AMENDMENT NUMBER ONE TO
TRANSACTION STATEMENT PURSUANT TO SECTION 13(e)
OF THE 1934 ACT AND RULE 13e-3 THEREUNDER
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
RULE 13e-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of The Securities Exchange Act of 1934)
BILTMORE BANK CORP.
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(Name of the Issuer)
BILTMORE BANK CORP.; JOHNSON INTERNATIONAL, INC.
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(Name of Person(s) Filing Statement)
Common Stock, no par value
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(Title of Class of Securities)
None
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(CUSIP Number of Class of Securities)
Mr. Mark Behrens William G. Ridenour, Esq.
Executive Vice President Ridenour, Swenson, Cleere
Biltmore Bank Corp. & Evans, P.C.
2425 East Camelback Road Two Renaissance Square
Phoenix, Arizona 85016 40 North Central, Suite 1400
1-414-681-4654 Phoenix, Arizona 85004-2397
1-602-254-9900
(Name, Address and Telephone Number of
Person Authorized to Receive Notices
and Communications on Behalf of
Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. | | The filing of solicitation materials or an information
statement subject to Regulation 14A, Regulation 14C or
Rule 13e-3(c) under the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities
Act of 1933.
c. [ ] A tender offer.
d. [X] None of the above.
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Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: |X|
Calculation of Filing Fee 1/50th of 1%(1)
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Transaction Amount of filing fee
Valuation* $492,885 98.58
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* Set forth the amount on which the filing fee is calculated and state
how it was determined.
[X] Check box if any part of the fee is offset as provided in Rule
0-11(a)(2) and identify the filing with which the offsetting fee was
previously paid. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
Amount Previously Paid: $98.58
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Form or Registration No.: Rule 13e-3 Transaction Statement
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Filing Party: Biltmore Bank Corp./Johnson International, Inc.
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Date Filed: November 7, 1996
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(1) [$1.00 per share purchase price x 492,885 shares]
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TABLE OF CONTENTS
BILTMORE BANK CORP / JOHNSON INTERNATIONAL, INC.
Rule 13e-3 Transaction Statement
Item 1. Issuer and Class of Security Subject to the Transaction
..................................................................4
Item 2. Identity and Background............................................5
Item 3. Past Contacts, Transactions or Negotiations........................5
Item 4. Terms of the Transaction...........................................6
Item 5. Plans or Proposals of the Issuer or Affiliate......................7
Item 6. Source and Amounts of Funds or Other Consideration.................8
Item 7. Purpose(s), Alternatives, Reasons and Effects......................8
Item 8. Fairness of the Transaction.......................................12
Item 9. Reports, Opinions, Appraisals and Certain Negotiations............14
Item 10. Interest in Securities of the Issuer..............................16
Item 11. Contracts, Arrangements or Understandings With Respect
to the Issuer's Securities........................................17
Item 12. Present Intention and Recommendation of Certain Persons
With Regard to the Transaction....................................18
Item 13. Other Provisions of the Transaction...............................18
Item 14. Financial Information.............................................21
Item 15. Persons and Assets Employed, Retained or Utilized.................22
Item 16. Additional Information............................................22
Item 17. Material to be Filed as Exhibits..................................23
a. Loan Agreement
b. Fairness Opinion
c. None
d. Disclosure to Shareholders
e. Appraisal Rights
f. Industry Peer Analysis
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Item 1. Issuer and Class of Security Subject to the Transaction
The name of the issuer of the class of equity securities which is the
subject of the Rule 13e-3 transaction (the "Transaction") is Biltmore Bank
Corp., an Arizona corporation (the "Company"). The address of the principal
executive offices of the Company is 2425 East Camelback Road, Phoenix, Arizona
85016. The Company is the bank holding company, parent and sole shareholder of
Biltmore Investors Bank, N.A., a national banking association (the "Bank"). The
Bank's main branch is also located at 2425 East Camelback Road, Phoenix, Arizona
85016.
The class of securities that is the subject of the Transaction is the
Company's common stock, no par value per share ("Company Common Stock"). As of
July 31, 1996, the most recent practicable date, 16,522,530 shares of Company
Common Stock were issued and outstanding to 324 holders of record of Company
Common Stock (the "Shareholders"). Of the 16,522,530 shares of Company Common
Stock, all but 492,885 shares are owned by Johnson International, Inc., ("JI"),
a Wisconsin based corporation owned primarily by Samuel C. Johnson and family
members, the Company's affiliated shareholder and joint filer of this
Transaction Statement. Although the Company is authorized to issue ten million
shares of preferred stock, no preferred stock has ever been issued by the
Company and the preferred stock is not subject to the Transaction.
There is currently no established trading market for shares of Company
Common Stock. Accordingly, there is no range of high and low bid quotations for
Company Common Stock for each quarterly period during the last two years.
The Company has paid no dividends to holders of Company Common Stock
since the Company's incorporation on March 19, 1984, and management of the Bank
and the Company intend to follow a policy of retaining earnings to cover capital
requirements and expenses. The fairness opinion, discussed in detail in Items 8
and 9, states that the Company may pay a dividend in 1997. Whether the Company
decides to pay a dividend at that time will depend, among other factors, on the
Company's capital requirements and earnings as well as market and economic
trends. The Company's ability to pay dividends is dependent upon the receipt of
dividends from the Bank. Currently, the Company has no other sources of revenue.
Under certain circumstances, approval of the Comptroller of the Currency may be
required prior to the Bank's payment of dividends. Arizona law also restricts a
corporation's ability to pay dividends. Under Arizona law, distributions to
shareholders (including distributions arising out of a purchase, redemption or
other acquisition of a corporation's shares) cannot be made if, after giving
effect, either: (1) the corporation would not be able to pay its debts as they
become due in the usual course of business; or (2) the corporation's total
assets would be less than the sum of its total liabilities plus, unless the
articles of incorporation permit otherwise, the amount that would be needed, if
the corporation were
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to be dissolved at the time of the distribution, to satisfy the preferential
rights on dissolution of shareholders whose preferential rights are superior to
those receiving the distribution. Although these statutory restrictions do not
apply to the Company's current financial posture, they nonetheless can impact a
company's ability to make distributions if it does not meet the statutory
criteria.
Neither the Company nor its affiliated shareholder, JI, has made an
underwritten public offering of Company Common Stock for cash during the past
three years which was registered under the Securities Act of 1933 or exempt from
registration thereunder pursuant to Regulation A.
The Company has not acquired any Company Common Stock since the
commencement of the Company's second full fiscal year [January 1, 1994]
preceding the date of this Schedule. The Company currently has no treasury
stock. JI has acquired 21,770 shares of Company Common Stock since the
commencement of the Company's second full fiscal year preceding the date of this
Schedule. JI paid a range of $0.85 to $1.00 per share for the shares of Company
Common Stock. The average purchase price of Company Common Stock for each
quarterly period of the Company during this period was as follows:
Fiscal Quarter Average Purchase Price
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ending March 31, 1994 $0.85
ending June 30, 1994 0.85
ending September 30, 1994 0.85
ending December 31, 1994 0.85
ending March 31, 1995 1.00
ending June 30, 1995 1.00
ending September 30, 1995 1.00
ending December 31, 1995 1.00
ending March 31, 1996 1.00
ending June 30, 1996 1.00
Item 2. Identity and Background
The person filing this Schedule is the Company which is the issuer of
the class of equity securities that is the subject of the Rule 13e-3
transaction, and JI, the Company's affiliated shareholder. JI is a Wisconsin
corporation with its principal executive offices located at 4041 North Main
Street in Racine, Wisconsin 53402. JI's principal business is financial
services. JI has not, during the last five years, been convicted in any criminal
proceeding, nor has it been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction which had, as a result, a
judgment, decree or final order enjoining further violations of, or prohibiting
activities subject to, federal or state securities' laws or finding any
violations of such laws.
Item 3. Past Contacts, Transactions or Negotiations
(a)(l). The following transactions and approximate dollar amount, other
than those described below, have occurred since the commencement of the issuer's
second full fiscal year preceding the date of this Schedule between JI
(including subsidiaries of JI and each executive officer and director of JI;
each person controlling JI; and each executive officer and director or any
corporation ultimately in control of JI) and the issuer:
JI, as a financial services corporation, performs a variety of services for the
issuer. For these services, such as accounting, group purchasing, risk
management, corporate auditing, loan review, human resources, marketing,
information systems, compliance, executive management, and training and
development, JI receives a management fee, payable monthly. The management fees
for 1994 totalled $275,520; for 1995 totalled $428,111; and for the first nine
months ended September 30, 1996, totalled $352,767. The cost of JI's services is
allocated using acceptable and recognized cost accounting techniques, and is
reviewed annually for reasonableness by the Office of the Comptroller of the
Currency (with respect to the Bank) and the Federal Reserve Bank of Chicago
(with respect to JI).
The Bank also assigns participation interests in loans above the Bank's legal
lending limit to JI upon JI's acceptance of the participation interest. The
Bank's legal lending limit is $2,200,000, and when loans are brought to the Bank
in excess of that limit, the loan is reviewed by JI and, if approved, the excess
is participated to JI.
The Bank owes JI $42,000. This loan is evidenced by an unsecured promissory note
due in May 1997.
JI passes through to the Bank the Bank's pro rata share of costs and expenses
associated with a data processing contract with M&I Data Services, Inc. The Bank
pays JI who, in turn, pays M&I Data Services, Inc. There is no markup or profit
charged the Bank by JI in connection with this contract.
Johnson Heritage Trust Company, a subsidiary of JI, provides trust management
services to the Bank. For these services, the subsidiary charges the Bank $4750
per month.
(a)(2) Beginning in the third quarter of 1995, the Company, through its then
President Mr. LeRoy Gust, reviewed the process of effecting a going private
transaction. At that time, management of the Company engaged in very informal
discussions about the feasibility of effecting such a transaction and the
potential impact the transaction would have on Bank customers who also were
shareholders. Company management elected not to pursue the transaction at that
time because, among other reasons, of the perceived impact on Bank customers and
the Bank's marketing efforts. In or around April 1996, the Company resurrected
these discussions, and contacted Mr. Richard Hansen, the President of JI, about
whether JI might consider acquiring 100% control of the Company through a going
private transaction. At that time, the reverse stock split was thought to be the
only realistic vehicle to effect the going private transaction. Except as
discussed by the Board in connection with the review of the Committee's
recommendations (See Item 7), there have been no other discussions concerning a
merger, consolidation or acquisition, tender offer for or other acquisition of
securities of any class of the issuer; an election of directors of the issuer;
or a sale or other transfer of a material amount of assets of the issuer or any
of its subsidiaries. Mr. Hansen indicated that JI would be interested in
acquiring 100% control of the Company. Serious negotiations regarding a reverse
stock split transaction commenced
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in June of 1996 and continued until July 31, 1996 when the Board of Directors of
the Company appointed a committee to investigate the feasibility of a reverse
stock split transaction. These negotiations were primarily between Mr. Mark
Behrens who is a Senior Vice-President and Corporate Controller of JI, then
acting interim President of the Company and Mr. Richard Hansen, President and
Chief Executive Officer of JI. JI also has indicated to the Company in these
negotiations that it intends to vote in favor of an amendment to the Company's
Second Amended and Restated Articles of Incorporation which, upon passage and
filing with the Arizona Corporation Commission, will effect the reverse stock
split transaction.
The Committee appointed by the Board of Directors consisted of members of the
Board who were not officers or directors of JI. The Committee, by delegation to
Mr. Mark Behrens, arranged for the procurement of a fairness opinion from Alex
Sheshunoff & Co. Investment Banking, the opinion that was used in connection
with the valuation of the shares of Company Common Stock. The Committee met
independently of the Board to consider the fairness opinion and make
recommendations to the Board about whether to effect a reverse stock split,
whether other means, such as a tender offer, would be effective to accomplish
the Company's purpose, and the price per share to be offered to the Company's
shareholders. The price per share was determined after extensive discussion by
members of the Committee. Although the fairness opinion adopted a $.60 per share
value, the Committee decided a value of $1.00 per share would help reduce the
impact on minority Shareholders who acquired their shares for substantially more
than $1.00 per share. To the Company's knowledge, no Shareholder paid less than
$1.00 per share. Furthermore, JI and other shareholders had, in prior stock
purchases, paid other Shareholders up to $1.00 per share (see Item 1). Finally
the Committee wanted to ensure the Bank would not be impacted adversely from a
marketing standpoint, and believed the offer in excess of the value set forth in
the fairness opinion might mitigate against any such adverse impact. After the
independent meeting, the Committee discussed its recommendations with the Board,
which then unanimously adopted the recommendations.
While the fairness opinion was being prepared, the Committee, by delegation to
Mr. Mark Behrens, made direct inquiry of JI about whether JI would be willing to
finance the cost to acquire the fractional interests created by the reverse
stock split. JI, through its Senior Vice President and Chief Financial Officer,
Mr. Dennis Axelson agreed to loan the Company the funds necessary to acquire the
interests. The terms of the loan were negotiated between Mr. Behrens and Mr.
Axelson, and approved first by the disinterested Committee appointed by the
Board, and then by the full Board of the Company.
(b) Except as noted above, there have not been any contacts or negotiations
concerning the matters referred to in Item 3(a)(2) which have been entered into
or which have occurred since the commencement of the issuer's second full fiscal
year preceding the date of this Schedule (i) between any affiliates of the
issuer of the class of securities which is the subject of the Rule 13e-3
transaction; or (ii) between such issuer or any of its affiliates and any person
who is not affiliated with the issuer and who would have a direct interest in
such matters.
Item 4. Terms of the Transaction
At a meeting held July 31, 1996, the Board of Directors of the Company
appointed a committee comprised of the four disinterested, non-affiliated
members of the Board (the "Committee") to prepare and present to the Board
recommendations regarding a Rule 13e-3 transaction and the fairness of any such
transaction to unaffiliated shareholders of Company Common Stock.
On September 4, 1996, a Special Meeting of the Board of Directors was
held to evaluate the recommendations of the Committee. At that Special Meeting,
the Board unanimously adopted a resolution authorizing the submission to the
holders of Company Common Stock an amendment (the "Amendment") to the Company's
Second Amended and Restated Articles of Incorporation reducing the number of
authorized shares of Company Common Stock from Twenty-Five Million to Two
Hundred shares by a reverse stock split of 125,000 to 1. Upon the adoption of
the Amendment (which adoption is assured because JI, the Company's affiliate,
owns 97% of the issued and outstanding shares of Company Common Stock and will
vote in favor of the Amendment), the Amendment will be filed with the State of
Arizona Corporation Commission as soon thereafter as practicable and will become
effective upon that filing. The reclassification of authorized Company Common
Stock will be automatic without any further action by the Company. Fractional
shares of Company Common Stock will not be issued. Instead, to accord the
purpose of the Transaction, the Company will purchase all fractional shares.
At the September 4, 1996 Special Meeting of the Board of Directors, the
Board unanimously adopted the recommendations of the Committee that Shareholders
of fractional shares of Company Common Stock be paid the sum of $1.00 per share
for each share of Company Common Stock held by the Shareholder prior to the
reverse stock split. Because all Shareholders other than JI will, after the
reverse stock split, own only fractional shares, the Company's purchase of those
fractional shares will terminate all fractional Shareholders as Company
Shareholders. Accordingly, promptly after the effective date of the Amendment,
the Company will notify each Shareholder of record of the effective date of the
Amendment and will forward with each
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notice, instructions for the surrender of share certificates of fractional
shares of Company Common Stock in exchange for the payment to the Shareholder in
cash of $1.00 per share for each share of Company Common Stock held by the
Shareholder prior to the reverse stock split.
Item 5. Plans or Proposals of the Issuer or Affiliate
Upon consummation of the Transaction, the Company will file a Form 15
advising the Securities and Exchange Commission (the "SEC") that the Company's
duty to file reports pursuant to Section 15(d) of the 1934 Act will be
immediately suspended. Because the Company files reports pursuant to Section
15(d) and not Section 12(b) or 12(g), there is no requirement for
deregistration.
Neither the Company nor its affiliate JI has any plan or proposal
regarding activities or transactions which are to occur after this Transaction,
except as discussed below, which would relate to or result in (a) an
extraordinary corporate transaction such as a merger, reorganization or
liquidation, involving the Company or any of its subsidiaries; (b) a sale or
transfer of a material amount of assets of the Company or any of its
subsidiaries; (c) except as noted below, any change in the present Board of
Directors or management of the Company including, but not limited to, any plan
or proposal to change the number or term of directors, to fill any existing
vacancy on the Board or to change any material term of the employment contract
of any executive officer; (d) any material change in the present dividend rate
or policy or indebtedness or capitalization of the Company; (e) any material
change in the Company's corporate structure or business; or (f) a class of
equity securities of the Company becoming eligible for termination or
registration pursuant to Section 12(g)(4) of the 1934 Act.
Unrelated to the Transaction, the Company has recently hired a new
president to replace Mr. LeRoy C. Gust who resigned his positions as President
and Director of both the Bank and the Company on June 27, 1996. His resignation
was not related to this Transaction, nor was his resignation a result of a
disagreement with the Company on any matter relating to the Company's opera-
tions, policies or practices. Mr. Gust has not furnished the Company with any
letter describing such disagreement nor has he requested any such disclosure.
Mr. Mark Behrens has been acting as interim President of the Company. Mr. Ronald
R. Estervig was recently hired to replace the interim President, Mr. Behrens,
and it is anticipated that Mr. Estervig also will serve as a member of the Board
of Directors of the Company and the Bank. Mr. Estervig formerly was President
and Chief Executive Officer of Heritage Bank, N.A., in Janesville, Wisconsin.
Only Mr. Richard A. Hansen, President of JI, and Mr. Mark Behrens, interim
President of the Company, participated in negotiations for the reverse stock
split. Neither Mr. Gust nor Mr. Estervig participated in those negotiations. See
Item 3. Mr. Estervig had not yet began serving as President of the Company at
the time of the Sept. 4, 1996 Board meeting. Mr. Behrens and Mr. Hansen are both
members of the Board and participated in the vote, although neither vote was
necessary for passage because the Board unanimously approved the Transaction.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Pub. Law 103-328), has relaxed the restrictions imposed on banking institutions
and the rationale behind the creation of bank holding companies such as the
Company, registered under the Bank Holding Company Act of 1956, as amended, are
no longer applicable.
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Although not discussed in detail by the Board of Directors of the
Company, and neither planned nor proposed, it is possible the Company may
consider liquidating at some future time. Upon approval of the Transaction, JI
will control 100% of the issued and outstanding Company Common Stock. The sole
asset of the Company is the ownership of all stock of the Bank. Accordingly,
after consummation of the Transaction, the Board of Directors may review whether
the continued separate corporate existence of the Company is justifiable. A
dissolution of the Company after approval of the Transaction would eliminate the
additional tier of corporate ownership of the Bank. This alternative will be
considered by the Company along with the benefits of continued corporate
existence approximately one year after consummation of the Transaction.
Item 6. Source and Amounts of Funds or Other Consideration
The funds necessary to purchase fractional shares created by the
Transaction will be obtained by a loan from JI to the Company. The total amount
of funds necessary to acquire the fractional shares at the $1.00 per share
purchase price is $492,885.00. The loan will be evidenced by a promissory note.
The note will bear interest at the Wall Street Journal (Western Edition) prime
rate, adjusted daily, and will be due and payable two years after the date of
the note. Principal and interest will be due at maturity. The Company has not
made any plans or arrangements to finance or repay such borrowings.
The Company anticipates that it will incur expenses of approximately
$35,500 in connection with the Transaction, including legal fees of
approximately $20,000, appraisal fees of approximately $7,500 and printing and
mailing fees of approximately $8,000.
Item 7. Purpose(s), Alternatives, Reasons and Effects
The Board of Directors of the Company considered a Rule 13e-3 "going
private transaction" to enable management to concentrate efforts on the
long-term growth of the Company's business free from the constraints of public
ownership which the Board believes often places undue emphasis on
quarter-to-quarter earnings at the expense of long-term growth. The Board also
has concerns about the Company's financial growth in relation to its industry
peers located in the Phoenix, Arizona market. See Exhibit F to this Schedule for
a chart depicting the percentage return on equity for the Company's industry
peers. As of June 30, 1996, the Company's return on equity was 6.57%. Only one
other financial institution out of the 23 polled in the Company's market had a
lower percentage, with the average peer group return on equity being 15.58%.
The peer group utilized by Alex Sheshunoff & Co. Investment Banking, the experts
who prepared the fairness opinion attached as Exhibit B and discussed
extensively in Items 8 and 9 of this Schedule, had an even higher average return
on equity of 20.53%.
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As a result, as part of long-term cost savings, the Board believes the
suspension of SEC filing requirements will reduce annual direct expenses
approximately $35,000.00, and reduce substantial indirect costs associated with
SEC filing requirements. To the Company's knowledge, no significant trading
market has developed for the Company Common Stock since the Company first went
public in 1985. The Company receives regular inquiries from Shareholders
regarding the willingness of the Company or its affiliate, JI, to purchase their
shares of Company Common Stock. In many of these instances, the Shareholder was
unable to obtain from a stockbroker any bid price or offer to purchase the
Company Common Stock.
The Transaction would permit Shareholders to receive fair value for
their shares without the possible diminution of value resulting from the lack of
an established trading market and without payment of potentially
disproportionate brokerage fees. The lack of liquidity illustrates the fact that
being a publicly held company has not served the original purpose for which the
Company had undertaken the responsibility of being a public company. The lack of
any market interest in Company Common Stock has not permitted Shareholders to
realize on the value of their shares, and, in the opinion of the Board, there
exists no reasonable prospect of their doing so. Based upon the lack of investor
interest in Company Common Stock, little potential for dividends (none have ever
been paid), limited stock appreciation potential, expense of being a public
company in terms of time spent by management and the significant expense for
legal, accounting and transfer agent fees, the Committee appointed by the Board
unanimously concluded, and the full Board unanimously concurred, that there was
no justification for continuing the Company as a public entity.
The Company has determined that a reverse stock split would be the most
efficient method to achieve the purposes discussed above. Delaying the
consummation of the Transaction beyond the December 31 fiscal year-end would
substantially reduce the amount of cost savings that could otherwise be
realized. If the Company is required to file a Form 10-K, the Company will be
required to secure audited financial statements at a cost of approximately
$20,000, as well as complying with mandatory Section 15(d) filings until the
Transaction is concluded. By consummating the Transaction by year-end,
Shareholders will be entitled to take the losses most of them will realize as a
result of the Transaction on their 1995 tax returns. It is anticipated most
Shareholders will realize a loss as a result of the Transaction because most, if
not all, Shareholders paid in excess of $1.00 per share of Company Common Stock.
(A further discussion regarding the tax consequences of the Transaction is set
forth below.)
The Board considered alternatives to the proposed reverse stock split,
including privately negotiated purchases of Company Common Stock as well as a
possible tender offer. However, these alternatives were rejected because there
was no assurance that either alternative would insure a sufficient response to
result in the Company having fewer than 300 Shareholders. Although either a
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purchase or tender offer may have reduced the holders of record of the Company
Common Stock below the 300 threshold, the Board rejected both approaches because
of the possibility that share ownership would be thinned further, thus impairing
the value of the remaining outstanding shares, and because neither approach
would have enabled JI to increase its ownership to 100% of all the issued and
outstanding shares of Company Common Stock. The Board did not consider a
possible sale of the Company because no offers had been presented to the Board
and no determination had been made that a sale would be in the best interests of
the Shareholders. In addition, the Board did not view a sale as an alternative
that could achieve the objectives that the Board sought to achieve with the
reverse stock split, which were providing liquidity for existing Shareholders
while at the same time reducing costs for the Company.
If the Transaction is consummated, the present holders of Company
Common Stock (other than JI) will no longer have an equity interest in the
Company and, therefore, will neither share in its future earnings and growth nor
the risks associated with achieving such earnings and growth. Instead, each
holder of Company Common Stock will receive $1.00 in cash, plus accrued
interest, for each share of Company Common Stock held by the Shareholder prior
to the reverse stock split. After the effective date of the Amendment,
Shareholders will receive notice after the Amendment is adopted, containing
instructions for the surrender of their share certificates of fractional shares
of Company Common Stock in exchange for the payment to the Shareholder in cash.
Shareholders who dissent to the adoption of the Amendment are entitled, under
Arizona law, to exercise statutory dissenters' rights of appraisal. See Item 13
for a detailed description of these statutory dissenters' rights of appraisal.
