finance Company had a total of
approximately 400 full-time equivalent employees. None of the employees of the
Finance Company are subject to a collective bargaining agreement. It is a
policy of the Finance Company, in order to promote stability, to enter into
employment agreements with employees in upper level management. Such
agreements generally have three-year terms and are terminable only for "Cause"
(as defined in such employment agreements). After the Split-Off, the Company
intends to continue this policy. The Finance Company considers its
relationships with its employees to be good. The Company estimates that it
will add approximately 10 to 15 employees to the Finance Company staff as a
result of the Split-Off Transactions.
Regulation. In addition to applicable federal laws, including the Truth-In-
Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting
Act, the Finance Company is subject to certain states laws relating to the
conduct of its operations in states where it purchases sales finance
contracts. Included among these are
54
<PAGE>
state usury (rates and fees) laws and laws governing motor vehicle finance,
sales finance, sales practices, credit discrimination, credit reporting,
disclosure and debt collection. The Finance Company is also subject to the
Federal Credit Practices Rule of the Federal Reserve Board and the Federal
Trade Commission's Holder in Due Course Rule.
Properties. Each of the branch offices of the Finance Company is located in
rented space in an office building that is reasonably close to the automobile
dealers from which the Finance Company purchases sales finance contracts. The
offices range in size from approximately 600 square feet to 2,900 square feet.
Monthly lease payments range from $600 to $2,320, and lease terms range from
one to five years in duration. The Finance Company's principal executive
offices currently are, and after the Split-Off the Company's principal
executive offices will be, located at 400 North Loop, Suite 1604 East, San
Antonio, Texas 78232.
The Bank's Used Automobile Receivables Business
Since 1982, the Bank has been in the business of purchasing sales finance
contracts collateralized by new and used automobiles. The sales finance
contracts are purchased from large automobile dealerships, primarily in the
Chicago metropolitan area. These contracts generally provide yields ranging
from 7-10% and are typically purchased from dealerships at premiums ranging
from 3% to 5% because they bear a higher rate of interest than the Bank's
required yield for profitability. The Bank operates this automobile finance
contract business through its branch office in Burbank, Illinois, which
employs several employees whose functions, in addition to their Bank
responsibilities, include underwriting, collecting and processing the
contracts. The Bank will transfer to New Reliance only its used automobile
receivables business. As of June 30, 1996, the Bank held approximately
$36,000,000 fair market value of sales finance contracts which were
collateralized by used automobiles. Prior to the Closing, the Company will
cause certain of the Bank employees who performed important services relating
to the Bank's used automobile receivables business to be terminated and
immediately offered employment with New Reliance.
MANAGEMENT OF THE COMPANY AFTER THE SPLIT-OFF
Two of the directors nominated for election at the Annual Meeting, Bruce W.
Taylor and Richard W. Tinberg, will resign from the Board upon consummation of
the Split-Off Transactions. At such time, Jeffrey W. Taylor, Sidney J Taylor,
Melvin E. Pearl and Adelyn Dougherty will also resign from the Board and
Sidney J Taylor and Jeffrey W. Taylor will resign from the Board of Directors
of the Finance Company. Furthermore, Jeffrey W. Taylor will resign as Chairman
and Chief Executive Officer of the Company, Bruce W. Taylor will resign as
President of the Company and John Christopher Alstrin will resign as Chief
Financial Officer of the Company.
After the Split-Off, Thomas L. Barlow, President and Chief Executive Officer
of the Finance Company, Howard B. Silverman, Chairman of the Finance Company,
and Michael Bernick, Chief Financial Officer of the Finance Company, are
expected to become the principal executive officers of the Company. The
Company has entered into employment agreements with Messrs. Barlow and
Silverman providing that, on the Closing Date of the Share Exchange Agreement,
Mr. Barlow will become President and Chief Executive Officer of the Company
and Mr. Silverman will become Chairman of the Board of Directors of the
Company. In addition, the following directors are expected to continue to
serve as directors of the Company after the Split-Off: Irwin H. Cole, Dean L.
Griffith, Solway F. Firestone, Lori Cole and (if elected at the Annual
Meeting) Howard B. Silverman, William Race and Ross J. Mangano. It is also
expected that Thomas L. Barlow will be elected by the Board to serve as a
director of the Company following the consummation of the Split-Off
Transactions. See "Proposal No. 1--Approval of the Share Exchange Agreement
and the Split-Off Transactions--Interests of Certain Persons in the Share
Exchange Agreement" and "Resignations of Directors and Executive Officers."
55
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements of the Company as
of June 30, 1996 and December 31, 1995 and for the periods then ended, have
been derived from the Company's consolidated financial statements included in
the Company's Current Report on Form 8-K dated October 10, 1996 (the "Form 8-
K") and the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1996 (the "June 1996 10-Q"), and reflect the Split-Off of the Company's
banking segment, consisting of the Bank and the Mortgage Company. The pro
forma statements begin with the historical amounts which have been
reclassified to reflect the banking segment as discontinued operations. The
pro forma adjustments reflect the exchange of cash and shares to effect the
Split-Off. These statements should be read in conjunction with the Form 8-K
and the June 1996
10-Q. The pro forma balance sheets assume that the Split-Off was consummated
at the end of the reporting period and include an estimate of nonrecurring
expenses directly attributable to the transaction. The pro forma income
statements assume the Split-Off was consummated as of the first day of the
reporting period and include only those adjustments expected to have
continuing impact on the Company. The pro forma statements are based on the
assumptions set forth in the accompanying notes and are not necessarily
indicative of the Company's future financial position or results of
operations.
56
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO
ASSETS HISTORICAL ADJUSTMENTS FORMA
------ ---------- ----------- --------
<S> <C> <C> <C>
Cash and cash equivalents.................. $ 1,453 $ 1,453
Finance receivables........................ 318,547 30,000 (a) 348,547
Less nonrefundable dealer discounts........ (12,255) (12,255)
-------- --------
Finance receivables, net................... 306,292 336,292
Other assets............................... 14,268 (550)(g) 13,718
Net assets of discontinued operations...... 143,520 (137,603)(a)
(5,917)(b)
-------- --------- --------
Total assets........................... $465,533 $(114,070) $351,463
======== ========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Commercial paper........................... $184,129 $184,129
Long-term debt............................. 103,668 (60,000)(a) 33,467
(5,917)(b)
(4,116)(c)
(168)(d)
Accounts payable and other liabilities..... 8,648 (1,033)(c) 11,335
3,720 (h)
-------- --------- --------
Total liabilities...................... 296,445 (67,514) 228,931
Stockholders' equity:
Common stock............................. 147 3 (c) 150
Surplus.................................. 77,290 5,146 (c) 161,271
78,835 (a)
Retained earnings........................ 91,819 (550)(g) 87,549
(3,720)(h)
Treasury stock........................... (126,438)(a) (126,438)
Employee Stock Ownership Plan loan....... (168) 168 (d)
-------- --------- --------
Total stockholders' equity............. 169,088 (46,556) 122,532
-------- --------- --------
Total liabilities and stockholders'
equity................................ $465,533 $(114,070) $351,463
======== ========= ========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements.
57
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
RESTATED FOR
DISCONTINUED PRO FORMA PRO
ASSETS OPERATIONS ADJUSTMENTS FORMA
------ ------------ ----------- --------
<S> <C> <C> <C>
Cash and cash equivalents................ $ 4,829 $ 4,829
Finance receivables...................... 231,726 30,000 (a) 261,726
Less nonrefundable dealer discounts...... (12,655) (12,655)
-------- --------
Finance receivables, net................. 219,071 249,071
Other assets............................. 10,009 (550)(g) 9,459
Net assets of discontinued operations.... 138,653 (135,866)(a)
(2,787)(b)
-------- --------- --------
Total assets......................... $372,562 $(109,203) $263,359
======== ========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Commercial paper......................... $127,268 (2,600)(a) $117,871
(2,787)(b)
(4,010)(c)
Long-term debt........................... 82,657 (57,400)(a) 25,000
(257)(d)
Accounts payable and other liabilities... 8,020 (1,039((c) 10,701
3,720 (h)
-------- --------- --------
Total liabilities.................... 217,945 (64,373) 153,572
Stockholders' equity:
Common stock........................... 146 3 (c) 149
Surplus................................ 75,212 5,046 (c) 161,361
81,103 (a)
Retained earnings...................... 79,516 (550)(g) 75,246
(3,720)(h)
Treasury stock......................... (126,969)(a) (126,969)
Employee Stock Ownership Plan loan..... (257) 257 (d)
-------- --------- --------
Total stockholders' equity........... 154,617 (44,830) 109,787
-------- --------- --------
Total liabilities and stockholders'
equity.............................. $372,562 $(109,203) $263,359
======== ========= ========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements.
58
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fee income.............. $ 32,937 1,411 (e) $ 34,348
Interest expense..................... 9,020 (2,982)(f) 6,038
----------- ----------- -----------
Net interest income.................... 23,917 4,393 28,310
Provision for credit losses............ 181 (e) 181
----------- ----------- -----------
Net interest income after provision
for credit losses................. 23,917 4,212 28,129
----------- ----------- -----------
Other income........................... 707 707
----------- ----------- -----------
Operating expenses:
Salaries and employee benefits....... 6,876 303 (e) 7,179
Occupancy expense.................... 429 429
Furniture and equipment.............. 235 2 (e) 237
Computer processing.................. 228 228
Other operating expenses............. 5,904 42 (e) 5,946
----------- ----------- -----------
Total operating expenses........... 13,672 347 14,019
----------- ----------- -----------
Income from continuing operations
before income taxes................... 10,952 3,865 14,817
Income taxes........................... 4,233 1,469 (i) 5,702
----------- ----------- -----------
Net income from continuing
operations........................ 6,719 2,396 9,115
----------- ----------- -----------
Discontinued operations:
Income from discontinued operations.. 11,705 (11,705)
Income taxes......................... 3,486 (3,486)
----------- ----------- -----------
Net income from discontinued
operations........................ 8,219 (8,219)
----------- ----------- -----------
Net income............................. $ 14,938 $ (5,823) $ 9,115
=========== =========== ===========
103,552 (c)
Average Number of Common Shares
Outstanding........................... 15,342,155 (4,250,000)(a) 11,195,707
=========== =========== ===========
Earnings per share from continuing
operations............................ $ 0.44 $ 0.81
===========
Earnings per share from discontinued
operations............................ $ 0.53
-----------
Net Income............................. $ 0.97
===========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements.
59
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
RESTATED FOR
DISCONTINUED PRO FORMA
OPERATIONS ADJUSTMENTS PRO FORMA
------------ ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fee income............. $ 36,419 $ 2,811 (e) $ 39,230
Interest expense.................... 11,594 (5,835)(f) 5,759
----------- ----------- -----------
Net interest income................... 24,825 8,646 33,471
Provision for credit losses........... 298 (e) 298
----------- ----------- -----------
Net interest income after
provision for credit losses...... 24,825 8,348 33,173
----------- ----------- -----------
Other income.......................... 1,250 1,250
----------- ----------- -----------
Operating expenses:
Salaries and employee benefits...... 8,679 667 (e) 9,346
Occupancy expense................... 627 627
Furniture and equipment............. 230 9 (e) 239
Computer processing................. 427 427
Other operating expenses............ 4,611 65 (e) 4,676
----------- ----------- -----------
Total operating expenses.......... 14,574 741 15,315
----------- ----------- -----------
Income from continuing operations
before income taxes.................. 11,501 7,607 19,108
Income taxes.......................... 4,439 2,891 (i) 7,330
----------- ----------- -----------
Net income from continuing
operations....................... 7,062 4,716 11,778
----------- ----------- -----------
Discontinued operations:
Income from discontinued operations. 22,521 (22,521)
Income taxes........................ 5,911 (5,911)
----------- ----------- -----------
Net income from discontinued
operations....................... 16,610 (16,610)
----------- ----------- -----------
Net income............................ $ 23,672 $ (11,894) $ 11,778
=========== =========== ===========
98,274 (c)
Average number of common shares
outstanding.......................... 15,222,426 (4,250,000)(a) 11,070,700
=========== =========== ===========
Earnings per share from continuing
operations........................... $ 0.47 $ 1.06
===========
Earnings per share from discontinued
operations........................... $ 1.09
-----------
Net Income............................ $ 1.56
===========
</TABLE>
See accompanying notes to the Unaudited Pro Forma Consolidated Financial
Statements.
60
<PAGE>
COLE TAYLOR FINANCIAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the tender of 4,250,000 shares of the Company's Common Stock from
the Taylor Family to the Company, the transfer of the estimated First Cash
Component of $60 million and the transfer of the estimated $30 million
fair market value of Automobile Receivables from the Bank, in exchange for
the Company's net investment in the Bank. The 4,250,000 shares acquired
are reflected as treasury shares at their fair value, which is the market
price of the stock as of the balance sheet date. The accounting gain on
the transaction is reflected as a credit to surplus. The cash received is
assumed to be used first to reduce long-term debt at the Company, then
bank debt at the Finance Company and finally commercial paper borrowings.
(b) Reflects the transfer of the estimated Second Cash Component for the
purchase of the Mortgage Company, the Company's interest in the Alpha
Capital Fund, the cash surrender value of officers' life insurance and
certain other assets. The cash received is assumed to be used to reduce
long-term debt.
(c) Reflects the exercise of the Taylor Family stock options and the use of
the cash received from their exercise to reduce borrowings.
(d) Reflects the payoff of the ESOP loan, primarily relating to the employees
of the Bank, in connection with the Bank terminating from the Company's
ESOP.
(e) Reflects the related interest income, loan fees and late charges earned on
the Automobile Receivables transferred to the Company from the Bank, along
with the provision for credit losses, salaries and benefits of employees
and other direct costs of originating and servicing these Automobile
Receivables.
(f) Reflects the reduction in interest expense as a result of the debt
reductions from the cash received through the sale of the net assets of
discontinued operations and the exercise of the Taylor Family Options.
(g) Reflects the write down to realizable value of the deferred tax asset
relating to certain state net operating loss carryforwards.
(h) Reflects an estimated $3.7 million of one-time charges, net of income tax
effect, for financial advisory, legal, accounting and auditing, investment
bankers and special payments to certain employees as a result of the
Split-Off Transactions. Included in income from continuing operations for
the period ended June 30, 1996 is approximately $300,000 of expenses
directly attributable to the Split-Off Transactions.
(i) Reflects the tax effect of the pro forma adjustments at a 38% effective
tax rate.
(j) The pro forma statements do not reflect the possible exercise of Bank
employee stock options, all of which become fully vested as a result of
the Split-Off Transactions. Total Bank employee options outstanding at
June 30, 1996 were 854,363 shares with a weighted average exercise price
of $15.66. The exercise of these options would result in an increase in
stockholders' equity of approximately $17.6 million, of which $13.4
million relates to the exercise price and $4.2 million relates to the
income tax benefit, assuming the market price of the Common Stock at the
date of exercise is $29.75 per share.
61
<PAGE>
PROPOSAL NO. 2--APPROVAL OF AN AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY
On July 31, 1996, the Board proposed and recommended for adoption by the
Company's stockholders an amendment to the Certificate of Incorporation to
change the name of the Company to "Reliance Acceptance Group, Inc.," to take
effect upon the consummation of the Split-Off Transactions.
The proposed amendment provides that Article I of the Company's Certificate
of Incorporation be amended to read as follows:
"The name of the Corporation is: Reliance Acceptance Group, Inc."
Because the Company, after the Split-Off, will cease its traditional
commercial and consumer banking business and because the Taylor Family will no
longer be involved in the business of the Company, the Board believes it will
be necessary to change the name of the Company from "Cole Taylor Financial
Group, Inc." The Board believes that the name "Reliance Acceptance Group,
Inc." would be appropriate given that the Finance Company has itself changed
its name to "Reliance Acceptance Corporation" and has been conducting its
business under the name of "Reliance Acceptance Corp." since its formation.
This amendment to the Company's Certificate of Incorporation is subject to,
and conditional upon, consummation of the Split-Off Transactions. If the
Split-Off Transactions are not consummated, the Company will not effect such
amendment and the name of the Company will remain Cole Taylor Financial Group,
Inc.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
CHANGE THE NAME OF THE COMPANY.
62
<PAGE>
PROPOSAL NO. 3--ELECTION OF DIRECTORS
The Board of Directors is comprised of 13 members. The Amended and Restated
Certificate of Incorporation currently in effect (the "Charter") provides that
the members of the Board of Directors shall be divided into three classes, as
nearly equal as possible, with one class being elected each year. At the
Annual Meeting five persons will be elected as Class II directors, each to be
elected for a term of three years (expiring at the 1999 Annual Meeting of
Stockholders) or until their successors are elected and qualified. All
nominees are currently serving as directors and have consented to serve for
new terms.
If at the time of the Annual Meeting any of the nominees should be unable or
decline to serve, the persons named in the proxy will vote for such substitute
nominee or nominees as the Board of Directors recommends, or vote to allow the
vacancy created thereby to remain open until filled by the Board, as the Board
recommends. If elected, Bruce W. Taylor and Richard W. Tinberg will resign
from the Board upon consummation of the Split-Off Transactions. The Board of
Directors has no reason to believe that any other nominee will be unable or
will decline to serve as a director if elected.
NOMINEES FOR ELECTION AS DIRECTORS
The following persons, if elected at the Annual Meeting, will serve as
directors until the earlier of the 1999 Annual Meeting of Stockholders or
until their successors are duly elected and qualified:
<TABLE>
<CAPTION>
SERVED AS DIRECTOR OF
NAME AGE POSITION WITH THE COMPANY THE COMPANY SINCE
---- --- ------------------------- ---------------------
<S> <C> <C> <C>
Bruce W. Taylor(1)(4)*.. 41 President and a Director of the Company, 1984
President, Chief Executive Officer and a
Director of the Bank and a Director of the
Finance Company
Howard B. Silverman..... 58 Director of the Company and Chairman and a 1992
Director of the Finance Company
William S. Race(1)...... 61 Director of the Company and the Finance 1989
Company
Ross J. Mangano(2)(3)... 51 Director of the Company and the Finance 1993
Company
Richard W. Tinberg(2)*.. 46 Director of the Company 1995
</TABLE>
- - --------
* Will resign from all positions with the Company and the Finance Company
upon consummation of the Split-Off Transactions.
(1)Member of the Executive Committee
(2)Member of the Compensation Committee
(3)Member of the Audit Committee
(4) Member of the Nominating Committee
BRUCE W. TAYLOR is President of the Company and has served as a director of
the Company since its inception in 1984. Mr. Taylor is also the President,
Chief Executive Officer and a director of the Bank and, from June 1994 until
June 1996, was a director of the Finance Company. Mr. Taylor is a member of
the Company's Executive Committee and Employee Profit Sharing Plan and
Employee Stock Ownership Plan Managing Committee. From 1991 to February 1994,
Mr. Taylor served as Vice Chairman of the Company and President and Chief
Operating Officer of the Bank. Mr. Taylor served as Vice Chairman of Banking
Operations from April 1990 until the end of 1990. Prior to that time, Mr.
Taylor served as Group Executive Corporate Banking beginning in 1989. Mr.
Taylor spent five years from 1983 through 1988 working at Cole Taylor Bank
Yorktown, and in 1988 he was named President of Cole Taylor Bank Yorktown.
Before that time, Mr. Taylor held positions in the Correspondent Banking area
from the time he began working for Cole Taylor Bank in 1979. Mr. Taylor is the
son of Sidney J Taylor and the brother of Jeffrey W. Taylor.
63
<PAGE>
HOWARD B. SILVERMAN is a director of the Company and has been Chairman and a
director of the Finance Company since its inception. Mr. Silverman has more
than thirty-five years of experience with financial institutions. From 1987 to
1991, Mr. Silverman was President of Rodman & Renshaw Capital Group, Inc., a
financial services company located in Chicago, Illinois. Prior to 1987, he
served as Chairman of the Board and Chief Executive Officer of First Illinois
Corporation, a multi-bank and financial services holding company, during which
time Mercury Finance Company was formed as a subsidiary of First Illinois
Corporation. Mr. Silverman also serves as president of Silverman and
Associates, a Chicago based consulting firm that provides financial and
strategic planning services to businesses.
WILLIAM S. RACE is a director of the Company and the Finance Company. Mr.
Race is a member of the Company's Capital Strategy Committee, Executive
Committee and Employee Profit Sharing Plan and Employee Stock Ownership Plan
Managing Committee. Mr. Race was also a director of the Bank from October 26,
1989 to June 12, 1996. Mr. Race served as the Chief Financial Officer of the
Bank from 1989 to August 1995, as the Chief Financial Officer of the Company
from 1990 to August 1995, and as Executive Vice President of the Company from
August 1995 until his retirement on December 31, 1995. Mr. Race also served as
President and Chief Executive Officer of Cole Taylor Bank, Ford City in 1988.
Mr. Race began his career with the Bank in 1987 as Executive Vice President.
ROSS J. MANGANO is a director of the Company and the Finance Company and is
a member of the Company's Nominating Committee and Audit Committee and is
Chairman of the Company's Compensation Committee. Since 1971, Mr. Mangano has
been employed by Oliver Estate, Inc., a management company located in South
Bend, Indiana, with which he served initially as Vice President of
Investments. Mr. Mangano is currently a director and President of Oliver
Estate, Inc. Since 1988, Mr. Mangano has been the Chairman of the Board of
CerProbe Corporation, a public company based in Tempe, Arizona, which develops
and markets testing and probing equipment for the semiconductor industry.
Since 1992, Mr. Mangano has been the President of Oliver Land Corporation, a
property development company located in South Bend, Indiana.
RICHARD W. TINBERG is a director of the Company and a member of the
Compensation Committee. Since 1985, Mr. Tinberg has been the President and
Chief Executive Officer of The Bradford Group, a group of corporations which
are engaged in the development and marketing of collectibles and President and
Chief Executive Officer of Hammacher Schlemmer & Company, which specializes in
the marketing of innovative products and gifts.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE ELECTION OF THE FIVE NOMINEES NAMED IN THIS PROXY
STATEMENT TO SERVE AS DIRECTORS OF THE COMPANY.
64
<PAGE>
OTHER DIRECTORS
The following persons will continue to serve as directors of the Company
after the Annual Meeting until their terms of office expire (as indicated
below) or until their successors are elected and qualified.
<TABLE>
<CAPTION>
SERVED AS
DIRECTOR OF THE TERM TO
NAME AGE POSITION WITH THE COMPANY COMPANY SINCE EXPIRE
---- --- ------------------------- --------------- -------
<S> <C> <C> <C> <C>
Irwin H. Cole(1)(4)..... 79 Director and Vice Chairman of the 1984 1998
Executive Committee of the Company and
a Director and Vice Chairman of the
Finance Company
Sidney J Taylor(1)(4)*.. 73 Director and Chairman of the Executive 1984 1998
Committee of the Company, a Director
of the Bank and a Director of the
Finance Company
Jeffrey W. 44 Chairman, Chief Executive Officer and 1984 1997
Taylor(1)(4)*.......... a Director of the Company, Chairman
and a Director of the Bank and a
Director of the Finance Company
Dean L. Griffith(3)(4).. 69 Director of the Company 1989 1998
Melvin E. Pearl(1)(4)*.. 60 Director of the Company 1984 1997
Solway F. Firestone(3).. 84 Director of the Company and the Bank 1993 1997
Lori Cole(4)............ 45 Director of the Company and the Bank 1995 1997
Adelyn Dougherty(2)*.... 66 Director of the Company 1995 1998
</TABLE>
- - --------
*Will resign from all positions with the Company and the Finance Company
upon consummation of the Split-Off Transactions.
(1)Member of the Executive Committee
(2)Member of the Compensation Committee
(3)Member of the Audit Committee
(4) Member of the Nominating Committee
IRWIN H. COLE is co-founder and Vice Chairman of the Executive Committee of
the Company and has served as a director of the Company since its inception in
1984. Mr. Cole is also Vice Chairman and a director of the Finance Company and
a member of the Company's Employee Profit Sharing Plan and Employee Stock
Ownership Plan Managing Committee. Mr. Cole was also a director of the Bank
from its inception to June 12, 1996. From the Company's inception through
February 1994, Mr. Cole served as its President and Deputy Chairman. Mr. Cole
began his banking career in 1969 when he and Sidney J Taylor purchased Main
State Bank in Chicago. Prior to purchasing Main State Bank, Mr. Cole worked as
a real estate developer and was past president of an automobile dealership.
Mr. Cole is the father of Lori Cole.