If the Transaction is consummated, the Company will become wholly-owned
by JI. Thus, JI will have a 100% interest in the net book value and net earnings
of the Company, $0.84 and $0.03, respectively, based on the June 30, 1996
financial statements. Currently, JI has a 97% interest in the net book value and
net earnings of the Company, $0.82 and $0.03, respectively, based on June 30,
1996 financial statements.
Accordingly, to the extent future earnings increase, JI will be the
only Shareholder who benefits from that increase. Conversely, to the extent
future earnings decrease, JI will be the only Shareholder impacted by that
decrease. And, should the Company require additional equity capital, JI, as the
sole remaining Shareholder of the Company, would be a likely source of that
equity capital.
The Company will, as a result of the Transaction, become a
privately-held company. After the Transaction, the Company will file a Form 15,
and the Company will be relieved of its obligations to file current reports with
the SEC. The Company will no longer be required to deliver to Shareholders
annual or quarterly reports; to maintain a transfer agent for Company Common
Stock; or to retain counsel or accountants to assist in the preparation of any
of the above reports or statements.
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Also, as described above, upon consummation of the Transaction, the
Company will purchase all fractional shares of Company Common Stock. Because all
Shareholders other than JI will own only fractional shares, the Company's
purchase of these shares will terminate Shareholder status for all existing
Shareholders except JI.
Although the Company will become wholly-owned by JI, in accordance with
12 U.S.C. Section 72, directors of the Company must own shares having an
aggregate par value of not less than $1,000.00 or an equivalent interest as
determined by the Comptroller of the Currency. Accordingly, after consummation
of the Transaction, and solely to comply with this statutory requirement,
Directors of the Company each will receive one share of Company Common Stock to
hold during his or her term. After the expiration of the Director's term, the
Director will transfer the share back to JI. The Directors will not be otherwise
permitted to sell, transfer or encumber their shares.
The following discussion is not intended to and does not constitute a
complete description of all possible Federal, State and local tax consequences
to Shareholders of the Company as a result of the purchase of fractional shares
of Company Common Stock held by Shareholders. The tax consequences of the
acquisition of fractional interests may vary depending upon the particular facts
relating to each Shareholder. ACCORDINGLY, EACH SHAREHOLDER IS URGED TO CONSULT
SUCH SHAREHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE
TRANSACTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL OR FOREIGN TAX LAWS.
The purchase of fractional interests of Company Common Stock created as
a result of the reverse stock split will be a taxable transaction for federal
income tax purposes. Each holder of Company Common Stock will recognize gain or
loss upon the surrender of that Shareholder's Company Common Stock equal to the
difference, if any, between (i) the sum of the cash payment of $1.00 per share
received pursuant to the Transaction in exchange for the Company Common Stock,
and (ii) that Shareholder's tax basis in the Company Common Stock. Holders of
Company Common Stock who exercise their right to dissent will recognize gain or
loss equal to the difference, if any, between (i) the sum of the cash payment
received by the Shareholder in exchange for his or her shares of Company Common
Stock upon a final determination of the fair market value of those shares, and
(ii) that Shareholder's tax basis in the Company Common Stock. Any gain or loss
will be treated as a capital gain or loss if the Company Common Stock exchanged
was held as a capital asset in the hands of the Shareholder.
Any such capital gain or loss will be combined with all other capital
gains and losses recognized by the Shareholder during the taxable year. The Tax
Reform Act of 1986 repealed the deduction
11
<PAGE>
that had previously been available for 60% of the net long-term capital gain
realized by non-corporate taxpayers. Accordingly, if the result of combining all
such capital gains and losses recognized during the taxable year is a net
capital gain, the full amount of such gain will be included in the Shareholder's
gross income. In general, if the result of combining all such capital gains and
losses recognized during the taxable year is a net capital loss, a Shareholder
which is a corporation may not deduct any portion of the loss and a Shareholder
who is not a corporation may deduct such loss only to the extent that it does
not exceed $3,000 ($1,500 in the case of a married individual filing a separate
return).
The Company and JI will not recognize any income, gain or loss by
reason of the Transaction, and the tax basis of the assets of the Company will
not be affected. The Company will have an interest expense deduction as a result
of the loan obtained from JI by the Company to purchase the fractional interests
in Company Common Stock held by all Shareholders except JI.
The cash payments due to the holders of fractional interests upon
completion of the Transaction (other than certain exempt entities and persons)
will be subject to a backup withholding tax under federal income tax law unless
certain requirements are met. Generally, the Company will be required to deduct
and withhold the tax on payments made for the fractional interests if (i) the
Shareholder fails to furnish a taxpayer identification number ("TIN" -- the TIN
of an individual Shareholder is his or her Social Security Number) to the
Company or fails to certify under penalty of perjury that such TIN is correct;
(ii) the Internal Revenue Service ("IRS") notifies the Company that the TIN
furnished by the Shareholder is incorrect; (iii) the IRS notifies the Company
that the Shareholder has failed to report interest, dividends or original issue
discount in the past; or (iv) there has been a failure by the Shareholder to
certify under penalty of perjury that such Shareholder is not subject to the
backup withholding tax.
Item 8. Fairness of the Transaction
The Company and its affiliate JI, reasonably believe that the
Transaction is fair to all unaffiliated Shareholders of the Company. The
Company's opinion is based upon a fairness opinion issued to the Company by an
independent research and investment banking firm, Alex Sheshunoff & Co.
Investment Banking ("Alex Sheshunoff & Co."), which was specifically retained by
the Company to render a fairness opinion of the value of the minority interest
in the Company Common Stock held by unaffiliated Shareholders for purposes of a
reverse stock split transaction. Further, information regarding the
qualifications of Alex Sheshunoff & Co., to render a fairness opinion regarding
the Transaction is described in section 9 below.
12
<PAGE>
No director of the Company dissented or abstained from voting on the
Transaction. All directors of the Company, including but not limited to all
disinterested nonaffiliated directors, unanimously voted in favor of the
Transaction at a Special Meeting of the Board of Directors of the Company held
on September 4, 1996 for the purpose of reviewing and considering the
Transaction.
The Company's belief that the Transaction is fair to unaffiliated
Shareholders of Company Common Stock is based primarily on the fairness opinion
of Alex Sheshunoff & Co. The Board of Directors of the Company in determining
the fairness of the Transaction to unaffiliated Shareholders of Company Common
Stock and in determining the per share price to be paid to holders of fractional
shares of Company Common Stock reviewed and considered: 1) Current market prices
of Company Common Stock; 2) Historical market prices of Company Common Stock; 3)
Net book value of the Company; 4) Going concern value of the Company; 5)
Liquidation value of the Company; 6) The purchase price paid in previous
purchases of Company Common Stock by the Company's affiliate JI,; 6) The
fairness opinion of Alex Sheshunoff & Co.; and 7) The absence of any offers made
by any unaffiliated persons during the preceding eighteen months for: (a) the
merger or consolidation of the Company into or with such person or of such
person into or with the Company; (b) the sale or other transfer of all or any
substantial part of the assets of the Company or; (c) securities of the Company
which would enable the holder thereof to exercise control of the Company. The
purchase price for the Company Common Stock of $1.00 per share held prior to the
reverse stock split is equal to or greater than the values which would be
obtained by the application of the factors described in (1) through (6) of this
paragraph. See Item 9 for a detailed description of these valuations. Due to the
very few transactions in shares of Company Common Stock, it was difficult to
assess the current, or even the historical, market value of such shares. Alex
Sheshunoff & Co. determined a market price of $.60 per share based on the
price/book and price/earnings ratios, among other factors. If the Company Common
Stock were freely marketable, Alex Shushunoff & Co. determined that the shares
would have a $1.18 per share value; however, because of the lack of
marketability and the Company's performance, Alex Shushunoff & Co. applied a 50%
discount. Alex Shushunoff & Co. also determined that its market value
determination was the most accurate valuation given the Company's operating
history and performance. The Board believes the liquidation and going concern
value would be equal to the net book value of the Company of $.84 per share; the
Board did not obtain an appraisal or analysis of the liquidation value beyond
that set forth in the Alex Shushunoff & Co. opinion. After considering all these
factors, the Board of Directors attributed the most weight to the independent
fairness opinion of Alex Sheshunoff & Co., coupled with the fact that JI has
previously purchased shares of Company Common Stock for $1.00 per share. Neither
the Committee nor the Board assigned any specific weight to the foregoing
factors, and individual members of the Board or the Committee may have given
differing weights to different factors. Because the Company and JI wanted the
Transaction to be equitable to Shareholders, and was concerned with any impact
the Transaction may have on Shareholders who also are Bank customers/depositors,
the Committee recommended to the Board, and the Board unanimously approved,
payment of a premium over Alex Shushunoff & Co. opinion and setting the per
share value of $1.00 per share, rather than the $.60 proposed in the Alex
Shushunoff & Co. fairness opinion. After considering all these factors, the
Board of Directors attributed the most weight to the independent fairness
opinion of Alex Sheshunoff & Co.
The Transaction is not structured so that approval of at least a
majority of unaffiliated Shareholders is required to approve the Transaction. In
fact, approval of the Transaction is assured because the 97% Shareholder, JI,
has indicated that JI will vote all its shares of Company Common Stock in favor
of the Transaction.
At the September 4, 1996 meeting of the Committee, a majority of the
Company's directors who are not employees of the Company or JI, unanimously
approved the Transaction. The Committee did not retain an unaffiliated
representative to act solely on behalf of the unafiliated shareholders for the
purpose of negotiating the Transaction or preparing a report concerning the
fairness of the Transaction. The Transaction, as recommended by the Committee,
was then unanimously approved by all directors of the Company at the Special
Meeting of the Board of Directors held on September 4, 1996 to consider and vote
upon the Transaction. In addition, after discussion and analysis, the Committee
unanimously recommended to the Board, and the Board unanimously approved,
payment to each Shareholder impacted by the reverse stock split, the amount of
$1.00 per share for each share of Company Common Stock held by the Shareholder
prior to the reverse stock split. This amount is 40% higher than the value
assigned to the shares in the Alex Sheshunoff & Co., fairness opinion, and which
is 1.20 times the Company's June 30, 1996 book value per share of $0.84.
13
<PAGE>
Item 9. Reports, Opinions, Appraisals and Certain Negotiations
The Company commissioned and has received from an outside party, Alex
Sheshunoff & Co., a report and fairness opinion relating to the Transaction, the
fairness of the consideration to be offered to holders of Company Common Stock
which is the subject of the Transaction, and the fairness of the Transaction to
the Company, its affiliate JI, and unaffiliated Shareholders of Company Common
Stock.
Alex Sheshunoff & Co. is part of the diversified bank consulting and
education firm, Alex Sheshunoff Management Services, Inc., which provides a
broad range of services offered almost exclusively to the financial services
industry. Alex Sheshunoff & Co. has over 1,000 active financial institution
clients. In the past three years, Alex Sheshunoff & Co. has completed over 150
fairness opinions involving mergers and acquisitions, reorganizations, reverse
stock splits and recapitalizations. Moreover, as part of its bank analysis
business, Alex Sheshunoff & Co. is continually involved in rendering valuation
opinions of financial institutions nationwide. Alex Sheshunoff & Co. performs in
excess of 350 fair market value determinations of banking organizations
annually.
In rendering a fairness opinion, Alex Sheshunoff & Co. considers, among
other factors, the nature and history of the bank or bank holding company, the
economic outlook in the respective market area and for the banking industry in
general, the book value and financial condition of the bank and its future
earnings and dividend paying capacities, the size of the block to be acquired,
the prices paid for the shares of comparable banks, and the financial impact of
the transaction on the bank.
The Committee selected Alex Sheshunoff & Co. based upon the firm's
experience in rendering fairness opinions and the firm's reputation as an
industry leader in bank and financial institution valuations.
There has been no material relationship between Alex Sheshunoff & Co.
and the Company or its affiliate JI, during the past two years, other than the
Company retaining Alex Sheshunoff & Co. to render a fairness opinion relating to
the Transaction.
The consideration paid to Alex Sheshunoff & Co. for the fairness
opinion was not determined by the Company or its affiliate JI. Rather, Alex
Sheshunoff & Co. quoted and will receive a fee of $7,500.00 for its services in
the preparation of the fairness opinion and related services. The consideration
to be paid to the Shareholders for shares of Company Common Stock was determined
by the Board of Directors of the Company, as recommended by the Committee, based
on the analysis set forth in the opinion, and the factors described in Item 8.
Alex Sheshunoff & Co.'s fairness opinion concludes that based upon its
analysis, the firm believes that as of August 30, 1996,
14
<PAGE>
the fair market value of a minority interest in the outstanding Company Common
Stock would be $0.60 per share.
In reaching this conclusion of value, Alex Sheshunoff & Co. conducted
an analysis of: (1) the Company's operating performance and financial condition
for the three years ended December 31, 1995 and the six months ended June 30,
1996; (2) the projected income, dividends, asset growth and book value of the
Company for the five years ending December 31, 2000; (3) the market for the
Company Common Stock; (4) the competitive environment in which the Company
operates; (5) the ownership composition of the Company; and (6) the general
economic conditions impacting the Company's operations and business prospects.
In analyzing the Company, Alex Sheshunoff & Co. noted that the only
material operations of the Company is being a holding company for the Bank and
therefore analyzed the Bank's performance relative to its Arizona based peer
group banks. The firm then analyzed the market for bank holding company stocks
in general.
In determining the value of the Company Common Stock, Alex Sheshunoff &
Co. utilized the market approach and the net present value approach to
valuation. The firm valued the Company as a going-concern under its current
business strategy and did not value the minority shares based on a liquidation
or other restructuring of the Company. The firm found that the market approach
to value (defined as the amount at which the minority shares would change hands
between a willing seller and a willing buyer when neither is acting under
compulsion and when both have reasonable knowledge of the relevant facts)
yielded a value at 1.20 times book value of the Company or $1.00 per share and
20.00 times projected 1996 earnings or $1.34 per share. However, the firm
determined that a discount should be applied to this value because of the lack
of marketability of the Company Common Stock and the ownership structure of the
Company. The only recent trades of Company Common Stock were the purchase of
21,770 shares by the Company's affiliate JI, at $1.00 per share, which was
attributed little weight by Alex Sheshunoff & Co. because it was not an arms
length transaction. Therefore, after applying the marketability discount, the
market value approach produced a value of $0.60 per share according to Alex
Sheshunoff & Co.
Alex Sheshunoff & Co. also examined the net present value approach
which discounts the anticipated cash flow from an investment in Company Common
Stock, considering projected dividends and the future residual value of the
stock. The firm then applied a 20% discount rate which it considered
appropriate, which produced an estimated net present value of Company Common
Stock of $0.55 per share as measured by the anticipated dividends and $0.57 per
share by discounting projected earnings.
15
<PAGE>
Alex Sheshunoff & Co. then performed a reconciliation of value of the
four approaches to value:
Market Value Approach $0.60
Recent Trades of Minority Stock $1.00
Net Present Value of Dividends $0.55
Net Present Value of Earnings $0.57
and stated that in its opinion, the value of the minority shares of the Company
Common Stock could range in value from $0.55 per share to $0.84 or June 30, 1996
book value. However, Alex Sheshunoff & Co. believed that the market value
approach was the most useful in valuing an interest in the Company's minority
shares and determined a value for the minority shares of Company Common Stock of
$0.60 per share.
The only instructions provided by the Company or its affiliate JI, to
Alex Sheshunoff & Co. relating to its fairness opinion was to estimate the fair
market value of approximately 492,885 shares of outstanding Company Common Stock
owned by minority shareholders as of August 30, 1996.
There were no limitations imposed on Alex Sheshunoff & Co. by the
Company or its affiliate JI, relating to the firm's fairness opinion or the
scope of its investigation.
The fairness opinion of Alex Sheshunoff & Co. is attached to this
Schedule as Exhibit "B". Additionally. the fairness opinion is available for
inspection and copying at the principal executive offices of the Company located
at 2425 East Camelback Road, Phoenix, Arizona, 85016 during the Company's
regular business hours by any interested Shareholder or his or her
representative who has been so designated in writing. A copy of the fairness
opinion will be transmitted by the Company to any interested Shareholder or his
or her representative who has been so designated in writing upon written request
and at the expense of the requesting Shareholder.
Item 10. Interest in Securities of the Issuer
The following table sets forth information as of July 31, 1996, (the
most recent practicable date) concerning shares of Company Common Stock
beneficially owned by each Director of the Company and the Bank, by all
Executive Officers and Directors as a group, and by each stockholder known by
the Company to be the beneficial owner of more than five percent (5%) of any
class of the Company's voting securities, as required by 17 CFR 229.403.
16
<PAGE>
Title of Name of Amount and Percent of
Class Beneficial Owner Nature of Class
- ----- ---------------- Beneficial -----
Ownership
---------
Common Richard A. Hansen 0 *
Common William G. Ridenour 7,900 *
Common Lawrence L. Stuckey 12,100 *
Common Philip B. Bell 5,000 *
Common John L. Heath 10,500 *
Common Mark C. Behrens 0 *
Common Carrie Louis-Hulburd 2,000 *
Common L. Robert Peterson 2,000 *
Common Kimberley A. Gill-Rimsza 2,000 *
------ -
Executive Officer and Directors as
a group 41,500 *
====== =
Common Johnson International, Inc. 16,029,645 97%
4041 North Main Street
Racine, WI 53402
- ----------------------
* The percentage of shares beneficially owned by each Director individually, and
all Directors and Executive Officers as a group, does not exceed one percent of
the issued and outstanding shares of the Company.
There have been no transactions in Company Common Stock effected during
the past 60 days by the Company or any of the persons or entities described in
the preceding paragraph.
Item 11. Contracts, Arrangements or Understandings With Respect to the Issuer's
Securities
There is no contract, arrangement, understanding or relationship in
connection with the Transaction between the Company or any other person or
entity with respect to shares of Company Common Stock or concerning the voting
of the Company Common Stock except, the Company has been advised that all
persons named in Item 10 above presently intend to vote all shares of Company
Common Stock held by these persons or entities in favor of the Transaction.
Collectively, the persons and entities named in section 10 above own or control
approximately 97% of the issued and outstanding shares of Company Common Stock.
Therefore, if these persons or entities vote their shares of Company Common
Stock in favor of the Transaction, approval of the Transaction is assured.
17
<PAGE>
Item 12. Present Intention and Recommendation of Certain Persons With Regard to
the Transaction
After reasonable inquiry, the Company believes that it is the present
intention of executive officers and directors of the Company and JI, an
affiliate of the Company and Joint filer of this Schedule, to vote all shares of
the Company Common Stock held by these persons or entities in favor of the
Transaction.
Since all executive officers and directors of the Company hold less
than 125,000 shares of Company Common Stock, the fractional shares held by these
persons will be purchased by the Company as part of the reverse stock split.
This will result in the remaining executive officers and directors of the
Company no longer being Company Shareholders after consummation of the
Transaction.
Although the Company will become wholly-owned by JI, in accordance with
12 U.S.C. Section 72, directors of the Company must own shares having an
aggregate par value of not less than $1,000.00 or an equivalent interest as
determined by the Comptroller of the Currency. Accordingly, after consummation
of the Transaction, and solely to comply with this statutory requirement,
Directors of the Company each will receive one share of Company Common Stock to
hold during his or her term. After the expiration of the Director's term, the
Director will transfer the share back to JI. The Directors will not be otherwise
permitted to sell, transfer or encumber their shares.
The Board of Directors of the Company has unanimously approved the
Transaction and recommends approval of the Transaction to the Company's
Shareholders.
Item 13. Other Provisions of the Transaction
The Transaction triggers statutory dissenters' rights of appraisal for
the Company's Shareholders pursuant to the Company's Second Amended and Restated
Articles of Incorporation and under Arizona corporate law. Arizona Revised
Statutes (A. R. S.) section 10-1301 et. seq. provides that shareholders who
oppose certain actions taken by a company, as approved by the shareholders, with
certain rights to require the company to purchase the dissenter's shares of the
company's stock. Under Arizona law, Shareholders who oppose the reverse stock
split transaction, have certain specific rights to require the Company to pay to
the Shareholder, the "fair value" of their shares of Company Common Stock,
provided certain criteria are met by the dissenting Shareholder and the
Transaction is approved.
A Shareholder is entitled to dissent from and obtain payment of the
fair value (as that term is defined in the Arizona Revised Statutes) of the
Shareholder's shares if the Shareholder is a Shareholder of record of the
Company on the Record Date set by the
18
<PAGE>
Company __________, delivers to the Company before the vote is taken, written
notice of the Shareholder's intent to demand payment for the Shareholder's
shares if the proposed action is effectuated, and does not vote the shares in
favor of the Amendment to the Second Amended and Restated Articles of
Incorporation which, upon adoption, will effect the reverse stock split.
No later that ten (10) days after approval of the Transaction, the
Company shall deliver a written dissenters' notice to all Shareholders who are
entitled to dissent. The dissenters' notice shall: 1) state where the payment
demand must be sent and where and when certificates for certificated shares of
Company Common Stock shall be deposited; 2) inform holders of uncertificated
shares to what extent transfer of the shares will be restricted after the
payment demand is received; 3) supply a form for demanding payment that includes
the date of the first announcement to Shareholders of the terms of the reverse
stock split transaction requiring that the person asserting dissenters' rights
certify whether of not the person acquired beneficial ownership of the shares
before that date; 4) set a date by which the Company must receive the payment
demand, (which date shall be a least thirty but not more that sixty days after
the date the notice to dissenters is delivered); and 5) be accompanied by a copy
of A.R.S. section 10-1301 et. seq.
Upon receipt of the notice to dissenters, dissenting Shareholders shall
demand payment, certify whether the Shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
and deposit the Shareholder's certificates of Company Common Stock with the
Company in accordance with the terms of the dissenters' notice. A Shareholder
who does not demand payment or does not deposit the Shareholder's certificates,
each by the date set in the dissenters' notice is not entitled to payment for
the Shareholder's shares of Company Common Stock.
As soon as the Transaction is completed, the Company shall pay each
valid dissenter, the amount the Company estimates to be the fair value of the
dissenter's shares plus accrued interest. At the time of payment, the Company
will provide to dissenting Shareholders: 1) the Company's balance sheet as of
the end of the Company's fiscal year, an income statement for that year, a
statement of changes in shareholder's equity for that year and the latest
available interim financial statements, if any; 2) a statement of the Company's
estimate of the fair value of the shares; 3) an explanation of how the interest
was calculated; 4) a statement of the dissenters' right to demand payment if the
Shareholder is dissatisfied with the payment or offer, and; 5) a copy of A.R.S.
section 10-1301.
A dissenting Shareholder may notify the Company in writing of the
dissenters' own estimate of the fair value of the dissenter's shares and the
amount of interest due and either demand payment of
19
<PAGE>
the dissenter's estimate, (less any payment made by the Company) or reject the
Company's offer and demand payment of the fair value of the dissenter's shares
and interest due, if either: 1) the dissenter believes that the amount paid by
or offered by the Company is less than the fair value of the dissenter's shares
or that the interest is incorrectly calculated; or 2) the Company fails to make
payment within sixty (60) days after the date set for demanding payment or fails
to take the proposed action and does not return the deposited certificates
within sixty (60) days. A dissenting Shareholder waives the right to demand
payment unless the dissenter notifies the Company of the dissenter's demand in
writing within thirty (30) days after the Company makes or offers payment for
the dissenter's shares.
If a demand for payment by a dissenting Shareholder remains unsettled,
the Company shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the Superior Court of Maricopa County,
Arizona, to determine the fair value of the dissenters shares of Company Common
Stock and accrued interest. If the Company fails to commence the action within
sixty days, the Company shall pay each dissenter whose demand remains unsettled
the amount demanded.
All dissenters, whether or not residents of Arizona, whose demands
remain unsettled shall be parties to the proceeding as an action against their
shares of Company Common Stock. All parties shall be served with a copy of the
petition. Non-residents of Arizona may be served by certified mail or by
publication as allowed by the Arizona rules of civil procedure. In any such
proceeding, there is no right to trial by jury. The superior court may appoint a
master to have the powers and authorities as are conferred on masters by law, by
the Arizona rules of civil procedure or by the order of appointment. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
Each dissenter made a party to the proceeding is entitled to judgment
either: 1) for the amount, if any, by which the superior court finds the fair
value of his or her shares plus interest exceeds the amount paid by the Company,
or; 2) for the fair value plus accrued interest of the dissenter's
after-acquired shares for which the Company elected to withhold payment.