SIDNEY J TAYLOR is co-founder and Chairman of the Executive Committee of the
Company and has served as a director of the Company since its inception in
1984. Mr. Taylor is also a director of each of the Bank and the Finance
Company and Chairman of the Company's Employee Profit Sharing Plan and
Employee Stock Ownership Plan Managing Committee. From the Company's inception
through February 1994, Mr. Taylor served as its Chairman and Chief Executive
Officer. Mr. Taylor has over 45 years of banking experience. Mr. Taylor began
his banking career in 1946, and in 1960 became the President of Main State
Bank. In 1969, Mr. Taylor purchased Main State Bank with Irwin H. Cole and
became Chairman of the Board. Mr. Taylor is the father of Jeffrey W. Taylor
and Bruce W. Taylor.
65
<PAGE>
JEFFREY W. TAYLOR is Chairman and Chief Executive Officer of the Company and
has served as a director of the Company since its inception in 1984. Mr.
Taylor is also the Chairman and a director of the Bank and, since June 1994,
has been a director of the Finance Company. Mr. Taylor is a member of the
Company's Executive Committee, Nominating Committee and Employee Profit
Sharing Plan and Employee Stock Ownership Plan Managing Committee. From 1991
to February 1994, Mr. Taylor served as Vice Chairman of the Company and
Chairman and Chief Executive Officer of the Bank. Mr. Taylor served as Vice
Chairman of Banking Strategy from April 1990 until the end of 1990. Prior to
that time, he served as Group Executive Retail Banking and Trust beginning in
1989. Mr. Taylor was named President and Chief Executive Officer of Cole
Taylor Bank, Chicago and Cole Taylor Bank, Wheeling in 1987. From 1983 through
1986, he also held positions in the Commercial Banking area including
Executive Vice President, and in 1986 was named President of Main Bank,
Wheeling. Mr. Taylor began his career with Cole Taylor in 1978 as Associate
General Counsel. Mr. Taylor is the son of Sidney J Taylor and the brother of
Bruce W. Taylor.
DEAN L. GRIFFITH is a director of the Company and a member of its Audit
Committee and Nominating Committee. Mr. Griffith is the Chairman and Chief
Executive Officer of Griffith Laboratories, a global manufacturer of food
ingredients and flavor systems for the food processing and food source
industries, located in Alsip, Illinois. Mr. Griffith has been with Griffith
Laboratories since 1950.
MELVIN E. PEARL has been a director of the Company since its inception in
1984 and is also a member of the Company's Executive Committee. Mr. Pearl was
also a director of the Finance Company from June 7, 1994 until June 12, 1996.
Mr. Pearl is a Partner with the law firm of Katten Muchin & Zavis, counsel to
the Company, the Bank and the Finance Company.
SOLWAY F. FIRESTONE is a director of the Company and the Bank, a member of
the Company's Nominating Committee, and Chairman of the Company's Audit
Committee. Mr. Firestone is a certified public accountant and served as
president of S.F. Firestone & Company, Ltd., a public accounting firm located
in Chicago, until his retirement in June 1994. Mr. Firestone continues to
serve as a consultant of S.F. Firestone & Company, Ltd. Mr. Firestone served
as a director of the Bank of the North Shore from 1976 to 1984 and also served
as Chairman of the Board and Chief Executive Officer of National Press Inc., a
manufacturer of printed office supplies, advertising specialties and
calendars, from 1975 to 1984.
LORI COLE is a director of the Company and the Finance Company and is
Chairman of the Company's Nominating Committee. Ms. Cole was also a director
of the Bank from July 20, 1995 to June 12, 1996. Ms. Cole is the Chairman and
President of Chicago Sound, Inc., which provides audio services, including
sound systems and engineering services, for theatrical performances, concerts
and similar shows. Ms. Cole is the daughter of Irwin H. Cole.
ADELYN DOUGHERTY is a director of the Company and a member of the Company's
Compensation Committee. Ms. Dougherty retired in August 1996 as the President
of the Institute of European and Asian Studies which, in collaboration with a
consortium of more than 100 colleges and universities throughout the United
States, educates American college students in Europe, Asia and Australia. From
1988 to 1992, Ms. Dougherty was Senior Vice President and director of Human
Resources for First Colonial Bankshares Corporation, a holding company for
sixteen banks and three nonbank subsidiaries located in the greater
metropolitan Chicago area. Ms. Dougherty is a member of the Mercy Hospital
Board of Directors and the Committee for Judicial Evaluation of the Supreme
Court of Illinois and is the Vice Chairman of the Economic Development Special
Committee of the Union League Club of Chicago.
DIRECTOR COMPENSATION
Since 1995, employee officers who are also directors do not receive any fees
for their service as directors. During 1995, each nonemployee director of the
Company received an annual fee of $7,500 and an attendance fee of $250 for
each directors' meeting or committee meeting attended. The Chairman of each
committee received an additional $250 per committee meeting attended.
66
<PAGE>
Beginning in 1996, each nonemployee director of the Company receives an
annual fee of $10,000 and an attendance fee of $500 for each directors'
meeting attended and $650 for each committee meeting attended. The Chairman of
each committee receives an additional $250 per committee meeting attended.
MEETINGS
During 1995, the total number of meetings of the Board of Directors was
seven. During the last full fiscal year, each director attended at least 75%
of the aggregate of the total number of meetings of the Board of Directors and
the total number of meetings held by all committees of the Board of Directors
on which he or she served.
STANDING COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee, consisting of Jeffrey W. Taylor, Bruce W. Taylor,
Sidney J Taylor, Irwin H. Cole, William S. Race and Melvin E. Pearl, is vested
with the powers delegated by the Board of Directors except those powers
specifically reserved by Delaware law to the full Board of Directors. The
Executive Committee exists to give the Board the flexibility to make decisions
during intervals between regular meetings of the full Board. The Executive
Committee conferred by telephone on a number of occasions and but held no
formal meetings in 1995. Sidney J Taylor serves as Chairman of the Executive
Committee and Mr. Cole serves as Vice Chairman.
The Audit and Examining Committee, consisting of Dean L. Griffith, Ross J.
Mangano and Solway F. Firestone, as well as two members of the Board of
Directors of the Bank, has responsibility for (i) recommending independent
auditors to the Board of Directors for selection, (ii) reviewing the plan and
scope of the accountants' audit, (iii) reviewing the Company's audit and
control functions and (iv) reporting to the full Board of Directors regarding
all of the foregoing. The Audit Committee conferred by telephone on a number
of occasions and held six formal meetings in 1995. Mr. Firestone serves as
Chairman of the Audit Committee.
The Compensation Committee reviews and makes recommendations to the Board of
Directors on the compensation payable to certain executive officers of the
Company. Specifically, among other things, the Compensation Committee reviews
and approves the Company's compensation strategy, including the individual
elements of total compensation for the Company's executive officers, reviews
the Company's employee benefit programs and approves changes to such programs,
subject to approval by the Board or the Company's stockholders, as necessary,
and assures that the Company's annual incentive compensation plans are
designed and administered in a manner consistent with the Company's
compensation strategy. See "Compensation Committee Report on Executive
Compensation." Through October 1995, the Compensation Committee consisted of
Melvin E. Pearl, as Chairman, Jeffrey W. Taylor, Bruce W. Taylor, Sidney J
Taylor, Irwin H. Cole, and William S. Race. Beginning in November, 1995, the
Compensation Committee consists of Ross J. Mangano, as Chairman, Adelyn
Dougherty and Richard W. Tinberg. The Compensation Special Committee conferred
by telephone on a number of occasions and held four formal meetings in 1995.
Through October 1995, the Nominating Committee consisted of Irwin H. Cole,
as Chairman, and Jeffrey W. Taylor, Bruce W. Taylor, Sidney J Taylor, Irwin H.
Cole, Melvin E. Pearl and Dean L. Griffith. Beginning in November 1995, the
Nominating Committee consists of Lori Cole (who became chairman of this
committee at such time), Solway F. Firestone, Dean L. Griffith, Ross J.
Mangano and Jeffrey W. Taylor. The Nominating Committee (i) conducts a
continuing study of the size, structure and composition of the Board; (ii)
seeks out and interviews possible candidates and reports its recommendations
to the Board; (iii) determines the criteria for selection and retention of
Board members and (iv) presents to the Board proposed nominees for directors.
The Nominating Committee conferred by telephone on a number of occasions but
held no formal meetings in 1995.
67
<PAGE>
OTHER EXECUTIVE OFFICERS
Set forth below is a table identifying each executive officer of the Company
who is not identified in the tables entitled "Election of Directors--Nominees"
or "--Other Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Thomas L. Barlow............. 50 President, Chief Executive Officer and a
Director of the Finance Company
John Christopher Alstrin..... 50 Chief Financial Officer of the Company and the
Bank
</TABLE>
THOMAS L. BARLOW has served as the President, Chief Executive Officer and a
Director of the Finance Company since January 1993. From 1968 to 1992, Mr.
Barlow was employed as a Senior Vice President and Area General Manager for
ITT Consumer Financial Corporation (ITT CFC), during which time Mr. Barlow was
responsible for operations of one-sixth of ITT CFC's domestic business.
JOHN CHRISTOPHER ALSTRIN is the Chief Financial Officer of the Company and
the Bank. From March, 1989 to June, 1994, Mr. Alstrin was the Chief Financial
Officer and the Chief Investment Officer of the Farm & Home Financial Corp., a
multi-state financial services corporation.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers (as defined in the Exchange
Act), directors and persons who own greater than ten percent of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and The
Nasdaq Stock Market. Based solely on a review of the forms it has received,
and on representations from certain reporting persons that no such forms were
required for them, the Company believes that, except as set forth below,
during the fiscal year ended December 31, 1995, all Section 16(a) filing
requirements applicable to its officers, directors and 10% beneficial owners
were complied with by such persons. Each of Jeffrey W. Taylor, Bruce W.
Taylor, John Christopher Alstrin, William Race, Shirley Cole, Irwin Cole, Iris
Taylor and Sidney J Taylor inadvertently did not timely report one transaction
on a Form 5 for 1995, and each of Lori Cole, Richard Tinberg and Adelyn
Dougherty inadvertently did not timely file a Form 3 upon becoming a director
of the Company.
RESIGNATIONS OF DIRECTORS AND EXECUTIVE OFFICERS
Two of the directors nominated for election at the Annual Meeting, Bruce W.
Taylor and Richard W. Tinberg, will resign from the Board upon consummation of
the Split-Off Transactions. Jeffrey W. Taylor, Sidney J Taylor, Melvin E.
Pearl and Adelyn Dougherty will also resign from the Board, and Sidney J
Taylor, and Jeffrey W. Taylor will resign from the Board of Directors of the
Finance Company, at such time. Furthermore, Jeffrey W. Taylor will resign as
Chairman and Chief Executive Officer of the Company, Bruce W. Taylor will
resign as President of the Company and John Christopher Alstrin will resign as
the Chief Financial Officer of the Company. In addition, on June 12, 1996,
Irwin Cole, Lori Cole and William Race resigned from the Board of Directors of
the Bank, and Bruce W. Taylor and Melvin E. Pearl resigned from the Board of
Directors of the Finance Company. Upon consummation of the Split-Off
Transactions, Louis Joseph, currently the Chief Administrative Officer of the
Bank and James I. Kaplan, currently the General Counsel of the Company and the
Bank, will resign their positions with the Bank. After the Split-Off, Mr.
Joseph will hold an executive position with the Company and Mr. Kaplan will
continue to serve as its General Counsel. Thomas L. Barlow, President and
Chief Executive Officer of the Finance Company, Howard B. Silverman, Chairman
of the Finance Company, and Michael D. Bernick, Chief Financial Officer of the
Finance Company, are expected to become the principal executive officers of
the Company. The Company has entered into employment agreements with Messrs.
Barlow and Silverman providing that, on the Closing Date of the Share Exchange
Agreement, Mr. Barlow will become President and Chief Executive Officer of the
Company and Mr. Silverman will become Chairman of the Board
68
<PAGE>
of Directors of the Company. It is expected that Thomas L. Barlow will be
elected by the Board to serve as a director of the Company following the
consummation of the Split-Off Transactions. The Board currently does not
intend to appoint any other replacements for the directors who resigned on
June 12, 1996 or will resign upon consummation of the Split-Off Transactions.
After the Split-Off, pursuant to the Company's Certificate of Incorporation,
the Board intends to establish the number of Directors of the Company at nine
(which number may be subsequently changed by the Board). See "Proposal No. 1--
Approval of the Share Exchange Agreement and the Split-Off Transactions--
Interests of Certain Persons in the Share Exchange Agreement."
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal
years ended December 31, 1995, 1994 and 1993 of the persons who were at
December 31, 1995 (i) the Chief Executive Officer and (ii) the four other most
highly compensated (based upon combined salary and bonus) executive officers
of the Company (collectively, with the Chief Executive Officer, the "Named
Officers"). The table also provides information concerning the annual and
long-term compensation for Thomas L. Barlow, who became an executive officer
of the Company effective January 1, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------ ---------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
POSITION YEAR ($) ($) ($) (#)(1) (#) ($)
------------------ ---- ------ ----- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sidney J Taylor, 1995 $300,000 $ -- $ 86,659 -- -- $ 93,849
Chairman of the Execu-
tive 1994 300,000 56,520 86,239 -- -- 124,189
Committee (2) 1993 300,000 8,222 46,044 -- -- 129,143
Irwin H. Cole, 1995 300,000 -- 151,044 -- -- 86,960
Vice Chairman of the 1994 300,000 56,520 138,101 -- -- 90,122
Executive Committee (3) 1993 300,000 8,222 94,348 -- -- 93,513
Jeffrey W. Taylor, 1995 337,494 92,000 -- -- 20,270 29,286
Chairman and Chief 1994 300,000 125,000 -- -- 40,000 15,110
Executive Officer (4) 1993 285,000 85,172 -- -- -- 20,369
Bruce W. Taylor, 1995 322,500 40,000 -- -- 20,270 26,625
President (5) 1994 300,000 100,000 -- -- 40,000 14,514
1993 285,000 85,172 -- -- -- 24,434
William S. Race, Chief 1995 196,000 -- -- -- 9,935 18,354
Financial Officer (6) 1994 196,000 40,000 -- -- -- 18,049
1993 194,500 48,222 -- 457 -- 23,976
Thomas L. Barlow, 1995 197,500 668,409 -- -- 30,500 71,831
President and Chief 1994 152,083 188,000 -- -- 40,000 7,843
Executive Officer of the 1993 100,000 25,000 -- -- -- 6,983
Finance Company (7)
</TABLE>
- - --------
(1) As of December 31, 1995, Mr. Race held 2,497 restricted shares of Common
Stock of the Company, having a value of $74,598 (based upon the closing
sale price of the Company's Common Stock of $29.875 reported on the Nasdaq
National Market on December 29, 1995). None of the other Named Officers
nor Mr. Barlow held any restricted stock as of December 31, 1995.
(2) Sidney J Taylor was Chairman and Chief Executive Officer of the Company
during 1993. "Other Annual Compensation" includes $61,893, $58,133 and
$28,151 in reimbursements for premiums paid by Mr. Taylor for split-dollar
life insurance for Mr. Taylor for 1995, 1994 and 1993, respectively, and
$19,076,
69
<PAGE>
$21,662 and $15,812 in reimbursements for country club dues for such years,
respectively. For 1995, "All Other Compensation" includes $2,316 in
contributions by the Company pursuant to the Cole Taylor Financial Group
Profit Sharing and Savings Plan (the "Profit Sharing Plan"), $4,524 in
contributions by the Company pursuant to the Cole Taylor Financial Group,
Inc. Stock Ownership Plan (the "ESOP") and payments totaling $87,009
representing the full dollar value of all premiums paid by the Company for
split-dollar life insurance for Mr. Taylor.
(3) "Other Annual Compensation" includes $120,000, $115,453 and $76,664 in
reimbursements for premiums paid by Mr. Cole for split-dollar life
insurance for Mr. Cole for 1995, 1994 and 1993, respectively, and $25,615,
$20,694 and $16,394 in reimbursements for country club dues for such years,
respectively. For 1995, "All Other Compensation" includes $2,316 in
contributions by the Company pursuant to the Profit Sharing Plan, $4,524 in
contributions by the Company pursuant to the ESOP and payments totaling
$80,120 representing the full dollar value of all premiums paid by the
Company for split-dollar life insurance for Mr. Cole.
(4) For 1995, "All Other Compensation" includes $2,316 in contributions by the
Company pursuant to the Profit Sharing Plan, $4,524 in contributions by the
Company pursuant to the ESOP, $15,003 in contributions by the Company
pursuant to the Cole Taylor Financial Group, Inc. Deferred Compensation
Plan (the "Deferred Compensation Plan") and payments totaling $7,443
representing the full dollar value of all premiums paid by the Company for
split-dollar life insurance for Mr. Taylor.
(5) For 1995, "All Other Compensation" includes $2,316 in contributions by the
Company pursuant to the Profit Sharing Plan, $4,524 in contributions by the
Company pursuant to the ESOP, $13,107 in contributions by the Company
pursuant to the Deferred Compensation Plan and payments totaling $6,660
representing the full dollar value of all premiums paid by the Company for
split-dollar life insurance for Mr. Taylor.
(6) For 1995, "All Other Compensation" includes $2,316 in contributions by the
Company pursuant to the Profit Sharing Plan, $4,524 in contributions by the
Company pursuant to the ESOP and payments totaling $11,514 representing the
full dollar value of all premiums paid by the Company for split-dollar life
insurance for Mr. Race.
(7) For 1995, "All Other Compensation" includes $1,862 in contributions by the
Company pursuant to the Profit Sharing Plan, $3,603 in contributions by the
Company pursuant to the ESOP, $38,180 in contributions by the Company
pursuant to the Deferred Compensation Plan and payments totaling $28,186
representing the full dollar value of all premiums paid by the Company for
split-dollar life insurance for Mr. Barlow.
70
<PAGE>
The following table provides information on grants of stock options in 1995
to the Named Officers and Mr. Barlow pursuant to the Company's 1991 Stock
Option Plan and the 1985 Stock Incentive Plan (collectively, the "Plans"). No
stock appreciation rights were granted under the Plans during 1995.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERMS (1)
- - --------------------------------------------------------------------------------- -----------------
% OF TOTAL
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) 1995 ($/SH) DATE 5% ($) 10% ($)
---- -------------------- --------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Irwin H. Cole........... -- -- -- -- -- --
Sidney J Taylor......... -- -- -- -- -- --
Jeffrey W. Taylor....... 20,270(2) 5.85% $17.75 2/23/05 $226,272 $573,417
Bruce W. Taylor......... 20,270(2) 5.85% $17.75 2/23/05 $226,272 $573,417
William S. Race......... 9,935(3) 2.87% $17.75 2/23/05 $110,903 $281,051
10,500(4) 3.03% $17.75 2/23/05 $117,210 $297,034
Thomas L. Barlow........ 20,000(5) 5.77% $19.50 8/01/05 $245,268 $621,560
</TABLE>
- - --------
(1) Potential realizable value is presented net of the option exercise price
but before any Federal or state income taxes associated with exercise.
These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercise are dependent on the future
performance of the Common Stock, as well as the option holder's continued
employment throughout the vesting period. The amounts reflected in the
Table may not necessarily be achieved.
(2) These options were granted under the Company's 1991 Stock Option Plan on
February 23, 1995. Subject to certain restrictions, these options vest in
five equal annual installments beginning on the first anniversary of the
date of grant.
(3) These options were granted under the Company's 1991 Stock Option Plan on
February 23, 1995. Pursuant to an agreement between the Company and Mr.
Race, these options are all fully vested. See "Employment and Severance
Agreements."
(4) These options were granted under the Company's 1991 Stock Option Plan on
February 23, 1995. Subject to certain restrictions, these options vest in
five equal annual installments beginning on the first anniversary of the
date of grant.
(5) These options were granted under the Company's 1991 Stock Option Plan on
August 1, 1995. Subject to certain restrictions, these options vest in
five equal annual installments beginning on the first anniversary of the
date of grant.
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<PAGE>
The following table provides information on options exercised in 1995 by the
Named Officers and on the Named Officers' and Mr. Barlow's unexercised options
at December 31, 1995. Included are options granted under the Plans.
AGGREGATE OPTION EXERCISES IN 1995
AND YEAR END 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($)(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Irwin H. Cole........... -- -- -- -- -- --
Sidney J Taylor......... -- -- -- -- -- --
Jeffrey W. Taylor....... -- -- 56,000 84,270 $1,328,360 $1,640,014
Bruce W. Taylor......... -- -- 56,000 84,270 $1,328,360 $1,640,014
William S. Race......... 1,500 $30,735 109,235 -- $2,571,732 --
Thomas L. Barlow........ -- -- 8,000 62,500 $ 152,600 $ 945,213
</TABLE>
- - --------
(1) The value per option is calculated by subtracting the exercise price from
the closing price of the Company's Common Stock of $29.875, as reported on
the Nasdaq National Market, on December 29, 1995.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In October 1995, the Company and the Bank entered into an agreement with
William S. Race which provided for Mr. Race's employment by the Company
through December 31, 1995 and his engagement as a consultant for the period
from January 1, 1996 through December 31, 1997. Under the agreement, the
Company is required to pay Mr. Race a total of $500,000 in consulting fees.
Under this agreement, Mr. Race currently provides consulting services relating
to corporate finance and investor relations issues. He will continue to
provide such services to the Company after the consummation of the Split-Off
Transactions. Mr. Race's agreement contains a non competition provision which
commenced on the date of the agreement and ends on December 31, 1997. In the
event of a "change in control" of the Company or the Bank, then all future
compensation payable under the agreement must be paid at the time of such
change in control. This "change in control" provision is not triggered by the
Split-Off Transactions. The agreement also provides that all of the stock
options previously granted to Mr. Race would vest in full on October 1, 1995.
Pursuant to a letter agreement approved by the Board of Directors on October
24, 1995 between the Finance Company and Thomas L. Barlow, upon the Closing,
Mr. Barlow will be entitled to a cash payment equal to 250% of Mr. Barlow's
annual base rate salary and incentive bonus for the then most recently
completed calendar year, which cash payment will be equal to approximately
$2.3 million plus any amounts necessary to pay federal excise taxes due to the
classification of certain amounts as "excess parachute payments."
72
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION STRATEGY
The Company's goals for its executive total compensation program are to
attract, motivate and retain the highly qualified employees needed to achieve
its defined performance goals. Having a total compensation package which is
competitive for the industry, appropriately reflects internal equity
considerations, satisfies the requirements of the appropriate regulatory
bodies and supports organizational objectives and stockholder interests is a
key factor in achieving Company goals. The total compensation program provides
targeted compensation opportunities which are at or above the competitive
market. The total compensation program comprises: (i) base salaries consistent
with the median of the market and each individual executive's experience and
performance, (ii) annual incentives with awards reflecting the annual
performance of the Company and its subsidiaries against predetermined
performance goals, (iii) long-term incentives providing awards linked to
longer-term stockholder value creation and (iv) executive benefits which
enhance the Company's ability to attract and retain key executives.
COMPENSATION COMMITTEE AUTHORITY
The Board of Directors of the Company has delegated to the Compensation
Committee the basic responsibility to assure that the Chief Executive Officer
and the other Named Officers are compensated in a manner consistent with the
stated compensation strategy of the Company. The Compensation Committee is
specifically responsible for (i) reviewing and approving the Company's stated
compensation strategy, (ii) reviewing and determining the individual elements
of total compensation for the Named Officers and other executive officers of
the Company and its subsidiaries, (iii) assuring that the annual incentive
compensation plans are designed and administered in a manner consistent with
the Company's compensation strategy, (iv) approving for submission to the
stockholders of the Company all new equity related incentive plans for
management, (v) approving revisions to the Company's salary range structure,
salary increase guidelines and executive promotions, (vi) reviewing the
Company's employee benefit programs and approving changes to these programs,
subject to stockholder or Board approval (as necessary), and (vii) preparing,
reviewing and approving the Compensation Committee Report to be provided in
each year's proxy statement.
COMPENSATION COMMITTEE MEMBERSHIP
In October 1995, the Board of Directors of the Company adopted a new charter
for the Compensation Committee. Under this charter, the Compensation Committee
will consist of not less than three members of the Board who are not (i)
employees of the Company, (ii) holders of in excess of 10% of the voting power
of the Company in elections of directors (including Common Stock held by
certain family members) or (iii) related to an entity doing in excess of
$50,000 of annual business with the Company. In 1995, the Board of Directors
of the Company appointed Ross J. Mangano, Adelyn Dougherty and Richard W.
Tinberg as the members of the Compensation Committee. These members satisfy
both the Compensation Committee's new charter and the requirements for an
"outside director" under Section 162(m) of the Internal Revenue Code.
INDEPENDENT CONSULTANT
The Compensation Committee has used the services of KPMG Peat Marwick LLP
("KPMG"), the Company's independent public accountants, from time to time to
address selected compensation issues. KPMG consultants have provided data on
industry norms and analyzed plan design changes in terms of the Company's
business goals and best compensation practices.