In any such appraisal proceeding, the superior court shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of any master appointed by the court. The court shall assess the costs against
the Company, except that the court shall assess costs against all or some of the
dissenters to the extent the court finds that the fair value does not materially
exceed the amount offered by the Company or that the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment.
20
<PAGE>
The superior court may also assess the fees and expenses of attorneys
and experts for the respective parties in amounts that the court finds equitable
either: 1) against the Company and in favor of any or all dissenters if the
court finds that the Company did not substantially comply with Arizona law; 2)
against the dissenters and in favor of the Company if the court finds that the
fair value does not materially exceed that amount offered by the Company, or; 3)
against either the Company or a dissenter if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith.
If the superior court finds that the services of an attorney for any
dissenter were of substantial benefit to other dissenters similarly situated and
that the fees for those services should not be assessed against the Company, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who benefitted.
ARIZONA REVISED STATUTES SECTION 10-1301 ET. SEQ. SETS FORTH IN DETAIL
THE MECHANICS OF DISSENTERS' RIGHTS. SHAREHOLDERS ARE ADVISED TO REVIEW THE
ARIZONA REVISED STATUTES WITH COUNSEL IF THEY INTEND TO PURSUE THEIR RIGHTS OF
DISSENT AND APPRAISAL.
No arrangements have been made by the Company or any affiliate of the
Company in relation to the Transaction to allow unaffiliated Shareholders to
obtain access to the files of the Company or its affiliate other than any such
rights granted to Shareholders under Arizona law. No provisions have been made
by the Company or any affiliate to obtain counsel or appraisal services at the
expense of the Company for the benefit of Shareholders relating to the reverse
stock split transaction.
Item 14. Financial Information
21
<PAGE>
[ARTHUR ANDERSEN LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Biltmore Bank Corp.:
We have audited the accompanying consolidated balance sheets of Biltmore Bank
Corp. and subsidiary (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1995, 1994 and 1993. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biltmore Bank Corp.
and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995, 1994, and
1993, in conformity with generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investments in debt and equity securities.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
February 23, 1996
F-2
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
<TABLE>
<CAPTION>
ASSETS
------
1995 1994
------------- -------------
<S> <C> <C>
CASH AND DUE FROM BANKS (Note 3) $ 6,336,967 $ 7,932,020
FEDERAL FUNDS SOLD -- 5,628,000
------------- -------------
Total cash and cash equivalents 6,336,967 13,560,020
INVESTMENT SECURITIES AVAILABLE FOR SALE (Notes 2 and 4) 36,808,353 36,442,647
LOANS, less allowance for credit losses of $2,362,310 and
$2,422,513 in 1995 and 1994, respectively (Note 5) 89,152,249 86,862,577
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS 1,936,204 2,697,702
PREMISES AND EQUIPMENT, net (Notes 6 and 9) 1,616,411 1,605,453
OTHER REAL ESTATE OWNED (Note 2) 103,015 --
INTANGIBLE ASSETS (Notes 1 and 12) 1,562,662 1,676,594
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
LIABILITIES AND SHAREHOLDERS'
-----------------------------
EQUITY
DEPOSITS:
Demand-
Noninterest-bearing $ 23,984,474 $ 27,261,963
Interest-bearing 28,098,433 39,968,012
Time certificates of deposit, $100,000 and over (Note 7) 13,689,910 14,089,586
Other time certificates and individual retirement accounts 30,266,899 29,076,926
Savings 20,317,051 18,831,535
------------- -------------
116,356,767 129,228,022
ACCRUED INTEREST PAYABLE 199,316 218,540
SHORT TERM BORROWINGS (Note 8) 6,340,500 603,000
OTHER LIABILITIES 848,600 949,103
------------- -------------
123,745,183 130,998,665
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13) -- --
SHAREHOLDERS' EQUITY (Notes 1, 10 and 11):
Preferred stock, no par value:
Authorized and unissued, 10,000,000 shares -- --
Common stock, no par value (stated value $.50)
Authorized, 25,000,000 shares; issued and outstanding,
16,522,530 shares in 1995 and 1994 8,261,265 8,261,265
Additional paid-in capital 4,417,304 4,415,407
Retained earnings 930,377 215,096
Net unrealized gain (loss) on securities, net of tax 161,732 (1,045,440)
------------- -------------
Total shareholders' equity 13,770,678 11,846,328
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,888,928 $ 6,229,328 $ 4,282,422
Other interest income (Note 14) 2,281,255 2,254,621 1,981,449
------------ ------------ ------------
Total interest income 10,170,183 8,483,949 6,263,871
INTEREST EXPENSE (Note 15) 4,399,030 3,369,868 3,284,495
------------ ------------ ------------
Net interest income 5,771,153 5,114,081 2,979,376
PROVISION FOR CREDIT LOSSES (Note 5) (98,868) (75,632) (218,573)
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 5,870,021 5,189,713 3,197,949
------------ ------------ ------------
CUSTOMER SERVICE FEES 506,796 458,651 338,738
NET GAIN ON SALE OF SECURITIES 28,261 10,715 6,607
INCOME FROM "LINK" BROKERAGE OFFICE 113,748 126,207 56,824
TRUST REVENUES 189,746 113,892 51,204
NET GAIN ON SALE OF OTHER REAL ESTATE OWNED -- -- 56,150
------------ ------------ ------------
838,551 709,465 509,523
------------ ------------ ------------
OPERATING EXPENSES:
Salaries and wages, net of deferred loan
origination costs of $137,630, $143,409 and
$89,869 at December 31, 1995, 1994 and 1993 2,229,621 1,681,001 1,105,838
Employee benefits 423,424 357,766 342,885
Occupancy expense 649,738 585,077 359,500
Equipment expense 354,970 299,044 181,433
Business development expense 130,302 102,275 38,450
FDIC deposit insurance 143,115 284,866 218,005
Management fee expense (Note 20) 428,111 275,520 175,783
Amortization of intangibles 172,566 128,957 27,609
Data processing 314,371 317,516 168,431
Supplies and printing 180,160 185,055 96,817
Other expenses 711,824 544,159 243,467
------------ ------------ ------------
5,738,202 4,761,236 2,958,218
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE,
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 970,370 1,137,942 749,254
(PROVISION FOR) BENEFIT FROM INCOME TAXES (255,089) 219,433 --
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 715,281 1,357,375 749,254
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 16) -- -- 700,000
------------ ------------ ------------
NET INCOME $ 715,281 $ 1,357,375 $ 1,449,254
============ ============ ============
NET INCOME PER COMMON SHARE:
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .04 $ .08 $ .05
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- .04
------------ ------------ ------------
NET INCOME PER COMMON SHARE $ .04 $ .08 $ .09
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 16,522,530 16,522,530 16,522,530
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
(NOTES 11 and 12)
<TABLE>
<CAPTION>
Net Unrealized
Common Stock Additional Retained Gains (Losses)
------------------------- Paid-in Earnings on Securities
Shares Amount Capital (Deficit) Net of Tax
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 16,522,530 $ 8,261,265 $ 4,412,078 ($2,591,533) $ --
Net Income -- -- -- 1,449,254 --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993 16,522,530 $ 8,261,265 $ 4,412,078 ($1,142,279) --
Adoption of SFAS 115,
"Accounting for Certain
Investments in Debt and
Equity Securities" -- -- -- -- 272,212
Net Income -- -- -- 1,357,375 --
Net Change in Unrealized
Gains (Losses) on
Securities, net
of Tax -- -- -- -- (1,317,652)
Other -- -- 3,329 -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 16,522,530 $ 8,261,265 $ 4,415,407 $ 215,096 ($1,045,440)
Net Income -- -- -- 715,281 --
Net Change in Unrealized
Gains (Losses) on
Securities, net
of Tax -- -- -- -- 1,207,172
Other -- -- 1,897 -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 16,522,530 $ 8,261,265 $ 4,417,304 $ 930,377 $ 161,732
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 715,281 $ 1,357,375 $ 1,449,254
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses (98,868) (75,632) (218,573)
Depreciation and amortization 361,600 274,336 98,472
Net amortization and accretion of investment
securities premiums and discounts 54,040 154,621 163,991
Net gain on sale of other real estate owned -- -- (56,150)
Net gains on sale of securities (28,261) (10,715) (6,607)
Net loss (gain) on sale of fixed assets 489 6,112 (8,452)
Recognition of preacquisition net operating
loss carryforward -- 257,173 95,000
Decrease (increase) in accrued interest
receivable and other assets 123,012 (498,570) (209,987)
(Decrease) increase in accrued interest payable
and other liabilities (125,709) (123,717) (95,225)
Cumulative effect of change in accounting
principle -- -- (700,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,001,584 1,340,983 511,723
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities 9,448,103 2,980,313 1,005,625
Proceeds from maturities of investment securities 7,000,000 15,300,000 12,050,000
Purchase of investment securities (15,040,700) (17,045,301) (19,456,854)
Net increase in loans (2,190,804) (4,876,134) (485,356)
Purchase of bank premises and equipment (321,810) (378,501) (127,566)
Proceeds from sale of bank premises and equipment 8,329 -- 12,624
Proceeds from sales of other real estate owned -- -- 509,500
Cash and cash equivalents of banks acquired,
net of payment for purchase -- 6,462,168 --
------------ ------------ ------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,096,882) 2,442,545 (6,492,027)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings (13,661,552) 2,553,678 12,334,463
Net increase (decrease) in time certificates
of deposit 790,297 (133,669) (5,548,283)
Net increase (decrease) in securities sold under
agreement to repurchase 5,743,500 603,000 (300,000)
------------ ------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (7,127,755) 3,023,009 6,486,180
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,223,053) 6,806,537 505,876
CASH AND CASH EQUIVALENTS, beginning of year 13,560,020 6,753,483 6,247,607
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 6,336,967 $ 13,560,020 $ 6,753,483
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,399,030 $ 3,379,954 $ 3,373,013
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BILTMORE BANK CORP.
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995, 1994 AND 1993
--------------------------------
(1) ORGANIZATION:
------------
Biltmore Bank Corp. (the Company), the holding company for Biltmore Investors
Bank (the Bank) (formerly Biltmore National Bank), was incorporated in Arizona
on March 19, 1984. On August 22, 1985, the Company acquired all of the issued
stock of the Bank and the Bank commenced banking operations. In 1989, Johnson
International Inc. (JI), a Wisconsin-based company owned primarily by Samuel C.
Johnson and family members, acquired approximately 76% of the Company's
outstanding common stock. As a result, the Company became a subsidiary of JI. In
a November 26, 1990 stock offering, JI acquired shares which increased its
ownership percentage to approximately 93%.
As per the 1989 Stock Purchase and Investment Agreement, based primarily upon
the level of loan losses from the time of its acquisition in 1989 through
December 31, 1991, JI was entitled to and did receive 7,570,896 additional
shares of stock in 1993. This transaction, combined with purchases of shares of
stock from other shareholders, increased JI's ownership to approximately 97%.
Since JI's effective ownership exceeded 95%, the goodwill recorded by JI at the
time of its acquisition of the Company was required to be "pushed down" to the
Company. Therefore, goodwill was recorded on the Company's Balance Sheet as of
January 1, 1992. Additional disclosure of this transaction is included in
footnotes (11) and (12).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank. All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
The consolidated financial statements of the Company are prepared in accordance
with generally accepted accounting principles. The following is a description of
the Company's significant accounting policies.
Estimates-
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure or
contingent assets and
F-7
<PAGE>
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
-------------------------
Cash and cash equivalents, for purposes of reporting cash flows, include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Investment Securities-
---------------------
In May 1993, the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115). SFAS 115 requires, among
other things, that securities classified as available for sale be carried at
market value, however, market value adjustments and the related income tax
effects, are excluded from earnings and reported separately as a component of
stockholders' equity. This new standard was adopted by the Company on January 1,
1994. Prior to this, investment securities available for sale were carried at
the lower of cost or market value.
Securities, when purchased, are designated as investment securities held to
maturity or investment securities available for sale and remain in that category
until they are sold or mature. The specific identification method is used in
determining the cost of securities sold. The Company does not engage in the
trading of securities, and does not hold any securities classified as held to
maturity.
Investment securities available for sale are carried at market value, determined
on an aggregate basis. While the Company has no current intention to sell these
securities, they may not be held to maturity.
Loans-
-----
Loans are reported at the principal amount outstanding, net of deferred loan
origination fees and costs. Interest income on loans is credited to operating
income as earned based on the principal amount outstanding. Accrual of interest
is suspended on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
Loan Fees-
---------
Loan origination fees and certain related direct loan origination costs are
offset and the resulting net amount is deferred and
F-8
<PAGE>
amortized over the life of the related loans as an adjustment to the yield of
such loans.
In addition, commitment fees are offset against related loans and amortized as a
yield adjustment if the commitment is exercised or, if the commitment expires
unexercised, it is recognized upon expiration of the commitment.
Allowance for Credit Losses-
---------------------------
The loan portfolio and other extensions of credit are regularly reviewed to
determine the adequacy of the allowance for credit losses which is established
through a provision for credit losses charged to expense. The impact of economic
conditions on the credit worthiness of borrowers is given major consideration in
determining the adequacy of the reserve.
A charge against the allowance for credit losses is made when management
believes that the collectability of the loan principal is unlikely. Management
believes the allowance is adequate to absorb losses inherent in existing loans
and commitments to extend credit, based on evaluations of the collectability and
prior loss experience of loans and commitments to extend credit. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments and current and anticipated economic conditions that may
affect the borrower's ability to pay. Ultimate losses may vary from current
estimates and the amount of the provision, which is a current expense, may be
either greater or less than actual net charge-offs. Recoveries of loans
previously charged off are added back to the allowance.
Premises and Equipment-
----------------------
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to expense over the estimated useful life
of the asset computed on the straight-line method. Leasehold improvements are
amortized over the life of the lease, including optional renewal periods, or the
estimated useful life of the asset, whichever is shorter.
Other Real Estate Owned-
-----------------------
Other real estate owned, which represents real estate acquired in settlement of
loans, is initially recorded at the lower of the recorded investment in the loan
or the fair value of the real estate.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired by a charge to the allowance for
credit losses, if necessary. Any subsequent write downs to reflect declines, if
any, in net
F-9
<PAGE>
realizable value of the property are charged to expense.
Net Income Per Common Share-
---------------------------
Net income per common share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the year. These
shares give consideration to outstanding stock options when such effect is
dilutive.
Reclassifications-
-----------------
Certain reclassifications have been made to conform to the classifications used
in the 1995 financial statements.
(3) CASH AND DUE FROM BANKS:
-----------------------
Cash includes deposits with the Federal Reserve Bank of $758,648 and $343,000
maintained to satisfy federal regulatory requirements at December 31, 1995 and
1994, respectively.
F-10
<PAGE>
(4) INVESTMENT SECURITIES:
---------------------
The amortized cost and market value of investment securities available for sale
as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States Treasury
securities $19,858,248 $20,054,063 $20,071,091 $19,198,458
Obligations of United States
government agencies 15,713,723 15,762,224 17,001,257 16,297,264
Corporate bonds 500,000 502,350 500,000 492,625
Certificate of deposit 100,000 98,866 100,000 100,000
Federal Reserve Bank stock 390,850 390,850 354,300 354,300
----------- ----------- ----------- -----------
$36,562,821 $36,808,353 $38,026,648 $36,442,647
=========== =========== =========== ===========
</TABLE>
At December 31, 1995, and 1994 the Company's investment portfolio included
unrealized gains of approximately $347,000 and $5,000 respectively, and
unrealized losses of approximately $101,000 and $1,589,000 respectively.
Gross realized gains and losses amounted to $34,527 and $6,266 in 1995, and
$27,249 and $16,534 in 1994, and $6,607 and $0 in 1993, respectively.
The following table presents the amortized cost and carrying amounts by maturity
distribution of the investment portfolio for investments with a stated maturity
date:
<TABLE>
<CAPTION>
Maturity Distribution at December 31, 1995
Amortized Amortized Amortized
Cost Cost Cost
Within Market One to Market Over Market
One Year Value Five Years Value Five Years Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States
Treasury
securities $ 2,014,602 $ 2,017,814 $17,843,646 $18,036,249 $ -- $ --
Obligations of
United States
government
agencies 2,985,311 2,990,000 11,045,357 11,105,274 1,683,055 1,666,950
Corporate bonds 500,000 502,350 -- -- -- --
Certificate of
deposit 100,000 98,866 -- -- -- --
Federal Reserve
Bank Stock -- -- -- -- 390,850 390,850
----------- ----------- ----------- ----------- ----------- -----------
$ 5,599,913 $ 5,609,030 $28,889,003 $29,141,523 $ 2,073,905 $ 2,057,800
=========== =========== =========== =========== =========== ===========
</TABLE>
F-11
<PAGE>
The Company had $6,000,000 available under federal funds lines of credit with
correspondent banks as of both December 31, 1995 and 1994. The Company has
assigned a United States Treasury security with a carrying value of $1,982,500
to secure a portion of one of the federal funds lines of credit. There were no
borrowings under this line at December 31, 1995 or 1994.
The Company has a Letter of Credit Line of $750,000 available with a
correspondent bank as of December 31, 1995 and 1994. There were no borrowings
under this line.
At December 31, 1995, the Company had assigned a United States Treasury security
with a carrying value of $1,013,750 to secure a Treasury, Tax and Loan account
with the Federal Reserve Bank. Also at December 31, 1995, the Company had
assigned a United States Treasury Security with a carrying value of $1,006,562
to secure trust account deposits.
(5) LOANS:
-----
Loans, which all arise from domestic operations, are summarized as of December
31 as follows:
1995 1994
------------ ------------
Commercial and industrial $ 45,379,732 $ 42,243,407
Real estate - construction 2,158,172 1,134,611
Consumer loans 3,313,321 4,049,441
Residential mortgage 40,896,989 42,082,311
------------ ------------
91,748,214 89,509,770
Less - Allowance for credit losses (2,362,310) (2,422,513)
Deferred loan origination fees (233,655) (224,680)
------------ ------------
$ 89,152,249 $ 86,862,577
============ ============
At December 31, 1995 and 1994, the Company had outstanding $624,704 and
$244,090, respectively, of loans made to directors, executive officers and
related parties. All such loans were made in the ordinary course of business.
The activity in related party loans for the years ended December 31 is
summarized as follows:
1995 1994
--------- ---------
Balance, beginning of year $ 244,090 $ 275,577
Loan disbursements 521,639 166,662
Loan payments received (141,025) (198,149)
--------- ---------
Balance, end of year $ 624,704 $ 244,090
========= =========
F-12
<PAGE>
The Company has evaluated its loan portfolio as of December 31, 1995 in
accordance with its normal practices and has given consideration to the factors
creating potential credit losses. While management believes that the allowance
for credit losses provides for all currently anticipated problems, management
recognizes that the Company may incur additional losses which cannot currently
be estimated, but which may be substantial.
Changes in the allowance for credit losses for the years ended December 31 were
as follows:
1995 1994 1993
----------- ----------- -----------
Balance, beginning of year $ 2,422,513 $ 1,776,129 $ 1,913,793
Reserve acquired in acquisition -- 806,141 --
Provision credited to operations (98,868) (75,632) (218,573)
Loans charged off (66,513) (141,822) (21,157)
Recoveries 105,178 57,697 102,066
----------- ----------- -----------
Balance, end of year $ 2,362,310 $ 2,422,513 $ 1,776,129
=========== =========== ===========
In May 1993 and October 1994, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118, an amendment to SFAS No. 114
(collectively "SFAS 114"). These new standards require that a loan's value be
measured, and if appropriate a valuation reserve established, when it has been
determined that the loan is impaired and loss is probable. At December 31, 1995,
the Corporation's recorded investment in impaired loans is approximately
$110,000. Management has determined that the entire amount of impaired loans
will be excluded from evaluation under SFAS 114 as these are smaller-balance
homogeneous loans. This amount is net of previous direct writedowns and
applications of cash interest payments against the loan balance outstanding.
The average recorded investment in total impaired loans and leases for the year
ended December 31, 1995, was not material.
Interest payments received on impaired loans and leases are recorded as interest
income unless collection of the remaining recorded investment is doubtful at
which time payments received are recorded as reductions of principal. During
1995, interest income recognized on total impaired loans was not material. The
gross income that would have been recognized had such loans and leases been
performing in accordance with their original terms would have not been material
for the same period.
At December 31, 1995, there were no commitments to lend additional funds to
borrowers whose loans are classified as nonaccrual or renegotiated.
Substantially all the loans contained in the portfolio are to individuals and
businesses located in the Phoenix metropolitan area.
F-13
<PAGE>
(6) PREMISES AND EQUIPMENT:
----------------------
Major classifications of premises and equipment as of December 31 were as
follows:
1995 1994
----------- -----------
Land $ 400,000 $ 400,000
Building 193,299 65,000
Equipment and furniture 1,288,483 940,248
Leasehold improvements 762,471 895,950
----------- -----------
2,644,253 2,301,198
Less- Accumulated depreciation and
amortization (1,027,842) (695,745)
----------- -----------
$ 1,616,411 $ 1,605,453
=========== ===========
(7) DEPOSITS:
--------
Time certificates of deposit with balances of $100,000 and over and their
remaining maturities as of December 31 were as follows:
1995 1994
----------- -----------
Less than three months $ 3,497,647 $ 2,086,262
Three to twelve months 7,326,066 4,609,937
One year to five years 2,866,197 7,393,387
Over five years -- --
----------- -----------
$13,689,910 $14,089,586
=========== ===========
(8) SHORT TERM BORROWINGS:
---------------------
Short term borrowings at December 31, were as follows:
1995 1994
---------- ----------
Federal funds purchased $1,200,000 $ --
Securities sold under agreement to
repurchase 5,140,500 603,000
---------- ----------
$6,340,500 $ 603,000
========== ==========
As of December 31, 1995, securities sold under agreement to repurchase of
$5,000,000 were with Heritage Bank and Trust, Racine, WI, a Johnson
International Company.
F-14
<PAGE>
(9) COMMITMENTS AND CONTINGENCIES:
-----------------------------
In 1988, the Company signed a ten-year lease agreement to lease approximately
10,300 square feet for its current banking offices. The lease was subsequently
amended to commence on October 15, 1989 and terminate on June 30, 1999. The
Company assigned the lease to the Bank effective December 29, 1989. The lease
agreement requires rental payments to be escalated in the seventh year of the
lease by a minimum of 20% and a maximum of 30% as determined by a formula based
upon the consumer price index, and then to remain constant through the remaining
term of the lease. Additionally, the lease requires the Bank to pay an allocated
percentage of the direct expenses of the building and project in excess of
specified levels. The lease agreement provides renewal options for two five-year
periods at fair-market rent at the renewal date.
On February 2, 1994, Biltmore Investors Bank acquired substantially all the
assets and liabilities of American National Bank (See note 18). As a result of
the acquisition, Biltmore Investors Bank signed a five year lease for a branch
location in Scottsdale, Arizona. The lease agreement provides renewal options
for two five-year periods.
Total rental expense under the aforementioned leases for the years ended
December 31, 1995, 1994 and 1993 was approximately $573,000, $522,000, and
$314,000, respectively. Future minimum rental payments required under the lease
agreements at December 31, 1995 were as follows:
Year Ending
December 31,
------------
1996 616,116
1997 616,116
1998 618,223
1999 210,636
Thereafter --
----------
$2,061,091
==========
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are not reflected in the
accompanying consolidated financial statements. These commitments and contingent
liabilities include various guarantees and commitments to extend credit arising
from normal business activities. At December 31, 1995 and 1994, commitments to
extend credit under loan agreements, net of participations sold, aggregated
approximately $28,770,000 and $24,745,000, respectively. Commitments to extend
credit under letter of credit agreements, net of participations sold, aggregated
approximately $567,000 and $495,000 at December 31, 1995 and 1994, respectively.
The Bank
F-15
<PAGE>
does not anticipate any material loss as a result of these transactions.
(10) STOCK OPTIONS:
-------------
The Company has adopted four stock option plans, the terms of which are
summarized as follows:
The 1984 Nonstatutory Stock Option Plan (the "Nonstatutory Plan")
provides for the issuance of a maximum of 20,000 options for the
purchase of one share of common stock each. All full-time salaried
officers, key employees and directors are eligible to receive options
under the Nonstatutory Plan. The option price is $10 per share. Options
are exercisable in 25% increments each year subsequent to the first
anniversary of the date of grant and expire six years from the date of
grant.