BASE COMPENSATION
With respect to base compensation, the Compensation Committee takes into
account (i) an officer's salary in prior years, (ii) base salaries of
similarly situated officers of comparably sized bank holding and financial
service companies, (iii) the achievement of short- and long-term revenue
performance, and (iv) the achievement of Company objectives in the prior year.
Information with respect to similarly situated officers was derived from
various market studies, national statistics identifying base salaries for
individuals in comparable positions with banks having $1 billion to $5 billion
in assets and publicly available information regarding executives of
73
<PAGE>
Northern Illinois banks. In 1995, the Compensation Committee targeted the
middle of the range in these studies in establishing the base salary for
Jeffrey W. Taylor, the Chairman and Chief Executive Officer, and Bruce W.
Taylor, the President, whose base salaries in 1995 increased by 12.5% and
7.5%, respectively, from 1994. Each of the factors discussed above was
considered in establishing the salaries of Messrs. Taylor and Taylor, although
the Compensation Committee did not assign any specific weight to such factors.
The base salaries for each of Sidney J Taylor, the Chairman of the Executive
Committee, Irwin H. Cole, the Vice Chairman of the Executive Committee, and
William S. Race, who was the Company's Chief Financial Officer until August
1995 and was the Company's Executive Vice President from September 1995 until
his retirement on December 31, 1995, did not increase from 1994 to 1995.
BONUSES
Historically, year-end bonuses have been an important component of total
compensation for the Company's officers. Aggregate bonuses in each year are
based, in part, upon the Company's performance compared to budgeted goals set
by the Compensation Committee in January of that year. Individual bonuses are
based upon the Compensation Committee's assessment of the value of the officer
to the Company and other competitive factors. With respect to Jeffrey W.
Taylor's bonus, the Compensation Committee primarily considered the Company's
performance, including the Company's return on equity and its earnings per
share. With respect to Bruce W. Taylor's bonus, the Compensation Committee
considered both the Company's and the Bank's performance. In reviewing the
Bank's performance, the Compensation Committee considered various factors,
including growth in deposit and loan volumes, profitability factors, such as
net interest margin, fee income and mortgage servicing income, and quality
factors, such as the percentage of nonperforming loans, the percentage of net
charge-offs and the ratio of noninterest expense to total income. These
factors were not assigned any specific weight by the Compensation Committee.
STOCK OPTIONS
On February 23, 1995, the Company granted stock options under the 1991 Stock
Option Plan to acquire shares of Common Stock at an exercise price of $17.75
per share. These grants included options to purchase 20,270 shares to each of
Jeffrey W. Taylor and Bruce W. Taylor and an option to purchase 9,935 shares
to William S. Race. Options granted to these Executive Officers vest 20% per
year over five years following the date of the grant. The above mentioned
grants were approved by the Stock Option Subcommittee of the Compensation
Committee and were intended to (i) reward these officers for their past
services to the Company, (ii) reflect the relative positions of these
executive officers within the Company and their respective contributions,
(iii) serve as a means of enabling these key executives of the Company to
participate in the Company's future growth, and (iv) contribute to the
Company's ability to retain these executives. The above listed factors were
not assigned any specific weight by the Compensation Committee. In determining
the terms of these options, the Compensation Committee considered stock option
grants issued by several regional bank holding companies of similar asset
size. Sidney J Taylor and Irwin H. Cole were not eligible for option grants in
1995.
SECTION 162(M)
Section 162(m) of the Code provides that the compensation paid to the Named
Officers in excess of $1,000,000 cannot be deducted by the Company for U.S.
federal income tax purposes, unless, in general, such compensation is
performance based, is established by an independent committee of directors, is
objective and the plan or agreement providing for such performance-based
compensation has been approved in advance by the stockholders. The Company
generally intends to meet the requirements of Section 162(m) for all
compensation paid to the Named Officers. The Company has taken steps to meet
such requirements, including appointing members of the Compensation Committee
who satisfy the requirements for an "outside director" under Section 162(m).
COMPENSATION COMMITTEE
Ross J. Mangano (Chairman)
Adelyn Dougherty
Richard W. Tinberg
74
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Through October 1995, the Compensation Committee consisted of Sidney J
Taylor, Irwin H. Cole, Jeffrey W. Taylor, Bruce W. Taylor, William S. Race and
Melvin E. Pearl. Since November 1995, the Compensation Committee has consisted
of Ross J. Mangano (Chairman), Adelyn Dougherty and Richard W. Tinberg. During
1995, Sidney J Taylor was the Chairman of the Company's Executive Committee,
Irwin H. Cole was the Vice Chairman of the Company's Executive Committee and
the Vice Chairman of the Finance Company, Jeffrey W. Taylor was the Chairman
and Chief Executive Officer of the Company and the Chairman of the Bank and
Bruce W. Taylor was the President of the Company and the President and Chief
Executive Officer of the Bank. William S. Race was the Chief Financial Officer
of the Company, the Bank and the Finance Company through August 1995 and was
an Executive Vice President of the Company until his retirement on December
31, 1995. Melvin E. Pearl, the Chairman of the Compensation Committee through
October 1995, is a partner in the law firm of Katten Muchin & Zavis. Katten
Muchin & Zavis served as counsel to the Company, the Bank and the Finance
Company during 1995 and will continue to serve in such role during 1996.
As set forth herein, the Taylor Family has entered into the Share Exchange
Agreement with the Company. See "Proposal No. 1--Approval of the Share
Exchange Agreement and the Split-off Transactions." The Taylor Family has a
substantial financial interest in the Split-Off Transactions. Members of the
Taylor Family collectively beneficially own approximately 25% of the
outstanding Common Stock. In addition, Jeffrey W. Taylor is the Chairman of
the Board and Chief Executive Officer of the Company, Bruce W. Taylor is the
President of the Company and the Chief Executive Officer of the Bank and
Sidney J Taylor is the Chairman of the Company's Executive Committee. Sidney J
Taylor is one of the co-founders of the Bank. Jeffrey W. Taylor and Bruce W.
Taylor are members of the Executive Committee and were members of the Second
Special Committee which, among other things, initiated the Company's
exploration of its strategic options. The Board retained independent financial
and legal advisors, negotiated with the Taylor Family at arm's length and
considered and approved the Share Exchange Agreement without the participation
of members of the Taylor Family.
The Company's primary insurance brokers are Dann Brothers, Inc. and Benefit
Planning Associates. Dann Brothers, Inc. provides property and casualty
insurance brokerage services to the Company, and Benefit Planning Associates
provides health insurance brokerage services. Each of Russell Dann and Scott
Dann, the brothers-in-law of Jeffrey W. Taylor, beneficially owns
approximately 25% of the capital stock of Dann Brothers, Inc. Each of Russell
Dann, Scott Dann and Armand Dann, the father-in-law of Jeffrey W. Taylor,
beneficially owns approximately 16% of the partnership interests of Benefit
Planning Associates. During 1995, the Company paid total commissions of
approximately $180,000 to Dann Brothers, Inc. and Benefit Planning Associates
in connection with various insurance policies.
75
<PAGE>
PERFORMANCE GRAPH
The graph set forth below compares the cumulative total stockholder return
on the Common Stock of the Company since its initial public offering on May
25, 1994 with the cumulative total return of the Nasdaq U.S. Index and the SNL
$1B-$5B Bank Asset Size Index over the same period (assuming the investment of
$100 in the Common Stock at its closing price on May 25, 1994 and in each
index on such date, and the reinvestment of all dividends).
[LOGO OF PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
5/25/94 6/30/94 12/30/94 6/30/95 12/29/95 6/30/96
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Cole Taylor Financial
Group, Inc............... $100 $103.18 $158.40 $129.25 $228.34 $228.80
Nasdaq U.S. Index......... $100 $ 96.40 $103.17 $128.60 $145.79 $165.90
SNL $1B - $5B Bank Asset
Size Index............... $100 $102.85 $101.44 $115.37 $140.29 $147.89
</TABLE>
CERTAIN TRANSACTIONS
Certain of the directors and officers of the Company and of the Bank and
members of their immediate families, and firms and corporations with which
they are associated, have had transactions with the Bank, including borrowings
and investments in certificates of deposit. Management believes that all such
loans and investments have been made in the ordinary course of business of the
Bank, have been made on substantially the same terms, including interest rates
paid or charged and collateral required, as those prevailing at the time for
comparable transactions with unaffiliated persons, and did not involve more
than the normal risk of collectibility or present other unfavorable features.
As of December 31, 1995, the aggregate outstanding amount of all loans which
exceeded $60,000 to officers and directors of the Company, and members of
their immediate families and firms and corporations in which they have at
least a 10% beneficial interest was approximately $20.3 million. The Company
relies on its directors and executive officers for identification of loans to
their related interests.
In addition, certain transactions between the Company and its directors and
executive officers are described under "Compensation Committee Interlocks and
Insider Participation."
76
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of September 20, 1996, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, (ii) each of the Named Officers
and Thomas L. Barlow, (iii) each director of the Company and (iv) all
executive officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME AND ADDRESS BENEFICIALLY OWNED (1) TOTAL
- - ---------------- ---------------------- -------------
<S> <C> <C>
Sidney J Taylor (2)(3).................... 684,842** 4.6%
Iris Taylor (2)(4)........................ 2,531,000** 17.1
Irwin H. Cole (5)......................... 187,496 1.3
Shirley Cole (2)(6)....................... 845,300 5.7
Jeffrey W. Taylor (7)..................... 211,384** 1.4
Bruce W. Taylor (8)....................... 210,934** 1.4
William S. Race (9)....................... 104,732 *
Melvin E. Pearl (10)...................... 126,920** *
Howard B. Silverman (11).................. 54,200 *
Ross J. Mangano (12)...................... 545,300 3.7
Dean L. Griffith.......................... 1,000 *
Solway F. Firestone (13).................. 132,000 *
Lori Cole (2)(14)......................... 1,600,200 10.8
Richard W. Tinberg........................ -- *
Adelyn Dougherty (15)..................... 1,000 *
John Christopher Alstrin.................. -- *
Cathy Cole Williams(2)(16)................ 1,021,440 6.9
Thomas L. Barlow.......................... -- *
All executive officers and directors as a
group (15 persons)(17)................... 3,860,008 25.6
</TABLE>
- - --------
*Less than 1%
**Includes shares deposited into escrow pursuant to the Escrow Agreement.
(1) Unless otherwise indicated below, the persons in the above table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The address of the stockholder listed is c/o Cole Taylor Financial Group,
Inc., Suite 300, 350 East Dundee Road, Wheeling, Illinois 60090.
(3) Excludes 2,531,100 shares beneficially owned by Mr. Taylor's spouse, Iris
Taylor, of which shares Mr. Taylor disclaims beneficial ownership.
(4) Excludes 684,342 shares beneficially owned by Mrs. Taylor's spouse,
Sidney J Taylor, of which shares Mrs. Taylor disclaims beneficial
ownership. Includes 2,531,000 shares held by various trusts and the
Taylor Family Partnership, L.P., over all of which Mrs. Taylor has sole
or shared voting and investment power.
(5) Includes 2,500 shares of which Mr. Cole shares voting and investment
power with his spouse, Shirley Cole. Excludes 842,800 shares beneficially
owned by Mr. Cole's spouse, Mrs. Cole, of which shares Mr. Cole disclaims
beneficial ownership.
(6) Includes 2,500 shares of which Mrs. Cole shares voting and investment
power with her spouse, Irwin Cole. Excludes 184,996 shares beneficially
owned by Mrs. Cole's husband, Irwin H. Cole, of which shares Mrs. Cole
disclaims beneficial ownership.
(7) Includes 84,054 shares issuable upon exercise of options exercisable on
or before November 19, 1996, 40,000 shares held in trust for the benefit
of Mr. Taylor's spouse and 450 shares held by Mr. Taylor's children.
(8) Includes 84,054 shares issuable upon exercise of options exercisable on
or before November 19, 1996.
77
<PAGE>
(9) Includes 102,235 shares issuable upon exercise of options exercisable on
or before November 19, 1996.
(10) Includes 112,920 shares held by various trusts over which Mr. Pearl has
sole or shared voting and investment power and also includes 14,000
shares issuable upon exercise of options exercisable on or before
November 19, 1996.
(11) Includes 26,800 shares issuable upon exercise of options exercisable on
or before November 19, 1996.
(12) Includes an aggregate of 530,300 shares over which Mr. Mangano has shared
voting power and sole investment power.
(13) Includes 5,000 shares held by Mr. Firestone's wife, 1,000 shares held by
a pension plan over which Mr. Firestone has sole voting and investment
power as investment advisor and 3,000 shares held by various trusts over
which Mr. Firestone has sole voting and investment power. Also includes
4,000 shares issuable upon exercise of options exercisable on or before
November 19, 1996.
(14) Includes 1,600,200 shares held by various trusts over which Ms. Cole has
sole voting and investment power.
(15) Includes 1,000 shares held by a trust over which Ms. Dougherty has sole
voting and investment power.
(16) Includes 1,021,440 shares held by various trusts over which Ms. Cole has
sole voting and investment power.
(17) Includes an aggregate of 312,343 shares issuable upon exercise of options
exercisable on or before November 19, 1996. Excludes 3,376,300 shares
held by spouses of the directors and executive officers.
ACCOUNTANTS
KPMG Peat Marwick LLP currently serves as the Company's independent public
accountants. It is expected that representatives of KPMG Peat Marwick LLP will
be present at the Annual Meeting and will be available to respond to
questions. They will be given an opportunity to make a statement if they
desire to do so.
On October 4, 1994, the Company decided to replace Coopers & Lybrand, L.L.P.
("Coopers") with KPMG Peat Marwick LLP as its independent accounting firm
engaged to audit the Company's consolidated financial statements. Coopers'
reports on the Company's financial statements for the years ended December 31,
1993 and 1992 contained no adverse opinion or disclaimer of opinion and were
not modified as to uncertainty, audit scope or accounting principles. The
decision to replace Coopers was recommended by the Company's audit committee
and approved by the Company's Board of Directors. The reason for the change
was the turnover of the engagement team members.
During the Company's two most recent fiscal years and the subsequent interim
period to the date of change, there were no disagreements between the Company
and Coopers on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Coopers, would have caused them to make
reference to the subject matters of the disagreements in connection with its
reports.
None of the "reportable events" described in Item 304(a)(1)(v) of Regulation
S-K occurred within the Company's two most recent fiscal years.
PROPOSALS OF SECURITY HOLDERS
Proposals of stockholders intended to be considered at the 1997 Annual
Meeting of Stockholders must be received by the Secretary of the Company no
later than January 6, 1997.
78
<PAGE>
SOLICITATION
The cost of this proxy solicitation is being borne by the Company. The
Company has engaged a proxy solicitation firm, McKenzie Partners, Inc., to
assist in the required search for beneficial owners of the Company's Common
Stock and in the distribution of proxy materials. The Company will pay
McKenzie Partners, Inc. a fee of approximately $10,000 in connection with such
services. In addition to the solicitation of proxies by the use of the mails,
certain officers and associates (who will receive no compensation therefor in
addition to their regular salaries) may be used to solicit proxies personally
and by telephone and telegraph. In addition, banks, brokers and other
custodians, nominees and fiduciaries will be requested to forward copies of
the proxy materials to their principals and to request authority for the
execution of proxies. The Company will reimburse such persons for their
expenses in doing so. The Company anticipates that costs and expenses incurred
in connection with this proxy solicitation will be approximately $30,000 (not
including the fee for McKenzie Partners, Inc.).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). Such reports, proxy statements
and other information filed by the Company with the SEC can be inspected, and
copies may be obtained, at the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington D.C. 20549, at prescribed rates, as well as the
following Regional Offices of the Commission: 7 World Trade Center, Suite
1300, New York, New York 10048; and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. The Common Stock is listed on the
Nasdaq National Market, and such reports, proxy materials and other
information can also be inspected at the offices of The Nasdaq Stock Market,
1735 K Street, N.W., Washington, D.C. 20549.
Copies of reports, proxy statements, and other information regarding
registrants that file electronically are available on the SEC's Web site
(http://www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the SEC
are incorporated herein by reference:
1. Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by a Form 10-K/A filed April 29, 1996;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and
June 30, 1996; and
3. Current Reports on Form 8-K dated June 12, 1996 and October 10, 1996.
All documents filed by the Company with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended, after
the date of this Proxy Statement and prior to the Annual Meeting, or any
adjournment or postponement thereof, shall be deemed to be incorporated by
reference in this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement.
Copies (without exhibits) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and Current Report on Form 8-K dated October
10, 1996 are being mailed to stockholders simultaneously with this Proxy
Statement. In addition, copies (without exhibits) of the Company's 1995 Annual
Report to
79
<PAGE>
Stockholders and Annual Report on Form 10-K for the year ended December 31,
1995 are being mailed, simultaneously with this Proxy Statement, to those
stockholders to whom such documents were not previously mailed. The Company's
1995 Annual Report to Stockholders has not been filed with the SEC.
This Proxy Statement incorporates and may incorporate documents by reference
which are not presented herein or delivered herewith. These documents, other
than the exhibits thereto, are available without charge from the Company to
each person, including any beneficial owner to whom this Proxy Statement is
delivered, upon the written or oral request of such person to Cole Taylor
Financial Group, Inc., 350 East Dundee Road, Wheeling, Illinois 60090,
Attention: James I. Kaplan. In order to ensure timely delivery of such
documents, any request should be made within 15 business days of the date of
mailing of this Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
LOGO
James I. Kaplan, Secretary
ALL STOCKHOLDERS ARE REQUESTED
TO SIGN AND MAIL THEIR PROXIES PROMPTLY
80
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APPENDIX A
AMENDED AND RESTATED
SHARE EXCHANGE AGREEMENT
<PAGE>
AMENDED AND RESTATED SHARE EXCHANGE AGREEMENT
THIS AMENDED AND RESTATED SHARE EXCHANGE AGREEMENT is entered into as of
June 12, 1996, by and among Cole Taylor Financial Group, Inc. ("CTFG") and
those certain persons listed on Schedule 7(b) hereof (the "Taylor Family") and
represented by the members of the Taylor Family shown on the signature page
hereof, for the purposes described below. References to "the date hereof" or
"the date of this Agreement," or similar references, shall mean June 12, 1996,
the date of the original Share Exchange Agreement between the parties hereto.
RECITALS
WHEREAS, CTFG is the beneficial and record owner of one hundred percent
(100%) of the issued and outstanding shares of capital stock (the "Bank
Stock") of Cole Taylor Bank, an Illinois state-chartered bank, having its
principal place of business at 350 East Dundee Road, Wheeling, Illinois 60090
(the "Bank"); and
WHEREAS, substantial disagreements have arisen between CTFG's two largest
shareholder groups concerning the future strategic direction of CTFG and, in
an effort to avoid the adverse consequences of these disagreements, the Taylor
Family has offered to exchange its shares in CTFG for shares of the Bank;
WHEREAS, the Board of Directors of CTFG (the "Board") has determined that
the transfer of all of the outstanding shares of Bank Stock and certain other
assets of CTFG in exchange for certain shares of common stock, par value $.01
per share, of CTFG (the "CTFG Stock") on the terms and subject to the
conditions set forth in this Agreement is fair to and in the best interest of
CTFG and its shareholders; and
WHEREAS, the parties desire to enter into certain other related agreements
in connection with the foregoing transactions; and
WHEREAS, the Taylor Family currently intends to cause a new bank holding
company ("Newco") to be formed to hold the Bank Stock at the Closing (as
defined below) if permitted by the Private Letter Ruling (as defined below);
and
WHEREAS, the parties hereto intend that the exchange of the Bank Stock (or
the common stock of Newco (the "Newco Stock") as the case may be) for CTFG
Stock owned by the Taylor Family, as described herein, qualify as a tax-free
split-off under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code").
NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual
covenants and agreements herein contained, the parties hereby agree as
follows:
1. Exchange of Bank Stock.
Upon the terms and subject to the conditions set forth in this Agreement,
CTFG shall assign, transfer and deliver to the Taylor Family (or, with respect
to not more than 49.9% of the outstanding stock of the Bank, to such party or
parties as the Taylor Family shall direct) on the Closing Date (as hereinafter
defined), in exchange for a number of shares of CTFG Stock equal to the Stock
Amount (as defined below), all right, title and interest in and to all of the
Bank Stock. In the event that the Private Letter Ruling specifically
contemplates the formation of Newco and the transfer of Bank Stock to it and
such transfer occurs prior to the Closing, CTFG shall exchange and the Taylor
Family (or, with respect to not more than 49.9% of the outstanding stock of
Newco, such party or parties as the Taylor Family shall direct) shall receive
Newco stock in lieu of Bank Stock.
2. Exchange of CTFG Stock; Options; Adjustments.
2.1 Transfer and Exchange. At the Closing, in exchange for the transfer of
the Bank Stock or Newco stock to the Taylor Family (or, with respect to not
more than 49.9% of the outstanding stock of the Bank or Newco, to such party
or parties as the Taylor Family shall direct), the Taylor Family shall assign,
transfer and deliver or cause to be assigned, transferred and delivered to
CTFG a number of shares of CTFG Stock to be determined, subject to the proviso
set forth below, at the discretion of the Taylor Family (such number of shares
of CTFG
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<PAGE>
Stock shall be referred to as the "Stock Amount"); provided, however, that in
no event shall the Stock Amount consist of more than 4,500,000 shares of CTFG
Common Stock or less than the greater of (i) 4,000,000 shares of CTFG Common
Stock or (ii) all of the shares of CTFG Stock owned beneficially or of record
by the Taylor Family (including any shares of CTFG Stock owned after the
exercise of any options to purchase shares of CTFG Stock ("Options") and any
shares of CTFG Stock in the CTFG Employee Stock Ownership Plan (the "ESOP")
and the CTFG 401(k) Plan allocated to members of the Taylor Family)
immediately prior to the Closing.
2.2 Options. CTFG will cause all outstanding Options to become vested and
exercisable prior to the Closing. Each Taylor Family member holding any
Options shall exercise such Options at or prior to the Closing.
2.3 Change in CTFG Stock. In the event that between the date of this
Agreement and the Closing Date CTFG subdivides the outstanding shares of CTFG
Stock into a greater number of shares, or combines its outstanding shares of
CTFG Stock into a smaller number of shares, or effects a reclassification of
the CTFG Stock, or pays a dividend in shares of its capital stock, then the
consideration set forth in this Section 2 shall be adjusted so that the number
of shares of CTFG Stock to be received by CTFG shall be reduced or increased
by an amount such that the aggregate value received is not increased or
decreased as a result of such subdivision, combination, reclassification or
dividend.
3. Pre-Closing Transactions.
3.1 Spin-Off of Automobile Receivables Business. (a) Prior to the Closing,
CTFG shall cause the Bank to form a new wholly-owned subsidiary ("Auto Sub")
to which the Bank shall contribute its used automobile receivables business,
consisting of substantially all of the assets used in its used automobile
receivables business (the "UARB Assets") and (i) the Cash Component (as
defined below); plus (ii) all of the Bank's rights and obligations pursuant to
automobile loans, notes or the Bank's securities which as of the Closing Date
are collateralized primarily with used automobiles and have a fair market
value as determined in writing by KPMG Peat Marwick (or such other person upon
whom the parties hereto shall mutually agree) of no less than $30,000,000 nor
more than $31,000,000 (the "Automobile Receivables"). Immediately prior to the
Closing, CTFG shall cause the Bank employees identified on Schedule 3.1 to be
terminated by the Bank and immediately offered employment with Auto Sub. The
Bank shall be responsible for and shall indemnify CTFG for severance costs
arising out of such termination. The term "Cash Component" shall mean: (x) if
the Stock Amount is less than 4,250,000, cash in an amount equal to (A)
$60,000,000 minus (B) the amount, if any, by which the fair market value of
the Automobile Receivables exceeds $30,000,000 plus (C) the product of $33.00
and the difference between 4,250,000 and the Stock Amount; (y) if the Stock
Amount is equal to 4,250,000, cash in an amount equal to (A) $60,000,000 minus
(B) the amount, if any, by which the fair market value of the Automobile
Receivables exceeds $30,000,000; and (z) if the Stock Amount is greater than
4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the amount, if
any, by which the fair market value of the Automobile Receivables exceeds
$30,000,000 minus (C) the product of $33.00 and the difference between the
Stock Amount and 4,250,000.
(b) In addition, prior to the Closing and in conjunction with the formation
of Auto Sub as contemplated by Section 3.1(a), the Bank shall contribute to
Auto Sub an amount in cash equal to the sum of: (i) the amount of CTFG's cash
investment in Alpha Capital Fund, net of all partner distributions, return of
capital and like payments, made from time to time prior to the date hereof
(which was $139,831 as of May 31, 1996), plus any additional cash investment
made by CTFG in Alpha Capital Fund after the date hereof if made with the
Taylor Family's consent, plus interest on the total amount invested beginning,
as to each portion of such amount invested at different times, on the date of
such investment, at the rate of 9% per annum, compounded annually; plus (ii)
the amount of CTFG's aggregate cash investments in CT Mortgage, net of all
distributions to stockholders, return of capital and like payments, made from
time to time prior to the date hereof (which was $1,007,000 as of May 31,
1996), plus any additional cash investment made by CTFG in CT Mortgage after
the date hereof if made with the Taylor Family's consent, plus interest on the
total amount invested beginning, as to each portion of such amount invested at
different times, on the date of such investment, at the rate of 9% per annum,
compounded annually.
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<PAGE>
3.2 Transfer to CTFG. Immediately prior to the Closing Date, CTFG shall
cause the Bank to distribute all of the capital stock of Auto Sub to CTFG,
following which CTFG shall cause Cole Taylor Finance Co., a Delaware
corporation and a wholly-owned subsidiary of CTFG ("Finance") to be merged
with and into Auto Sub.
3.3 Investment in Alpha Capital Fund II, L.P. In conjunction with the
formation of Newco as contemplated by Section 3.5, immediately prior to the
Closing Date, CTFG shall transfer to Newco all of CTFG's rights, obligations
and interest, including, without limitation, CTFG's $500,000 commitment with
respect thereto (the "Alpha Interest") in Alpha Capital Fund II, L.P., a small
business investment company ("Alpha Capital Fund").
3.4 Transfer of CT Mortgage Stock. In conjunction with the formation of
Newco as contemplated by Section 3.5, immediately prior to the Closing Date,
CTFG shall transfer to Newco 100% of the capital stock (the "CT Mortgage
Stock") of CT Mortgage Company, Inc. ("CT Mortgage"), a subsidiary of CTFG.,
All intercompany indebtedness between CTFG and CT Mortgage reflected on the
books and records of CT Mortgage and CTFG on the Closing Date shall have been
repaid, together with interest thereon at the interest rate specified by such
indebtedness, and no intercompany indebtedness shall be incurred subsequent to
the date hereof, except in accordance with Section 9(a)(i)(E) hereof.
3.5 Formation of Newco; Transfer of Bank Stock. If specifically contemplated
by the Private Letter Ruling and requested by the Taylor Family, prior to the
closing CTFG shall form Newco and shall transfer all the Bank shares owned by
CTFG to Newco. CTFG shall not, however, be required to effectuate this
transfer unless (1) the Taylor Family shall have applied for and obtained
appropriate regulatory approval for Newco, (2) the Internal Revenue Service
shall have ruled in the Private Letter Ruling that the transfer of Bank Stock
by CTFG to Newco is a tax-free transaction to CTFG and Newco, and (3) the New
Bank Securities (as defined below) shall be issued on terms disclosed to the
Internal Revenue Service and consistent with the Private Letter Ruling.
4. Consummation of the Transactions; Closing Date. The consummation of the
transactions contemplated herein (the "Closing") and the delivery of the
certificates and acknowledgements called for by this Agreement shall take
place at the offices of Mayer, Brown & Platt, 190 South LaSalle Street,
Chicago, Illinois 60603, at such time and date (the "Closing Date") as shall
be fixed by mutual agreement of the Taylor Family and CTFG as promptly as
practicable following the satisfaction or waiver of the conditions set forth
in Sections 11 and 12 of this Agreement.
5. Regulatory Matters.
5.1 Regulatory Approvals. The parties hereto acknowledge that requisite
approvals must be received from or notices must be given to certain federal
and state governmental bodies and agencies which may include (i) the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"); (ii)
the Federal Deposit Insurance Corporation (the "FDIC"); (iii) the Illinois
Commissioner of Banks and Trust Companies; (iv) the Federal Trade Commission,
(v) the Antitrust Division of the Department of Justice and/or (vi) any other
regulatory authorities having jurisdiction (collectively, the governmental
bodies and agencies referred to in this Section 5.1 are referred to herein as
the "Applicable Governmental Authorities"), in accordance with the laws, rules
and regulations governing or related to the Applicable Governmental
Authorities (the "Applicable Laws"). The parties hereto agree to use their
reasonable best efforts to obtain all such approvals as promptly as
practicable and to give all such notices.
5.2 Capital Infusion; Newco Stock Registration.
(a) Capital Infusion. The Taylor Family acknowledges that the Bank will
require additional capital upon the consummation of the transactions
contemplated by this Agreement in order to comply with the minimum capital
requirements of any applicable banking laws, regulations or any requirements
of any regulatory agencies and agrees to use its reasonable best efforts to
obtain financing sufficient to satisfy this requirement. It is understood that
the Taylor Family intends to obtain some or all of such financing from the net
proceeds of a sale of securities
A-3
<PAGE>
of the Bank (or Newco, as the case may be) (the "New Bank Securities");
provided, that the terms of the New Bank Securities shall have been disclosed
to the Internal Revenue Service and shall be consistent with the Private
Letter Ruling. If the Taylor Family chooses to make such a sale through a
public offering, CTFG, following the direction of the Taylor Family (except as
such direction may be inconsistent with the fiduciary duties of CTFG's
directors), shall cause the Bank (or Newco, as the case may be) to file prior
to the Closing Date a registration statement (the "Registration Statement")
with the U.S. Securities and Exchange Commission (the "SEC") or a comparable
agency relating to the offer and sale of New Bank Securities. The Registration
Statement shall be in form and substance reasonably satisfactory to the Taylor
Family. CTFG shall cause the Bank to use its reasonable best efforts to have
the Registration Statement declared effective and to cause the offer and sale
of the New Bank Securities to be registered, qualified or exempted under
applicable state securities laws as soon as is reasonably practicable, but in
no event later than the Closing Date. CTFG shall cause the Bank (or Newco, as
the case may be) to use its reasonable best efforts to amend or supplement the
Registration Statement or the prospectus contained therein and to take such
actions as may be necessary to cause the Registration Statement to remain
effective until the offer and sale of the New Bank Securities has been
completed. If the New Bank Securities are offered in a manner not involving a
public offering requiring a Registration Statement, CTFG will similarly
cooperate in the preparation of documents for such offering. Unless this
Agreement has been terminated by the Taylor Family pursuant to Section 13(d),
the Taylor Family will indemnify and hold harmless CTFG against all costs and
liabilities related to the offer and sale of the New Bank Securities,
including but not limited to all underwriting, accounting, legal, printing,
filing fee and other expenses of a public or private offering and any
liabilities relating to misstatements or omissions in the Registration
Statement or other offering documents or any part thereof. The Bank will
assume such indemnity and hold harmless agreement upon consummation of the
transfer and exchange referred to in Section 2.1 hereof.
(b) Newco Stock Registration. It is understood that Newco may need to file a
registration statement with the SEC with respect to the offer and sale of
Newco Stock in exchange for CTFG Stock pursuant to Section 1 (a "Common
Registration Statement"). CTFG, following the direction of the Taylor Family
(unless the Board, without the participation of the Taylor Directors (as
defined below), shall reasonably determine that such direction is inconsistent
with the Board's fiduciary duties under applicable law), shall cause Newco to
file prior to the Closing Date a Common Registration Statement with the SEC.
The Common Registration Statement shall be in form and substance reasonably
satisfactory to the Taylor Family. CTFG shall cause Newco to use its
reasonable best efforts to have the Common Registration Statement declared
effective and to cause the offer and sale of the Newco Stock referenced
therein to be registered, qualified or exempted under applicable state
securities laws as soon as reasonably practicable, but in no event later than
two weeks prior to the Closing Date. CTFG shall cause Newco to use its
reasonable best efforts to amend or supplement the Common Registration
Statement or the prospectus contained therein and to take such actions as may
be necessary to cause the Common Registration Statement to remain effective
until the earlier to occur of the Closing Date or the completion of the offer
and sale of the Newco Stock thereunder. Unless this Agreement has been
terminated by the Taylor Family pursuant to Section 13(d), the Taylor Family
will indemnify and hold harmless CTFG against all costs and liabilities
related to the offer and sale of the Newco Stock registered pursuant to the
Common Registration Statement, including but not limited to all underwriting,
accounting, legal, printing, filing fee and other expenses of such offer and
sale of Newco Stock and any liabilities relating to misstatements or omissions
in the Common Registration Statement or other offering documents or part
thereof. The Bank and Newco will assume such indemnity and hold harmless
agreement from and after the Closing; provided, however, that no such
assumption shall relieve the Taylor Family from any liability or obligation in
the event that the Bank or Newco shall fail to perform thereunder.
6. Escrow. Within five business days from the date hereof, as security to
ensure the payment of any termination fee required pursuant to Section 14(c)
of this Agreement, the Taylor Family shall deposit 750,000 shares of CTFG
Stock, with executed stock transfer powers, into escrow (the "Escrow Fund")
with The Northern Trust Company (or such other entity as the parties hereto
shall reasonably agree) pursuant to an Escrow Agreement between the Taylor
Family, CTFG and The Northern Trust Company substantially in the form attached
hereto as Exhibit A.
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<PAGE>
7. Representations and Warranties of the Taylor Family. Each member of the
Taylor Family, jointly and severally, represents and warrants to CTFG that:
(a) Authorization, No Violation, Et Cetera. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
by such Taylor Family member has been duly authorized by all necessary
action on the part of such member of the Taylor Family and this Agreement
constitutes the legal, valid and binding obligation of such Taylor Family
member, enforceable against such Taylor Family member in accordance with
its terms. The execution and delivery of this Agreement by the Taylor
Family, and the consummation of the transactions contemplated by this
Agreement, will not violate the provisions of, or constitute a breach or
default under, any material agreement to which such member of the Taylor
Family is a party or is bound, or any other material license, law, order,
rule, regulation or judgment to which such member of the Taylor Family is a
party.
(b) Stock and Option Ownership. Each member of the Taylor Family owns in
the aggregate or has allocated to him or her in the ESOP and the CTFG
401(k) Plan, as applicable, that number of shares of CTFG Stock and Options
to purchase shares of CTFG Stock as set forth opposite his, her or its name
on Schedule 7(b) hereto, and as of the Closing Date, such CTFG Stock and
Options will be free and clear of any security interests, liens, claims,
pledges, charges, voting agreements or other encumbrances of any nature
whatsoever ("Liens").
(c) Formation of Newco. In the event the Taylor Family determines to form
Newco as a bank holding company, and the Private Letter Ruling specifically
contemplates the formation of Newco and transfer of Bank Stock to it, the
Taylor Family represents that it will cooperate with CTFG in taking all
necessary corporate and other action to create and form Newco and cause
Newco to enter into, ratify and approve this Agreement and all of the
related transactions prior to the Closing Date.
(d) Broker's and Finder's Fees. No member of the Taylor Family has
incurred any obligation or liability, contingent or otherwise, to any
brokers or finders in respect of the matters provided for in this Agreement
other than to Piper, Jaffray Companies.
(e) UARB Assets. The UARB Assets are substantially all of the assets used
exclusively in or necessary for the conduct of the Bank's used automobile
receivables business.
(f) Prohibitions. Neither any member of the Taylor Family nor any of
their respective properties is subject to any order, writ, judgment,
injunction, decree, determination or award which would prevent or delay the
consummation of the transactions contemplated hereby.
(g) Transfer of Title. The transfer of the shares of CTFG constituting
the Stock Amount hereunder to CTFG will transfer to CTFG good and valid
title to the shares of CTFG constituting the Stock Amount, free and clear
of any Liens (except for Liens CTFG has permitted to attach upon transfer
at the Closing).
8. Representations and Warranties of CTFG. Except as set forth below, CTFG
makes no representation or warranty with respect to the Bank, CT Mortgage or
Alpha Capital Fund and the Taylor Family acknowledges that the Bank, CT
Mortgage and the Alpha Interest are being transferred on an as is, where is
basis. Notwithstanding the foregoing, CTFG represents and warrants to the
Taylor Family that:
(a) Capital Stock. On the date hereof, the Bank has authorized, issued
and outstanding capital stock as follows:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING TREASURY
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Common.......................... 1,500,000 1,500,000 1,500,000 0
</TABLE>
There are no issued or outstanding warrants, options, preemptive rights, rights
of first refusal or other rights to purchase equity or debt instruments of the
Bank.
On the date hereof, CT Mortgage has authorized, issued and outstanding
capital stock as follows:
<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING TREASURY
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Common.......................... 10,000 1,000 1,000 0
</TABLE>
A-5
<PAGE>
There are no issued or outstanding warrants, options, preemptive rights,
rights of first refusal or other rights to purchase equity or debt instruments
of CT Mortgage.
All of the issued and outstanding shares of Bank Stock and stock of CT
Mortgage are duly and validly authorized and issued. All of the outstanding
shares of Bank Stock and stock of CT Mortgage are fully paid and nonassessable
and are owned free and clear of any liens, mortgages or claims by CTFG.
On the date hereof, CTFG holds a $500,000 commitment in Alpha Capital Fund
of which $139,831 was funded as of May 31, 1996.
(b) Authorization: Validity. The consummation of the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action on the part of CTFG and this Agreement
constitutes the legal, valid and binding obligation of CTFG, enforceable
against CTFG in accordance with its terms.
(c) Broker's and Finder's Fees. Neither CTFG nor the Bank has incurred
any obligation or otherwise, to any brokers or finders in respect of the
matters provided for in this Agreement other than to The Chicago
Corporation and Sandler O'Neill & Partners, L.P.
(d) Investment Schedule. CTFG has previously delivered to the Taylor
Family a true and accurate schedule showing the amounts and dates of its
investments in CT Mortgage and Alpha Capital Fund.
(e) Prohibitions. None of CTFG, any of its subsidiaries or any of their
respective properties is subject to any order, writ, judgment, injunction,
decree, determination or award which would prevent or delay the
consummation of the transactions contemplated hereby.
(f) Title. At the Closing, CTFG will have good and valid title to all of
the Bank Stock, the CT Mortgage Stock and the Alpha Interest free and clear
of any Liens.
(g) Transfer of Title. The transfer of the Bank Shares, the CT Mortgage
Stock and the Alpha Interest hereunder to the Taylor Family, the Bank or
Newco, as the case may be, will transfer to such person good and valid
title to the Bank Shares, the CT Mortgage Stock and the Alpha Interest,
free and clear of any Liens (except for Liens the Taylor Family has
permitted to attach upon transfer at the Closing).
(h) Proposals. Except as previously disclosed in writing to the Taylor
Family, CTFG has not received since September 1, 1995 any offers or
proposals for the acquisition of CTFG, the Bank or Finance.
9. Agreements with Respect to Conduct of the Business After the Date Hereof.
(a) Ordinary Course, Insurance, Preservation of Business.
(i) Except as otherwise agreed to in writing by the Board and Sidney
Taylor, Jeffrey Taylor and Bruce Taylor (the "Taylor Directors") and
except to the extent required to consummate the transactions
contemplated by Section 3 hereof, CTFG and the Taylor Directors
covenant and agree that they will not, prior to the earlier of the
Closing Date and the termination of this Agreement, terminate or change
the terms or conditions of employment of Jeffrey Taylor or Bruce Taylor
at CTFG, and prior to the later of (i) the Closing Date and (ii) the
termination of the Taylor Sale Period (as that term is defined in
Section 14(d) hereof), terminate or change the terms or conditions of
employment of any employees of CTFG (other than Jeffrey Taylor or Bruce
Taylor), the Bank (including Jeffrey Taylor and Bruce Taylor) or CT
Mortgage (provided that this Section 9(a)(i) shall not apply to
employees of Finance or its subsidiaries in their capacity as such)
having an annual salary of $100,000 or more per year and that they will
use their reasonable best efforts to cause each of the Bank and CT
Mortgage from and after the date of this Agreement and until the later
of (i) the Closing Date and (ii) the termination of the Taylor Sale
Period to:
(A) carry on its business only in the ordinary course and
consistent with its respective policies, procedures and practices in
substantially the same manner as heretofore conducted (provided that
it may take any action listed on Schedule 9(a)(i));
A-6
<PAGE>
(B) except as they may terminate in accordance with their terms or
in accordance with the terms of this Agreement, keep in full force
and effect, and not commit or cause a default of any of its
obligations under, any material contracts;
(C) keep in full force and effect the insurance coverage in effect
on the date hereof to the extent that such insurance continues to be
reasonably available;
(D) use its best efforts to maintain, renew, keep in full force
and effect and preserve its business organization and material
rights and franchises, permits and licenses and to retain its
present employee force (including retaining each Taylor Director in
all of his current positions as director, officer and employee of
the Bank with no diminution of his current duties, authority,
compensation and benefits except as otherwise provided in this
Agreement), and to maintain its existing, or substantially
equivalent, credit arrangements with banks and other financial
institutions and to use its reasonable best efforts to maintain the
continuance of its general customer relationships;
(E) continue all usual intercompany relationships and practices to
support the ongoing business activities of the Bank and CT Mortgage
in accordance with existing practices, including funding usual
working capital contributions and normal budgeted expenditures and
making reimbursements for services rendered in accordance with
existing practices, budgets and plans; and
(F) take such action as may be necessary to maintain, preserve,
renew and keep in full force and effect its corporate existence and
material rights and franchises; and duly comply in all material
respects with all laws applicable to it and to the conduct of its
business.
(ii) Except as otherwise agreed to by the Board (with the
participation of the Taylor Directors) and except to the extent
required to consummate the transactions contemplated by Section 3
hereof, CTFG covenants and agrees that it will use its reasonable best
efforts to cause each of Finance and Finance's subsidiaries from and
after the date of this Agreement and until the earlier of the Closing
Date and the termination of this Agreement to:
(A) carry on its business only in the ordinary course and
consistent with its respective policies, procedures and practices in
substantially the same manner as heretofore conducted;
(B) except as they may terminate in accordance with their terms or
in accordance with the terms of this Agreement, keep in full force
and effect, and not commit or cause a default of any of its
obligations under, any material contracts;
(C) keep in full force and effect the insurance coverage in effect
on the date hereof to the extent that such insurance continues to be
reasonably available;
(D) use its best efforts to maintain, renew, keep in full force
and effect and preserve its business organization and material
rights and franchises, permits and licenses and to retain its
present employee force, and to maintain its existing, or
substantially equivalent, credit arrangements with banks and other
financial institutions and to use its reasonable best efforts to
maintain the continuance of its general customer relationships;
(E) continue all usual intercompany relationships and practices to
support the ongoing business activities of Finance in accordance
with existing practices, including funding usual working capital
contributions and normal budgeted expenditures and making
reimbursements for services rendered in accordance with existing
practices, budgets and plans; and
(F) take such action as may be necessary to maintain, preserve,
renew and keep in full force and effect its corporate existence and
material rights and franchises; and duly comply in all material
respects with all laws applicable to it and to the conduct of its
business.
(b) Prohibited Action Without Approval.
(i) Except as otherwise expressly provided in or permitted by this
Agreement, including the Schedules hereto, or as agreed by CTFG (with
the participation of the Taylor Directors), CTFG and the Taylor
Directors covenant and agree that they will use their reasonable best
efforts to cause the
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<PAGE>
Bank and CT Mortgage, from and after the date of this Agreement and
until the earlier of the Closing and the termination of this Agreement,
not to:
(A) incur or agree to incur any obligation or liability (absolute
or contingent) other than the taking of deposits and other
liabilities incurred in the ordinary course of business and
consistent with prior practice, and liabilities arising out of,
incurred in connection with, or related to the consummation of this
Agreement; except in the ordinary course of business consistent with
past practice, assume, guarantee or endorse the obligations of any
other person; except in the ordinary course of business consistent
with past practice, mortgage or pledge any of its assets, tangible
or intangible, or create or suffer to exist any Lien thereupon; make
or permit any amendment or termination of any material contract
which would materially adversely affect its rights thereunder;
acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization
or division or substantial part thereof; sell, transfer or otherwise
dispose of any substantial part of its assets; sell, acquire or form
any branch location; enter into, dispose or divest itself of any
joint venture or partnership or cause any business entity to become
a subsidiary or affiliate; sell or otherwise dispose of any real
property owned or operated by it except for the sale of real estate
held for sale in the ordinary course of business; enhance, expand,
modify, replace or alter any computer or data processing system
owned, leased or licensed by it (including any software associated
with any such computer or system); authorize any new capital
expenditure or expenditures or any other expenditures in excess of
$50,000, either individually or in the aggregate; make, originate or
otherwise acquire one or more loans, or one or more loan commitments
for one or more loans, or one or more lines of credit, except in the
ordinary course of business, in accordance with prior practice and
with all approvals as are required by applicable procedures on the
date hereof; or enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing; or
(B) authorize for issuance, issue, sell, deliver (whether through
the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), redeem or acquire
for value, or agree or commit to do so, any debt securities or any
shares of the capital stock or other equity securities, or any other
securities or equity equivalents (including, without limitation,
stock appreciation rights), or declare, issue or pay any dividend or
other distribution of assets, whether consisting of money, other
personal property, real property or other things of value, to its
shareholders other than as set forth in Section 3 or Section 9(j)
hereof; or
(C) split, combine or reclassify any shares of its capital stock;
or
(D) sell or pledge or otherwise encumber any stock owned by it in
any subsidiary; amend or propose to amend its, or permit the
amendment of any subsidiary's certificate of incorporation, charter
or by-laws or any other governing document of any subsidiary; split,
combine or reclassify any shares of its capital stock; or enter into
any agreement, commitment or arrangement with respect to any of the
foregoing; or
(E) enter into, adopt or (except as may be required by law) amend
or terminate any bonus, profit sharing, compensation, severance,
termination, stock appreciation right, restricted stock, performance
unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust, plan, fund or other arrangement
for the benefit or welfare of any director, officer or employee,
increase in any manner the compensation or benefits of any director,
officer or employee or pay any benefit not required by any plan or
arrangement as in effect as of the date hereof (including, without
limitation, the granting of stock options, restricted stock, stock
appreciation rights or performance units) or hire any employee with
a salary in excess of $150,000 per year or hire, terminate or change
the terms or conditions of employment of any employee who would be
entitled to any payment upon a change of control of the Bank or CT
Mortgage; or
(F) obligate the Bank or CT Mortgage to any intercompany charge;
or
(G) acquire or dispose of any securities or interests for
investment purposes or sell or purchase mortgage servicing rights;
or
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(H) enter into any transactions other than in the ordinary course
of business; or
(I) compromise or otherwise settle or adjust any assertion or
claim of a deficiency in taxes (or interest thereon or penalties in
connection therewith) or file any appeal from an asserted
deficiency, except in a form previously approved by the Board and
the Taylor Directors, which approval shall not be unreasonably
withheld, or file any federal or state tax return before furnishing
a copy to the Taylor Directors and affording an opportunity to
consult with the filing entity; or
(J) unless the Board decides otherwise, open any new office or
close any current office of the Bank, any of the Bank's subsidiaries
or CT Mortgage at which business is conducted.
(K) take, or agree in writing or otherwise to take, any of the
actions described above in this Section 9(b)(i) or any action which
would make any of the representations or warranties of CTFG or the
Taylor Family contained in this Agreement untrue or incorrect or
would result in any of the conditions hereunder not being satisfied.