The Incentive Stock Option Plan (the "Incentive Plan") provides for the
issuance of a maximum of 40,000 options for the purchase of one share of
common stock each. The exercise price of the option may not be less than
the fair market value of the stock at the date of grant. Options may be
granted under the Incentive Plan to any director, officer or employee of
the Company or the Bank. Options granted under the Incentive Plan expire
ten years from date of grant and are exercisable at the option of the
holder. All options under this plan were forfeited in 1994.
The Founding Directors Nonstatutory Stock Option Plan (the "Founding
Directors Plan") provides for the issuance of a maximum of 60,000
options for the purchase of one share of common stock each. The six
founding directors are the only participants in the Founding Directors
Plan. Each founding director has been granted options to purchase 10,000
shares of common stock at a purchase price of $12 per share. All options
under this plan expired in 1994.
On September 26, 1989, the Company executed an amendment to the Stock
Purchase Agreement with JI (see Note 10) which included an agreement to
issue an additional $150,000 in options to a new employee of the Bank,
at the per share investment price of the JI transaction. The option plan
was approved in 1990 as the 1990 Incentive Stock Option Plan. The JI
transaction closed on December 29, 1989 at $2.57 per share which equated
to 58,366 shares under the option agreement. As of December 31, 1995,
390 of the options had been granted and exercised.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") was issued in October 1995 by the
Financial Accounting Standards Board and is required to be adopted in
1996. FAS 123 establishes financial accounting and reporting standards
for
F-16
<PAGE>
stock-based employee compensation. Currently the Company does not
recognize compensation cost on options issued under Accounting
Principal Board Opinion No. 25 "Accounting For Stock Issued to
Employees" ("APB 25") as the exercise price is the same as or higher
than the fair market value at time of issuance. FAS 123 permits the
Company to continue to follow this treatment as long as pro-forma
disclosures of net income and earnings per share are presented as if
the fair value based method of accounting defined in FAS 123 had been
applied. The fair value based method requires measurement of
compensation cost on the grant date based on the fair value of the
award using an option pricing model. Management has not yet determined
whether it will adopt the fair value based method defined by FAS 123 or
continue to use the APB 25 method.
F-17
<PAGE>
The following summarizes the activity in stock options under the four plans for
each of the years in the two-year period ended December 31, 1995 and 1994:
Outstanding Option Exercisable
Options Price Options
------- ----- -------
BALANCE, December 31, 1993 71,400 $10 - $13 11,400
Options expired (60,000) $12 -
Options forfeited (9,400) $13 (9,400)
------- -------
BALANCE, December 31, 1994 2,000 $10 2,000
Options expired (2,000) $10 (2,000)
------- -------
BALANCE, December 31, 1995 0 0
======= =======
(11) STOCK OFFERINGS AND COMMON STOCK:
--------------------------------
On March 2, 1989, the Company signed a definitive agreement with JI which
allowed them to acquire a controlling interest in the Company (Note 1). The
agreement was to purchase approximately $3,000,000 of newly-issued stock at the
December 31, 1988, book value per share. In September 1989, an amendment was
signed by the Company and JI to change the price per share to the unaudited book
value per share of the Company's common shares as of the end of November, 1989,
which both parties agreed was $2.57. The purchase, which was consummated on
December 29, 1989 and which required regulatory approval, gave JI ownership of
approximately 76% of the Company's outstanding stock.
The definitive agreement contained a warrant purchase agreement granting to JI
the right to purchase warrants at the price of $.01 per warrant and to purchase
common stock equal in number and option price with respect to other shares
eligible to be purchased under all of the Company's option plans. The warrants
contain anti-dilution provisions providing for the issuance of additional
warrants or changes to the warrant prices, as the case may be, should the
Company take any action in the future to issue options, rights, warrants or
other securities convertible into common stock, or take any other action which
will or may have the effect of diminishing JI's proportionate interest in the
Company's common stock.
During 1990, pursuant to the terms of the agreement, the Company issued a common
stock offering to its stockholders. As a result of this offering, 7,414,345
shares of stock were sold for $8,600,640. JI purchased 7,181,106 shares in the
1990 offering, increasing its ownership of the Company from 76% to 93%. In
addition to the stock offering, 390 stock options were exercised at $2.57 per
share by an employee of the Bank.
Under the terms of the 1989 definitive agreement, JI would pay additional cash
to the Company or receive additional shares of common stock of the Company
depending primarily upon losses in the loan portfolio from the date of the
agreement in 1989 through December 31, 1991. Based upon
F-18
<PAGE>
actual loan losses incurred, 7,570,896 additional shares were due and payable to
JI as of December 31, 1991. The shares were issued to JI on April 30, 1992. A
reclassification was made to Common Stock from Additional Paid-in Capital for
the stated value of the shares.
This transaction, combined with purchases of shares of common stock from other
shareholders, increased JI's ownership of the Company to approximately 97%.
(12) INTANGIBLE ASSETS:
-----------------
Because the stock to be issued under the terms of the 1989 definitive agreement
was due and payable as of December 31, 1991, JI's effective ownership exceeded
95%. Therefore, the remaining unamortized goodwill, which was originally
recorded by JI at the time of JI's acquisition of the Company, was required to
be "pushed down" to the Company.
Accordingly, goodwill in the amount of $640,094 was recorded on the Company's
Balance Sheet as of January 1, 1992 with an offsetting amount recorded to
retained earnings. The goodwill is being amortized using the straight-line
method over 25 years, and had approximately 23 years remaining when it was
"pushed down" to the Company from JI.
As per Accounting Principles Board Opinion No. 16 (APB 16), retained earnings of
the Company was required to be restated on the date of application of pushdown
accounting. The restated retained earnings included the remaining minority
ownership's percentage of the retained earnings (accumulated deficit at the
time), plus JI's recorded equity in the income and losses of the Company from
the time of the original acquisition, less all amortization of the goodwill
recorded by JI relating to the acquisition of the Company. Therefore, a
reclassification of $2,639,069 was made from retained earnings to additional
paid-in capital on January 1, 1992
Additional goodwill in the amount of $10,431 was "pushed down" to the Company
from JI in 1992 relating to additional shares purchased by JI from other
shareholders during the year.
Goodwill was $114,059 and $65,294 at December 31, 1995 and 1994 respectively.
The core deposit intangible resulting from the acquisition of ANB, as described
in note 17, was $1,384,584 and $1,611,300 at December 31, 1995 and 1994
respectively. The core deposit intangible is amortized over 10 years.
Negative goodwill generated from a previous acquisition was $163,449 and
$224,773 at December 31, 1995 and 1994, respectively.
F-19
<PAGE>
(13) REGULATORY MATTERS:
------------------
The activities of the Bank are regulated by the Office of the Comptroller of the
Currency (the OCC). Approval by the OCC may be required prior to payment of
dividends by the Bank to the Company under certain circumstances. Additionally,
regulations prevent the Bank from transferring funds to the Company for reasons
other than the payment of dividends or the purchase of services and supplies.
Therefore, included in the balance sheet at December 31, 1995 and 1994, are
$13,714,000 and $11,527,000 respectively, of net assets restricted to use by the
Bank only.
The Federal Reserve Board has adopted capital regulations which require the Bank
to maintain two separate minimum capital ratios. Included are the Tier 1 Capital
Ratio and the Total Risk-Weighted Capital Ratio. The Bank's capital ratios are
shown, along with the minimum required ratios as of December 31, 1995, and 1994
respectively, in the following table:
Total Risk-
Tier 1 Weighted
Capital Capital
------- -------
Capital Ratio at December 31, 1995 13.57% 16.16%
Capital Ratio at December 31, 1994 12.96% 14.23%
Regulatory Capital Requirement 4.00% 8.00%
The federal banking agencies have also adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a leverage ratio of at least 3% Tier 1 capital
to total assets, while lower rated banking organizations must maintain a ratio
of at least 4% to 5%. The Bank's leverage ratios for the years ended December
31, 1995 and 1994 were 8.88% and 7.12% respectively.
At December 31, 1995 and 1994, due to OCC Regulations, the Bank had no retained
earnings available for distribution as dividends to the Company.
(14) OTHER INTEREST INCOME:
---------------------
Other interest income for the years ended December 31 is summarized as follows:
1995 1994 1993
---------- ---------- ----------
Interest on federal funds sold $ 216,886 $ 142,360 $ 106,913
Interest on deposits in other
financial institutions 2,775 2,500 2,329
Interest on investment
securities 2,061,594 2,109,761 1,872,207
---------- ---------- ----------
$2,281,255 $2,254,621 $1,981,449
========== ========== ==========
F-20
<PAGE>
(15) INTEREST EXPENSE:
----------------
Interest expense for the years ended December 31 is summarized as follows:
1995 1994 1993
---------- ---------- ----------
Demand deposits and savings $1,778,941 $1,371,399 $ 939,280
Time certificates of deposit,
$100,000 and over 824,972 604,580 521,449
Other time deposits 1,714,099 1,389,057 1,820,239
Securities sold under
agreement to repurchase 59,883 4,832 3,527
Federal funds purchased 21,135 -- --
---------- ---------- ----------
$4,399,030 $3,369,868 $3,284,495
========== ========== ==========
(16) INCOME TAXES:
------------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which was issued by
the Financial Accounting Standards Board. Under this method, deferred tax assets
and liabilities are recognized for future tax consequences relating to
differences between the book and tax accounting treatment of existing assets and
liabilities as of the balance sheet dates. Deferred tax assets and liabilities
are calculated using enacted tax rates expected to apply to taxable income in
the years in which the book-to-tax accounting differences are expected to be
reversed.
The following is a reconciliation between the amount of the provision for income
taxes and the amount of tax computed by applying the statutory Federal income
tax rate of 34% for each year:
1995 1994
----------- ---------
Tax computed at statutory rate $ 329,926 $ 386,900
Other (74,837) (42,333)
Adjustment of valuation allowance - (564,000)
----------- ---------
Total income tax expense (benefit) $ 255,089 $(219,433)
=========== =========
F-21
<PAGE>
The tax effects of temporary differences that give rise to significant elements
of the deferred tax assets and deferred tax liabilities for each year, are as
follows:
1995 1994
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 803,185 $ 549,576
Mortgage loan premium 13,283 168,960
Net deferred loan fees 79,443 76,392
Net operating loss carryforwards 377,526 847,676
Net unrealized depreciation on
investment securities available for sale -- 538,560
Other 16,229 90,049
----------- -----------
Total deferred tax assets $ 1,289,666 $ 2,271,213
----------- -----------
Deferred tax liabilities:
Fixed assets, primarily due to
depreciation $ (31,516) $ (100,713)
Discount accretion on bonds (71,120) (43,120)
Net unrealized depreciation on
investment securities available for sale (83,800) --
Other (301,162) (42,120)
----------- -----------
Total deferred tax liabilities (487,598) (185,953)
----------- -----------
802,068 2,085,260
Valuation Allowance -- (352,000)
----------- -----------
Net deferred tax assets $ 802,068 $ 1,733,260
=========== ===========
Changes in the valuation allowance were as follows:
1995 1994
----------- -----------
Balance, beginning of year $ 352,000 $ 1,817,000
Expiration of State NOL (352,000) (624,000)
Recognition of previously generated
federal NOLs -- (841,000)
----------- -----------
Balance, end of year $ -- $ 352,000
=========== ===========
F-22
<PAGE>
The Company has a tax NOL carryforwards of approximately $1.1 million for
federal income taxes as of December 31, 1995. The $1.1 million federal NOL
carryforward is comprised of prechange NOLs (before JI purchased a 76% ownership
on December 29, 1989) and postchange NOLs (from December 29, 1989 to November
26, 1990 when JI became a 93% owner of the Company).
The federal prechange NOL approximates $201,000, and must be utilized by the
Company (it cannot be used by JI) no later than the year 2003. The postchange
federal NOL, which approximates $910,000, must be utilized by the Company (but
not by JI) in full by no later than the year 2004. The Company has fully
benefitted all NOL's existing at December 31, 1995.
The cumulative effect of adopting SFAS 109 at January 1, 1993, was $700,000
representing the recognition of the net deferred tax assets at January 1, 1993
plus the Company's estimate of the amount of postchange NOLs it reasonably
expected to realize at the time.
(17) NEW PRONOUNCEMENTS:
------------------
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of."
This standard, which must be adopted in 1996, requires long-lived impaired
assets to be carried at fair value and all long-lived assets to be disposed of
to be reported at the lower of carrying amount or fair value less cost to sell.
SFAS 121 prescribes a cash flow test for recoverability whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of SFAS 121, assets include certain identifiable
intangibles and goodwill if the asset tested for recoverability was acquired in
a business combination accounted for using the purchase method.
The Corporation does not anticipate that SFAS 121 will have a material impact on
the consolidated financial statements.
F-23
<PAGE>
(18) BUSINESS COMBINATION:
--------------------
On February 1, 1994, the Bank acquired substantially all of the assets and
liabilities of American National Bank (ANB), which had one office in Scottsdale,
Arizona and one office in Phoenix, Arizona. The acquisition was funded through
available capital of the Bank at a cost of approximately $1.1 million.
The transaction was accounted for as a purchase and is included in the Company's
results of operations as of February 1, 1994. The following table shows the fair
value of assets acquired, fair value of liabilities assumed, and net cash paid:
Fair Value of Assets Acquired $32,422,667
Fair Value of Liabilities Assumed 31,335,419
------------
Cash Paid for Acquisitions 1,087,248
Cash Received in Acquisition (7,549,416)
-----------
Net Cash and Cash Equivalents Received $6,462,168
===========
The pro-forma impact on the Company's results of operations for the year ended
December 31, 1994, assuming ANB had been acquired as of the beginning of the
year, are not materially different than the Company's actual results. The
unaudited pro-forma impact on the Company's results of operation for the year
ended December 31, 1993 had the ANB transaction described above been consummated
January 1, 1993 is as follows:
For the Year Ended
December 31, 1993
(Unaudited)
Net Interest Income $4,253,000
Provision for Loan Losses $ 219,000
Net Income $1,119,000
Net Income per Share $ .07
F-24
<PAGE>
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The following tables present the estimated fair values of financial instruments
as of December 31, 1995 and 1994:
1995
---------------------------
Carrying Fair
Value Value
------------ ------------
Financial Assets:
Cash and Cash Equivalents $ 6,337,000 $ 6,337,000
Investments Securities Available
for Sale 36,808,000 36,808,000
Net Loans 89,152,000 89,199,000
Interest Receivable 1,109,000 1,109,000
Financial Liabilities:
Deposits 116,357,000 116,919,000
Short Term Borrowings 6,341,000 6,201,000
Interest Payable 199,000 199,000
1994
---------------------------
Carrying Fair
Value Value
------------ ------------
Financial Assets:
Cash and Cash Equivalents $ 13,560,000 $ 13,560,000
Investments Securities Available
for Sale 36,443,000 36,443,000
Net Loans 86,863,000 81,382,000
Interest Receivable 1,018,000 1,018,000
Financial Liabilities:
Deposits 129,228,000 121,281,000
Short Term Borrowings 603,000 603,000
Interest Payable 219,000 219,000
Where readily available, quoted market prices were utilized by the Company. If
quoted market prices were not available, fair values were based on estimates
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The calculated fair value estimates, therefore,
cannot be substantiated by comparison to independent markets and may not be
realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair value for
financial instruments.
F-25
<PAGE>
Cash and cash equivalents, interest receivable, securities sold under agreements
- --------------------------------------------------------------------------------
to repurchase, and interest payable
- -----------------------------------
The carrying amounts reported for these financial instruments are a reasonable
estimate of fair value.
Investment securities available for sale
- ----------------------------------------
Fair value is based on quoted market prices or dealer quotes.
Loans
- -----
Loans that reprice or mature within three months of year end were assigned fair
values based on their carrying values. For remaining loans, fair value was
estimated by discounting the expected future cash flows using current interest
rates at which similar loans would be made to borrowers of comparable
creditworthiness.
Deposits
- --------
The fair value of fixed-maturity time deposits was estimated based on discounted
cash flows using rates currently offered for deposits of similar remaining
maturities.
Though demand and savings deposits may have duration characteristics which could
justify fair value estimation using methods similar to those used for
fixed-maturity time deposits, their fair value was considered to be carrying
value pursuant to the disclosure requirements.
(20) MANAGEMENT FEE:
--------------
The Company pays its allocable portion of expenses to JI in an arrangement
similar to all of JI's subsidiaries. The arrangement calls for partial payment
of allocable expenses in the early years after becoming a subsidiary of JI.
In 1993, the Company paid $175,783 in management fees, equalling 63% of its
allocable portion of expenses. In 1994, the Company paid $275,520 in management
fees, equalling 83% of its allocable portion of expenses. In 1995, the Company
paid $428,111 in management fees, equaling 88% of its allocable portion of
expenses.
Future payments as a percentage of the Company's allocable portion of expenses
are expected to be 100% in 1996.
F-26
<PAGE>
(21) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
-----------------------------------------------------
CONDENSED BALANCE SHEETS DECEMBER 31 1995 1994
----------- -----------
ASSETS:
CASH $ 424 $ 120
DEFERRED TAXES -- 257,173
INVESTMENT IN BILTMORE INVESTORS BANK 13,714,165 11,527,411
PREPAID EXPENSES 1,826 2,160
GOODWILL 64,019 65,294
----------- -----------
TOTAL ASSETS $13,780,434 $11,852,158
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
OTHER LIABILITIES $ 9,756 $ 5,830
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 13,770,678 11,846,328
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $13,780,434 $11,852,158
=========== ===========
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME FOR THE YEARS
ENDED DECEMBER 31: 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
EQUITY IN NET INCOME OF BILTMORE
INVESTORS BANK $ 722,418 $ 1,376,788 $ 771,879
EXPENSES:
General and administrative 6,009 10,334 2,926
Amortization of goodwill 3,172 9,079 19,699
----------- ----------- -----------
TOTAL EXPENSES (9,181) (19,413) (22,625)
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ACCOUNTING PRINCIPAL 713,237 1,357,375 749,254
BENEFIT FROM INCOME TAXES (2,044) -- --
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 715,281 1,357,375 749,254
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- 700,000
----------- ----------- -----------
NET INCOME $ 715,281 $ 1,357,375 $ 1,449,254
=========== =========== ===========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
RECONCILIATION OF NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
Net income $ 715,281 $ 1,357,375 $ 1,449,254
Adjustments to reconcile net income to
net cash provided (used) by operating activities-
Equity in net income of Biltmore
Investors Bank (722,418) (1,376,788) (771,879)
Amortization of goodwill 3,172 9,079 19,699
Recognition of preacquisition net
operating loss carryforward -- 257,173 95,000
Cumulative effect of a change in
accounting principal -- -- (700,000)
Increase in investment in Biltmore
Investors Bank due to utilization of
preacquisition net operating loss
carryforward -- (257,173) (95,000)
(Decrease) increase in other
liabilities 3,934 (621) (12,888)
Decrease in other assets 335 518 278
----------- ----------- -----------
Net cash provided (used) by operating
activities 304 (10,437) (15,536)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: -- -- --
CASH FLOWS FROM FINANCING ACTIVITIES: -- -- --
DECREASE IN CASH AND CASH EQUIVALENTS 304 (10,437) (15,536)
CASH AND CASH EQUIVALENTS,
beginning of period 120 10,557 26,093
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 424 $ 120 $ 10,557
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 176 $ -- $ --
=========== =========== ===========
NON-CASH TRANSACTION:
Pushdown of goodwill from Parent $ 1,897 $ 3,329 $ --
=========== =========== ===========
</TABLE>
F-28
<PAGE>
Item 15. Persons and Assets Employed, Retained or Utilized
William G. Ridenour, is a member of the Board of Directors of the
Company and is a founding shareholder of the law firm Ridenour, Swenson, Cleere
& Evans, P.C. (RSC&E). RSC&E has in the past and continues to provide legal
services to the Company, including providing legal representation to the Company
in connection with the Transaction. The Company is charged and has agreed to pay
RSC&E for its legal services on an hourly basis at the rate of $125.00 per hour.
It is anticipated that the legal fees and costs of RSC&E in connection with the
Transaction will be the sum of $20,000.00.
Item 16. Additional Information
None.
22
<PAGE>
Item 17. Material to be Filed as Exhibits
a. Loan Agreement
b. Fairness Opinion
c. None
d. Disclosures to Shareholders
e. Appraisal Rights
f. Industry Peer Analysis
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this Schedule is true, complete and correct.
Dated November 7, 1996
Biltmore Bank Corp.
By: /s/ Mark Behrens
--------------------------
Name: Mark Behrens
Title:Executive Vice President
Johnson International, Inc.
By:/s/ Dennis Axelson
---------------------------
Name: Dennis Axelson
Title: Senior Vice President
and Chief financial
Officer
23
<PAGE>
PROMISSORY NOTE
$492,885.00 Phoenix, Arizona
_______________, 1996
The undersigned, for value received, promises to pay to the
order of Johnson International, Inc. (herein called "JI") at the offices of JI
at 4041 N. Main Street, Racine, Wisconsin, the principal sum of Four Hundred
Ninety-Two Thousand Eight Hundred Eighty-Five and 00/100 Dollars ($492,885.00).
This Note shall be due and payable on _________________, 1998, the date which is
two years after the date of this Note.
The aggregate unpaid amount of the loan made by JI to the
undersigned, shall be subject to a variable interest rate. The rate will be the
prime rate reflected in the Wall Street Journal (Western Edition), adjusted
daily. Interest is computed for the actual number of days principal is unpaid on
a basis of a 365-day year. An adjustment in the Note rate will result in an
increase or decrease in the final payment amount.
This Note has been made under and is governed by the laws of
the State of Arizona.
BILTMORE BANK CORP., an Arizona
corporation
By:________________________________
Its: Chief Executive Officer
2425 E. Camelback Road, Suite 100
Phoenix, Arizona 85016
ITEM 17
EXHIBIT "A"
<PAGE>
Item 17
Exhibit B
Fair Market Value Analysis
OF 492,885 SHARES (2.98%) OF THE OUTSTANDING COMMON STOCK OF
BILTMORE BANK CORP., PHOENIX, ARIZONA
AS OF AUGUST 30, 1996
FAIR MARKET VALUE DISCUSSION
EXHIBITS
- --------
I. GUIDELINE COMPANANIES
II. FINANCIAL PROJECTIONS
III. FAIR MARKET VALUE SUMMARY
IV. COMPANY AND BANK FINANCIAL DATA
This material represents our opinion, based on interpretation and analysis of
information generally available to the public or specifically released by the
subject banks or on their behalf. We believe that our sources of information are
reliable, however, we do not assume any liability for the accuracy or
comprehensiveness of the information. Certain of the data presented in this
report are the result of calculations performed by us on figures obtained from
other sources. The assumptions used to make projections of future performances
are not certain to become reality. If future events do not occur as projected,
the actual future performance level may vary substantially from the projections
contained within. This material is not to be reproduced in whole or in part
without our specific written permission.
<PAGE>
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
September 3, 1996
The Board of Directors of
Biltmore Bank Corp.
2425 East Camelback Road
Phoenix, Arizona 85016
Re: Fair market valuation of 492,885 (2.98%) shares of the outstanding common
stock of Biltmore Bank Corp., Phoenix, Arizona (the "Company"), as of
August 30, 1996, to be used in a reverse stock split.
Dear Members of the Board :
Pursuant to your request, we are presenting to you our fair market valuation of
the minority interest in the outstanding common stock of Biltmore Bank Corp.,
Phoenix, Arizona (the "Company"), as of August 30, 1996, which is to be used in
a reverse stock split.
Alex Sheshunoff & Co. Investment Banking renders valuation opinions of banks,
bank holding companies, thrifts and other financial institutions nationwide. As
part of our valuation business, we render opinions for tax purposes, estate
planning, employee stock ownership plans, private placements, buy/sell
agreements, initial public offerings, secondary offerings, dissenters' rights
proceedings, mergers and acquisitions including fairness opinions, and other
purposes. We are experts in the valuation of common stock of entities engaged in
the lines of business of the Company. The staff of Alex Sheshunoff & Co.
Investment Banking are qualified appraisers and exhibit such through our
extensive experience performing over 1,500 appraisals of banks and bank holding
companies over the past 5 years.