(ii) Except as otherwise expressly provided in or permitted by this
Agreement or as agreed by the Board (with the participation of the
Taylor Directors), CTFG will use its reasonable best efforts to cause
Finance, from and after the date of this Agreement and until the
earlier of the Closing and the termination of this Agreement, not to:
(A) incur or agree to incur any obligation or liability (absolute
or contingent) other than liabilities incurred in the ordinary
course of business and consistent with prior practice, and
liabilities arising out of, incurred in connection with, or related
to the consummation of this Agreement; except in the ordinary course
of business consistent with past practice, assume, guarantee or
endorse the obligations of any other person; except in the ordinary
course of business consistent with past practice, mortgage or pledge
any of its assets, tangible or intangible, or create or suffer to
exist any Lien thereupon; make or permit any amendment or
termination of any material contract which would materially
adversely affect its rights thereunder; acquire (by merger,
consolidation, or acquisition of stock or assets) any corporation,
partnership or other business organization or division or
substantial part thereof; sell, transfer or otherwise dispose of any
substantial part of its assets; enter into, dispose or divest itself
of any joint venture or partnership or cause any business entity to
become a subsidiary or affiliate; sell or otherwise dispose of any
real property owned or operated by it except for the sale of real
estate held for sale in the ordinary course of business; except as
identified on Schedule 9(b)(ii)(A), enhance, expand, modify, replace
or alter any computer or data processing system owned, leased or
licensed by it (including any software associated with any such
computer or system); authorize any new capital expenditure or
expenditures or, except as identified on Schedule 9(b)(ii)(A), any
other expenditures in excess of $50,000, either individually or in
the aggregate; make, originate or otherwise acquire one or more
loans, or one or more loan commitments for one or more loans, or one
or more lines of credit, except in the ordinary course of business,
in accordance with prior practice and with all approvals as are
required by applicable procedures on the date hereof; or enter into
any contract, agreement, commitment or arrangement with respect to
any of the foregoing; or
(B) authorize for issuance, issue, sell, deliver (whether through
the issuance or granting of options, warrants, commitments,
subscriptions, rights to purchase or otherwise), redeem or acquire
for value, or agree or commit to do so, any debt securities or any
shares of the capital stock or other equity securities, or any other
securities or equity equivalents (including, without limitation,
stock appreciation rights), except pursuant to any employee benefit
plan of Finance as in effect as of the date hereof, or amend any of
the terms of any such securities or agreements outstanding as of the
date hereof; or
(C) split, combine or reclassify any shares of its capital stock;
or
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(D) sell or pledge or otherwise encumber any stock owned by it in
any subsidiary; (b) amend or propose to amend its, or permit the
amendment of any subsidiary's certificate of incorporation, charter
or by-laws or any other governing document of any subsidiary; (c)
split, combine or reclassify any shares of its capital stock; or (d)
enter into any agreement, commitment or arrangement with respect to
any of the foregoing; or
(E) enter into, adopt or (except as may be required by law) amend
or terminate any bonus, profit sharing, compensation, severance,
termination, stock appreciation right, restricted stock, performance
unit, stock equivalent, stock purchase agreement, pension,
retirement, deferred compensation, employment, severance or other
employee benefit agreement, trust, plan, fund or other arrangement
for the benefit or welfare of any director, officer or employee,
increase in any manner the compensation or benefits of any director,
officer or employee or pay any benefit not required by any plan or
arrangement as in effect as of the date hereof (including, without
limitation, the granting of stock options, restricted stock, stock
appreciation rights or performance units) or hire any employee with
a salary in excess of $150,000 per year or hire, terminate or change
the terms or conditions of employment of any employee who would be
entitled to any payment upon a change of control of the Bank or CT
Mortgage; or
(F) obligate Finance to any intercompany charge other than in the
ordinary course of business consistent with past practice; or
(G) acquire or dispose of any securities or interests for
investment purposes or sell or purchase mortgage servicing rights;
or
(H) enter into any transactions other than in the ordinary course
of business; or
(I) compromise or otherwise settle or adjust any assertion or
claim of a deficiency in taxes (or interest thereon or penalties in
connection therewith) or file any appeal from an asserted
deficiency; or
(J) take, or agree in writing or otherwise to take, any of the
actions described above in this Section 9(b)(ii).
(c) No Solicitation.
(1) CTFG will immediately cease any existing discussions or
negotiations with any third parties conducted prior to the date hereof
with respect to any Acquisition Proposal (as defined below). CTFG shall
not, directly or indirectly, through any officer, director, employee,
representative or agent or any of its subsidiaries, (i) solicit,
initiate, continue or encourage any inquiries, proposals or offers that
constitute, or could reasonably be expected to lead to, a proposal or
offer for a merger, consolidation, business combination, sale of
substantial assets, sale of shares of capital stock (including, without
limitation, by way of a tender offer) or similar transactions involving
CTFG, the Bank or any of CTFG's subsidiaries, other than the
transactions contemplated by this Agreement (any of the foregoing
inquiries or proposals being referred to in this Agreement as an
"Acquisition Proposal"), (ii) solicit, initiate, continue or engage in
negotiations or discussions concerning, or provide any non-public
information or data to any person or entity relating to, any
Acquisition Proposal, or (iii) agree to, approve or recommend any
Acquisition Proposal; provided, that nothing contained in this Section
9(c) shall prevent CTFG from furnishing non-public information or data
to, or entering into discussions or negotiations with, any person in
connection with an unsolicited Acquisition Proposal by such person or
recommending an unsolicited Acquisition Proposal to the stockholders of
CTFG, if and only to the extent that (1) CTFG's directors determine in
good faith that such action is required for the discharge of their
fiduciary duties to stockholders under applicable law if so advised by
independent counsel, and (2) CTFG advises the Taylor Family of all such
nonpublic information delivered to such person concurrently with its
delivery to the requesting party.
(2) CTFG shall notify the Taylor Directors immediately (and in no
event later than 24 hours) after receipt by CTFG of any Acquisition
Proposal or any request for non-public information in connection with
an Acquisition Proposal or for access to the properties, books or
records of CTFG by any person or entity that informs CTFG that it is
considering making, or has made, an Acquisition Proposal.
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(d) Liabilities. After the date hereof and prior to the Closing Date,
CTFG and the Taylor Directors shall use their reasonable best efforts to
cause the Bank, Finance, CT Mortgage and each of their subsidiaries to pay
or discharge their current liabilities when the same become due and
payable, except for such liabilities as may be subject to a good faith
dispute or counterclaim.
(e) Goodwill. After the date hereof and prior to the Closing Date, CTFG
and the Taylor Directors shall use their reasonable best efforts to cause
each of the Bank, Finance, CT Mortgage and each of their subsidiaries not
to enter into any transaction which will create goodwill on its books and
records under generally accepted accounting principles.
(f) Insider Lending. After the date hereof and prior to the Closing Date,
CTFG and the Taylor Directors shall use their reasonable best efforts to
cause each of the Bank, Finance, CT Mortgage and each of their subsidiaries
not to change or modify any of its current practices relating to the
lending of money, secured or unsecured, to its affiliated persons,
including but not limited to its directors, officers and employees.
(g) No Violation. After the date hereof and prior to the Closing Date,
CTFG and the Taylor Directors shall use their reasonable best efforts to
cause each of the Bank, Finance, CT Mortgage and each of their subsidiaries
not to take any action which knowingly violates any statute, code,
ordinance, rule, regulation or judgment, order, writ, arbitral award,
injunction or decree of any court, governmental agency or body or
arbitrator, domestic or foreign, having jurisdiction over its properties.
(h) Operating Expenses. After the date hereof and prior to the Closing
Date, CTFG and the Taylor Directors shall use their reasonable best efforts
to cause each of the Bank, Finance, CT Mortgage and each of their
subsidiaries not to increase the level of its operating expenses in any
material respect.
(i) Accounting. After the date hereof and prior to the Closing Date, CTFG
and the Taylor Directors shall use their reasonable best efforts to cause
each of the Bank, Finance, CT Mortgage and each of their subsidiaries to
maintain its books, accounts and records in accordance with generally
accepted accounting principles. CTFG and the Taylor Directors shall use
their reasonable best efforts to cause the Bank, Finance, CT Mortgage and
each of their subsidiaries not to make any change in any method of
accounting or accounting practice, or any change in the method used in
allocating income, charging costs or accounting for income, except as may
be required by law, regulation or generally accepted accounting principles.
CTFG and the Taylor Directors shall use their reasonable best efforts to
cause the Bank, Finance, CT Mortgage and each of their subsidiaries not to
change any practice or policy with respect to the charging off of loans or
the maintenance of its reserves for possible loan losses, except as
required by law, regulation or generally accepted accounting principles.
(j) Dividends. Except as required otherwise by law, the parties
acknowledge and agree that, from the date hereof through the Closing Date,
the Bank will pay monthly dividends to CTFG equal to one-half of Bank
earnings with an adjustment in December, 1996 so that the cumulative
dividends to CTFG for calendar year 1996 are equal to $10,100,000; provided
further, that if the Closing Date occurs prior to January 1, 1997, the
maximum amounts of dividends which may be paid in calendar year 1996 shall
be reduced by $27,671.23 for each day after the Closing Date and prior to
January 1, 1997; and provided further, that such dividends will be $880,000
per month of calendar year 1997 ($10,560,000 for all of calendar year 1997)
if the Closing Date has not occurred prior to December 31, 1996 and, if the
Closing Date does not occur at the end of a month, the dividends paid shall
be pro-rated on a daily basis through the Closing Date.
(k) Lenders' Consents. After the date hereof and prior to the Closing
Date, CTFG and the Taylor Directors will use their reasonable best efforts
to cause CTFG, the Bank and Finance to obtain any waivers, consents,
amendments or approvals required to prevent any default, acceleration or
other adverse effect upon CTFG, the Bank or Finance under any indenture,
credit agreement, note or other indebtedness of CTFG, the Bank or Finance.
10. Additional Agreements.
(a) Continuing Access to Information. CTFG shall permit the Taylor Family
and its authorized representatives reasonable access during regular
business hours to the Bank's properties and those of the Bank's
subsidiaries and CT Mortgage. The Bank shall make its and its subsidiaries'
directors, management
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<PAGE>
and other employees and agents and authorized representatives (including
counsel and independent public accountants) available to confer with the
Taylor Family and its authorized representatives at reasonable times and
upon reasonable request, and CTFG shall, and shall cause the Bank and its
subsidiaries and CT Mortgage to disclose and make available to the Taylor
Family, and shall use its reasonable best efforts to cause its agents and
authorized representatives to disclose and make available to the Taylor
Family, all books, papers and records relating to the assets, properties,
operations, obligations and liabilities of the Bank and its subsidiaries
and CT Mortgage.
(b) Notification of Change. CTFG shall promptly notify the Taylor
Directors and the Taylor Directors shall promptly notify the Board of any
material change in the ordinary course of business or in the operation of
the properties of the Bank or any of its subsidiaries or CT Mortgage and of
any governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated), or the institution or the
threat of litigation involving the Bank or its subsidiaries or CT Mortgage
which is known to CTFG and which is material or which might have a material
adverse effect, or of any other material breach by CTFG, the Bank or any of
its subsidiaries or CT Mortgage of any representation, warranty, covenant
or agreement set forth in this Agreement, and will keep the Taylor Family
promptly and fully informed of such events. CTFG will consult with the
Taylor Directors before taking any steps to comply with suggestions made by
any Applicable Governmental Authorities which could reasonably be
considered significant to the Bank or CT Mortgage.
(c) Information for Regulatory Filings. CTFG promptly shall furnish the
Taylor Directors, and the Taylor Directors shall furnish the Board, with
any information relating to CTFG, the Bank or any of its subsidiaries or CT
Mortgage which is required under any applicable law or regulation for
inclusion in any filing that the Taylor Family, on the one hand, or CTFG,
on the other hand, is required to make with any regulatory or supervisory
authority (including the SEC and State securities authorities) in order to
consummate the transactions contemplated by this Agreement. CTFG represents
and warrants to the Taylor Family that all information so furnished by it
shall be true and correct in all material respects without omission of any
material fact required to be stated to make the information stated therein
not misleading and the Taylor Family represents and warrants to CTFG that
all information furnished by it relating to the transactions contemplated
by this Agreement or relating to its ownership interest in CTFG shall be
true and correct in all material respects without omission of any material
fact required to be stated to make the information stated therein not
misleading.
(d) Regulatory Approvals. As promptly as practicable, and in any event no
later than August 31, 1996, the Taylor Directors will submit any necessary
applications to the Applicable Governmental Authorities for approval of the
transactions contemplated hereby, including but not limited to, the Federal
Reserve Board, FDIC and the Illinois Commissioner of Banks. The Bank and
CTFG shall cooperate with and shall assist the Taylor Directors in the
preparation and filing of all such applications.
(e) Private Letter Ruling. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best
efforts to take, or cause to be taken, all actions and to do, or cause to
be done, all things necessary, proper or advisable to obtain a private
letter ruling from the Internal Revenue Service (the "IRS") that the
exchange of Bank (or, as the case may be, Newco) Stock for CTFG Stock held
by the Taylor Family members constitutes a tax-free transaction under
Section 355 of the Internal Revenue Code, and that the transfer of Bank
Stock to Newco constitutes a tax-free transaction to CTFG and Newco (the
"Private Letter Ruling"); provided, however, that no party shall be
required to make any representation or take any action having an effect
inconsistent with the limitations set forth on Schedule 10(e). CTFG will
agree to any changes in the structure of the transactions contemplated
herein required by the IRS before it will issue the Private Letter Ruling
so long as such changes do not materially affect the benefits or impact
(economic or otherwise) of, or legal risks associated with, those
transactions on CTFG, Finance or any of their subsidiaries, affiliates,
shareholders, or employees other than the Bank or the members of the Taylor
Family. CTFG and Finance agree in particular that if necessary they will
either eliminate intercompany debt between them prior to the Closing or,
alternatively, convert obligations of Finance to CTFG into a term
promissory note with a minimum term of 10 years. Except as set forth in
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<PAGE>
Schedule 10(e), neither party shall take action that is intended to cause
the transactions contemplated herein not to qualify as a tax-free exchange
under the Internal Revenue Code. All contacts with the IRS shall be
coordinated through the Taylor Family and its representatives. Counsel for
CTFG shall be entitled to attend all meetings with and participate in all
material discussions with the IRS in connection with the ruling process,
and shall review (prior to submission) all written material submitted to
the IRS.
(f) CTFG Shareholder Approval.
(i) CTFG, acting through the Board, shall in accordance with
applicable law and subject to the fiduciary duties of the Board under
applicable law (as determined in good faith after consultation with
independent counsel), as soon as practicable following the execution of
this Agreement:
(x) duly call, give notice of, convene and hold an annual or
special meeting of its shareholders (the "Shareholders Meeting") for
the purpose of considering and taking action upon this Agreement;
(y) prepare and file with the SEC a proxy or information statement
(as amended or supplemented, the "Proxy Statement") to be mailed to
CTFG's shareholders in connection with the Shareholders Meeting and
include in the Proxy Statement the recommendation of the Board that
shareholders of CTFG vote in favor of the approval and adoption of
this Agreement and the transactions contemplated hereby; and
(z) use its reasonable best efforts (A) to obtain and furnish the
information required to be included by it in the Proxy Statement
and, after consultation with the Taylor Family, respond promptly to
any comments made by the SEC with respect to the Proxy Statement and
any preliminary version thereof and cause the Proxy Statement to be
mailed to its shareholders at the earliest practicable time and (B)
to obtain the necessary approvals by its shareholders of this
Agreement and the transactions contemplated hereby.
(ii) CTFG and the Taylor Family shall cooperate in the preparation of
the Proxy Statement. The Proxy Statement shall not, at the time filed
with the SEC, at the time mailed to the Company's shareholders, at the
time of the Shareholders Meeting or at the Closing Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are
made, not misleading.
(iii) At the Shareholders Meeting, the members of the Taylor Family
will vote all shares of CTFG Stock owned or controlled by them in favor
of this Agreement and the transactions contemplated hereby.
(g) Compliance with Tax and Regulatory Representations.
(i) Each party hereto will comply with any covenants it makes in
connection with the Private Letter Ruling or with any Applicable
Governmental Authority to ensure the tax-free nature of the
transactions contemplated hereby. CTFG, for the two-year period
following the Closing Date, will cause Auto Sub to continue the
operation of the used automobile receivables business previously
operated by the Bank through undertaking the following actions: (v)
purchasing the same type of automobile receivables previously purchased
by the Bank (except that such receivables may be collateralized by used
automobiles only), (w) maintaining a portfolio of at least $30,000,000
in face amount value of such receivables (net of unearned finance
charge); (x) continuing to underwrite, collect and process such
receivables; (y) to the extent practicable, purchasing receivables from
the same automobile dealerships from which the Bank previously
purchased such receivables, and (z) to the extent practicable,
retaining the employees specified in Schedule 3.1 transferred from the
Bank to conduct the Auto Sub business.
(ii) For the two-year period following the Closing Date, unless the
Taylor Family has obtained a written opinion from nationally recognized
tax counsel, which opinion shall be reasonably satisfactory in form and
substance to tax counsel for CTFG, that the desired transactions and
any transaction related
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<PAGE>
thereto will neither affect the qualification of the exchange of the
Bank Stock (or the Newco Stock, as the case may be) for the CTFG Stock
under Section 355 of the Code nor affect the validity of the Private
Letter Ruling (a "Tax Opinion"), (x) no Taylor Family member will sell,
exchange, transfer or enter into any transaction reducing economic risk
with respect to, the Bank Stock received in the split-off, (y) the
Taylor Family will cause the Bank to continue the active conduct of its
banking business, and (z) the Taylor Family will not permit either the
Bank or Newco (if Newco is formed) to (A) merge or consolidate with or
into any other corporation, (B) liquidate or partially liquidate, (C)
sell or transfer any significant part of its assets, (D) redeem or
otherwise purchase any of its capital stock, or (E) except as
specifically contemplated by the Private Letter Ruling, issue
additional shares of its capital stock; provided, however, that,
regardless of whether the Taylor Family has obtained a Tax Opinion, the
Taylor Family shall not enter into any agreement, arrangement or
understanding for transfer of control of the Bank or Newco (a "Transfer
Arrangement") for one year following the Closing Date and, if the
Taylor Family enters into a Transfer Arrangement more than one year but
less than two years following the Closing Date, the Taylor Family shall
remain responsible for ensuring that, and shall obtain a written
contractual commitment from the other parties to the Transfer
Arrangement that they will ensure that, the Bank and Newco comply with
this Section 10(g)(ii) except to the extent that the Tax Opinion also
opines that the qualification of the exchange of the Bank Stock (or the
Newco Stock, as the case may be) for the CTFG Stock under Section 355
and the validity of the Private Letter Ruling will not be affected by
the particular actions specified in the Tax Opinion.
(iii) For the two-year period following the Closing Date, unless CTFG
has obtained a written opinion from nationally recognized tax counsel,
which opinion shall be reasonably satisfactory in form and substance to
tax counsel for the Taylor Family, that the desired transactions and
any transaction related thereto will neither affect the qualification
of the exchange of the Bank Stock (or the Newco Stock, as the case may
be) for the CTFG Stock under Section 355 of the Code nor affect the
validity of the Private Letter Ruling, (x) CTFG will not sell, exchange
or transfer the capital stock of Auto Sub, (y) CTFG will not permit
Auto Sub to (A) merge or consolidate with or into any other corporation
(other than a merger of Finance with and into Auto Sub), (B) liquidate
or partially liquidate, or (C) sell or transfer any significant part of
the UARB Assets and (z) CTFG will not redeem or repurchase any shares
of CTFG Stock (except for purchases of up to 16 percent of the
outstanding CTFG Stock as described in Schedule 10(e) or such greater
amounts as may be consistent with the Private Letter Ruling).
(iv) CTFG and the Bank shall immediately amend their existing tax
allocation agreement so that (A) the allocation of federal, state and
local tax liabilities through the Closing between CTFG and its
subsidiaries on the one hand and Bank on the other shall continue in a
manner consistent with past practice, except that, beginning with the
date of the execution of this Agreement, all tax benefits associated
with the exercise or buyout of all compensatory options on CTFG shares,
whether held by employees or former employees of the Bank or otherwise,
shall inure solely to the benefit of CTFG; and (B) any claims or
liabilities arising from audits (including audits commenced or
completed after the Closing) of preclosing periods shall be borne by
the party (i.e., the Bank and CT Mortgage on the one hand or CTFG and
its continuing subsidiaries on the other) to whom the adjustment is
attributable. The party financially responsible for a proposed audit
adjustment shall be afforded the opportunity to determine and direct
the defense of the particular matter at its own expense and the matter
shall be settled or compromised only with such party's consent.
(v) Each of the Bank and/or Newco and CTFG shall deliver a
certificate of an officer as to compliance with such covenants to the
other on the last day of each calendar quarter until such ongoing
covenants have terminated.
(h) Deconsolidation. After the Closing, CTFG and the Taylor Directors
agree to take such steps in accordance with generally accepting accounting
principles to deconsolidate the Bank from CTFG for accounting purposes. The
parties acknowledge that any Options exercised immediately prior to Closing
pursuant to this Agreement are Options of CTFG, and shall be treated as
such for tax, accounting and deconsolidation purposes.
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<PAGE>
(i) Lease Arrangements. If requested by CTFG, for 90 days after the
Closing Date, the Bank will sublease to CTFG the space currently utilized
by CTFG on terms reasonably acceptable to the parties hereto. On the
Closing Date, CTFG will assign to the Bank any leases, licenses, and real
or personal property used by or adjacent to the Bank properties but owned
by CTFG or Reliance Acceptance Corporation for no additional consideration.
All property (including leases and real property) owned by the Bank on the
date hereof shall be and remain the property of the Bank on and after the
Closing Date.
(j) Employees. CTFG hereby assumes all liability (and indemnifies the
Bank and the Taylor Family against such liability) for any payments which,
as a result of the Closing, are owed to the persons listed on Schedule
10(j)(i) or full-time employees of Finance or its subsidiaries. The Taylor
Family will cause the Bank to assume all liability (and to indemnify CTFG
and its subsidiaries against such liability) for any severance or change of
control payments which, as a result of the Closing, are owed to any
employee of CTFG, the Bank or any of their affiliates other than the
persons listed on Schedule 10(j)(i) and other than full-time employees of
Finance or any of its subsidiaries. On the Closing Date, the employees of
CTFG other than the persons listed on Schedule 10(j)(i) and persons who are
also full-time employees of Finance or any of its subsidiaries will remain
or become employees of the Bank.
(k) CT Mortgage Comfort. CTFG has made, and through the Closing Date will
continue in the normal course of business in accordance with prior practice
to make, representations and provide indemnification, guarantees as
customarily required by mortgage investors to assure the validity of
mortgages sold and other assurances to purchasers of mortgages and
mortgage-backed securities from CT Mortgage and the Bank. After the Closing
the Bank will indemnify and hold harmless CTFG from any liability with
respect thereto.
(l) Finance Comfort. CTFG has made and will make representations and
provide indemnification and other assurances and make-well agreements to
purchasers of securities and mortgages from, and creditors of, Finance. The
parties acknowledge that the Bank has no responsibility for such agreements
and CTFG will indemnify and hold the Bank and CT Mortgage harmless from any
liability with respect thereto.
(m) Insurance Policies. The Bank may purchase from CTFG any insurance
policies owned by CTFG and providing coverage with respect to the Bank or
any of its officers at the greater of the book value of such policies or
the cash value of such policies. CTFG may purchase from the Bank any
insurance policies owned by the Bank and providing coverage with respect to
CTFG, any of its subsidiaries or any of their respective officers at the
greater of the book value of such policies or the cash value of such
policies.
(n) Employee Benefit Plans.
(i) CTFG's obligations to CTFG employees who will become Bank
employees at Closing, provided such obligations are incurred prior to
the Closing (including a pro rata portion of obligations accruing with
the passage of time in accordance with usual practice but for which
cash or other contributions are not then required) pursuant to its
benefit plans, including, without limitation, the CTFG 1996 incentive
plan, the CTFG 401(k) Plan and the CTFG ESOP, will be and remain the
responsibility of CTFG. The Bank's obligations to Bank employees who
will become employees of CTFG at Closing, provided such obligations are
incurred prior to the Closing (including a pro rata portion of
obligations accruing with the passage of time in accordance with usual
practice but for which cash or other contributions are not then
required) pursuant to the CTFG benefit plans in which the Bank
participates, including, without limitation, the CTFG 1996 incentive
plan, the CTFG 401(k) Plan and the CTFG ESOP, will be and remain the
responsibility of the Bank. Any such accrued and unpaid salary and
vacation will be paid in full at or prior to the Closing. Any such
accrued and unpaid amounts under the CTFG 1996 incentive plan, the CTFG
401(k) Plan and the CTFG ESOP shall be paid in accordance with the
terms of such plans.
(ii) 401(k) Plans.
(A) Prior to the Closing Date but no later than the transfer date
described in paragraph (B) next below, the Taylor Family shall cause
the Bank or Newco to establish a profit sharing plan with a salary
reduction arrangement that covers the employees who are or will
become employees
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of the Bank and former employees of the Bank ("Bank Employees") and
meets the requirements of Sections 401(a) and 401(k) of the Code
(the "CTB 401(k) Plan"). The Taylor Family shall cause the sponsor
of the CTB 401(k) Plan to credit the Bank Employees with all service
credited to them under the CTFG 401(k) Plan as of the Closing Date
and to fully vest them in the account balances that are transferred
from the CTFG 401(k) Plan to the CTB 401(k) Plan.