In preparing the valuation report, we reviewed information regarding the
Company's and its subsidiary's, Biltmore Investors Bank (the "Bank"), financial
performance and condition for the three years ending December 31, 1995 and the
six months ending June 30, 1996. We received from the Company projected income,
asset growth, book value, and dividends for the five fiscal years ending
December 31, 2000. We did not verify the accuracy of such information and
assumed it to be accurate in all material respects. We
Suite 710
301 Congrees Avenue
Austin, Texas 78701
Fax 512-472-8953
Telephone 512-479-8200
<PAGE>
Board of Directors of
Biltmore Bank Corp.
September 3, 1996
Page 2
did not independently value the assets and liabilities of the Company and have
not been furnished with appraisals. We also reviewed other publicly available
information regarding the market for bank and bank holding company common stock
and economic conditions in the Company's market area. We believe such publicly
available information to be accurate; however, we cannot guarantee the accuracy
of such information.
We valued the minority shares at their "fair market value" as of the valuation
date. Fair market value is defined as the price at which the minority shares
would change hands between a willing buyer and a willing seller when the former
is not under any compulsion to buy and the latter is not under any compulsion to
sell. Both parties are assumed to be able and willing to trade and are well
informed about all relevant factors impacting the value of the minority shares
and their market.
We considered the Company as a going-concern under its current business strategy
and did not value the minority shares based upon a liquidation or other
restructuring of the Company. We believe that the most useful valuation approach
under the fair market valuation method is to derive the value of minority shares
based upon the price of comparable transactions of institutions in the same
lines of business as the Company.
In arriving at our opinion of the fair market value of the minority shares, we
considered the financial performance and condition of the Bank including future
earnings and dividend paying capacity, the economic outlook of the trade area
and the banking industry in general, previous sales of the Company's stock, the
size of the minority block of shares being valued, and the market price of
selected comparable banking institutions.
It is our opinion that as of August 30, 1996 the fair market value of the
minority interest in the common shares of the Company was $0.60 per share.
Our valuation of the minority shares shall not be construed and is not intended
to be a recommendation with respect to the purchase or sale of the common stock
of the Company. Our valuation is solely our opinion of the fair market value of
the minority shares and may be materially different at any date other than the
valuation date indicated herein. The application of the valuation methodologies
utilized in arriving at our opinion is discussed in the accompanying valuation
report, which should be read in its entirety to fully understand our conclusion.
<PAGE>
Board of Directors of
Biltmore Bank Corp.
September 3, 1996
Page 3
We consent to the inclusion in the Schedule 13E-3 of this opinion relating to
the Company's reverse stock split. This opinion may not be used for any other
purpose or otherwise quoted in whole or in part, or otherwise referred to in any
report or document, or furnished or otherwise communicated to any other person
without the consent of Alex Sheshunoff & Co. Investment Banking. This letter and
report herein shall not be provided to the Internal Revenue Service unless the
IRS specifically requests the information. Please advise us in writing if such a
request is made.
Alex Sheshunoff & Co. Investment Banking has no current or intended ownership or
other interest in Biltmore Bank Corp., other than the performance of this
financial consulting service and is an "independent appraiser" as that term is
defined in Section 401(a) (28) (C) of the Internal Revenue Code for purposes of
this valuation.
Respectfully Submitted,
ALEX SHESHUNOFF & CO.
INVESTMENT BANKING
By: /s/
<PAGE>
FAIR MARKET VALUE ANALYSIS
OF 492,885 SHARES (2.98%) OF THE OUTSTANDING COMMON STOCK OF
BILTMORE BANK CORP., PHOENIX, ARIZONA
AS OF AUGUST 30, 1996
DESCRIPTION OF ASSIGNMENT
This appraisal estimates the fair market value of the minority interest in the
outstanding common stock of Biltmore Bank Corp., Phoenix, Arizona, (the
"Company") owned by minority shareholders, as of August 30, 1996. Alex
Sheshunoff & Co. Investment Banking was retained by the Company to prepare the
valuation to be used for a reverse stock split. As of the valuation date, the
number of minority shares to be purchased represented 492,885 shares of the
Company's common stock, or approximately 2.98% of the common shares outstanding.
Our valuation was prepared based upon the financial statements and other
information provided to us by the Company, which we did not independently
verify. We also utilized other publicly available information, which we believe
to be accurate; however, we cannot guarantee the accuracy of such information.
In preparing our valuation, we conducted an analysis of: (1) the Company's
operating performance and financial condition for the three years ended December
31, 1995 and the six months ended June 30, 1996; (2) the projected income,
dividends, asset growth and book value of the Company for the five years ending
December 31, 2000; (3) the market for the Company's common stock; (4) the
competitive environment in which the Company operates; (5) the ownership
composition of the Company; and (6) the general economic conditions impacting
the Company's operations and business prospects. In preparing our financial
analysis we primarily relied on quarter-end financial data as of June 30, 1996,
however we also reviewed month-end data for July in order to ensure that there
were no material changes in the financial condition of the Company. Our
valuation is limited by the conditions stated herein and presented in our
valuation letter to the Board of Directors. Our valuation letter and this report
should be read in their entirety to fully understand our conclusion.
<PAGE>
OVERVIEW OF THE COMPANY
- -----------------------
The Company, which was incorporated in Arizona on March 19, 1984, owns 100% of
the Biltmore Investors Bank (the "Bank") which is the Company's only subsidiary.
On August 22, 1985, the Company acquired all of the outstanding stock of the
Biltmore National Bank, Phoenix, Arizona, and commenced operations as the Bank.
In 1989, Johnson International Inc. ("JI"), a Wisconsin-based company owned
primarily by Samuel C. Johnson and family members, acquired approximately 76.0%
of the Company's outstanding common stock. Subsequently, the Company became a
subsidiary of JI. In a November 26, 1990 stock offering, JI acquired shares
which increased its ownership percentage to approximately 93.0%. As per the 1989
Stock Purchase and Investment Agreement, JI was entitled to and did receive 7.6
million additional shares of stock in 1993. This transaction, combined with
purchases of stock shares from other shareholders, increased JI's ownership to
approximately 97.0%. A discussion of the Company's historical and projected
financial performance will follow in a later section of this report.
THE ECONOMY
- -----------
National
Despite strong growth in the U.S. economy during the first half of 1996,
inflationary pressures remain subdued. The core consumer price index ("CPI")
rose at a 2.8% annual rate which is a half percentage point lower than where it
was a year ago. Stock markets reacted positively to first quarter economic data
as evidenced by an 10.50% increase in the DJIA and a 8.90% increase in the S&P
500 since year-end 1995. The Federal Reserve forecast for the second half of
1996 calls for overall economic growth of 2.5% to 2.75% with unemployment
remaining in the mid 5.0% range and a projected CPI of 3.0% to 3.25% through the
end of the year.
Local
After an economic decline in the late 1980's, the Phoenix economy rebounded and
currently remains vibrant and growing. Metro-Phoenix, the largest metropolitan
statistical area between Los Angeles and Houston, is home to roughly 2.5 million
people and continues to be one of the nation's fastest growing cities. With a
large, qualified workforce and strong educational resources, Phoenix serves as
an excellent base for its major economic sectors which include manufacturing,
government, regional hub activities, travel and tourism, and construction. Some
of the area's major employers include Motorola, Allied Signal, Honeywell, Intel,
and McDonnell Douglas. Drawing on its numerous resources,
<PAGE>
the population of Phoenix is projected to increase from 2.5 million people in
1995 to 2.8 million in the year 2000, a growth rate of 12.0%. With positive
economic trends projected for the Phoenix area, the city is rich in competition
for local banks with over 32 financial service providers in the area. While
continued economic and population growth in Phoenix provides abundant
opportunities for banks, stiff competition from the financial services industry
and major regional banks will remain a continual challenge to the Company.
FINANCIAL ANALYSIS OF THE COMPANY
- ---------------------------------
Besides its investment in the Bank, the Company's remaining assets and
operations are not material to its performance, and thus we focused on the
performance of the Bank in order to derive a historical financial analysis of
the Company. In analyzing the historical performance of the Bank, we compared
the Bank's financial data with a state peer group consisting of all Arizona
banks with total assets between $100 million and $499 million (8 banks), as of
March 31, 1996.
Total Assets
On February 1, 1994, the Company acquired substantially all of the assets and
liabilities of American National Bank ("ANB") which had one office in Phoenix
and one office in Scottsdale, Arizona. The acquisition of ANB boosted the Bank's
total assets from $108.2 million in 1993 to $143.0 million at year-end 1994.
Since 1994, the Bank's assets decreased from $137.6 million in 1995 to $134.0
million at June 30, 1996. The decrease in total assets reflects the post-merger
run-off of certain interest bearing transaction account deposits.
Goodwill
At June 30, 1996, the Company had goodwill totaling $1.34 million which resulted
from several transactions involving JI, a core deposit intangible resulting from
the acquisition of ANB, and negative goodwill which resulted from a previous
acquisition. The goodwill is being amortized using the straight-line method at
approximately $108,000 per year through the year 2008.
Loans
As of June 30, 1996, the Bank's loan portfolio was primarily comprised of
residential real estate loans (56.0%), commercial and industrial loans (22.3%)
and commercial real estate (16.5%). The total loan portfolio increased from
$89.5 million at year-end 1994 to $91.5 million at year-end 1995. The portfolio
remained at $91.5 million as of June 30, 1996. The entire increase in the
portfolio was attributable to growth in commercial and commercial real estate
loans. The Bank's assets/liability management and liquidity policies set forth
internal guidelines which require the Bank's total loans not to exceed 80.0% of
total deposits. At June 30, 1996, the Bank's loan to deposit ratio equaled
77.3%.
<PAGE>
After significant loan losses in the late 1980's and early 1990's, the Bank's
asset quality has improved. Total nonperforming loans to gross loans have
gradually fallen from 0.63% in 1994 to 0.18% through the first six months of
1996, which ranks in the 80th percentile relative to its peer group. In
addition, total nonperforming assets to total assets declined from 0.39% in 1994
to 0.20% at June 30, 1996. Another indication of the Bank's solid asset quality
is the level of net charge-off's realized over the last few years. Net
charge-off's decreased from 0.11% in 1994 to (0.01%) in 1996. Simply stated, the
Bank recovered more in past loan losses than it charged off during the first six
months of 1996. To provide for future losses the Bank maintained a loan loss
reserve to total loans of 2.6%, a figure that ranks in the 75th percentile
relative to its peer group.
Deposits
At June 30, 1996, the main components in the Bank's deposit mix were money
market accounts (38.4%), demand deposit accounts (22.5%), and time deposits less
than $100,000 (20.0%). Total deposits decreased from $129.5 million at year-end
1994 to $118.4 million at June 30, 1996. The decline was attributable to a
reduction in interest bearing demand accounts which management believes most
likely occurred because of better asset management by their customers and the
proliferation of more attractive investment alternatives in the market place.
Equity
Total equity increased from $11.8 million at year-end 1994 to $13.9 million as
of June 30, 1996. The increase was attributable to full retention of earnings by
the Bank. Due to Office of the Comptroller of the Currency regulation, the Bank
had no retained earnings available for distribution to the Company for the years
ending 1994 and 1995, and through the first half of 1996.
Profitability
Despite an improvement in overall profitability during the last few years, the
Bank remains well below the peer group average in nearly every measure of
performance.
<PAGE>
The following table sets forth selected financial ratios which display the
historical performance of the Bank.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Table 1 1994 1995 June 30, 1996 Peer Group (3/31/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on Average Assets 1.30 0.52 0.67 1.54
Return on Average Equity 14.22 5.62 6.62 20.53
Net Interest Margin 4.33 4.44 4.82 5.44
Noninterest Income to Average E/A's 0.58 0.62 0.66 1.58
Overhead Efficiency Ratio 81.54 87.05 79.92 61.79
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Several key factors have contributed to the Bank's decline in profitability
since 1994. Looking to the future, the Bank made a substantial investment in
both people and technology. The average salary and benefits per employee for the
Bank increased from $47,349 in 1994 to $61,489 at June 30, 1996, a figure which
ranks roughly 21.0% higher than the peer group average. In addition, while the
Bank's overhead ratio has improved from 81.5% in 1994 to 79.9% through the first
six months of 1996, the ratio remains well above the peer average of 61.8%.
After the merger with ANB in 1994, the Bank booked numerous expenses primarily
relating to increased marketing efforts and training. Improvement in the Bank's
net interest margin ("NIM") has been attributable to the maintenance of a lower
than average cost of funds. The Bank's NIM improved from 4.33% in 1994 to 4.82%
in 1996, but still ranks below the peer average of 5.44%. To date, management
has been willing to sacrifice a higher yield on earning assets for more
stringent underwriting standards and subsequently, a cleaner loan portfolio.
MARKET FOR BANK HOLDING COMPANY STOCKS
- --------------------------------------
The market for bank stock was very strong during 1995, continuing a nearly five
year trend. During 1996, bank stocks have generally risen as evidenced by the
9.50% increase in the SNL index year-end 1995 to May 31, 1996. However, in line
with overall market conditions, bank stocks have been volatile so far in 1996.
Speculation over inflation, interest rate trends, and rate actions by the
Federal Reserve continue to impact bank stocks. Economic news indicating whether
the economy is slowing or the expansionary pace is remaining brisk determines
the short-term course of bank stocks. The uncertain interpretation of recent
economic data makes it difficult to predict future bank stock trends.
<PAGE>
DEFINITION OF FAIR MARKET VALUE
- -------------------------------
We define fair market value as the amount at which the minority shares would
change hands between a willing seller and a willing buyer when neither is acting
under compulsion and when both have reasonable knowledge of the relevant facts.
This definition complies with the definition found in the U.S. Tax Code and
Revenue Ruling 59-60. We assumed that the hypothetical buyer and seller are
able, as well as willing, to trade shares and to obtain information concerning
factors relevant to the value of and the market for the minority shares.
In arriving at our conclusion of fair market value, we utilized the market and
net present value methods. We believe the use of comparable transaction data
supplied by the market approach is the most relevant and useful indicator of
fair market value for the securities of a closely held corporation. The net
present value approach discounts the projected dividends from holding the common
stock over a five year period, assuming a residual value equal to book value, at
a risk-adjusted rate.
MARKET APPROACH
- ---------------
The market approach estimates a value by examining the relevant market pricing
characteristics of similar securities which are publicly traded. This produces a
market value as if the securities were exchanged in the open market on a
minority interest basis, or a freely traded value. We selected a group of
regional banks and bank holding companies (the "guideline companies") which we
believe investors would likely compare to the Company when making a decision to
purchase the Company's Common Stock. In selecting the guideline companies, we
employed the following criteria: (1) banking organizations located in the United
States; (2) positive net income; (3) return on average equity of less than
8.00%; (4) total assets less than $250 million; (5) not subject to announced or
rumored acquisition; and (5) publicly traded securities as evidenced by listing
on a major exchange. Exhibit I presents selected financial data for the
guideline companies.
The market value for bank and bank holding company common stock is typically
determined by price/book and price/earnings ratios. The weight accorded to the
price/book and price/earnings approaches varies depending upon market
conditions, the influence of takeover speculation in the market, and other
factors. We believe that as of the valuation date, the market was giving the
price/book and price/earnings ratios equal weight in making valuation decisions
for companies reporting returns on equity and other financial characteristics
similar to the Company. Exhibit I presents the market valuation characteristics
of the guideline companies. Based upon the trading pattern of the selected
guideline companies and the financial comparisons with the Company overall, we
believe the Company's market value utilizing
<PAGE>
the market approach would be at 1.20 times book value or $1.00 per share and
20.00 times projected 1996 earnings or $1.34 per share. Giving equal weight to
the price/book and price/earnings ratios produces a freely traded value of $1.18
per share, rounded. The Company's shares are distinguishable from the shares of
publicly traded companies due to their lack of marketability. The Company's
stock trades infrequently, and sellers may not be able to sell their shares when
desired. The Company's stock is not listed on a major stock exchange. Also
impacting the discount for lack of marketability is the dividend policy and
paying capacity of the Company. The Company has not paid a dividend in recent
years and does not anticipate paying a dividend until 1997, which tends to
increase the lack of marketability discount modestly.
Another factor in determining the appropriate discount to the Company's stock is
the ownership structure of the Company. Since JI owns approximately 97.0% of the
total shares outstanding, minority shareholders of the Company's stock have
little or no real determination as to dividend or any other policy decisions
made by the Company. Thus, a minority shareholder of the Company's common stock
would typically expect to receive a discounted price for the Company's stock.
Two types of studies provide evidence of the lack of marketability discount.
Restricted stock studies indicate a discount of 35% and possibly higher. Studies
of IPOs provide evidence of a discount for lack of marketability of
approximately 45%. Giving weight to the considerations discussed above, we
believe a lack of marketability discount of 50% is appropriate. After applying
the marketability discount, the market value approach produces a value of $0.60
per share, rounded.
Another indicator of market value is recent trading activity in the Company's
common stock. Management indicated to us that 21,770 shares traded representing
0.13% of the total common stock outstanding took place over the last several
years at an average price of $1.00 per share. However, since each of the trades
involved JI, and thus do not represent an "arms length" transaction, we have
attributed little weight to the recent trading prices of the Company's minority
shares.
NET PRESENT VALUE APPROACH
- --------------------------
The net present value approach discounts the anticipated cash flow from an
investment in the Company's common stock, considering projected dividends and
the future residual value of the stock. We received from management estimates of
projected income and dividends for the Bank over a five year period. Since the
performance of the Company is essentially the same as the performance of the
Bank, the same projections were used for the Company. Then, based on the
projections for the Company, an appropriate cash flow was determined. The
<PAGE>
Company has not been paying a dividend and does not anticipate paying dividends
until at least 1997. The residual value of an investment is difficult to measure
given the uncertainty regarding future earnings and book value. Over the
long-term, book value represents the economic value of the balance sheet of a
banking concern and we believe it appropriate to utilize the projected book
value of the Company to calculate residual value at the end of the projection
period. We also discounted the future benefits to be received by the
shareholders as measured by projected earnings and utilized a residual value of
6 times ending period earnings.
Important to the net present value approach is the determination of the
appropriate discount rate. The discount rate was estimated by comparing the
Company's average return on equity, the average return on equity for the
guideline companies, and the equity risk premium over the risk-free rate which
incorporates investors' expectations. In deriving the equity risk premium we
utilized the arithmetic mean and geometric mean returns for common shares listed
on the S&P 500 Index above the risk-free rate over the past 65 years.(1) This
arithmetic and geometric means were 7.0% and 5.4%, respectively.
We also considered possible adjustments which may be due to the small size of
the Company's market value and risk inherent in holding the Company's stock. In
particular, we examined betas of publicly traded community banks with assets
below $500 million, which ranged from (0.659) to 1.985 with an average of .31
and median of .28. Stocks with a beta less than one have risk levels that are
lower than that of the overall market. We estimated the risk premium for the
Company's stock, considering the above information, to be 7.0%. We utilized the
10-year Treasury bond as an estimate of the risk-free rate. Based upon our
analysis of the Company and the benchmark rates below, we believe a discount
rate of 20% is appropriate. The following benchmarks were utilized in selecting
the discount rate:
Comparative Returns on Equity
-----------------------------
Company's ROE 6.62%
Guideline Companies' Median ROE 4.61%
Average ROE of Publicly Traded Banks Under $500 Million 12.40%
<PAGE>
Risk-weighted Discount Rate
---------------------------
10-year T-Bond (risk-free rate) 6.25%
Industry Risk Premium 1.96%
Equity Risk Premium 12.00%
Risk-adjusted Rate 20.21%
Discounting the projected dividend and estimated residual value of the Company
at a 20% discount rate (based upon the Company's financial projections displayed
in Exhibit II) produces an estimated net present value of $0.55 per share as
measured by the anticipated dividends and $0.57 per share as measured by
discounting projected earnings.
(1) As determined in the Stocks, Bonds, Bills and Inflation: 1995 Yearbook
(Chicago: Ibbotson Associates, 1995).
RECONCILIATION OF VALUE
- -----------------------
Exhibit III presents a summary of the range of values produced under various
valuation methods. The following estimates of value were indicated:
Market Value Approach $ 0.60
Recent Trades of Minority Stock $ 1.00
Net Present Value of Dividends $ 0.55
Net Present Value of Earnings $ 0.57
It is our opinion that value of the minority shares of the Company's stock could
range in value from $0.55 per share to $0.84 or June 30, 1996 book value.
However, we believe that the market value approach is the most useful in valuing
an interest in the Company's minority shares and produces a value of $0.60 per
share.
<PAGE>
CONCLUSION
- ----------
Based upon our analysis, we believe that as of August 30, 1996, the fair market
value of a minority interest in the outstanding common stock of the Company was
$0.60 per share.
Our valuation of the minority shares shall not be construed and is not intended
to be a recommendation with respect to the purchase or sale of the common stock
of the Company. Our valuation is solely our opinion of the fair market value of
the minority shares and may be materially different at any date other than the
valuation date indicated herein.
Respectfully Submitted,
ALEX SHESHUNOFF & CO. INVESTMENT BANKING
By: Signature Illegible
---------------------------------
<PAGE>
Exhibit I
Financial and Pricing Characteristics of Banking Organizations in the United
States with Total Assets less than $250 million and a Return on Average Equity
of less than 8.00%
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning Current Total Total Equity/ NPAs/ Return on
Year-to-Date Stock Percentage Assets Equity Assets Assets Avg Assets
Stock Price Price Change ($000) ($000) (%) (%) (%)
Short Name ($) ($) (%) 06/30/96 06/30/96 06/30/96 06/30/96 06/30/96
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Biltmore Bank Corp. AZ NM NM NM 134,009 13,921 10.39 0.20 0.67
American Bancshares, Inc. FL NM 7.625 NM 190,686 17,285 9.06 0.09 0.46
Capital Corp of the West CA 12.143 13.250 9.12 239,808 19,327 8.06 2.44 0.52
Community Financial Corp. IL 13.000 13.000 NM 183,400 35,630 19.43 0.19 0.86
First Bank of Philadelphia PA 3.500 2.750 (21.43) 59,466 4,443 7.47 9.69 0.22
Madison Bancshares Group PA 6.628 9.500 43.33 95,625 7,681 8.03 1.43 0.45
MetroBanCorp IN 7.250 6.188 (14.65) 105,140 11,231 10.68 0.21 0.55
Patriot National Bank CT 7.125 6.000 (15.79) 45,756 4,900 10.71 0.50 0.38
Skylands Community Bank NJ 7.500 6.000 (20.00) 107,234 9,312 8.68 1.10 0.54
West Coast Bancorp, Inc. FL 15.250 17.125 12.30 151,824 16,776 11.05 4.02 0.47
- ---------------------------------------------------------------------------------------------------------------------------------
High 43.33 239,808 35,630 19.43 9.69 0.86
Low (21.43) 45,756 4,443 7.47 0.09 0.22
Average (1.02) 130,993 14,065 10.35 2.19 0.49
Median (14.65) 107,234 11,231 9.06 1.10 0.47
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Return on LTM Current Current
Avg Equity Dividend Price/ Price/
(%) Payout Ratio LTM EPS Book Value
Short Name 06/30/96 (%) (x) (%)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Biltmore Bank Corp. AZ 6.62 0.00 NM NM
American Bancshares, Inc. FL 4.61 0.00 19.55 170.20
Capital Corp of the West CA 6.85 22.67 63.10 118.62
Community Financial Corp. IL 4.35 0.00 16.46 91.68
First Bank of Philadelphia PA 2.94 0.00 NM 103.77
Madison Bancshares Group PA 5.36 0.00 17.27 120.10
MetroBanCorp IN 5.11 55.56 17.19 92.63
Patriot National Bank CT 3.61 0.00 NM 149.63
Skylands Community Bank NJ 6.02 0.00 27.27 143.54
West Coast Bancorp, Inc. FL 4.31 30.38 21.68 157.69
- ----------------------------------------------------------------------------------------------
High 6.85 55.56 63.10 170.20
Low 2.94 - 16.46 91.68
Average 4.80 12.07 26.07 127.54
Median 4.61 - 19.55 120.10
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT II
Financial Projections for
Biltmore Bank Corp.
Phoenix, Arizona
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Common & Preferred Loss
Net ----------------------- Loan
Total Asset Net Income Return Return Dividend Total Reserve
Assets Growth Income Growth on Avg. on Avg. Dividends Payout Equity $(000)
Year $(000) Rate $(000) Rate Assets Equity $(000) Ratio $(000) *1*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Historical
- -------------------------------------------------------------------------------------------------------------------------------
1993 $108,209 8.05% $749 43.81% 0.72% 7.20% $0 0.00 $11,196 $1,776
1994 $142,845 32.01% $1,357 81.11% 1.08% 11.78% $0 0.00 $11,846 $2,422
1995 $137,516 -3.73% $715 -47.31% 0.51% 5.58% $0 0.00 $13,771 $2,362
- -------------------------------------------------------------------------------------------------------------------------------
Projected
- -------------------------------------------------------------------------------------------------------------------------------
1996 $137,516 0.00% $1,100 53.86% 0.80% 7.68% $0 0.00 $14,871 $2,362
1997 $147,142 7.00% $1,281 16.44% 0.90% 8.43% $640 50.00 $15,512 $2,527
1998 $161,856 10.00% $1,545 20.61% 1.00% 9.72% $772 50.00 $16,284 $2,780
1999 $169,949 5.00% $1,825 18.12% 1.10% 10.90% $912 50.00 $17,197 $2,919
2000 $178,447 5.00% $2,090 14.55% 1.20% 11.80% $1,045 50.00 $18,242 $3,065
NPV of earnings (with a residual of 6x)
NPV of dividends (with a residual of book value)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Est. Risk- Per Share Year-end
Intang- Est. Based Long -------------------------------- Primary
ible Tier 1 Capital Term Fully Common Common
Assets Leverage Ratio Debt Diluted Common Divi- Shares
Year $(000) Ratio *2* $(000) Earnings Equity dends Outstanding
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Historical
- --------------------------------------------------------------------------------------------------------------
1993 $1,790 9.19% 19.11% $0 $0.045 $0.678 $0.000 16,522,530
1994 $1,676 8.21% 14.52% $0 $0.082 $0.717 $0.000 16,522,530
1995 $1,562 8.81% 16.15% $0 $0.043 $0.833 $0.000 16,522,530
- --------------------------------------------------------------------------------------------------------------
Projected
- --------------------------------------------------------------------------------------------------------------
1996 $1,454 9.86% 17.62% $0 $0.067 $0.900 $0.000 16,522,530
1997 $1,346 10.05% 17.36% $0 $0.078 $0.939 $0.039 16,522,530
1998 $1,238 9.82% 16.77% $0 $0.094 $0.986 $0.047 16,522,530
1999 $1,130 9.75% 17.01% $0 $0.110 $1.041 $0.055 16,522,530
2000 $1,021 9.94% 17.31% $0 $0.127 $1.104 $0.063 16,522,530
$0.573
$0.550
- --------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------------------------------------------------------
Outstanding Common Shares 1995 1996
------------------------- ---- ----
Average Fully Diluted Shares 16,522,530 16,522,530
Average Primary Shares 16,522,530 16,522,530
----------------------------------------------------------------------
*1* The Loan Loss Reserve is assumed to increase at the same growth rate as
Total Assets unless a projected Loan Loss Reserve to Total Assets ratio is
input, which would cause the Loan Loss Reserve to change in accordance
with the specified Loan Loss Reserve to Total Assets ratio.
*2* The Estimated Risk-Based Capital Ratio is calculated for purposes of this
analysis as follows: Tier I Capital (common equity + perpetual preferred
stock + convertible preferred stock - intangible assets) + Tier II Capital
(loan loss reserve + convertible debt) divided by Estimated Net
Risk-Weighted Assets (gross risk-weighted assets - intangible assets -
excess loan loss reserve). In Tier II Capital, the Loan Loss Reserve is
limited to 1.25% of Gross Risk-Weighted Assets, excluding Intangible
Assets. Any excess Loan Loss Reserve is subtracted from the denominator.
For projection purposes, the Gross Estimated Risk-Weighted Assets are
assumed to grow at the same rate as Total Assets.
<PAGE>
Exhibit III
Fair Market Value of 492,885 Shares of the Common Stock of
Biltmore Bank Corp., Phoenix, Arizona
As of August 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Book Value Per Share (As of June 30, 1996) $0.84
1995 EPS $0.04
1996 Projected EPS $0.07
Discount for lack of marketability 50.0%
MARKET APPROACH VALUATION
=========================
Price/Book Valuation at estimated price/book ratio of 1.20x
* $0.84 x 1.20x = $1.00 x 50% (discounted for lack of marketability by 50%) $0.50
Price/Earnings Valuation at estimated price/earnings ratio of 20.0x
* 1995 EPS $0.04 x P/E 20x = $ 0.80x 50% (discounted for lack of marketability by 50%) $0.40
* 1996 EPS (projected) $0.07 x P/E 20x = $1.40 x 50% (discounted for lack of marketability by 50%) $0.70
OTHER VALUE INDICATORS
======================
Recent Trading Price (Price of stock trades [0.13%] during 1995 and 1996) $1.00
Net Present Value (discount of 20%)
* Dividends with a residual value which equals book value in year 2000 $0.55
* Net Income through year 2000 with a 6x earnings residual value in 2000 $0.57
FAIR MARKET VALUE $0.60
COMPARATIVE VALUATION RATIOS
============================
FMV as a Multiple of Book Value (6/30/96 Equity/Assets 10.39%) 0.71x
FMV as a Multiple of Earnings
* 1995 (ROA = 0.52%) 15.00x
* Projected 1996 (ROA = 0.80%) 8.57x
FMV as a Percentage of Total Assets (6/30/96 Total Assets Per Common Share Outstanding of $8.32) 7.21%
NPV of Dividends/FMV 91.67%
</TABLE>
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
<TABLE>
<CAPTION>
ASSETS
------
1995 1994
------------- -------------
<S> <C> <C>
CASH AND DUE FROM BANKS (Note 3) $ 6,336,967 $ 7,932,020
FEDERAL FUNDS SOLD -- 5,628,000
------------- -------------
Total cash and cash equivalents 6,336,967 13,560,020
INVESTMENT SECURITIES AVAILABLE FOR SALE (Notes 2 and 4) 36,808,353 36,442,647
LOANS, less allowance for credit losses of $2,362,310 and
$2,422,513 in 1995 and 1994, respectively (Note 5) 89,152,249 86,862,577
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS 1,936,204 2,697,702
PREMISES AND EQUIPMENT, net (Notes 6 and 9) 1,616,411 1,605,453
OTHER REAL ESTATE OWNED (Note 2) 103,015 --
INTANGIBLE ASSETS (Notes 1 and 12) 1,562,662 1,676,594
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
LIABILITIES AND SHAREHOLDERS'
-----------------------------
EQUITY
DEPOSITS:
Demand-
Noninterest-bearing $ 23,984,474 $ 27,261,963
Interest-bearing 28,098,433 39,968,012
Time certificates of deposit, $100,000 and over (Note 7) 13,689,910 14,089,586
Other time certificates and individual retirement accounts 30,266,899 29,076,926
Savings 20,317,051 18,831,535
------------- -------------
116,356,767 129,228,022
ACCRUED INTEREST PAYABLE 199,316 218,540
SHORT TERM BORROWINGS (Note 8) 6,340,500 603,000
OTHER LIABILITIES 848,600 949,103
------------- -------------
123,745,183 130,998,665
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13) -- --
SHAREHOLDERS' EQUITY (Notes 1, 10 and 11):
Preferred stock, no par value:
Authorized and unissued, 10,000,000 shares -- --
Common stock, no par value (stated value $.50)
Authorized, 25,000,000 shares; issued and outstanding,
16,522,530 shares in 1995 and 1994 8,261,265 8,261,265
Additional paid-in capital 4,417,304 4,415,407
Retained earnings 930,377 215,096
Net unrealized gain (loss) on securities, net of tax 161,732 (1,045,440)
------------- -------------
Total shareholders' equity 13,770,678 11,846,328
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,888,928 $ 6,229,328 $ 4,282,422
Other interest income (Note 14) 2,281,255 2,254,621 1,981,449
------------ ------------ ------------
Total interest income 10,170,183 8,483,949 6,263,871
INTEREST EXPENSE (Note 15) 4,399,030 3,369,868 3,284,495
------------ ------------ ------------
Net interest income 5,771,153 5,114,081 2,979,376
PROVISION FOR CREDIT LOSSES (Note 5) (98,868) (75,632) (218,573)
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 5,870,021 5,189,713 3,197,949
------------ ------------ ------------
CUSTOMER SERVICE FEES 506,796 458,651 338,738
NET GAIN ON SALE OF SECURITIES 28,261 10,715 6,607
INCOME FROM "LINK" BROKERAGE OFFICE 113,748 126,207 56,824
TRUST REVENUES 189,746 113,892 51,204
NET GAIN ON SALE OF OTHER REAL ESTATE OWNED -- -- 56,150
------------ ------------ ------------
838,551 709,465 509,523
------------ ------------ ------------
OPERATING EXPENSES:
Salaries and wages, net of deferred loan
origination costs of $137,630, $143,409 and
$89,869 at December 31, 1995, 1994 and 1993 2,229,621 1,681,001 1,105,838
Employee benefits 423,424 357,766 342,885
Occupancy expense 649,738 585,077 359,500
Equipment expense 354,970 299,044 181,433
Business development expense 130,302 102,275 38,450
FDIC deposit insurance 143,115 284,866 218,005
Management fee expense (Note 20) 428,111 275,520 175,783
Amortization of intangibles 172,566 128,957 27,609
Data processing 314,371 317,516 168,431
Supplies and printing 180,160 185,055 96,817
Other expenses 711,824 544,159 243,467
------------ ------------ ------------
5,738,202 4,761,236 2,958,218
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE,
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 970,370 1,137,942 749,254
(PROVISION FOR) BENEFIT FROM INCOME TAXES (255,089) 219,433 --
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 715,281 1,357,375 749,254
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 16) -- -- 700,000
------------ ------------ ------------
NET INCOME $ 715,281 $ 1,357,375 $ 1,449,254
============ ============ ============
NET INCOME PER COMMON SHARE:
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .04 $ .08 $ .05
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- .04
------------ ------------ ------------
NET INCOME PER COMMON SHARE $ .04 $ .08 $ .09
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 16,522,530 16,522,530 16,522,530
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
BILTMORE INVESTORS BK NA PHOENIX AZ EXECUTIVE SUMMARY
SHESHUNOFF RATING GUIDELINES
National Rating Percentile Ranking(PCT)
Distribution 99 PCT = Best
Rating Cum.% 0 PCT = Worst
- -------------------------
0 0.6
10 2.6
20 4.8
30 8.0
40 13.3
50 24.7
60 43.5
70 68.2
80 87.9
90 96.6
99 100.0
<TABLE>
<CAPTION>
Sheshunoff Rating C A M E L
--------------------------------------------------------------------------------------------------
Asset
Capital Quality Mgmt. Earnings Liquidity
Prior Year PRIOR YEAR
Return Asset Core Capital Adj.Nonperf Operating Liquid
Total on Avg. Size Asset All Banks All Banks United Loss Loans & OREO Profit Assets
Assets Assets Peer Peer In In ------- ------- ------- -------
$(000) (R.O.A.) Group Group Nation Region Asset/PCT TL&OREO/PCT Avg.Assets/PCT Liabilities/PCT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MAR 96 137620 0.58 6 51 50 55 8.98/51 0.47/67 0.89/ 9 9.31/14
DEC 95 137555 0.52 6 49 48 54 8.94/51 0.52/66 0.68/ 7 16.15/47
SEP 95 138750 0.45 6 42 41 49 8.54/42 0.97/49 0.60/ 5 11.93/28
JUN 95 136014 0.48 6 44 44 50 8.60/43 0.79/59 0.62/ 6 12.21/28
MAR 95 141030 0.50 6 ** ** ** 7.69/26 ****/** 0.69/ 6 ****/**
DEC 94 143068 1.30 6 54 53 57 7.57/29 0.13/93 0.91/11 19.66/55
DEC 93 108209 0.83 6 50 50 54 10.42/77 0.91/72 0.73/12 18.09/44
DEC 92 100151 0.52 6 38 38 46 9.89/78 2.04/51 0.67/15 15.46/32
DEC 91 99364 0.16 7 21 25 36 9.15/62 2.61/24 0.16/12 14.52/16
</TABLE>
LOAN QUALITY
Net Nonperf.
Charge Loans &
Offs Debt Sec.
----- -----
Avg. Loan Core Cap.
Loans Growth Reserves
MAR 96 -0.01 -3.0 0.8
DEC 95 -0.04 2.5 0.8
SEP 95 0.01 3.0 3.6
JUN 95 0.03 3.0 5.7
MAR 95 -0.01 **** 3.3
DEC 94 0.11 30.5 4.1
DEC 93 -0.12 0.8 0.7
DEC 92 -0.41 8.4 1.5
DEC 91 0.69 7.8 1.1
<TABLE>
<CAPTION>
EXCEPTION ANALYSIS AS OF 3/31/96
PERCENTILE
RANGE
- ---------------------------------
25
OVER TO UNDER
75 75 25 PROFITABILITY
- ---------------------------------- --------------
<S> <C> <C> <C>
12 OPERATING PROFIT/AVERAGE ASSETS = 0.89%
11 RETURN ON AVERAGE ASSETS = 0.58%
10 RETURN ON AVERAGE EQUITY = 5.80%
43 NET INTEREST SPREAD (TAX ADJ.)/AVG. EARNING ASSETS = 4.54%
11 NET OVERHEAD EXPENSE/AVERAGE EARNING ASSETS = 3.59%
6 ADJUSTED BANK INCOME PER DOLLAR OF SALARY = $0.41
ASSET QUALITY (DOMESTIC)
------------------------
83 ADJ. NONPERFORMING LOANS & OREO/TL & OREO - 0.24%
80 ADJ. NONPERFORMING ASSETS (INCL. OREO) = 0.16%
81 NET CHARGE-OFFS/AVERAGE LOANS = -0.01%
90 LOAN LOSS RESERVE/TOTAL LOANS = 2.59%
LIQUIDITY & FUNDS MANAGEMENT
----------------------------
35 LIQUID ASSETS/TOTAL LIABILITIES = 15.53%
45 LARGE LIABILITY DEPENDENCE RATIO = 6.15%
43 TIME DEPOSITS OVER $100,000 = 9.91%
35 TOTAL LOANS/DEPOSITS = 74.76%
PERCENTILE
RANGE
- -------------------------------
26
OVER TO UNDER
75 75 25 CAPITAL ADEQUACY
- ------------------------------- ----------------
54 CORE CAPITAL-UNREALIZED LOSSES (SECS)/ASSETS = 8.98%
53 CORE CAPITAL/ASSETS = 8.99%
64 RISK-ADJUSTED CAPITAL RATIO = 16.53%
85 NONPERFORMING LOANS & DEBT SEC/CORE CAP + RES = 0.85%
DEBT + LIMITED-LIFE PFD. STOCK/TOT CAPITAL = 0.00%
47 DIVIDEND PAYOUT RATE = 0.00%
CONTINGENT LIABILITIES
----------------------
7 LOAN COMMITMENTS/TOTAL LOANS = 37.41%
53 LETTERS OF CREDIT, NET/TOTAL LOANS = 0.53%
FIVE YEAR COMPOUND GROWTH
-------------------------
39 5 YEAR COMPOUND GROWTH IN TOTAL ASSETS = 5.08%
31 5 YEAR COMPOUND GROWTH IN IPC DEPOSITS = 3.51%
62 5 YEAR COMPOUND GROWTH IN TOTAL LOANS = 9.52%
79 5 YEAR COMPOUND GROWTH IN C&I LOANS = 17.12%
79 5 YEAR COMPOUND GROWTH IN COMM'L RE LOANS = 25.47%
27 5 YEAR COMPOUND GROWTH IN NET OVERHEAD EXP. = 10.83%
</TABLE>
<PAGE>
BILTMORE INVESTORS BK NA PHOENIX AZ EXECUTIVE SUMMARY
<TABLE>
OVERVIEW ASSETS DEPOSITS LOANS
---------------------------------------------------------------------------------------------------
Net
Charge Loan
Nonper- Offs for Loss
Total % Total % Total % forming Period Reserve
Year ($000) Change ($000) Change ($000) Change $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
JUN 96 134138 -1.4 118359 -2.8 91527 1.9 167 -10 2372
MAR 96 137620 -2.4 122783 -2.6 91794 -3.0 124 -11 2373
DEC 95 137555 -3.9 116462 -10.1 91501 2.5 110 -30 2362
SEP 95 138750 3.5 124120 2.4 86468 3.0 519 10 2412
JUN 95 136014 **** 121752 **** 89847 **** 798 26 2396
MAR 95 141030 **** 126045 **** 94633 **** 454 -9 2431
DEC 94 143068 32.2 129518 34.4 89285 30.5 564 84 2422
DEC 93 108209 8.0 96392 7.7 68426 0.8 90 -81 1776
DEC 92 100151 0.8 89529 0.4 67860 8.4 168 -266 1914
DEC 91 99364 -7.5 89141 -8.6 62623 7.8 119 418 1648
OVERVIEW PROFITS CAPITAL
------------------------------------------------------------------
Income
Extra Divi- Total
Items % dends Equity %
Year $(000) Change $(000) $(000) Change
JUN 96 456 35.7 0 13872 6.49
MAR 96 199 13.1 0 13742 10.11
DEC 95 722 -55.8 0 13714 16.37
SEP 95 476 -63.0 0 13180 11.85
JUN 95 336 **** 0 13027 ****
MAR 95 176 **** 0 12480 ****
DEC 94 1634 88.5 0 11785 5.26
DEC 93 867 66.4 0 11196 16.27
DEC 92 521 208.3 0 9629 9.64
DEC 91 169 **** 0 8782 3.61
</TABLE>
<TABLE>
<CAPTION>
PEER GROUP COMPARISONS (PCT = Percentile Rank within National Asset Size Peer Group)
3/96 3/95 12/95 12/94 12/93 12/92 12/91
<S> <C> <C> <C> <C> <C> <C> <C>
PROFITABILITY
Operating Profit/Average Assets 0.89/12 0.69/ 9 0.68/10 0.91/16 0.73/16 0.67/20 0.16/21
Return on Average Assets (R.O.A.) 0.58/11 0.50/10 0.52/10 1.30/67 0.83/29 0.52/20 0.16/21
Return on Average Equity (R.O.E.) 5.80/10 5.80/11 5.62/10 14.22/63 8.33/22 5.66/17 1.96/20
Net Interest Spread (Tax Adj.) 4.54/43 4.58/39 4.44/34 4.33/29 2.96/ 3 3.33/ 5 2.89/ 3
Noninterest Income/Average Assets 0.77/53 0.54/33 0.58/35 0.54/30 0.48/24 0.42/19 0.34/14
Net Overhead Expense/Average Assets 3.35/10 3.57/10 3.53/ 9 3.22/17 2.34/54 2.50/48 2.47/62
Overhead Efficiency Ratio 82.32/ 6 85.68/ 6 87.05/ 5 81.54/10 84.32/10 81.37/14 91.89/11
ASSET QUALITY
Adj. Nonperf. Loans & OREO/Total Loans & OREO 0.24/83 0.47/69 0.22/83 0.52/70 0.13/94 0.91/77 2.04/56
Adj. Nonperf. Assets (incl. OREO)/Total Assets 0.16/80 0.31/67 0.15/81 0.32/68 0.08/93 0.62/70 1.31/49
Nonperf. LoaLoans & DebteSecs./Core Capital + Reserves 0.85/85 3.28/58 0.76/86 4.13/51 0.69/90 1.46/89 1.14/87
Earnings Coverage: Net Charge-Offs ****/** ****/** ****/** 12.74/42 ****/** ****/** 0.61/13
Net Charge-Offs/Average Loans -0.01/81 -0.01/78 -0.04/92 0.11/52 -0.12/95 -0.41/99 0/69/32
Loan Loss Reserve/Total Loans 2.59/90 2.57/89 2.58/90 2.71/90 2.60/87 2.82/89 2.63/86
LIQUIDITY
Liquid Assets/Total Liabilities 15.53/35 9.31/12 11.33/14 16.15/43 19.66/52 18.09/42 15.46/25
Time Deposits Over $100,000/Total Assets 8.84/40 9.81/29 9.95/32 9.85/27 8.89/29 9.38/28 9.24/45
Borrowings & Foreign Dep/Total Assets 0.00/46 0.00/47 0.00/46 0.00/46 0.00/43 0.00/43 0.00/26
Net Fed. Funds Purch.(Sold)/Tot. Assets -2.44/52 0.31/28 4.61/ 6 -3.51/76 -3.64/63 -2.20/43 -0.42/17
Brokered Deposits/Total Assets 0.00/** 0.00/** 0.00/** 0.00/** 0.00/** 0.00/** 0.00/**
Total Loans/total Deposits 74.76/35 75.08/37 78.57/24 68.94/52 70.99/40 75.80/23 70.25/38
CAPITAL
Core Capital - Unrealized Losses (Secs.)/Assets 8.98/54 7.69/30 8.94/55 7.57/33 10.42/80 9.89/81 9.15/69
Core Capital/Assets 8.99/53 8.06/35 8.94/54 8.34/44 10.42/80 9.89/81 9.15/69
Risk-Adjusted Capital Ratio 16.53/64 15.87/54 15.98/58 15.91/56 22.54/84 21.51/85 20.82/83
Core Capital + Loan Loss Reserve/Total Loans 15.98/49 14.64/38 15.75/48 15.28/43 18.96/66 17.01/60 16.66/57
% Change: Core Capital 7.63/38 ****/** 7.43/37 0.21/10 16.27/76 9.64/47 3.61/31
% Change: Total Assets -2.42/ 7 ****/** -3.85/ 6 32.21/95 8.05/67 0.79/24 -7.47/ 7
Dividend Payout Rate 0.00/47 0.00/48 0.00/71 0.00/70 0.00/69 0.00/69 0.00/67
</TABLE>
<PAGE>
BILTMORE INVESTORS BK NA PHOENIX AZ
<TABLE>
<CAPTION>
BALANCE SHEET
=============
06/96 06/95 12/95 12/94 12/93 12/92 12/91
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
------
CASH & DUE FROM DEPOSITORY INSTITUTIONS:
NONINTEREST-BEARING. CURRENCY & COIN 6638 6251 6455 8491 3059 3882 4559
INTEREST-BEARING BALANCES 100 100 100 100 100 0 0
SECURITIES 28010 30683 36708 36343 32261 26117 29553
HELD-TO-MATURITY SECS (AMORTIZED COST) 0 0 0 0 *** *** ***
AVAILABLE-FOR-SALE SECS (FAIR VALUE) 28010 30683 36708 36343 *** *** ***
FED FUNDS SOLD & SECS. PURCHASED 5000 6115 0 5628 3940 2508 1191
FEDERAL FUNDS SOLD 5000 6115 0 5628 3940 2508 1191
SECS. PUNCH UNDER AGREEMENTS TO RESELL 0 0 0 0 0 0 0
LOANS & LEASE FINANCING RECEIVABLES:
TOTAL, NET OF UNEARNED INCOME 91527 89847 91501 89285 68426 67860 62623
LESS: ALLOWANCE FOR LOSSES -2372 -2396 -2362 -2422 -1776 -1914 -1648
LESS: ALLOCATED TRANSFER RISK RESERVE 0 0 0 0 0 0 0
LOANS & LEASES, NET 89155 87451 89139 86863 66650 65946 60975
TRADING ASSETS 0 0 0 0 0 0 0
PREMISES & FIXED ASSETS 1621 184 1616 1605 756 773 840
OTHER REAL ESTATE OWNED 103 103 103 0 0 453 1185
INVESTMENTS IN UNCONSOLIDATED SUBS 0 0 0 0 0 0 0
ACCEPTANCES (CUSTOMER'S LIABILITY) 0 0 0 0 0 0 0
INTANGIBLE ASSETS 1409 1537 1499 1611 0 0 0
OTHER ASSETS 2102 2090 1935 2427 1443 472 1061
TOTAL ASSETS 134138 136014 137555 143068 108209 100151 99364
LIABILITIES
-----------
TOTAL DEPOSlTS 118359 121752 116462 129518 96392 89529 89141
HELD IN DOMESTIC OFFICES:
DOMESTIC NONINTEREST-BEARING 26632 24968 24090 27552 16441 13969 9780
DOMESTIC INTEREST-BEARING 91727 96784 92372 101966 79951 75560 79361
HELD IN FOREIGN OFFICES:
FOREIGN NONINTEREST-BEARING 0 0 0 0 0 0 0
FOREIGN INTEREST BEARING 0 0 0 0 0 0 0
FED FUNDS PURCHASED & SECS. SOLD 1160 426 6341 603 0 300 774