(B) Prior to the Closing Date, CTFG shall cause the account
balances of all Bank Employees under the CTFG 401(k) Plan as of the
date of the transfer (other than the accounts of those Bank
Employees who are expected to become employees of CTFG at Closing)
to be transferred from the trust maintained under the CTFG 401(k)
Plan to the trust maintained under the CTB 401(k) Plan. Shares of
CTFG Stock allocated to the account balances of the Bank Employees
shall be transferred in kind. Such transfer shall be made only after
the sponsor of the CTB 401(k) Plan has supplied CTFG either a copy
of an Internal Revenue Service determination letter finding the CTB
401(k) Plan to be a qualified plan meeting the requirements of
Sections 401(a) and 401(k) of the Code or an opinion of counsel or
written representation from the sponsor of the CTB 401(k) Plan (with
appropriate indemnities), in either case to the effect that the CTB
401(k) Plan is a qualified plan under Sections 401(a) and 401(k) of
the Code and the related trust is exempt from taxation under Section
501(a) of the Code, and an agreement that the sponsor of the CTB
401(k) Plan will timely request a determination letter from the IRS
with respect to the qualified status of the CTB 401(k) Plan and will
make any and all changes to the CTB 401(k) Plan necessary to receive
a favorable determination letter. As soon as practicable after the
Closing Date, the Taylor Family shall cause the sponsor of the CTB
401(k) Plan to transfer from the trust maintained under the CTB
401(k) Plan to the trust maintained under the CTFG 401(k) plan the
account balances of all Bank Employees who become employees of CTFG
at Closing. As soon as practicable after the Closing Date, CTFG
shall cause the transfer from the trust maintained under the CTFG
401(k) Plan to the trust maintained under the CTB 401(k) plan the
account balances of all CTFG employees who become employees of the
Bank at Closing.
(C) The parties agree that the participants in the CTB 401(k)
Plan, in the discretion of the Taylor Family, may have the
opportunity to participate in the Exchange Transaction by electing
to exchange for shares of Newco Stock the shares of CTFG Stock held
in their CTFG Stock accounts under the CTB 401(k) Plan, subject to
the terms and conditions of the Exchange Agreement, as long as the
requirements of applicable securities laws have been satisfied by
the closing date to which the parties have otherwise agreed.
(iii) ESOPs.
(A) Prior to the Closing Date, the Taylor Family shall cause the
Bank or Newco to establish an employee stock ownership plan that
covers the Bank Employees and meets the requirements of Sections
401(a) and 4975(e)(7) of the Code (the "CTB ESOP"). The Taylor
Family shall cause the sponsor of the CTB ESOP to credit the Bank
Employees with all service credited to them under the CTFG ESOP as
of the Closing Date and to fully vest them in the account balances
that are transferred from the CTFG ESOP to the CTB ESOP.
(B) The parties agree that prior to the Closing Date CTFG shall
cause the applicable employers to make contributions to the CTFG
ESOP sufficient to prepay the outstanding CTFG ESOP loan and shall
cause, in accordance with applicable law, the allocation to the
accounts of participants of the shares of CTFG Stock that are
released from the suspense account by reason of such loan
prepayment.
(C) Effective as of the Closing Date, CTFG shall cause the shares
of CTFG Stock and cash held in the account balances of all Bank
Employees under the CTFG ESOP as of such date (other than the
accounts of those Bank Employees who become employees of CTFG on
such date) to be transferred from the trust maintained under the
CTFG ESOP to the trust maintained under the CTB ESOP. Such transfer
shall be made only after the sponsor of the CTB ESOP has supplied
CTFG either a copy of an Internal Revenue Service determination
letter finding the CTB ESOP to
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be a qualified plan meeting the requirements of Sections 401(a) and
4975(e)(7) of the Code or an opinion of counsel or written
representation from the sponsor of the CTB ESOP (with appropriate
indemnities), in either case to the effect that the CTB ESOP is a
qualified plan under Sections 401(a) and 4975(e)(7) of the Code and
the related trust is exempt from taxation under Section 501(a) of
the Code, and an agreement that the sponsor of the CTB ESOP will
timely request a determination letter from the IRS with respect to
the qualified status of the CTB ESOP and will make any and all
changes to the CTB ESOP necessary to receive a favorable
determination letter.
(D) The parties agree that the CTB ESOP, in the discretion of the
Taylor Family, may be offered the opportunity to participate in the
Exchange Transaction by exchanging for shares of Newco Stock the
shares of CTFG Stock that will be transferred to the CTB ESOP under
paragraph (C) next above, subject to the terms and conditions of the
Exchange Agreement, as long as the CTB ESOP trustee making the
determination on the exchange of the shares is an independent
financial institution and retains an independent financial advisor.
(iv) The parties agree that (A) prior to the Closing, they will come
to agreement on any other employee benefit plan matters that need to be
resolved and (B) they shall consult with each other and share
information relating to all the matters set forth in this Section
10(n).
11. Conditions Precedent to Obligations of the Taylor Family. The
obligations of the Taylor Family to effect the transactions contemplated
hereby shall be subject to the fulfillment at the Closing Date of each of the
following conditions (any one or more of which may be waived by the Taylor
Family, but only in writing):
(a) Status as of Closing Date. All representations and warranties of CTFG
contained in this Agreement shall be true in all material respects when
made and at and as of the Closing Date, as though such representations and
warranties were made at and as of the Closing Date (except where the
failure to be so true has been caused by the Taylor Family), and CTFG shall
have performed and satisfied in all material respects all covenants and
agreements required by this Agreement to be performed and satisfied on or
prior to the Closing Date (except where the failure to be so performed or
satisfied has been caused by the Taylor Family), and at the Closing Date
there shall be delivered to the Taylor Family a certificate signed by an
officer of CTFG dated as of the Closing Date to the foregoing effect.
(b) Required Action. All action required to be taken by or on the part of
CTFG and the Bank to authorize the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
shall have been duly and validly taken by the Boards of Directors of CTFG
and the Bank.
(c) Regulatory Approvals. Any applicable waiting periods under any
Applicable Laws shall have expired or been terminated and the transactions
contemplated by this Agreement shall have been approved by all Applicable
Governmental Authorities and such approval shall not contain or be subject
to any terms or conditions that the Taylor Family reasonably deems
materially burdensome. The IRS shall have issued rulings that (i) the
exchange of Bank (or, as the case may be, Newco) Stock for CTFG Stock held
by the Taylor Family members will be a tax-free transaction under Section
355 of the Code, and (ii) that if the transfer of Bank Stock to Newco is
part of the transaction, that transfer will be a tax-free transaction to
CTFG and Newco.
(d) No Order Preventing Consummation. There shall not be any order,
injunction or decree of any such court or any governmental agency,
department or other regulatory body prohibiting the consummation of the
transactions contemplated hereby.
(e) Material New Litigation. After the date of this Agreement there shall
have been no litigation filed which could reasonably be expected to have a
material adverse effect on the business or financial condition (a "Material
Adverse Effect") of the Bank and its subsidiaries, taken as a whole.
(f) No Action to Prevent or Restrict Transactions. No statute, rule,
regulation or policy shall have been proposed, promulgated or enacted by
any governmental or regulatory agency of competent jurisdiction which
prevents or restricts the transactions contemplated hereby.
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(g) Pre-Closing Transactions. The transactions set forth in Section 3
hereof shall have occurred.
(h) Shareholder Approval. Shareholders of CTFG holding at least a
majority of the outstanding shares of CTFG Stock shall have approved the
transactions contemplated by this Agreement.
(i) Consents. All required approvals, consents and authorizations of any
third parties in connection with the transactions contemplated hereby shall
have been obtained except such approvals, consents and authorizations which
if not obtained would not individually or in the aggregate have a Material
Adverse Effect on the Bank and its subsidiaries, taken as a whole.
12. Conditions Precedent to Obligations of CTFG. The obligations of CTFG to
effect the transactions contemplated hereby shall be subject to the
fulfillment at the Closing Date of each of the following conditions (any one
or more of which may be waived by CTFG, but only in writing):
(a) Status as of Closing Date. All representations and warranties of the
Taylor Family contained in this Agreement shall be true in all material
respects when made and at and as of the Closing Date, as though such
representations and warranties were made at and as of the Closing Date
(except where the failure to be so true has been caused by CTFG), and the
Taylor Family and Taylor Directors shall have performed and satisfied in
all material respects all covenants and agreements required by this
Agreement to be performed and satisfied on or prior to the Closing Date
(except where the failure to be so performed or satisfied has been caused
by CTFG), and at the Closing Date there shall be delivered to CTFG
certificates dated as of the Closing Date and signed by Jeffrey Taylor, as
representative of the Taylor Family, to the foregoing effect.
(b) Required Action. All action required to be taken by or on the part
the Taylor Family to authorize the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby
shall have been duly and validly taken by the Taylor Family and, if
appropriate, by the Board of Directors of Newco.
(c) Regulatory Approvals. Any applicable waiting periods under any
Applicable Laws shall have expired or been terminated, and the transactions
contemplated by this Agreement shall have been approved by all Applicable
Governmental Authorities and such approval shall not contain or be subject
to any terms or conditions that CTFG reasonably deems materially
burdensome. The IRS shall have issued rulings that (i) the exchange of Bank
(or, as the case may be, Newco) Stock for CTFG Stock held by the Taylor
Family members will be a tax-free transaction under Section 355 of the
Code, and (ii) that if the transfer of Bank Stock to Newco is part of the
transaction, that transfer will be a tax-free transaction to CTFG and
Newco.
(d) No Order Preventing Consummation. There shall not be any order,
injunction or decree of any such court or any governmental agency,
department or other regulatory body of competent jurisdiction prohibiting
the consummation of the transactions contemplated hereby.
(e) No Action to Prevent or Restrict Transactions. No statute, rule,
regulation or policy shall have been proposed, promulgated or enacted by
any governmental or regulatory agency of competent jurisdiction which
prevents or restricts or could prevent or restrict the transactions
contemplated hereby.
(f) Pre-Closing Transactions. The transactions set forth in Section 3
hereof shall have occurred.
(g) Material New Litigation. After the date of this Agreement there shall
have been no litigation filed which could reasonably be expected to have a
Material Adverse Effect on CTFG and its subsidiaries (other than the Bank),
taken as a whole.
(h) Shareholder Approval. Shareholders of CTFG holding at least a
majority of the outstanding shares of CTFG Stock shall have approved the
transactions contemplated by this Agreement.
(i) Consents. All required approvals, consents and authorizations of any
third parties in connection with the transactions contemplated hereby shall
have been obtained except such approvals, consents and authorizations which
if not obtained would not individually or in the aggregate have a Material
Adverse Effect on CTFG and its subsidiaries (other than the Bank), taken as
a whole.
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13. Termination. This Agreement may be terminated at any time prior to the
Closing, notwithstanding approval thereof by the stockholders of CTFG:
(a) by mutual written consent of the Taylor Family and CTFG;
(b) by the Taylor Family or CTFG if any court of competent jurisdiction
or other governmental body located or having jurisdiction within the United
States shall have issued an order, decree or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated hereby and such order, decree, ruling or
other action shall have become final and nonappealable;
(c) by the Taylor Family or CTFG if the approval of any Applicable
Governmental Authorities has been denied or if any approval of any
Applicable Governmental Authorities contains or is subject to any terms or
conditions that the Taylor Family or CTFG reasonably deems to be materially
burdensome; provided, however, that neither the Taylor Family nor CTFG
shall terminate this Agreement pursuant to this Section 13(c) until the
other party has had a reasonable opportunity (but not to exceed 60 days) to
persuade the relevant Applicable Governmental Authority to change its
decision; and further provided that neither party may terminate this
Agreement pursuant to this Section 13(c) if it has not complied with all
reasonable requests of the other party in connection with the other party's
efforts to obtain such approval;
(d) provided that the party seeking termination pursuant to this Section
13(d) shall have performed and satisfied in all material respects all
covenants and agreements required by this Agreement to be performed and
satisfied by it on or prior to the date of termination (except where the
failure to be so performed or satisfied has been caused by the other
party), by the Taylor Family or CTFG if the other party shall have breached
in any material respect any of its covenants or agreements contained in
this Agreement required to be complied with prior to the date of such
termination, which failure to comply has not been cured within thirty days
(but in no event later than June 30, 1997) following receipt by such other
party of written notice of such failure to comply;
(e) provided that CTFG shall have performed and satisfied in all material
respects all covenants and agreements required by this Agreement to be
performed and satisfied by it on or prior to the date of termination
(except where the failure to be so performed or satisfied has been caused
by the Taylor Family), by CTFG if the Taylor Family has failed to submit a
request for the Private Letter Ruling to the Internal Revenue Services
prior to July 31, 1996 or an application to any Applicable Governmental
Authority whose approval is required for the transactions contemplated
herein prior to August 31, 1996;
(f) by the Taylor Family or CTFG if the Closing has not occurred prior to
June 30, 1997 (provided, however, that a party may not terminate this
Agreement under this Section 13(f) if that party has caused the Closing not
to occur in breach of this Agreement);
(g) by either CTFG or the Taylor Family if the IRS has finally determined
not to issue the Private Letter Ruling or has issued an adverse ruling
(provided, however, that neither the Taylor Family nor CTFG shall terminate
this Agreement pursuant to this Section 13(g) until the other party has had
a reasonable opportunity (but not to exceed 60 days) to persuade the IRS to
change its decision);
(h) by CTFG, prior to the Shareholders Meeting, after CTFG's receipt of
an Acquisition Proposal if the Board determines, based on the advice of
independent counsel, that such action is required for the discharge of its
fiduciary duties to shareholders under applicable law;
(i) by the Taylor Family if the Board shall have withdrawn or modified in
a manner adverse to the Taylor Family its approval of this Agreement or its
recommendation that CTFG's shareholders approve the transactions
contemplated hereby or if CTFG shall have entered into an agreement
providing for an Acquisition Proposal or the Board shall have resolved to
do any of the foregoing;
(j) by the Taylor Family if the Shareholders Meeting has not occurred
prior to November 28, 1996 (provided, however, that the Taylor Family may
not terminate this Agreement under this Section 13(j) if the Taylor Family
has caused the Shareholders Meeting not to occur prior to November 28,
1996);
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(k) by either CTFG or the Taylor Family if shareholders of CTFG holding a
majority of CTFG's outstanding common stock do not approve the transactions
contemplated herein at the Shareholders Meeting; or
(l) by CTFG if the Taylor Family has not complied with its obligations
under Section 6 within five business days after the execution of this
Agreement (provided, however, that CTFG may not terminate this Agreement
pursuant to this Section 13(l) if CTFG has prevented such compliance by the
Taylor Family).
14. Effect of Termination. (a) If this Agreement is terminated pursuant to
Section 13(h), or pursuant to Section 13(i) under circumstances where the
actions of CTFG or the Board which triggered the right of the Taylor Family to
terminate this Agreement pursuant to Section 13(i) were permitted by Section
9(c) and not otherwise a breach of this Agreement, CTFG shall immediately pay
the Taylor Family as an exclusive remedy liquidated damages in an amount equal
to (i) its out of pocket expenses paid to lawyers, accountants, investment
bankers or other experts plus (ii) three percent of the fair market value
(determined as of the date this Agreement is terminated) of the Acquisition
Proposal that gave rise to the termination of this Agreement.
(b) If this Agreement is terminated by the Taylor Family pursuant to
Section 13(d), CTFG shall immediately pay the Taylor Family as an exclusive
remedy liquidated damages equal to $15 million.
(c) If this Agreement is terminated pursuant to (i) Section 13(c) other
than because of a failure to obtain the approval of the Applicable
Governmental Authorities resulting from a failure to comply with the
Community Reinvestment Act or fair lending statutes, (ii) pursuant to
Section 13(f) where the failure to have closed before the applicable date
was caused by (x) a failure to have obtained the Private Letter Ruling, (y)
a failure to obtain the financing required by Section 5.2, or (z) the
failure to have obtained the approval of the Applicable Governmental
Authorities for any reason other than a failure to comply with the
Community Reinvestment Act or fair lending statutes or (iii) pursuant to
Section 13(g) (a termination pursuant to (i), (ii) or (iii) of this Section
14(c) being a "Triggering Termination"), then CTFG will be entitled,
subject to adjustment pursuant to, and in the manner provided by, Section
14(d), to receive from the Taylor Family, as an exclusive remedy,
liquidated damages in an amount equal to $15 million.
(d) If this Agreement is terminated as a result of a Triggering
Termination, CTFG agrees to immediately use its reasonable best efforts to
solicit bids from third parties for the sale of all of the equity interest
in the Bank (the "Bank Sale Process"). The Taylor Family shall use its
reasonable best efforts to support the Bank Sale Process. If members of the
Taylor Family are members of the Board, those Board members shall direct
the Bank Sale Process, which power of direction shall include the right to
choose an investment banker to represent CTFG (with such investment banker
to be retained and compensated by CTFG on customary terms) in connection
with the Bank Sale Process. The Nominating Committee of the Board shall
reslate any Taylor Director for reelection as a director of CTFG if his
present term will expire before the end of the Bank Sale Process. If,
during the nine month period after a Triggering Termination, CTFG receives
a Sufficient Bona Fide Offer to acquire all of the equity interest in the
Bank that the Taylor Family wishes the Board to consider, the obligation of
the Taylor Family to pay CTFG $15 million pursuant to Section 14(c) shall
be reduced (provided that in no event shall such obligation ever be less
than zero) by the amount by which the Sufficient Bona Fide Offer would
provide CTFG with gross proceeds with a fair market value in excess of $235
million, and CTFG shall be entitled to receive the amount payable under
Section 14(c), as reduced pursuant to this sentence. The Board shall be
under no obligation to accept a Sufficient Bona Fide Offer that the Taylor
Family wishes the Board to consider; provided, however, that should the
Board decide to reject a Sufficient Bona Fide Offer, the obligation of the
Taylor Family to pay CTFG $15 million shall nonetheless be reduced as
provided for in the preceding sentence. If no Sufficient Bona Fide Offer
that the Taylor Family wishes the Board to consider has been made during
the nine months after a Triggering Termination, the full $15 million
payable under Section 14(c) shall be payable to CTFG. A "Sufficient Bona
Fide Offer" shall be an offer for all of the equity interest in the Bank
from a financially reliable third party (or parties) and subject only to
customary terms and conditions that, if accepted, would be likely to be
consummated and that, if consummated, would provide CTFG with gross
proceeds with a fair market value in excess of $235 million.
Notwithstanding the foregoing, the Board, without the participation of any
member of the Taylor Family, may resolve not to pursue the Bank Sale
Process, to
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terminate the Bank Sale Process (with or without an agreement to sell all
of the equity interest in the Bank) or to enter into an agreement providing
for the merger or disposition of the stock or assets of CTFG prior to the
expiration of the nine month period following a Triggering Termination, in
which case the obligation of the Taylor Family to pay CTFG $15 million
pursuant to Section 14(c) shall be extinguished. Any amounts payable under
Section 14(c) or this Section 14(d) may be paid, at the option of the
Taylor Family, in cash, in CTFG Stock valued at the Market Value as of the
date of such payment, or in a combination of cash and CTFG Stock valued at
the Market Value (as defined below) as of the date of such payment and
shall be paid within seven days from the expiration of the Taylor Sale
Period. Should any such amounts not be paid by the Taylor Family within
such seven days, the amount shall be paid from the Escrow Fund to the
extent the Escrow Fund is sufficient for this purpose and immediately by
the Taylor Family directly to the extent the Escrow Fund is insufficient
for this purpose. Should the Taylor Family pay such liquidated damages from
another source, CTFG agrees to issue joint written instructions with the
Taylor Family to effectuate the release of the Escrow Fund to the Taylor
Family. The term "Market Value" on any date shall mean the average of the
last quoted trading price of CTFG Stock on the Nasdaq Stock Market for the
five preceding Nasdaq Stock Market trading days. The "Taylor Sale Period"
shall be the shorter of (i) the nine month period after a Triggering
Termination, (ii) the period beginning with a Triggering Termination and
ending with a decision by the Board to not pursue or to terminate the Bank
Sale Process or (iii) the period beginning with a Triggering Termination
and ending on the date the Taylor Directors present a Sufficient Bona Fide
Offer to the Board.
(e) In the event of the termination of this Agreement pursuant to Section
13, this Agreement shall forthwith become void and have no effect, other
than as provided in this Section 14, in the second to last sentence of
Section 5.2, in Section 9 (provided that, in the absence of a Triggering
Termination, Section 9 shall become void and have no effect upon the
termination of this Agreement), in Section 17 and in Section 24. No
termination of this Agreement and nothing contained in this Section 14(e)
shall relieve any party from liability for any breach of this Agreement
except insofar as liquidated damages are paid by any party pursuant to
Sections 14(a), 14(b) or 14(c). The parties acknowledge that the liquidated
damages specified in Sections 14(a), 14(b) and 14(c) are not a penalty, and
are reasonable in light of the anticipated or actual harm, the difficulty
of proof of loss, and the inconvenience and non-feasibility of otherwise
obtaining an adequate remedy.
15. Indemnification. (a) The Taylor Family shall indemnify and hold harmless
CTFG and its affiliates from and against any and all losses, damages, claims,
liabilities or obligations (including attorneys' fees and interest) ("Losses")
with respect to (i) any breach of any representation, warranty or agreement of
the Taylor Family contained in this Agreement and (ii) any brokerage fees,
commissions or finders' fees payable on the basis of any action taken or
caused to be taken by the Taylor Family. After the Closing, the Taylor Family
shall cause the Bank to indemnify and hold harmless CTFG and its affiliates
from and against any and all Losses (x) whenever incurred, arising or accrued,
relating to the Bank or CT Mortgage or CTFG's ownership of securities in the
Bank, CT Mortgage or Alpha Capital Fund or (y) incurred, arising or accrued
prior to the Closing and relating to Auto Sub. In addition, after the Closing,
the Taylor Family shall indemnify and hold harmless CTFG from and against 25%
of any Losses, including, without limitation, any costs or expenses of defense
or settlement of any suits, actions or proceedings initiated by third parties
and any judgments in such suits, actions or proceedings relating to the
transactions contemplated by this Agreement and any Losses relating to
disputes regarding Option terminations or limitations (collectively,
"Transaction Challenge Losses"); provided, however, that Transaction Challenge
Losses shall be net of any insurance proceeds paid to, or for the benefit of,
CTFG or members of the Board, and provided, further, that, for purposes of
computing what the Taylor Family owes under this sentence, any attorneys fees
or expenses, settlements or judgments paid separately by the Taylor Family in
connection with suits, actions or proceedings relating to the transactions
contemplated by this Agreement or regarding Option limitations or terminations
(net of any insurance proceeds paid to, or for the benefit of, the Taylor
Family) shall (A) be considered part of Transaction Challenge Losses and (B)
constitute a credit against any amounts that the Taylor Family owes under this
sentence (with such credit not to exceed such amounts that the Taylor Family
owes under this sentence).
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(b) CTFG shall indemnify and hold harmless the Taylor Family, its
affiliates, and the Bank from and against any and all Losses with respect to
(i) any breach of any representation, warranty or agreement of CTFG contained
in this Agreement and (ii) any brokerage fees, commissions or finders' fees
payable on the basis of any action taken or caused to be taken by CTFG. In
addition, after the Closing, CTFG shall indemnify and hold harmless the Taylor
Family from and against any and all Losses (x) whenever incurred, arising or
accrued, relating to CTFG (except for matters for which the Taylor Family is
indemnifying CTFG pursuant to this Agreement) or Finance or (y) incurred,
arising or accrued after the Closing and relating to Auto Sub.
(c) As soon as reasonably practicable after becoming aware of a claim for
indemnification under this Agreement, the person claiming a right to
indemnification (the "Indemnified Person") shall promptly give notice to the
person from whom indemnification is being sought (the "Indemnifying Person")
of such claim and the amount of indemnification claimed hereunder; provided
that the failure of the Indemnified Person to give notice shall not relieve
the Indemnifying Person of its obligations under this Agreement except to the
extent (if any) that the Indemnifying Person shall have been prejudiced
thereby.
(d) With respect to claims for indemnification arising out of a claim, or
the commencement of any suit, action or proceeding asserted by a person not a
party to this Agreement, the Indemnifying Person may, at its own expense (i)
participate in the defense of any such claim, suit, action or proceeding and
(ii) upon notice to the Indemnified Person and the Indemnifying Person's
delivering to the Indemnified Person a written agreement that the Indemnified
Person is entitled to indemnification pursuant to this Section 15 for all
Losses arising out of such claim, suit, action or proceeding, at any time
during the course of any such claim, suit, action or proceeding, assume the
defense thereof; provided that (y) the Indemnifying Person's counsel is
reasonably satisfactory to the Indemnified Person, and (z) the Indemnifying
Person shall thereafter consult with the Indemnified Person upon the
Indemnified Person's reasonable request for such consultation from time to
time with respect thereto. If the Indemnifying Person assumes such defense,
the Indemnified Person shall have the right (but not the obligation) to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the Indemnifying Person. Whether or not
the Indemnifying Person chooses to defend or prosecute any such claim, suit,
action or proceeding, all parties shall cooperate in the defense or
prosecution thereof. Neither the Indemnifying Person nor the Indemnified
Person shall settle any matter subject to indemnification under this Agreement
without the consent of the other, which consent shall not be unreasonably
withheld.