FEDERAL FUNDS PURCHASED 1019 0 1200 0 0 0 0
SECS. SOLD UNDER AGREEMENTS TO REPURCH 141 426 5141 603 0 300 774
DEMAND NOTES ISSUED TO U.S. TREASURY 0 0 0 0 0 0 0
TRADING LIABILITIES 0 0 0 0 *** *** ***
OTHER LIABILITIES FOR BORROWED MONEY 0 0 0 0 0 0 0
REMAIN MATURITY OF ONE YEAR OR LESS 0 0 0 0 *** *** ***
REMAIN MATURITY OF MORE THAN ONE YEAR 0 0 0 0 *** *** ***
MTG. INDEBTEDNESS, CAPITALIZED LEASES 0 88 29 145 0 0 0
ACCEPTANCES (BANK'S LIABILITY) 0 0 0 0 0 0 0
SUB0RDINATED NOTES & DEBENTURES 0 0 0 0 0 0 0
OTHER LIABIILITIES 747 721 1009 1017 621 693 667
TOTAL LIABILITIES 120266 122987 123841 131283 97013 90522 90582
LIMITED LIFE PREFERRED STOCK 0 0 0 0 0 0 0
EQUITY CAPITAL
--------------
PERPETUAL PREFERRED STK & REL. SURPLUS 0 0 0 0 0 0 0
COMMON STOCK 1782 1782 1782 1782 1782 1782 1782
SURPLUS(EXCL. SURPLUS REL. TO PREF. STK) 13092 13093 13093 13093 13093 13093 13093
UNDIVIDED PROFITS & CAPITAL RESER, GROSS -867 -1709 -1323 -2045 -3679 -5246 -6093
UNREAL GAINS ON AVAILABLE-FOR-SALE SECS -136 -139 162 -1045 0 0 0
FOREIGN CURRENCY TRANSLATION ADJUSTMENT *** *** *** *** *** *** ***
TOTAL EQUITY CAPITAL 13872 13027 13714 11785 11196 9629 8782
TOTAL LIABILITIES & EQUITY CAPITAL 134138 136014 137555 143068 108209 100151 99364
</TABLE>
LEVEL OF AUDITING WORK PERFORMED AS OF ANY DATE DURING 1996:
Independent audit of the bank's parent holding company conducted in accordance
with generally accepted auditing standards by a certified public accounting firm
which submits a report on the consolidated holding company (but not on the bank
separately)
<PAGE>
BILTMORE INVESTORS BK NA PHOENIX AZ
<TABLE>
<CAPTION>
INCOME STATEMENT
================
06/96 06/95 12/95 12/94 12/93 12/92 12/91
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST & FEES ON LOANS 4009 3966 7888 6230 4282 4959 5560
INCOME FROM LEASE FINANCING RECEIVABLES 0 0 0 0 0 0 0
TOTAL INTEREST ON BALANCES WITH BANKS 1 1 3 2 2 0 0
DOMESTIC OFFICES 1 1 3 2 2 0 0
FOREIGN OFFICES 0 0 0 0 0 0 0
TOTAL INTEREST & DIVIDENDS ON SECURITIES 920 1014 2062 2110 1872 2016 2639
U.S. TREASURY & AGENCY OBLIGATIONS 902 987 2006 2056 1820 1978 2626
SECURITIES ISSUED BY STATES & POL.SUBS 0 0 0 0 0 0 0
TAXABLE SECURITIES 0 0 0 0 0 0 0
TAX-EXEMPT SECURITIES 0 0 0 0 0 0 0
OTHER DOMESTIC SECURITIES 0 16 34 35 35 22 0
FOREIGN SECURITIES 0 0 0 0 0 0 0
EQUITY SECURITIES 18 11 22 19 17 16 13
INTEREST INCOME FROM TRADING ACCOUNTS 0 0 0 0 0 0 0
INCOME ON FEDERAL FUNDS SOLD 151 103 217 142 107 62 118
TOTAL INTEREST INCOME 5081 5084 10170 8484 6263 7037 8317
TOTAL INTEREST EXPENSE ON DEPOSITS 2006 2109 4318 3365 3280 3864 5468
NOW, ATS & OTHER TRANSFER ACCOUNTS 54 77 133 144 60 86 121
MONEY MARKET DEPOSIT ACCOUNTS 810 446 778 679 380 402 540
OTHER SAVINGS DEPOSITS 57 389 868 548 499 634 967
TIME CD'S OF $100,000 OR MORE 297 398 825 605 521 576 746
ALL OTHER TIME DEPOSITS 788 799 1714 1389 1820 2166 3094
INTEREST ON FOREIGN OFFICE DEPOSITS 0 0 0 0 0 0 0
EXPENSE OF FEDERAL FUNDS PURCHASED 8 32 81 5 4 12 36
INTEREST ON US NOTES & OTHER BORROWINGS 0 0 0 0 0 0 0
INTEREST ON MORTGAGE INDEBTEDNESS 0 3 5 10 0 0 0
INTEREST ON SUBORDINATED NOTES & DEBS 0 0 0 0 0 0 0
TOTAL INTEREST EXPENSE 2014 2144 4404 3380 3284 3876 5504
NET INTEREST MARGIN 3067 2940 5766 5104 2979 3161 2813
NET INTEREST MARGIN (TAX ADJ) 3067 2940 5766 5104 2979 3161 2813
PROVISION FOR LOAN & LEASE LOSSES 0 0 -99 -76 -219 0 90
PROVISION FOR ALLOCATED TRANSFER RISK 0 0 0 0 0 0 0
SERVICE CHARGES ON DEPOSIT ACCOUNTS 54 113 223 226 161 157 132
INCOME FROM FIDUCIARY ACTIVITIES 128 88 190 114 51 26 0
TRADING REVENUE 0 0 0 0 0 0 0
OTHER FOREIGN TRANSACTION GAINS(LOSSES) 0 0 0 0 0 0 0
0TH GAIN(LOSS),FEES ON TRADE ASSETS&LIAB *** 0 0 0 0 0 0
OTHER NONINTEREST INCOME 237 190 397 341 291 236 224
OTHER FEE INCOME 208 178 377 300 178 113 54
ALL OTHER NONINTEREST INCOME 29 12 20 41 113 123 170
TOTAL NONINTEREST INCOME 419 391 810 681 503 419 356
REALIZED GAINS (LOSSES) ON SECURITIES -4 28 28 11 7 180 148
REAL GAIN/LOSS ON HELD-TO-MATR SECS 0 0 0 0 *** *** ***
REAL GAIN/LOSS ON AVAIL-FOR-SALE SECS -4 28 28 11 *** *** ***
SALARIES & EMPLOYEE BENEFITS 1404 1256 2653 2036 1449 1352 1250
EXPENSES OF PREMISES & FIXED ASSETS, NET 501 495 1005 889 541 554 510
OTHER NONINTEREST EXPENSE 881 1143 2066 1790 946 1007 1152
TOTAL NONINTEREST EXPENSE 2786 2894 5724 4715 2936 2913 2912
INCOME BEFORE TAXES & EXTRAORDINARY 696 465 979 1157 772 847 315
APPLICABLE INCOME TAXES -240 -129 -257 477 95 -326 -146
INCOME BEFORE EXTRAORDINARY ITEMS 456 336 722 1634 867 521 169
EXTRAORDINARY ITEMS, GROSS 0 0 0 0 700 326 146
APPLICABLE INCOME TAXES ON EXTRA. ITEMS 0 0 0 0 0 0 0
EXTRAORDINARY ITEMS, NET OF TAXES 0 0 0 0 700 326 146
NET INCOME (LOSS) 456 336 722 1634 1567 847 315
</TABLE>
<PAGE>
BILTMORE INVESTORS BANK ARIZONA MONTH END
STATEMENT OF CONDITION
TOTAL BANK AS OF JULY 31, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
CURRENT CURRENT MONTHS PREVIOUS MONTHS PREVIOUS YEAR YEAR TO DATE
BALANCE AVERAGE AVERAGE MONTHS AVERAGE AVERAGE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CASH & CASH ITEMS 314,985.37 359,096.65 338,034.55 289,835.83 332,145.00
DUE FROM BANKS 5,394,641.49 5,701,747.09 5,699,124.91 5,254,794.56 5,768,237.75
-------------------------------------------------------------------------------------------------
TOTAL CASH 5,709,626.86 6,060,843.74 6,037,159.46 5,544,630.39 6,100,382.75
-------------------------------------------------------------------------------------------------
U.S. TREASURY 17,880,731.05 17,878,746.82 17,874,357.36 14,982,957.05 18,312,610.66
U.S. GOVT. AGENCIES 8,774,430.31 9,354,327.97 10,042,222.31 15,053,887.01 12,254,451.19
CD'S PURCHASED 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00
OTHER SECURITIES 682,320.26 509,878.59 454,717.99 879,300.00 822,468.31
FASB 115 MARKET VALUE ADJUSTMENT (186,043.57) (220,873.91) (174,369.60) (211,045.12) 27,154.17
-------------------------------------------------------------------------------------------------
TOTAL SECURITIES 27,251,438.05 27,622,079.47 28,296,928.06 30,805,098.94 31,516,684.33
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
FUNDS SOLD 6,000,000.00 7,356,483.87 6,320,000.00 7,664,548.38 6,071,647.88
-------------------------------------------------------------------------------------------------
COMMERCIAL LOANS 45,737,671.27 45,470,729.55 44,280,666.46 42,255,899.25 44,445,665.59
INSTALLMENT LOANS-NET 945,647.07 941,246.78 964,017.65 2,327,282.07 1,790,078.66
REAL ESTATE LOANS 43,470,986.99 43,520,517.95 43,185,833.80 42,779,803.61 42,868,151.23
HOME EQUITY LOANS 2,006,649.88 1,879,363.59 1,810,350.48 0.00 726,072.41
ICC LOANS 226,035.11 219,728.74 208,640.33 271,536.13 220,355.37
MASTER CARD LOANS 793,156.53 750,162.79 757,690.97 688,006.35 747,546.50
OTHER LOANS 265,448.84 448,574.60 375,013.19 198,644.86 273,391.51
-------------------------------------------------------------------------------------------------
TOTAL LOANS 93,445,595.69 93,230,324.00 91,582,212.88 88,521,172.27 91,071,261.27
-------------------------------------------------------------------------------------------------
LESS RESV FOR LOAN LOSSES (2,377,787.28) (2,375,612.21) (2,372,728.64) (2,402,365.87) (2,370,017.88)
-------------------------------------------------------------------------------------------------
NET LOANS 91,067,808.41 90,854,711.79 89,209,484.24 86,118,806.40 88,701,243.39
-------------------------------------------------------------------------------------------------
FIXED ASSETS 843,830.16 1,031,989.71 1,634,733.28 1,701,183.07 1,546,556.16
OTHER REAL ESTATE 103,015.30 103,015.30 103,015.30 103,015.30 110,060.73
ACCOUNTS RECEIVABLE 28,051.63 44,073.93 26,470.80 24,719.23 26,851.34
INTEREST RECEIVABLE 800,387.53 872,960.36 855,725.06 875,128.08 866,498.20
OTHER ASSETS 2,311,238.18 2,273,110.16 2,395,649.95 2,587,345.24 2,249,920.79
=================================================================================================
TOTAL ASSETS 134,115,396.12 136,219,268.33 134,879,166.15 135,424,475.03 137,189,845.57
=================================================================================================
</TABLE>
<PAGE>
BILTMORE INVESTORS BANK ARIZONA MONTH END
STATEMENT OF CONDITION
TOTAL BANK AS OF JULY 31, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
CURRENT CURRENT MONTHS PREVIOUS MONTHS PREVIOUS YEAR YEAR TO DATE
BALANCE AVERAGE AVERAGE MONTHS AVERAGE AVERAGE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND CAPITAL
BUSINESS 23,607,719.24 22,024,687.97 21,151,200.68 19,206,657.39 20,351,937.09
PERSONAL 3,587,812.06 3,719,959.96 3,824,309.47 2,932,713.83 4,139,366.14
OTHER DDA 1,486,631.42 1,904,811.84 2,019,530.80 1,348,413.75 1,837,829.20
-------------------------------------------------------------------------------------------------
TOTAL DDA 28,682,162.72 27,649,459.77 26,995,040.95 23,487,784.97 26,329,132.43
-------------------------------------------------------------------------------------------------
MONEY MARKET SAVINGS 47,636,295.39 48,559,039.62 45,615,788.18 38,149,591.70 44,979,906.08
NOW ACCOUNTS 8,276,987.86 8,055,902.88 8,296,650.18 8,455,895.84 8,149,265.42
REGULAR SAVINGS 889,339.60 937,246.72 944,107.04 1,221,327.26 1,700,185.45
CORPORATE SAVINGS 1,828,628.34 1,866,083.22 1,836,048.48 1,645,265.23 2,568,353.41
LARGE CD'S--STANDARD RATES 9,217,394.21 9,674,175.00 10,263,369.44 13,448,374.32 10,650,873.67
LARGE CD'S--NEGOTIABLE RATES 0.00 0.00 0.00 0.00 0.00
7 DAY MONEY MARKET CD'S 251,983.77 251,595.19 219,301.14 0.00 91,944.31
3 MONTH CD'S 376,223.16 365,027.64 359,115.86 0.00 151,972.10
6 MONTH CD'S 26,174.48 24,647.11 12,936.46 0.00 6,669.14
1 YEAR CD'S 5,891,424.68 5,842,505.69 5,755,159.85 0.00 2,359,913.06
2 YEAR CD'S 5,205,453.52 6,367,559.54 7,768,466.02 28,219,730.67 16,898,763.12
3 YEAR CD'S 2,090,197.78 2,177,332.12 2,383,686.45 0.00 944,491.81
4 YEAR CD'S 82,134.12 151,536.58 188,689.36 0.00 73,858.70
5 YEAR CD'S 3,378,343.15 3,435,968.98 3,465,457.64 0.00 1,416,627.75
IRAS AND KEOGHS 5,091,453.86 5,584,009.55 5,532,268.84 6,534,530.00 5,887,294.56
OTHER TDA 5,653.69 34,657.10 24,766.69 (69,213.71) (49,851.07)
-------------------------------------------------------------------------------------------------
TOTAL TDA 90,247,687.61 93,327,286.94 92,665,811.63 97,605,501.31 95,830,267.51
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
TOTAL DEPOSITS 118,929,850.33 120,976,746.71 119,660,852.58 121,093,286.28 122,159,399.94
-------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 140,500.00 140,500.00 140,500.00 425,500.00 222,659.62
OTHER BORROWINGS 231,347.06 424,544.09 427,687.49 397,937.33 309,180.46
OTHER LIABILITIES 825,548.98 693,391.72 714,551.09 502,103.52 656,984.93
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 120,127,246.37 122,235,182.52 120,943,591.16 122,418,827.13 123,348,224.95
-------------------------------------------------------------------------------------------------
CAPITAL
COMMON STOCK 1,782,005.00 1,782,005.00 1,782,005.00 1,782,005.00 1,782,005.00
PAID IN SURPLUS 13,093,112.00 13,093,112.00 13,093,112.00 13,093,112.00 13,093,112.00
UNDIVIDED PROFITS (1,322,701.56) (1,322,701.56) (1,322,701.56) (2,045,119.55) (1,322,701.56)
FASB 115 MARKET VALUE ADJ (113,088.45) (134,260.41) (107,561.11) (139,609.54) 20,429.90
CURRENT PROFITS 548,822.76 565,930.78 490,720.66 315,259.99 268,775.28
-------------------------------------------------------------------------------------------------
TOTAL CAPITAL 13,988,149.75 13,984,085.81 13,935,574.99 13,005,647.90 13,841,620.62
-------------------------------------------------------------------------------------------------
=================================================================================================
TOTAL LIABILITIES AND CAPITAL 134,115,396.12 136,219,268.33 134,879,166.15 135,424,475.03 137,189,845.57
=================================================================================================
</TABLE>
<PAGE>
BILTMORE INVESTORS BANK ARIZONA COMPARATIVE STATEMENT
OF
OPERATING INCOME & EXPENSE
TOTAL BANK PERIOD ENDED JULY 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------------------------------------------
CURRENT PERIOD YEAR TO DATE
- --------------------------------------------- ------------------------------------------------------
ACTUAL BUDGET VARIANCE LAST YEAR ACTUAL BUDGET VARIANCE LAST YEAR
- --------------------------------------------- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME
87,741 92,886 (5,145) 68,220 U.S. TREASURY SECURITIES 614,392 648,025 (33,633) 567,530
45,798 84,425 (38,627) 69,826 U.S. GOVERNMENT AGENCIES 412,518 572,863 (160,345) 557,153
237 0 237 237 CDS PURCHASED 1,600 0 1,600 1,606
2,410 4,896 (2,486) 4,667 OTHER SECURITIES 29,453 34,272 (4,819) 31,513
42,122 2,183 39,939 37,160 FUNDS SOLD 193,107 18,914 174,193 139,755
- --------------------------------------------- ------------------------------------------------------
178,308 184,390 (6,082) 180,110 TOTAL INVESTMENT INCOME 1,251,070 1,274,074 (23,004) 1,297,557
- --------------------------------------------- ------------------------------------------------------
LOAN INTEREST INCOME
355,073 401,289 (46,216) 352,907 COMMERCIAL LOANS 2,440,129 2,654,957 (214,828) 2,546,339
7,838 23,327 (15,489) 19,702 INSTALLMENT LOANS 102,981 150,193 (47,212) 148,864
285,778 295,708 (9,930) 266,138 REAL ESTATE LOANS 1,950,414 2,014,080 (63,666) 1,843,666
15,740 0 15,740 0 HOME EQUITY LOANS 43,044 0 43,044 0
2,738 2,753 (15) 3,326 ICC LOANS 18,917 18,915 2 24,173
4,416 6,403 (1,987) 4,594 MASTER CARD LOANS 32,492 44,790 (12,298) 31,633
- --------------------------------------------- ------------------------------------------------------
671,583 729,480 (57,897) 646,667 TOTAL LOAN INTEREST INCOME 4,587,977 4,882,935 (294,958) 4,594,675
- --------------------------------------------- ------------------------------------------------------
- --------------------------------------------- ------------------------------------------------------
849,891 913,870 (63,979) 826,777 TOTAL INTEREST INCOME 5,839,047 6,157,009 (317,962) 5,892,232
- --------------------------------------------- ------------------------------------------------------
DEPOSIT EXPENSE
147,170 85,702 61,468 131,232 MONEY MARKET SAVINGS 957,105 587,987 369,118 938,563
8,835 65,089 (56,254) 11,119 NOW ACCOUNTS 63,080 450,582 (387,502) 86,654
4,642 4,743 (101) 4,702 REGULAR SAVINGS 62,001 30,849 31,152 32,373
44,993 84,788 (39,795) 65,861 LARGE CDS--STANDARD RATE 341,769 556,693 (214,924) 418,924
907 0 907 0 7 DAY MONEY MARKET CDS 2,206 0 2,206 0
1,344 170,588 (169,244) 0 3 MONTH CDS 3,794 1,111,758 (1,107,964) 0
(389) 0 (389) 0 6 MONTH CDS (311) 0 (311) 0
23,148 0 23,148 0 1 YEAR CDS 64,942 0 64,942 0
31,301 0 31,301 0 2 YEAR CDS 102,039 0 102,039 0
10,079 0 10,079 0 3 YEAR CDS 29,282 0 29,282 0
760 0 760 0 4 YEAR CDS 2,532 0 2,532 0
18,414 0 18,414 0 5 YEAR CDS 53,569 0 53,569 0
26,717 0 26,717 32,877 IRAS AND KEOGHS 197,365 0 197,365 208,927
0 0 0 135,426 OTHER TIME DEPOSITS 445,353 0 445,353 803,297
597 7,856 (7,259) 1,806 REPURCHASE AGREEMENTS 7,070 60,054 (52,984) 33,722
1,064 1,271 (207) 404 OTHER BORROWINGS 2,446 13,724 (11,278) 5,334
- --------------------------------------------- ------------------------------------------------------
319,582 420,037 (100,455) 383,427 TOTAL INTEREST EXPENSE 2,334,242 2,811,647 (477,405) 2,527,794
- --------------------------------------------- ------------------------------------------------------
- --------------------------------------------- ------------------------------------------------------
530,309 493,833 36,476 443,350 NET INTEREST INCOME 3,504,805 3,345,362 159,443 3,364,438
- --------------------------------------------- ------------------------------------------------------
</TABLE>
<PAGE>
BILTMORE INVESTORS BANK ARIZONA COMPARATIVE STATEMENT
OF
OPERATING INCOME & EXPENSE
TOTAL BANK PERIOD ENDED JULY 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------- ------------------------------------------------
CURRENT PERIOD YEAR TO DATE
- -------------------------------------------- ------------------------------------------------
ACTUAL BUDGET VARIANCE LAST YEAR ACTUAL BUDGET VARIANCE LAST YEAR
- -------------------------------------------- ------------------------------------------------
- -------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
530,309 493,833 36,476 443,350 NET INTEREST INCOME 3,504,805 3,345,362 159,443 3,364,438
- -------------------------------------------- ------------------------------------------------
OTHER OPERATING INCOME
8,418 13,000 (4,582) 8,620 LINK INVESTMENT SERVICES 127,954 91,000 36,954 56,460
23,537 23,440 97 15,294 TRUST INCOME 151,843 140,536 11,307 103,093
31,501 42,250 (10,749) 30,387 LOAN FEES 145,137 316,750 (171,613) 164,487
21,110 23,250 (2,140) 21,311 SERVICE CHARGES 136,340 146,850 (10,510) 154,105
1,904 1,460 444 839 OTHER INCOME 7,184 10,220 (3,036) 6,962
0 0 0 0 SECURITY GAIN/LOSS - GROSS (4,078) 0 (4,078) 28,455
- ------------------------------------------- ------------------------------------------------
86,470 103,400 (16,930) 76,451 TOTAL OTHER OPERATING INCOME 564,380 705,356 (140,976) 513,562
- ------------------------------------------- ------------------------------------------------
GENERAL OPERATING EXPENSES
(24,700) (13,500) (11,200) (13,519) FASB 91 SALARY/BENEFIT ADJ (145,913) (87,400) (58,513) (76,732)
206,327 164,528 41,799 199,932 SALARIES 1,485,293 1,264,852 220,441 1,299,104
49,410 42,777 6,633 41,498 EMPLOYEE BENEFITS 322,283 327,368 (5,085) 273,015
13,547 13,900 (353) 19,061 PROFESSIONAL FEES 80,990 95,300 (14,310) 102,078
48,559 36,151 12,408 33,594 MANAGEMENT FEES 265,465 253,057 12,408 235,158
0 0 0 0 CENTRAL OPERATIONS EXPENSE 9,833 0 9,833 0
36,943 32,700 4,243 29,674 DATA PROCESSING FEES 203,619 228,900 (25,281) 194,148
54,329 57,400 (3,071) 57,873 OCCUPANCY EXPENSE 375,852 404,000 (28,148) 373,813
5,523 5,000 523 3,861 TELEPHONE EXPENSE 60,596 35,000 25,596 29,353
33,863 27,650 6,213 32,880 EQUIPMENT EXPENSE 212,838 193,550 19,288 211,928
865 3,283 (2,418) 10,185 ADVERTISING & PROMOTION 25,382 31,981 (6,599) 76,447
0 0 0 0 LOAN LOSS PROVISION 0 0 0 0
6,639 8,950 (2,311) 12,491 POSTAGE & FREIGHT 62,087 63,650 (1,563) 74,646
5,776 9,400 (3,624) 9,066 SUPPLIES 72,142 65,800 6,342 72,422
2,877 1,550 1,327 1,405 LOAN FEE EXPENSE 16,384 10,850 5,534 12,795
110 350 (240) 891 OTHER REAL ESTATE EXPENSE (5,570) 7,850 (13,420) 46,332
32,758 32,814 (56) 58,882 OTHER EXPENSES 188,381 228,799 (40,418) 466,158
- ------------------------------------------- ------------------------------------------------
472,826 422,953 49,873 497,774 TOTAL GENERAL EXPENSES 3,229,662 3,123,557 106,105 3,390,665
- ------------------------------------------- ------------------------------------------------
=========================================== ================================================
143,953 174,280 (30,327) 22,027 NET OPERATING INCOME 839,523 927,161 (87,638) 487,335
51,100 67,038 (15,938) 2,450 INCOME TAXES 290,700 350,083 (59,383) 131,778
92,853 107,242 (14,389) 19,577 NET INCOME 548,823 577,078 (28,255) 355,557
=========================================== ================================================
</TABLE>
<PAGE>
Item 17
Exhibit D
BILTMORE BANK CORP. / JOHNSON INTERNATIONAL, INC.