16. Further Assurances. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable on the part of such party, to consummate and
make effective the transactions contemplated by this Agreement at the earliest
practicable date, including the obtaining of all required consents, approvals,
waivers, exemptions, amendments and authorizations, give all notices, and make
or effect all filings, registrations, applications, designations and
declarations, including, but not limited to, those described herein, and each
party shall cooperate fully with the other (including by providing any
necessary information) with respect to the foregoing. Each of the parties
agrees not to enter into, or agree to enter into, any transaction or perform,
or agree to perform, any act which would result in any of the representations
or warranties on the part of such party not being true and correct in all
material respects at and as of the time immediately after the occurrence of
any such transaction or event or on the Closing Date or that would be likely
to jeopardize the consummation of the transactions contemplated hereby. In
case at any time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and/or directors of CTFG, the
Bank and Newco and the members of the Taylor Family will take all such
necessary action.
17. Payment of Expenses. Except as otherwise specifically set forth herein,
each party hereto shall pay its own fees and expenses incident to preparing
for, entering into, and carrying out this Agreement and the transactions
contemplated hereby. The fees and expenses of CTFG and Finance, including any
brokers', finders', investment bankers', attorneys', filing, accountants' or
tax advisors' fees (collectively, "Fees") are to be borne by CTFG, and the
Fees of the Bank and the Taylor Family are to be borne by the Taylor Family.
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18. Publicity and Reports. CTFG shall coordinate all publicity relating to
the transactions contemplated by this Agreement and, except as otherwise
required by law or as required to secure the financing referred to in Section
5.2, the Taylor Family shall not issue any press release, publicity statement
or other public notice relating to this Agreement or any of the transactions
contemplated hereby, or communicate with analysts or the investment community,
without obtaining the prior consent of the Board, which consent shall not be
unreasonably withheld. All press releases, publicity statements,
communications with analysts or the investment community, or other public
notice by CTFG relating to this Agreement or any of the transactions
contemplated hereby shall be submitted for the approval of the full Board,
including Sidney J. Taylor, Jeffrey W. Taylor and Bruce W. Taylor. Each party
shall obtain the prior consent of the other party, which consent shall not be
unreasonably withheld, to the form and content of any application or report
made to any regulatory authority, taxing authority or similar agency in each
case which relates to any of the transactions contemplated by this Agreement
and to any proxy or information statement or other material to be delivered to
CTFG shareholders.
19. Survival of Representations and Warranties. The representations and
warranties in Sections 7(a), 7(b), 7(d), 7(g), 8(a), 8(b), 8(c), 8(f) and
8(g), and the covenants and agreements, made herein shall survive the Closing
to the fullest extent permitted under the applicable statute of limitations.
All other representations and warranties contained in this Agreement shall not
survive beyond the Closing.
20. Binding Effect. Neither this Agreement nor any rights, duties or
obligations hereunder shall be assignable by CTFG or the Taylor Family, in
whole or in part, and any attempted assignment in violation of this
prohibition shall be null and void; provided, however, that this Agreement
shall be assignable by the Taylor Family to an affiliate of the Taylor Family
without the consent of CTFG, but no such assignment shall relieve the Taylor
Family of its obligations hereunder if such assignee does not perform such
obligations. Subject to the foregoing, all of the terms and provisions hereof
shall be binding upon, and inure to the benefit of, the successors and assigns
of the parties hereto.
21. Law Governing. This Agreement will be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware. The parties hereto agree that the exclusive place of jurisdiction
for any action, suit or proceeding relating to this Agreement shall be in the
courts of the State of Delaware sitting in Wilmington, Delaware and each such
party hereby irrevocably and unconditionally agrees to submit to the
jurisdiction of such courts for the purposes of any such action, suit or
proceeding. Each party hereto irrevocably waives any objection it may have to
the venue of any action, suit or proceeding brought in such courts or to the
convenience of the forum. Final judgment in any such action, suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
the suit on the judgment, a certified or true copy of which shall be
conclusive evidence of the fact and amount of any indebtedness or liability of
any party therein described.
22. Counterparts. This Agreement may be executed in several counterparts and
one or more separate documents, all of which together shall constitute one and
the same instrument with the same force and effect as though all of the
parties had executed the same document.
23. Amendment and Waiver. Any of the terms or conditions of this Agreement
may be waived, amended or modified in whole or in part at any time before or
after the receipt of any approvals, to the extent authorized by applicable
law, by a writing signed by CTFG and the representatives of the Taylor Family.
24. CTFG Action. From and after the date of this Agreement any amendment of
this Agreement, any action or inaction of CTFG or any of its subsidiaries
relating to this Agreement (other than as set forth in Sections 9(a)(ii), 9(b)
and 18), including any termination of this Agreement by CTFG or any extension
by CTFG of the time for performance of any of the acts or obligations of the
Taylor Family or any waiver of CTFG's rights hereunder, will require the
concurrence of the Board or a duly authorized committee thereof by a majority
of those voting (assuming a quorum is present), without the vote of any member
of the Taylor Family.
25. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of the Taylor Family and CTFG and their respective
successors and permitted assigns, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
A-23
<PAGE>
26. Notices. Any notice or communication required or permitted hereunder
shall be sufficiently given if in writing and (a) delivered in person or (b)
mailed by certified or registered mail, postage prepaid, as follows:
If to CTFG, addressed to:
Cole Taylor Financial Group, Inc.
350 East Dundee Road
Wheeling, Illinois 60090
Attn: James Kaplan
With a copy addressed to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attn: Robert A. Helman and Scott J. Davis
With a copy addressed to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Attn: Steven A. Shapiro
If to the Taylor Family, addressed to:
Mr. Jeffrey Taylor
62 Lakewood
Highland Park, Illinois 60035
With a copy addressed to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, Illinois 60606
Attn: Mark L. Yeager
27. Entire Agreement. All exhibits and lists referred to in this Agreement
are integral parts hereof, and this Agreement, such exhibits and related
lists, constitute the entire agreement among the parties hereto with respect
to the matters contained herein and therein, and supersede all prior
agreements and understandings between the parties with respect thereto.
28. Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
A-24
<PAGE>
***
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
Cole Taylor Financial Group, Inc.
/s/ Howard B. Silverman
By: _________________________________
Howard B. Silverman
Name: _______________________________
Director
Title: ______________________________
"Taylor Family" Representatives
/s/ Sidney Taylor
-------------------------------------
Sidney Taylor
/s/ Jeffrey Taylor
-------------------------------------
Jeffrey Taylor
/s/ Bruce Taylor
-------------------------------------
Bruce Taylor
/s/ Iris Taylor
-------------------------------------
Iris Taylor
A-25
<PAGE>
APPENDIX B
ESCROW AGREEMENT
<PAGE>
ESCROW AGREEMENT
ESCROW AGREEMENT, made this 19th day of June, 1996, by and among Cole Taylor
Financial Group, Inc., a Delaware corporation ("CTFG"), those certain persons
listed on Schedule 7(b) of that certain Share Exchange Agreement dated June
12, 1996 by and among CTFG and such persons (the "Taylor Family") and
represented by the members of the Taylor Family shown on the signature page
hereof and The Northern Trust Company (the "Escrow Agent").
WHEREAS, CTFG and the Taylor Family have entered into a Share Exchange
Agreement (the "Agreement") in respect of the sale by CTFG of all the issued
and outstanding shares of capital stock and ownership interests in Cole Taylor
Bank (the "Bank") to the Taylor Family; and
WHEREAS, the Agreement requires that 750,000 shares of CTFG common stock
(the "Escrow Amount") be deposited in escrow by the Taylor Family pending
resolution of certain matters; and
WHEREAS, the Taylor Family agreed to and is prepared to place the Escrow
Amount in escrow with Escrow Agent; and
WHEREAS, the Escrow Agent is prepared to accept the deposit of the Escrow
Amount in escrow.
NOW THEREFORE, the parties agree as follows:
1. Escrow Agent shall open an escrow account on the date hereof in the
joint names of CTFG and the Taylor Family, entitled "CTFG/Taylor Agreement
Escrow Account".
2. The Taylor Family shall deliver the Escrow Amount to Escrow Agent for
deposit into the Escrow Account effective as of the date of the opening of
said Escrow Account.
3. Escrow Agent shall hold the Escrow Amount in escrow in the form
received until such time as it receives (i) a final order or judgment of a
court of competent jurisdiction directing the disposition of the Escrow
Amount or any part thereof, together with an opinion of counsel to CTFG or
counsel to the Taylor Family to the effect that such order or judgment is
final and not subject to appeal or (ii) joint written notice from CTFG and
the persons whose names appear below as representatives of the Taylor
Family in which event Escrow Agent shall distribute the Escrow Amount in
accordance with the final order or judgment or the joint written notice, as
the case may be. The Escrow Agent shall hold any interest, dividends,
distributions or other earnings on the Escrow Amount for the sole benefit
of the Taylor Family and shall pay such amounts as instructed in writing
from time to time by the Taylor Family.
4. Any cash funds deposited in the Escrow Account shall be invested by
Escrow Agent in CTFG securities, government securities or certificates of
deposit as instructed by the Taylor Family. CTFG Stock deposited in the
Escrow Account shall be held for investment and shall not be sold or
transferred except pursuant to the requirements of this Escrow Agreement.
5. The duties and responsibilities of the Escrow Agent shall be limited
to those expressly set forth in this Agreement. No implied duties or
discretionary powers may be imputed to it by the terms of this Agreement,
or otherwise. The Escrow Agent shall not be subject to, nor obliged to
recognize, any other instrument governing the rights or duties of the other
parties to this Agreement, even though reference thereto may be made in
this Agreement.
6. The Escrow Agent may disregard any and all notices or instructions
received from any source, except only (i) such notices or instructions as
are specifically provided for in this Agreement and (ii) orders or process
of any court of competent jurisdiction. If from time to time any property
held pursuant to this Agreement becomes subject to any order, judgment,
decree, injunction or other judicial process of any court of competent
jurisdiction ("Order"), the Escrow Agent may comply with any such Order
without liability to any person, even though such Order may thereafter be
annulled, reversed, modified or vacated.
7. Whenever the Escrow Agent should receive or become aware of any
conflicting demands or claims with respect to this Agreement or the rights
of any of the parties hereto or any property held hereunder, the Escrow
Agent may without liability refrain from any action until the conflict has
been resolved or,
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<PAGE>
alternatively, may tender into the registry or custody of any court which
the Escrow Agent determines to have jurisdiction all money or property in
its hands under this Agreement, together with such legal pleadings as it
deems appropriate, less a reasonable allowance for its outside legal fees
and other reasonable out-of-pocket expenses, and thereupon be discharged
from all further duties and liabilities under this Agreement. Any inaction
or filing of proceedings pursuant to this section shall not deprive the
Escrow Agent of its compensation during such inaction or prior to such
filing.
8. Unless otherwise specifically indicated herein the Escrow Agent shall
proceed as soon as practicable to collect any checks or other collection
items at any time deposited hereunder. All such collections shall be
subject to the usual collection agreement regarding items received by its
commercial banking department for deposit or collection. The Escrow Agent
shall have no duty (1) to collect from any party any money, securities or
documents required to be deposited with it, (2) to notify anyone of any
payment or maturity under the terms of any instrument deposited hereunder,
or (3) to take any legal action to enforce payment of any check, note or
security deposited with it.
9. Except as may be specifically provided herein concerning investments
of cash, the Escrow Agent shall have no liability to pay interest on any
money held pursuant to this Agreement. The Escrow Agent may use its own
bond department in purchasing or selling securities. The Escrow Agent shall
not be liable for any depreciation or change in the value of such documents
or securities or any property evidenced thereby or for any losses incurred
in liquidating securities or other property to satisfy a distribution
request. All distributions provided for hereunder shall be made by the
Escrow Agent from the Escrow Amount or any interest, dividends,
distributions or other earnings thereon, subject to any unpaid fees and
unreimbursed out-of-pocket expenses of the Escrow Agent permitted by this
Agreement which are then outstanding, in the order that proper requests
therefor are received by the Escrow Agent. In no event shall the Escrow
Agent be required to seek contributions from any source or to advance its
own funds in order to satisfy a distribution request.
10. The Escrow Agent shall not be responsible for any recitals of fact in
this Agreement, or for the sufficiency, form, execution, validity or
genuineness of any documents or securities deposited under this Agreement
or for any signature, endorsement or any lack of endorsement thereon, or
for the accuracy of any description therein, or for the identity, authority
or rights of the persons executing or delivering the same or this
Agreement.
11. The Escrow Agent shall be fully protected in relying without
investigation upon any written notice, demand, certificate or document
which it in good faith believes to be genuine, as to the truth and accuracy
of the statements made therein, the identity and authority of the persons
executing the same and the validity of any signature thereon. Although the
Escrow Agent may demand specific authorizations (including corporate
resolutions, incumbency certificates and the like) or identification from a
party or its representative prior to taking any action hereunder, no such
demand shall constitute a waiver or deprive the Escrow Agent of the
protections afforded by this paragraph.
12. The Escrow Agent shall not be personally liable for any act taken or
omitted by it under this Agreement in good faith and in the exercise of its
own best judgment. In no event shall the Escrow Agent be liable to any
person for special, indirect or consequential damages of any kind, even if
it is advised of the possibility thereof. The parties shall jointly and
severally indemnify, defend and hold harmless the Escrow Agent from and
against any and all claims that may be asserted against the Escrow Agent by
any third parties and any and all liability, loss, cost or expense
(including outside attorneys' fees in a reasonable amount) that may be
incurred by the Escrow Agent as a result of any such claim or otherwise as
a result of acting as Escrow Agent hereunder unless due to bad faith, gross
negligence or willful misconduct. The obligations of the parties under this
paragraph shall survive termination of this Agreement and distribution of
the Deposit.
13. The Escrow Agent may engage nationally recognized legal counsel to
advise it concerning any of its duties in connection with this Agreement,
or in case it becomes involved in litigation on account of being Escrow
Agent under this Agreement, and reliance on the advice of such counsel
shall fully protect the Escrow Agent except for any action taken by Escrow
Agent in bad faith or due to its gross negligence or willful misconduct.
B-2
<PAGE>
14. The Escrow Agent shall be entitled to a fee of $3,000, payable in
advance for each 12-month period or any part thereof, without proration
plus reimbursement for its reasonable expenses, including outside
attorneys' fees in a reasonable amount. The fees and expenses of the Escrow
Agent shall be paid by CTFG.
15. Any notices or communication required or permitted hereunder shall be
sufficiently given if in writing and (a) delivered in person, (b) mailed by
certified or registered mail, postage prepaid or (c) transmitted by
facsimile, as follows:
If to Escrow Agent, addressed to:
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
Attn: Frank D. Szymanek
Facsimile: (312) 557-2704
If to CTFG, addressed to:
Cole Taylor Financial Group, Inc.
350 East Dundee Road
Wheeling, IL 60090
Attn: James I. Kaplan
Facsimile: (847) 808-9145
With a copy addressed to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, IL 60603
Attn: Scott J. Davis
Facsimile: (312) 701-7711
If to the Taylor Family, addressed to:
Mr. Jeffrey Taylor
62 Lakewood
Highland Park, IL 60035
With a copy addressed to:
McDermott, Will & Emery
227 West Monroe Street
Chicago, IL 60606
Attn: Mark L. Yeager
Fax: (312) 984-2099
Whenever under this Agreement the time for giving a notice or performing
an act falls upon a Saturday, Sunday, or holiday, such time shall be
extended to the next business day.
16. Any Escrow Agent may resign by written notice to the other parties to
this Agreement. Any such resignation shall be effective upon delivery of
the property then held in escrow to the successor Escrow Agent, whereupon
the resigning Escrow Agent shall be discharged of any further duties under
this Agreement. If an Escrow Agent resigns, the other parties shall appoint
a successor Escrow Agent; provided that if no successor is appointed within
30 days after resignation, the resigning Escrow Agent may appoint as
successor any corporation with trust powers in the United States or may
tender the Escrow Amount into court as provided in paragraph 4.3 hereof.
17. The Escrow Agent shall not be responsible for any delays or failure
to perform caused by circumstances reasonably beyond its control, including
but not limited to breaches by other parties of their obligations
hereunder, delays by messengers or other independent contractors,
mechanical or computer
B-3
<PAGE>
failures, malfunctioning or breakdowns in public utilities, securities
exchanges, Federal Reserve Banks, or securities depositories; interference
by governmental units; strikes, lockouts, or civil disobedience; fires or
other casualties, acts of God or other similar occurrences.
18. The rights and duties of CTFG and the Taylor Family to each other
shall be governed by the laws of the state of Delaware. The rights and
duties of the Escrow Agent shall be determined in accordance with the laws
of the State of Illinois without reference to its conflict of law
principles. This Agreement shall be deemed to be a contract made and to be
performed in the State of Illinois.
19. This Agreement may be amended from time to time by written instrument
executed by all the parties other than the Escrow Agent; provided that
duties and liabilities of the Escrow Agent may not thereby be changed
without its prior written consent.
20. This Agreement shall benefit, and be binding upon, only the parties
hereto and their respective heirs, estates, successors and assigns (each a
"Party"). Nothing in this Agreement shall be construed to give any right
against the Escrow Agent to any person who is not a Party. The Escrow Agent
shall have no duty, express or implied, to any non-Party and no such person
shall be deemed a "third party beneficiary" of this Agreement.
21. The Escrow Agent shall furnish CTFG and the Taylor Family upon the
request of either CTFG or the Taylor Family with a report showing receipts
and disbursements during the period and a priced list of (publicly traded)
assets. Valuations appearing on such reports or otherwise utilized
hereunder may be obtained from third parties generally recognized as
sources of pricing information, but the Escrow Agent shall not be liable
for the accuracy of valuations furnished by recognized pricing sources.
22. This Agreement contains the entire agreement among the parties hereto
with respect to the subject matter hereof and may not be amended or
modified in any manner except by an instrument signed by all parties
hereto.
23. This Agreement may be executed in several counterparts and one or
more separate documents, all of which together shall constitute one and the
same instrument with the same force and effect as though all of the parties
had executed the same document.
***
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
Cole Taylor Financial Group, Inc.
By: /s/ Howard B. Silverman
----------------------------------
Name: Howard B. Silverman
--------------------------------
Title: Director
---------------------------------
"Taylor Family" Representatives
/s/ Sidney Taylor
-------------------------------------
Sidney Taylor
/s/ Jeffrey Taylor
-------------------------------------
Jeffrey Taylor
/s/ Bruce Taylor
-------------------------------------
Bruce Taylor
/s/ Iris Taylor
-------------------------------------
Iris Taylor
The Northern Trust Company
By: /s/ Roger E. Jackman
-----------------------------
Name: Roger E. Jackman
---------------------------
Title: Vice President
----------------------------
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<PAGE>
APPENDIX C
FAIRNESS OPINION OF THE CHICAGO CORPORATION
<PAGE>
THE CHICAGO CORPORATION
June 12, 1996
Board of Directors
Cole Taylor Financial Group, Inc.
350 East Dundee Road
Wheeling, IL 60090
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the non-Taylor Family shareholders of Cole Taylor Financial Group,
Inc. (the "Company") of the consideration to be paid to the Company for 100%
of the shares of Cole Taylor Bank (the "Bank"), a wholly-owned subsidiary of
the Company, pursuant to the terms of Share Exchange Agreement dated as of
June 12, 1996 (the "Agreement"), by and among the Company and a group of
senior executives of the Company (the "Taylor Family").
The Chicago Corporation, as part of its investment banking business, is
regularly engaged in the valuation of banks and bank holding companies and
thrifts and thrift holding companies in connection with mergers and
acquisitions as well as offerings of securities and valuations for other
purposes. The Chicago Corporation is a member of all principal U.S. Securities
exchanges and in the conduct of our broker-dealer activities may from time to
time purchase securities from, and sell securities to, the Company and as a
market maker buy or sell the equity securities of the Company for our own
account and for the accounts of customers. In rendering this fairness opinion
we have been retained by the Board of Directors of the Company and our opinion
is directed to the Board of Directors and does not constitute a recommendation
to any stockholder of the Company. The Chicago Corporation will receive a fee
from the Company for our services.
As fully described in the Agreement, under the terms of this proposed
transaction (the "Transaction"), the consideration to the Company will consist
of common stock of the Company in an amount equal to at least 4,000,000 shares
and no more than 4,500,000 shares (the "Stock Amount"). As additional
consideration, the Company will receive the automobile receivables business
which will be "spun-off" from the Bank as described in the following paragraph
(the "Consideration").
The Company shall cause the Bank to form a new wholly-owned subsidiary to
which the Bank shall contribute its used automobile receivables business,
consisting of all the assets used in its used automobile receivables business
and (i) the Cash Component (as defined below); plus (ii) all of the Bank's
rights and obligations pursuant to automobile loans, notes or Bank's
securities which as of the closing date are not in default, are current in the
payment of principal and interest, are collateralized primarily with used
automobiles and as to which there are no known adverse claims, with a fair
market value of no less than $30,000,00 nor more than $31,000,000 (the
"Automobile Receivable"). The term "Cash Component" shall mean (x) if the
Stock Amount is less than 4,250,000, cash in an amount equal to (A)
$60,000,000 minus (B) the amount, if any by which the fair market value of the
Automobile Receivables exceeds $30,000,000 plus (C) the product of $33.00 and
the difference between 4,250,000 and the Stock Amount; (y) if the Stock Amount
is equal to 4,250,000, cash in an amount equal to (A) $60,000,000 minus (B)
the amount, if any, by which the fair market value of the Automobile
Receivables exceeds $30,000,000; and (z) if the Stock Amount is greater than
4,250,000, cash in an amount equal to (A) $60,000,000 minus (B) the amount, if
any, by which the fair market value of the Automobile Receivables exceeds
$30,000,000 minus (C) the product of $33.00 and the difference between the
Stock Amount and 4,250,000. The Transaction is contingent on receipt of a
private letter ruling from the Internal Revenue Service qualifying the
Transaction as a "tax free" split-off under Section 355 of the Internal
Revenue Code.
During the course of our engagement, we have, among other things:
1) reviewed the Agreement and related documents, the audited financial
statements for the Company for the three fiscal years ended December 31,
1995 and unaudited financial statements for the quarter ended
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<PAGE>
March 31, 1996 as provided to us, as well as other internally generated
Company reports relating to asset/liability management, asset quality and
so forth;
2) reviewed and analyzed other information bearing upon the financial and
operating condition of the Company and material prepared in connection with
the proposed transaction;
3) reviewed the operating characteristics of certain other financial
institutions deemed relevant to the contemplated transaction;
4) reviewed the nature and terms of recent sale and merger transactions
involving banks and bank holding companies and other financial institutions
that we consider relevant;
5) reviewed historical and current market data for the Company common
stock;
6) reviewed financial and other information provided to us by the
management of the Company;
7) conducted meetings with members of the senior management of the
Company for the purpose of reviewing the future prospects of the Company;
8) reviewed historical and current market data for automobile finance
companies that we deemed relevant;
9) performed such other analyses and examinations and considered such
other factors as we have, in our sole judgment, deemed appropriate.
In rendering this opinion, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information and representations provided to us by the Company. We have relied
upon the management of the Company as to the reasonableness and achievability
of the financial forecasts and projections (and the assumptions and basis
therefor) provided to us, and have assumed that such forecasts and projections
are the best available estimates of management.
Completion of this Transaction is dependent on the successful resolution of
a number of critical conditions (the "Conditions"), including the following:
(1) the Taylor Family's ability to raise sufficient Tier I capital to
adequately capitalize the restructured Bank; (2) the Taylor Family's receipt
of all necessary regulatory approvals including, but not limited to, the
approvals of the Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the Illinois Commissioner of Banks and Trust Companies; and
(3) the Company's receipt of a private letter ruling from the Internal Revenue
Service qualifying this Transaction as a "tax free" split-off under Section
355 of the Internal Revenue Code. Representatives of the Taylor Family
communicated to the Company and its representatives their high level of
confidence that the Conditions can be satisfied in a manner which will ensure
the successful completion of the Transaction. Although the undersigned has
participated in such communications with representatives of the Taylor Family,
the undersigned has neither verified nor confirmed the representations of the
Taylor Family's representatives as to the Taylor Family's ability to meet the
Conditions. Although this Opinion is based on the assumption that the
Conditions can be met, and takes into account the establishment of an escrow
arrangement with the Taylor Family which provides for certain payments to the
Company under certain circumstances, this Opinion in no way implies or should
be interpreted to imply that the Conditions can, in fact, be met.
Our Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this Opinion. We have not undertaken to reaffirm or revise
this Opinion or otherwise comment upon events occurring after the date hereof.
This opinion does not opine on or give assurance of the price at which the
shares of CTFG will actually trade after the Transaction.
We have acted as the Company's financial advisor in connection with the
Transaction. Under the terms of its engagement with the Company, the
undersigned, at the direction of the Board of Directors of the Company,
explored a number of strategic alternatives potentially available to the
Company, including a sale of the Bank to a third party, a sale of the
Company's wholly owned automobile finance company to a third party and a sale
or merger of the Company. In the determination of its Opinion, the undersigned
took into account, as noted in the
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<PAGE>
Agreement, that substantial disagreements have arisen between the Company's
two largest shareholder groups concerning the future strategic direction of
the Company and the alternatives to be pursued by the Company to resolve these
disagreements. In the determination of its Opinion, the undersigned took into
consideration the results of the pursuit of these strategic alternatives in
the context of the above-referenced disagreements.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the Company pursuant to the
Agreement is fair from a financial point of view, to the non-Taylor Family
shareholders of the Company.
Sincerely,
/s/ The Chicago Corporation
The Chicago Corporation
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<PAGE>
APPENDIX D
FAIRNESS OPINION OF SANDLER O'NEILL & PARTNERS, L.P.
<PAGE>
June 12, 1996
Board of Directors
Cole Taylor Financial Group, Inc.
350 East Dundee Road
Wheeling, IL 60090
Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to the non-Taylor Family holders of the outstanding shares of common
stock, par value $.01 per share (the "Shares"), of Cole Taylor Financial
Group, Inc. (the "Company") of the consideration to be paid to the Company for
100% of the shares of Cole Taylor Bank (the "Bank"), a wholly-owned subsidiary
of the Company, pursuant to the terms of a Share Exchange Agreement, dated as
of June 12, 1996 (the "Agreement"), by and among the Company and a group of
senior executives of the Company (collectively, the "Taylor Family").
As described in the Agreement, under the terms of the proposed transaction
(the "Transaction"), the consideration to the Company will consist of (a)
common stock of the Company in an amount equal to at least 4,000,000 shares
and no more than 4,500,000 shares (the "Stock Amount"), and (b) a Cash
Component (as defined below) and the Bank's automobile receivables business
which will be "spun-off" from the Bank, as described in the following
paragraph (the "Consideration").
The Company shall cause the Bank to form a new wholly-owned subsidiary to
which the Bank shall contribute its used automobile receivables business,
consisting of all the assets used in its used automobile receivables business
and (i) the Cash Component (as defined below); plus (ii) all of the Bank's
rights and obligations pursuant to automobile loans, notes or the Bank's
securities which as of the closing date are not in default, are current in the
payment of principal and interest, are collateralized primarily with used
automobiles and as to which there are no known adverse claims, with a fair
market value of no less than $30,000,000 nor more than $31,000,000 (the
"Automobile Receivables"). The term "Cash Component" shall mean (x) if the
Stock Amount is less than 4,250,000 shares, cash in an amount equal to (A)
$60,000,000 minus (B) the amount, if any, by which the fair market value of
the Automobile Receivables exceeds $30,000,000 plus (C) the product of $33.00
and the difference between 4,250,000 shares and the Stock Amount; (y) if the
Stock Amount is equal to 4,250,000 shares, cash in an amount equal to (A)
$60,000,000 minus (B) the amount, if any, by which the fair market value of
the Automobile Receivables exceeds $30,000,000; and (z) if the Stock Amount is
greater than 4,250,000 shares, cash in an amount equal to (A) $60,000,000
minus (B) the amount, if any, by which the fair market value of the Automobile
Receivables exceeds $30,000,000 minus (C) the product of $33.00 and the
difference between the Stock Amount and 4,250,000 shares. The Transaction is
contingent on receipt of a private letter ruling from the Internal Revenue
Service qualifying the Transaction as a "tax free" split-off under Section 355
of the Internal Revenue Code.
Sandler O'Neill Corporate Strategies, a division of Sandler O'Neill &
Partners, L.P., as part of its investment banking business, is regularly
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions and other corporate transactions.
In connection with this opinion we have reviewed, among other things: (a)
the Agreement; (b) the Company's audited consolidated financial statements and
notes thereto and management's discussion and analysis of the financial
condition and results of operations contained in the Company's Annual Report
to Shareholders for the year ended December 31, 1995, and the financial and
statistical tables contained in the
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<PAGE>
Company's Annual Report on Form 10-K for the year ended December 31, 1995; (c)
the Company's unaudited consolidated financial statements and management's
discussion and analysis of the financial condition and results of operations
contained in its Quarterly Report on Form 10-Q for the quarter ended March 31,
1996; (d) audited financial statements for the Company's two wholly-owned
subsidiaries, the Bank and Cole Taylor Finance Co. (the "Finance Company"),
for the year ended December 31, 1995; (e) unaudited financial statements for
the Bank and the Finance Company for the quarter ended March 31, 1996; (f)
financial analyses and forecasts of the Company, the Bank and the Finance
Company prepared by and reviewed with management of the Company, the Bank and
the Finance Company, respectively; (g) the views of senior management of the
Company, the Bank and the Finance Company concerning the current business
operations, results thereof, financial condition and future prospects of the
Company, the Bank and the Finance Company, respectively; (h) historical
reported price and trading activity for the Company's common stock, including
comparison of certain financial and stock market information for the Company
with similar information for certain other companies, the securities of which
are publicly traded; (i) the financial terms of recent business combinations
in the commercial banking industry; (j) the current market environment
generally and the commercial banking and auto finance industry environments in
particular; and (k) such other information, financial studies, analyses and
investigations and financial, economic and market material as we considered
relevant.
In performing our review, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all of the
financial information, analyses and other information reviewed by and
discussed with us, and we did not make an independent evaluation or appraisal
of the specific assets, the collateral securing assets or the liabilities of
the Company, the Bank, the Finance Company or any of their subsidiaries, or
the collectibility of any such assets (relying, where relevant, on the
analyses and estimates of the Company). With respect to financial projections
reviewed with management, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management of the future financial performances of the Company,
the Bank and the finance Company and that such performances will be achieved.
We have also assumed that there has been no material change in the Company's,
the Bank's or the Finance Company's assets, financial condition, results of
operations, business or prospects since the date of the last financial
statements noted above. We have further assumed that the Company will remain
as a going concern for all periods relevant to our analysis and that the
conditions precedent in the Agreement are not waived. This opinion does not
opine on or give assurances of the price at which the shares of the Company
will actually trade after the Transaction.
Completion of this Transaction is dependent on the successful resolution of
a number of critical conditions (the "Conditions"), including the following:
(1) the Taylor Family's ability to raise sufficient Tier I capital to
adequately capitalize the restructured Bank; (2) the Taylor Family's receipt
of all necessary regulatory approvals including, but not limited to, the
approvals of the Federal Reserve Board, the Federal Deposit Insurance
Corporation, and the Illinois Commissioner of Banks and Trust Companies; and
(3) the Taylor Family's receipt of a private letter ruling from the Internal
Revenue Service qualifying this Transaction as a "tax free" split-off under
Section 355 of the Internal Revenue Code. Representatives of the Taylor Family
have communicated to the Company and its representatives their high level of
confidence that the Conditions can be satisfied in a manner which will ensure
the successful completion of the Transaction. Although the undersigned has
participated in such communications with representatives of the Taylor Family,
the undersigned has neither verified nor confirmed the representations of the
Taylor Family's representatives as to the Taylor Family's ability to meet the
Conditions. Although this opinion is based on the assumption that the
Conditions can be met, and takes into account the establishment of an escrow
arrangement with the Taylor Family which provides for certain payments to the
Company under certain circumstances, this opinion in no way implies or should
be interpreted to imply that the Conditions can, in fact, be met.
Our opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to us as of, the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have not undertaken to reaffirm or revise
this opinion or otherwise comment upon any events occurring after the date
hereof.
D-2
<PAGE>
We have acted as the Company's financial advisor in connection with the
Transaction and will receive a fee for our services, a significant portion of
which is contingent upon consummation of the Transaction. Under the terms of
its engagement with the Company, the undersigned explored a number of
strategic alternatives potentially available to the Company, including a sale
of the Bank to a third party, a sale of the Finance Company to a third party
and a sale of the Company. In the determination of its opinion, the
undersigned took into consideration the results of its pursuit of the above
noted strategic alternatives, as well as the future prospects and potential
market value of the Company, as adjusted for the Transaction, and the Finance
Company.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
This opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any shareholder of the Company as to how
such shareholder should vote at the special meeting of shareholders to
consider and vote upon the Transaction. Our opinion is not to be quoted or
referred to, in whole or in part, in a registration statement, prospectus,
proxy statement or in any other document, nor shall this opinion be used for
any other purposes, without Sandler O'Neill's prior written consent; provided,
however, that we hereby consent to the inclusion of this opinion in any
registration statement or proxy statement used in connection with the
Transaction so long as the opinion is quoted in full in such registration
statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the Company pursuant to the
Agreement is fair, from a financial point of view, to the non-Taylor Family
holders of the shares.
Very truly yours,
/s/ Sandler O'Neill Corporate
Strategies
Sandler O'Neill Corporate Strategies
D-3
<PAGE>
APPENDIX E
TAX RULING
<PAGE>
INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY
Washington, DC 20224
Index No.
0355.00-00
0355.01-01 Person to Contact:
Marnie Rapaport
Mr. Jeffrey W. Taylor Telephone Number:
Chairman (202) 622-7550
Cole Taylor Financial Group, Inc.
350 East Dundee Road Refer Reply to:
Wheeling, Il 60090 CC:DOM:CORP:5 PLR-245580-96
Date: September 3, 1996
<TABLE>
<C> <C> <S>
Distributing = Cole Taylor Financial Group, Inc.
a Delaware corporation
EIN: 36-3235321
Bank = Cole Taylor Bank
an Illinois corporation
EIN: 36-2950169
Finance Company = Reliance Acceptance, Inc.
a Delaware corporation
EIN: 36-4047874
Mortgage Company = CT Mortgage Company, Inc.
Fund = Alpha Capital Fund II, L.P.
Controlled 1 = a Delaware corporation to be formed in the transaction
EIN to be applied for
Controlled 2 = a Delaware bank holding company to be formed in the
transaction
EIN to be applied for
Business A = the banking business
Business B = the purchase of sales finance contracts collateralized by
used automobiles
Business C = the purchase and resale of first and second mortgage
loans
Family A = members of the family of Irwin Cole
Family B = members of the family of Sidney Taylor
Family B Group = Family B and the other Distributing shareholders who
elect to participate in the exchange of Distributing
stock for stock of Controlled 2
a = 26
b = 25
c = 60,000,000
d = 4,250,000
e = 35
f = 80
g = 60,000,000
h = 16
State X = Delaware
</TABLE>
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Dear Mr. Taylor:
This is in reply to a letter dated July 30, 1996, requesting rulings as to
the federal income tax consequences of a proposed transaction. We received
additional information in letters dated August 7, 1996, August 9, 1996, August
12, 1996, and August 27, 1996. The material submitted for consideration is
summarized below.
Distributing is a financial services holding company, engaged, through its
wholly-owned subsidiary, Bank, in Business A and Business B. Distributing is
also engaged in Business B through subsidiaries of its wholly-owned
subsidiary, Finance Company, and Business C through subsidiaries of its
wholly-owned subsidiary, Mortgage Company. The outstanding stock of
Distributing is publicly traded, although approximately a percent is held by
Family A and approximately b percent is held by Family B. Distributing and its
subsidiaries file a consolidated federal income tax return.
Financial information has been received that indicates that each of the
Bank's Business A and Business B has had gross receipts and operating expenses
representative of the active conduct of a trade or business for each of the
past 5 years.
Serious disputes have arisen between Family A and Family B as to the
management and operation of the Bank and are having an adverse effect on its
day-to-day operations. In addition, Family B is more interested in owning and
operating the Bank's Business A and less interested in the Bank's Business B
or the Finance Company. In order to eliminate the problems caused by these
disputes and to facilitate Family B's desire to own and operate the Bank, the
following transactions have been proposed:
(i) Bank will transfer substantially all of the assets used in Business
B, approximately $c in cash, and an amount of cash equal to Distributing's
aggregate investments in Mortgage Company and Fund, net of all
distributions to shareholders and partners, return of capital and similar
payments, plus interest on the total amounts invested from time to time, at
the rate of 9 percent per annum, compounded annually, to newly formed
Controlled 1 in exchange for all of its issued and outstanding stock. No
liabilities will be assumed by Controlled 1 in connection with this
transaction.
(ii) Bank will distribute the stock of Controlled 1 to Distributing (the
"Bank Spin-off").
(iii) Distributing will cause Finance Company to be merged with and into
Controlled 1, with Controlled 1 succeeding to all of the assets and
liabilities of Finance Company. Thereafter, Controlled 1 will conduct
Business B and will own all of the subsidiaries previously owned by Finance
Company.
(iv) Distributing will convert its intercompany debt from Finance Company
into stock or securities of Finance Company by either: (a) transferring to
Finance Company (prior to its merger into Controlled 1), as a capital
contribution, all intercompany debt running from Finance Company to
Distributing, or (b) converting all such intercompany debt into a
promissory note with a minimum term of 10 years.
(v) Distributing will organize Controlled 2 and transfer thereto, in
exchange for all of the common stock of Controlled 2, all of the issued and
outstanding stock of Bank and Mortgage Company and all of Distributing's
interest in Fund (the "Bank Assets").
(vi) Distributing will distribute all of the issued and outstanding stock
of Controlled 2 to the Family B Group in exchange for approximately d
shares of Distributing stock (which, in the case of Family B, will consist
of all of their Distributing stock) (the "Bank Split-off"). Any
Distributing options owned by Family B that were not previously exercised
will be cashed out or forfeited. Following the distribution, the ownership
interests of Family A in Distributing will increase to approximately e
percent and it will own no stock in Controlled 2. Family B will own at
least f percent of Controlled 2 and will have no continuing interest in
Distributing.
(vii) To supplement capital necessary for bank regulatory purposes,
following the Bank Split-off, Controlled 2 will issue a combination of
Controlled 2 senior debt and preferred stock. To the extent that Controlled
2 preferred stock is issued, such stock will have certain voting rights
that will entitle the holders to elect, as a class, at least one, but less
than 20 percent, of the Controlled 2 directors.
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<PAGE>
Following the Bank Split-off, it is anticipated that Distributing will make
an offer to purchase from its shareholders up to $g of its then outstanding
stock, representing approximately h percent of its then outstanding stock,
funding the buyback with the cash that was transferred by the Bank to
Controlled 1 as part of the Bank Spin-off. In addition, Distributing may
utilize some of this cash to repurchase shares in the open market, buy out
compensatory stock options, pay dividends or reduce debt. To the extent cash
is utilized to buy out compensatory stock options or pay dividends, the amount
of Distributing stock repurchased will be reduced.
In connection with the proposed transaction, it has been represented
that:
(a) The fair market value of the Controlled 2 stock to be received by
each shareholder of Distributing will be approximately equal to the fair
market value of the Distributing stock surrendered by the shareholder in
the exchange.
(b) No part of the consideration to be distributed by Distributing will
be received by any Distributing shareholder as a creditor, employee, or in
any capacity other than that of a shareholder of Distributing.
(c) The 5 years of financial information submitted on behalf of each of
the relevant businesses is representative of the present operations of
those businesses, and there have been no substantial operational changes
since the date of the last financial statements submitted.
(d) Immediately after the Bank Split-off: (i) at least 90 percent of the
fair market value of the gross assets of Distributing will consist of the
stock and securities of Controlled 1, which will be engaged in the active
conduct of a trade or business as defined in (S) 355(b) (2) of the Internal
Revenue Code; and (ii) at least 90 percent of the fair market value of the
gross assets of Controlled 2 will consist of the stock and securities of
Bank, which will be engaged in the active conduct of a trade or business as
defined in (S) 355(b) (2).
(e) Following the Bank Split-off, Distributing and Controlled 2 (through
Controlled 1 and Bank, respectively) will each continue the active conduct
of its business, independently and with its separate employees.
(f) The distribution of the stock of Controlled 2 is carried out for the
following corporate business purposes: (i) to resolve the problems being
experienced by Distributing and Bank as a result of the disputes between
Family A and Family B; and (ii) to allow the Family B Group to focus its
efforts and resources on owning and operating Bank. The distribution of the
stock of Controlled 2 is motivated, in whole or in substantial part, by one
or more of these corporate business purposes.
(g) Except with respect to the possible sale by Family A of some or all
of their Distributing stock either before or after the Bank Split-off,
there is no plan or intention by any shareholder who owns 5 percent or more
of the stock of Distributing, and management of Distributing, to the best
of its knowledge, is not aware of any plan or intention on the part of any
particular remaining shareholder or security holder of Distributing to
sell, exchange, transfer by gift, or otherwise dispose of any of their
stock in, or securities of, either Distributing or Controlled 2 after the
transaction.
(h) Other than the possible repurchase by Distributing of up to $g of its
stock following the Bank Split-off, there is no plan or intention by either
Distributing or Controlled 2, directly or through any subsidiary
corporation, to purchase any of its outstanding stock after the
transaction.
(i) There is no plan or intention to liquidate either Distributing or
Controlled 2, to merge either corporation with any other corporation, or to
sell or otherwise dispose of the assets of either corporation after the
transaction other than in the ordinary course of business.
(j) There are no liabilities being assumed by Controlled 2 in connection
with the transaction nor are there any liabilities to which the transferred
assets are subject.
(k) Other than liabilities arising out of the Distributing consolidated
group tax-sharing agreement, no intercorporate debt will exist between
Controlled 2 and Distributing or between Bank and Distributing at the time
of, or subsequent to, the distribution of the Controlled 2 stock.
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<PAGE>
(l) Immediately before the distribution, items of income, gain, loss,
deduction, and credit will be taken into account as required by the
applicable intercompany transaction regulations.
(m) Payments made in connection with all continuing transactions, if any,
between Distributing and Controlled 2, will be for fair market value based
on terms and conditions arrived at by the parties bargaining at arm's
length.
(n) No two parties to the transaction are investment companies as defined
in (S) 368(a)(2)(F)(iii) and (iv).
Based solely on the information submitted and on the representations set
forth above, it is held as follows:
(1) The transfer by Distributing to Controlled 2 of the Bank Assets in
exchange for all of the stock of Controlled 2, followed by the distribution
of the Controlled 2 stock to the Family B Group in exchange for their stock
in Distributing, will be a reorganization within the meaning of
(S) 368(a)(1)(D). Distributing and Controlled 2 will each be "a party to a
reorganization" within the meaning of (S) 368(b).
(2) No gain or loss will be recognized by Distributing upon the transfer
of the Bank Assets to Controlled 2 in exchange for Controlled 2 stock
((S)(S) 361(a) and 357(a)).
(3) No gain or loss will be recognized by Controlled 2 on the receipt of
the Bank Assets in exchange for Controlled 2 stock ((S) 1032(a)).
(4) The basis of each of the Bank Assets to be received by Controlled 2
will be the same as the basis of such asset in the hands of Distributing
immediately prior to the transfer ((S) 362(b)).
(5) The holding period of each of the Bank Assets to be received by
Controlled 2 will include the period during which such asset was held by
Distributing ((S) 1223(2)).
(6) No gain or loss will be recognized by Distributing on the
distribution of the Controlled 2 stock to the Family B Group in exchange
for their stock in Distributing ((S) 361(c)(1)).
(7) No gain or loss will be recognized by (and no amount will be included
in the income of) the Family B Group on receipt of the Controlled 2 stock
in exchange for their stock in Distributing ((S) 355(a)(1)).
(8) The basis of the Controlled 2 stock in the hands of the Family B
Group will be the same as the basis of the Distributing stock surrendered
in exchange therefor ((S) 358(a)(1)).
(9) The holding period of the Controlled 2 stock to be received by the
Family B Group will include the holding period of their Distributing stock
surrendered in exchange therefor, provided such stock is held as a capital
asset on the date of the transaction ((S) 1223(1)).
(10) As provided in (S) 312(h), following distribution of the Controlled
2 stock, proper allocation of earnings and profits between Distributing and
Controlled 2 will be made in accordance with (S) 1.312-10(a) of the Income
Tax Regulations.
No opinion is expressed about the federal income tax consequences of steps
(i) and (ii) of the proposed transaction. See Rev. Proc. 96-39, 1996-33
I.R.B., dated August 12, 1996. In addition, no opinion is requested and no
opinion is expressed about the federal income tax consequences of steps (iii),
(iv), or (vii) of the proposed transaction.
Finally, no opinion is expressed about the tax treatment of the proposed
transaction under other provisions of the Code and regulations or about the
tax treatment of any conditions existing at the time of, or effects resulting
from, the proposed transaction that are not specifically covered by the above
rulings.
This ruling is directed only to the taxpayers who requested it. Section
6110(j)(3) provides that it may not be used or cited as precedent.
It is important that a copy of this letter be attached to the federal income
tax returns of the taxpayers involved for the taxable year in which the
transaction covered by this letter is consummated.
E-4
<PAGE>
Pursuant to the power of attorney on file in this office, a copy of this
letter has been sent to the taxpayer's authorized representative.
Sincerely yours,
Assistant Chief Counsel (Corporate)
/s/ Charles Whedbee
By __________________________________
Charles Whedbee
Senior Technical Reviewer, Branch
5
E-5
<PAGE>
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COLE TAYLOR FINANCIAL GROUP, INC.
350 EAST DUNDEE ROAD
WHEELING, ILLINOIS 60090
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 12, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder(s) hereby appoints Howard B. Silverman, James I.
Kaplan and Solway F. Firestone, and each of them, with full power of
substitution, as attorneys and proxies for and in the name and place of the
undersigned, and hereby authorizes each of them to represent and to vote all of
the shares of Common Stock of Cole Taylor Financial Group, Inc. (the "Company")
held of record by the undersigned as of September 20, 1996 which the
undersigned is entitled to vote at the Annual Meeting of Stockholders of the
Company to be held on November 12, 1996, at The Standard Club, 320 South
Plymouth Court, Chicago, Illinois, at 9:00 a.m., local time, and at any
adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED AND RETURNED IN A TIMELY MANNER, WILL BE
VOTED AT THE ANNUAL MEETING AND AT ANY ADJOURNMENT THEREOF IN THE MANNER
DESCRIBED HEREIN. IF NO CONTRARY INDICATION IS MADE THE PROXY WILL BE VOTED FOR
PROPOSALS 1 AND 2 AND FOR ALL NOMINEES LISTED IN PROPOSAL 3 AND IN ACCORDANCE
WITH THE JUDGMENT OF THE PERSONS NAMED AS PROXIES HEREIN ON ANY OTHER MATTERS
THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING; PROVIDED, HOWEVER, THAT, IF
THIS PROXY DIRECTS A VOTE AGAINST A PROPOSAL, IT MAY NOT BE VOTED, PURSUANT TO
SUCH DISCRETIONARY AUTHORITY, FOR A PROPOSAL TO ADJOURN THE ANNUAL MEETING IN
ORDER TO PERMIT FURTHER SOLICITATION WITH RESPECT TO SUCH PROPOSAL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR PROPOSALS 1
AND 2 AND FOR ALL NOMINEES LISTED IN PROPOSAL 3.
1. Proposal to approve the Share Exchange Agreement and the Split-Off
Transactions, as described in the accompanying Proxy Statement.
[_] FOR [_] AGAINST [_] ABSTAIN
2. Proposal to approve an amendment to the Company's Certificate of
Incorporation to change the name of the Company from Cole Taylor Financial
Group, Inc. to Reliance Acceptance Group, Inc., to take effect upon
consummation of the Split-Off Transactions.
[_] FOR [_] AGAINST [_] ABSTAIN
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
3. Election of Class II Directors (terms to expire in 1999).
[_] FOR all nominees listed below (except as marked to the
contrary below)
[_] WITHHOLD AUTHORITY to vote for all
nominees listed below
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
STRIKE A LINE THROUGH THE NOMINEE'S NAME BELOW)
Bruce W. Taylor William S. Race Howard B. Silverman
Ross J. Mangano Richard W. Tinberg
4. Each of the persons named as proxies herein is authorized, in such person's
discretion, to vote upon such other matters as may properly come before the
Annual Meeting; provided, however, that, if this Proxy directs a vote
against a Proposal, it may not be voted, pursuant to such discretionary
authority, for a proposal to adjourn the Annual Meeting in order to permit
further solicitation with respect to such Proposal.
[_] MARK HERE FOR ADDRESS CHANGE
AND NOTE AT LEFT
This Proxy must be signed exactly
as your name appears hereon. When
shares are held by joint tenants,
both should sign. Attorneys,
executors, administrators, trustees
and guardians should indicate their
capacities. If the signer is a
corporation, please print full
corporate name and indicate
capacity of duly authorized officer
executing on behalf of the
corporation. If the signer is a
partnership or limited liability
company, please print full
partnership or limited liability
company name and indicate capacity
of duly authorized person executing
on behalf of the partnership or
limited liability company.
Date ________________________ , 1996
------------------------------------
Signature(s)
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