2425 East Camelback Road
Phoenix, Arizona 85016
- --------------------------------------------------------------------------------
INFORMATION STATEMENT
Special Meeting of Shareholders - ________ , 1996
- --------------------------------------------------------------------------------
Introduction
This Information Statement and the enclosed form of Ballot are being
sent to the shareholders (the "Shareholders") of Biltmore Bank Corp., an Arizona
corporation (the "Company"), in connection with a proposed amendment to the
Second Amended and Restated Articles of Incorporation of the Company reducing
the number of authorized shares of Common Stock of the Company, from Twenty-Five
Million to Two Hundred and, if adopted, effecting a reverse stock split
transaction of 125,000 to 1 recommended by the Board of Directors of the Company
and the company's affiliate and Joint filer, Johnson International, Inc. for
shareholder vote at the Special Meeting of Shareholders to be held at 2:00,
p.m., Mountain Standard Time, ________, 1996, and at any adjournment thereof for
the purposes set forth in the attached Notice of Special Meeting of
Shareholders. The Special Meeting will be held at the Company's executive
offices located at 2425 East Camelback Road, Phoenix, Arizona, 85016.
The first date on which this Information Statement, Ballot, and Notice
of Special Meeting are being sent to Company Shareholders is November __, 1996.
The Board of Directors unanimously recommends approval of the Amendment and
completing the reverse stock split transaction set forth in Schedule 13e-3 and
this Information Statement.
The Company knows of no other matters to be submitted for consideration
and vote at the Meeting. If any other matter properly comes before the Meeting,
it is the intention of the Company to consider and vote on any such matters as
the Board of Directors may recommend.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
Table of Contents
Item 1. Special Factors.....................................................2
Purpose(s), Alternatives, Reasons and Effects.......................2
Fairness of the Transaction.........................................6
Reports, Opinions, Appraisal and Certain Negotiations...............7
Item 2. Issuer and Class of Security Subject to the Transaction............10
Item 3. Past Contacts, Transactions or Negotiations........................11
Item 4. Terms of the Transaction...........................................12
Item 5. Plans or Proposals of the Issuer or Affiliate......................13
Item 6. Source and Amounts of Funds or Other Consideration.................14
Item 7. Interest in Securities of the Issuer...............................14
Item 8. Contracts, Arrangements or Understandings With Respect to
the Issuer's Securities............................................15
Item 9. Present Intention and Recommendation of Certain Persons
With Regard to the Transaction.....................................15
Item 10. Other Provisions of the Transaction................................16
Item 12. Financial Information..............................................18
Item 13. Persons and Assets Employed, Retained or Utilized..................19
Item 14. Additional Information.............................................19
Item 15. Exhibits...........................................................19
Item 16. Other Matters......................................................19
1
<PAGE>
Item 1. Special Factors
Purpose(s), Alternatives, Reasons and Effects
The Board of Directors of the Company and Johnson International, Inc.,
the joint-filer of the Schedule 13e-3,has proposed a Rule 13e-3 "going private
transaction" (the "Transaction") to enable management to concentrate efforts on
the long-term growth of the Company's business free from the constraints of
public ownership which the Board believes often places undue emphasis on
quarter-to-quarter earnings at the expense of long-term growth. The Board also
has concerns about the Company's financial growth in relation to its industry
peers located in the Phoenix, Arizona market. As of June 30, 1996, the Company's
return on equity was 6.57%. Only one other financial institution out of the 23
polled in the Company's market had a lower percentage, with the average peer
group return on equity being 15.58%. The peer group analyzed by Alex Sheshunoff
& Co., Investment Banking, the expert who prepared a fairness opinion regarding
the Transaction had an even higher return on equity of 20.53%.
As a result, as part of long-term cost savings, the Board believes the
suspension of Securities Exchange Commission (the "SEC") filing requirements
will reduce annual direct expenses approximately $35,000.00, and reduce
substantial indirect costs associated with SEC filing requirements. To the
Company's knowledge, no significant trading market has developed for the Common
Stock of the Company ("Company Common Stock") since the Company first went
public in 1985. The Company receives regular inquiries from Shareholders
regarding the willingness of the Company (or its affiliated shareholder and
joint-filer of this Information Statement and the Schedule 13e-3, Johnson
International, Inc. (JI), a Wisconsin based company owned primarily by Samuel C.
Johnson and family members) to purchase their shares of Company Common Stock. In
many of these instances, the Shareholder was unable to obtain from a stockbroker
any bid price or offer to purchase the Company Common Stock.
The Transaction would permit Shareholders to receive fair value for
their shares without the possible diminution of value resulting from the lack of
an established trading market and without payment of potentially
disproportionate brokerage fees. The lack of liquidity illustrates the fact that
being a publicly held company has not served the original purpose for which the
Company had undertaken the responsibility of being a public company. The lack of
any market interest in the securities has not permitted Shareholders to realize
on the value of their shares, and, in the opinion of the Board, there exists no
reasonable prospect of their doing so. Based upon the lack of investor interest
in Company Common Stock, little potential for dividends (none have ever been
paid), limited stock appreciation potential,
2
<PAGE>
expense of being a public company in terms of time spent by management and the
significant expense for legal, accounting and transfer agent fees. The Committee
appointed by the Board to develop a plan and make recommendations regarding a
reverse stock split transaction and the fairness of the Transaction to
unaffiliated holders of Company Common Stock unanimously concluded, and the full
Board unanimously concurred, that there was no justification for continuing the
Company as a public entity.
The Company has determined that a reverse stock split would be the most
efficient method to achieve the purposes discussed above. Delaying the
consummation of the Transaction beyond the December 31 fiscal year-end would
substantially reduce the amount of cost savings that could otherwise be
realized. If the Company is required to file a Form 10-K, the Company will be
required to secure audited financial statements at a cost of approximately
$20,000, as well as to continue with mandatory Section 15(d) filings until the
Transaction is concluded. Furthermore, by consummating the Transaction by
year-end, Shareholders will be entitled to take the losses most of them will
realize as a result of the Transaction on their 1995 tax returns. It is
anticipated most Shareholders will realize a loss as a result of the
Transaction, because most, if not all, Shareholders paid in excess of $1.00 per
share of Company Common Stock. (A further discussion regarding the tax
consequences of the Transaction is set forth below.)
The Board considered alternatives to the proposed reverse stock split,
including privately negotiated purchases of Company Common Stock as well as a
possible tender offer. However, these alternatives were rejected because there
was no assurance that either alternative would insure a sufficient response to
result in the Company having fewer than 300 Shareholders. Although either a
purchase or tender offer may have reduced the holders of record of Company
Common Stock below the 300 threshold, the Board rejected both approaches because
of the possibility that share ownership would be thinned further, thus impairing
the value of the remaining outstanding shares, and because neither approach
would have enabled JI to increase its ownership to 100% of the issued and
outstanding shares of Company Common Stock. The Board did not consider a
possible sale of the Company because no offers had been presented to the Board
and no determination had been made that a sale would be in the best interests of
the Shareholders. In addition, the Board did not view a sale as an alternative
that could achieve the objectives that the Board sought to achieve with the
reverse stock split, which were providing liquidity for existing Shareholders
while at the same time reducing costs for the Company.
If the Transaction is consummated, the present holders of Company
Common Stock (other than JI) will no longer have an equity interest in the
Company and, therefore, will neither share in its future earnings and growth nor
the risks associated with achieving such earnings and growth. Instead, each
holder of Company Common Stock, will
3
<PAGE>
receive $1.00 in cash, plus accrued interest, for each share of Company Common
Stock held by the Shareholder prior to the reverse stock split. After the
effective date of the Amendment, Shareholders will receive notice after the
Amendment is adopted, containing instructions for the surrender of their share
certificates of fractional shares of Company Common Stock in exchange for the
payment to the Shareholder in cash. Shareholders who dissent to the adoption of
the Amendment are entitled, under Arizona law, to exercise statutory dissenters'
rights of appraisal. See page ____ for a detailed description of these statutory
dissenters' rights of appraisal.
If the Transaction is consummated, the Company will become wholly-owned
by JI. Thus, JI will have a 100% interest in the net book value and net earnings
of the Company, $0.84 and $0.03, respectively, based on the June 30, 1996
financial statements. Currently, JI has a 97% interest in the net book value and
net earnings of the Company $0.82 and $0.03, respectively, based on June 30,
1996 financial statements.
Accordingly, to the extent future earnings increase, JI will be the
only Shareholder who benefits from that increase. Conversely, to the extent
future earnings decrease, JI will be the only Shareholder impacted by that
decrease. And, should the Company require additional equity capital, JI, as the
sole remaining Shareholder of the Company, would be a likely source of that
equity capital.
The Company will, as a result of the Transaction, become a
privately-held company. After the Transaction, the Company will file with the
SEC a Form 15D, and the Company will be relieved of its obligations to file
current reports with the SEC. The Company will no longer be required to deliver
to Shareholders annual or quarterly reports; to maintain a transfer agent for
Company Common Stock; or to retain counsel or accountants to assist in the
preparation of any of the above reports or statements.
Although the Company will become wholly-owned by JI, in accordance with
12 U.S.C. Section 572, directors of the Company must own shares having an
aggregate par value of not less than $1,000.00 or an equivalent interest as
determined by the Comptroller of the Currency. Accordingly, after consummation
of the Transaction, and solely to comply with this statutory requirement,
Directors of the Company each will receive one share of Company Common Stock to
hold during his or her term. After the expiration of the Director's term, the
Director will transfer the share back to JI. The Directors will not be otherwise
permitted to sell, transfer or encumber their shares.
Also, as described above, upon consummation of the Transaction, the
Company will purchase all fractional shares of Company Common Stock. Because all
Shareholders other than JI will own only fractional shares, the Company's
purchase of these shares will terminate Shareholder status for all existing
Company Shareholders except JI.
The following discussion is not intended to and does not constitute a
complete description of all possible Federal, State and local tax consequences
to Shareholders of the Company as a result of the purchase of fractional shares
of Company Common Stock held by Shareholders. The tax consequences of the
Transaction and
4
<PAGE>
acquisition of fractional interests may vary depending upon the particular facts
relating to each Shareholder. ACCORDINGLY, EACH SHAREHOLDER IS URGED TO CONSULT
SUCH SHAREHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE
TRANSACTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL OR FOREIGN TAX LAWS.
The purchase of fractional interests of Company Common Stock created as
a result of the reverse stock split will be a taxable transaction for federal
income tax purposes. Each holder of Company Common Stock will recognize gain or
loss upon the surrender of that Shareholder's Company Common Stock equal to the
difference, if any, between (i) the sum of the cash payment of $1.00 per share
received pursuant to the Transaction in exchange for the Company Common Stock,
and (ii) that Shareholder's tax basis in the Company Common Stock. Holders of
Company Common Stock who exercise their right to dissent will recognize gain or
loss equal to the difference, if any, between (i) the sum of the cash payment
received by the Shareholder in exchange for his or her shares of Company Common
Stock upon a final determination of the fair market value of those shares, and
(ii) that Shareholder's tax basis in the Company Common Stock. Any gain or loss
will be treated as a capital gain or loss if the Company Common Stock exchanged
was held as a capital asset in the hands of the Shareholder.
Any such capital gain or loss will be combined with all other capital
gains and losses recognized by the Shareholder during the taxable year. The Tax
Reform Act of 1986 repealed the deduction that had previously been available for
60% of the net long-term capital gain realized by non-corporate taxpayers.
Accordingly, if the result of combining all such capital gains and losses recog-
nized during the taxable year is a net capital gain, the full amount of such
gain will be included in the Shareholder's gross income. In general, if the
result of combining all such capital gains and losses recognized during the
taxable year is a net capital loss, a Shareholder which is a corporation may not
deduct any portion of the loss and a Shareholder who is not a corporation may
deduct such loss only to the extent that it does not exceed $3,000 ($1,500 in
the case of a married individual filing a separate return).
The Company and JI will not recognize any income, gain or loss by
reason of the Transaction, and the tax basis of the assets of the Company will
not be affected. The Company will have an interest expense deduction as a result
of the loan obtained from JI by the Company to purchase the fractional interests
in Company Common Stock held by all Shareholders except JI.
The cash payments due to the holders of fractional interests upon
completion of the Transaction (other than certain exempt entities and persons)
will be subject to a backup withholding tax under federal income tax law unless
certain requirements are met. Generally, the Company will be required to deduct
and withhold the
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tax on payments made for the fractional interests if (i) the Shareholder fails
to furnish a taxpayer identification number ("TIN" -- the TIN of an individual
Shareholder is his or her Social Security Number) to the Company or fails to
certify under penalty of perjury that such TIN is correct; (ii) the Internal
Revenue Service ("IRS") notifies the Company that the TIN furnished by the
Shareholder is incorrect; (iii) the IRS notifies the Company that the
Shareholder has failed to report interest, dividends or original issue discount
in the past; or (iv) there has been a failure by the Shareholder to certify
under penalty of perjury that such Shareholder is not subject to the backup
withholding tax.
Fairness of the Transaction
The Company and its affiliate JI, reasonably believe that the
Transaction is fair to all unaffiliated Shareholders of the Company. The
Company's opinion is based upon a fairness opinion issued to the Company by an
independent research and investment banking firm, Alex Sheshunoff & Co.
Investment Banking (Alex Sheshunoff & Co.), which was specifically retained by
the Company to render a fairness opinion of the value of the minority interest
in the Company Common Stock held by unaffiliated Shareholders for purposes of a
reverse stock split transaction.
No director of the Company dissented or abstained from voting on the
Transaction. All directors of the Company, including but not limited to all
disinterested nonaffiliated directors, unanimously voted in favor of the
Transaction at a Special Meeting of the Board of Directors of the Company held
on September 4, 1996 for the purpose of reviewing and considering the
Transaction.
The Company's belief that the Transaction is fair to unaffiliated
Shareholders of Company Common Stock is based primarily on the fairness opinion
of Alex Sheshunoff & Co. The Board of Directors of the Company in determining
the fairness of the Transaction to unaffiliated Shareholders of Company Common
Stock and in determining the per share price to be paid to holders of fractional
shares of Company Common Stock reviewed and considered: 1) Current market prices
of Company Common Stock; 2) Historical market prices of Company Common Stock; 3)
Net book value of the Company; 4) Going concern value of the Company; 5)
Liquidation value of the Company; 6) The purchase price paid in previous
purchases of Company Common Stock by the Company's affiliate JI,; 6) The
fairness opinion of Alex Sheshunoff & Co.; and 7) The absence of any offers made
by any unaffiliated persons during the preceding eighteen months for: (a) the
merger or consolidation of the Company into or with such person or of such
person into or with the Company; (b) the sale or other transfer of all or any
substantial part of the assets of the Company or; (c) securities of the Company
which would enable the holder thereof to exercise control of the Company. The
purchase price for the Company Common Stock of $1.00 per share held prior to the
reverse stock split is equal to or greater than the values which would be
obtained by the application of the factors described in (1) through (6) of this
paragraph. Due to the very few transactions in shares of Company Common Stock,
it was difficult to assess the current, or even the historical, market value of
such shares. Alex Sheshunoff & Co. determined a market price of $.60 per share
based on the price/book and price/earnings ratios, among other factors. If the
Company Common Stock were freely marketable, Alex Sheshunoff & Co. determined
that the shares would have a $1.18 per share value; however, because of the lack
of marketability and the Company's performance, Alex Sheshunoff & Co. applied a
50% discount. Alex Sheshunoff & Co. also determined that its market value
determination was the most accurate valuation given the Company's operating
history and performance. The Board believes the liquidation and going concern
value would be equal to the net book value of the Company of $.84 per share; the
Board did not obtain an appraisal or analysis of the liquidation value beyond
that set forth in the Alex Sheshunoff & Co. opinion. After considering all these
factors, the Board of Directors attributed the most weight to the independent
fairness opinion of Alex Sheshunoff & Co., coupled with the fact that JI has
previously purchased shares of Company Common Stock for $1.00 per share. Neither
the Committee nor the Board assigned any specific weight to the foregoing
factors, and individual members of the Board or the Committee may have given
differing weights to different factors. Because the Company and JI wanted the
Transaction to be equitable to Shareholders, and was concerned with any impact
the Transaction may have on Shareholders who also are Bank customers/depositors,
the Committee recommended to the Board, and the Board unanimously approved,
payment of a premium over the Alex Sheshunoff & Co. opinion and setting the per
share value of $1.00 per share, rather than the $.60 proposed in the Alex
Sheshunoff & Co. fairness opinion. After considering all these factors, the
Board of Directors attributed the most weight to the independent fairness
opinion of Alex Sheshunoff & Co.
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The Transaction is not structured so that approval of at least a
majority of unaffiliated Shareholders is required to approve the Transaction. In
fact, approval of the Transaction is assured because the 97% Shareholder and
joint filer of this Information Statement and the Schedule 13e-3, JI, has
indicated that JI will vote all its shares of Company Common Stock in favor of
the Transaction.
The Board of Directors of the Company appointed a committee, comprised
of the of four disinterested nonaffiliated directors who were not employees of
the Company or JI (the "Committee"), to formulate a recommendation relating to
the Transaction and to obtain a report concerning the fairness of the
Transaction for the benefit of unaffiliated Shareholders of Company Common
Stock. Alex Sheshunoff & Co., an unaffiliated representative of the Company, has
rendered a fairness opinion which was accepted by the Committee and the Board
and relied upon by the Board in unanimously approving the fairness of the
Transaction.
At the September 4, 1996 meeting of the Committee, a majority of the
Company's directors who are not employees of the Company or JI, unanimously
approved the Transaction. The Committee did not retain an unaffiliated
representative to act solely on behalf of the unaffiliated Shareholders for the
purpose of negotiating the Transaction or preparing a report concerning the
fairness of the Transaction. The Transaction, as recommended by the Committee,
was unanimously approved by all Directors of the Company at the Special Meeting
of the Board of Directors held on September 4, 1996 to consider and vote upon
the Transaction. In addition, after discussion and analysis, the Committee
unanimously recommended to the Board, and the Board unanimously approved,
payment to each Shareholder impacted by the reverse stock split, the amount of
$1.00 per share for each share of Company Common Stock held by the Shareholder
prior to the reverse stock split. This amount is 40% higher than the value
assigned to the shares in the Alex Sheshunoff & Co., fairness opinion and is
1.20 times higher than the Company's June 30, 1996 book value per share of $.84.
Reports, Opinions, Appraisal and Certain Negotiations
The Company commissioned and has received from an outside party, Alex
Sheshunoff & Co., a report and fairness opinion relating to the Transaction, the
fairness of the consideration to be offered to holders of Company Common Stock
which is the subject of the Transaction, and the fairness of the Transaction to
the Company, its affiliate JI, and unaffiliated Shareholders.
Alex Sheshunoff & Co. is part of the diversified bank consulting and
education firm, Alex Sheshunoff Management Services, Inc., which provides a
broad range of services offered almost exclusively to the financial services
industry. Alex Sheshunoff & Co. has over 1,000 active financial institution
clients. In the past three years, Alex Sheshunoff & Co. has completed over 150
fairness opinions involving mergers and acquisitions, reorganizations, reverse
stock splits and recapitalizations. Moreover, as part of its bank analysis
business, Alex Sheshunoff & Co. is
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continually involved in rendering valuation opinions of financial institutions
nationwide. Alex Sheshunoff & Co. performs in excess of 350 fair market value
determinations of banking organizations annually.
In rendering a fairness opinion, Alex Sheshunoff & Co. considers, among
other factors, the nature and history of the bank or bank holding company, the
economic outlook in the respective market area and for the banking industry in
general, the book value and financial condition of the bank and its future
earnings and dividend paying capacities, the size of the block to be acquired,
the prices paid for the shares of comparable banks, and the financial impact of
the transaction on the bank.
The Committee selected Alex Sheshunoff & Co. based upon the firm's
experience in rendering fairness opinions and the firm's reputation as an
industry leader in bank and financial institution valuations.
There has been no material relationship between Alex Sheshunoff & Co.
and the Company or its affiliate JI, during the past two years, other than the
Company retaining Alex Sheshunoff & Co. to render a fairness opinion relating to
the Transaction.
The consideration paid to Alex Sheshunoff & Co. for the fairness
opinion was not determined by the Company or its affiliate JI, rather Alex
Sheshunoff & Co. quoted and will receive a fee of $7,500 for its services in the
preparation of the fairness opinion and related services. The consideration to
be paid to the Shareholders for shares of Company Common Stock was determined by
the Board of Directors of the Company, as recommended by the Committee, based on
the analysis set forth in the opinion, and the factors described on page ____.
Alex Sheshunoff & Co.'s fairness opinion concludes that based upon its
analysis, the firm believes that as of August 30, 1996, the fair market value of
a minority interest in the outstanding Company Common Stock would be $0.60 per
share.
In reaching this conclusion of value, Alex Sheshunoff & Co. conducted
an analysis of: (1) the Company's operating performance and financial condition
for the three years ended December 31, 1995 and the six months ended June 30,
1996; (2) the projected income, dividends, asset growth and book value of the
Company for the five years ending December 31, 2000; (3) the market for the
Company Common Stock; (4) the competitive environment in which the Company
operates; (5) the ownership composition of the Company; and (6) the general
economic conditions impacting the Company's operations and business prospects.
In analyzing the Company, Alex Sheshunoff & Co. noted that the only
material operations of the Company is being a holding company for the Bank and
therefore analyzed the Bank's performance relative to its Arizona based peer
group banks. The firm then analyzed the market for bank holding company stocks
in general.
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In determining the value of the Company Common Stock, Alex Sheshunoff &
Co. utilized the market approach and the net present value approach to
valuation. The firm valued the Company as a going concern under its current
business strategy and did not value the minority shares based on a liquidation
or other restructuring of the Company. The firm found that the market approach
to value (defined as the amount at which the minority shares would change hands
between a willing seller and a willing buyer when neither is acting under
compulsion and when both have reasonable knowledge of the relevant facts)
yielded a value at 1.20 times book value of the Company or $1.00 per share and
20.00 times projected 1996 earnings or $1.34 per shares. However, the firm
determined that a discount should be applied to this value because of the lack
of marketability of the Company Common Stock and the ownership structure of the
Company. The only recent trades of Company Common Stock were the purchase of
21,770 shares by the Company's affiliate JI, at $1.00 per share, which was
attributed little weight by Alex Sheshunoff & Co. because it was not an arms
length transaction. Therefore, after applying the marketability discount, the
market value approach produced a value of $0.60 per share accordingly to Alex
Sheshunoff & Co.
Alex Sheshunoff & Co. also examined the net present value approach
which discounts the anticipated cash flow from an investment in Company Common
Stock, considering projected dividends and the future residual value of the
stock. The firm then applied a 20% discount rate which it considered
appropriate, which produced an estimated net present value of Company Common
Stock of $0.55 per share as measured by the anticipated dividends and $0.57 per
share by discounting projected earnings.
Alex Sheshunoff & Co. then performed a reconciliation of value of the
four approaches to value:
Market Value Approach $0.60
Recent Trades of Minority Stock $1.00
Net Present Value of Dividends $0.55
Net Present Value of Earnings $0.57
and stated that in its opinion, the value of the minority shares of the Company
Common Stock could range in value from $0.55 per share to $0.84 or June 30, 1996
book value. However, Alex Sheshunoff believed that the market value approach was
the most useful in valuing an interest in the Company's minority shares and
determined a value for the minority shares of Company Common Stock of $0.60 per
share.
The only instructions provided by the Company or its affiliate JI, to
Alex Sheshunoff & Co. relating to its fairness opinion was to estimate the fair
market value of approximately 492,885 shares of outstanding Company Common Stock
owned by minority shareholders as of August 30, 1996.
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There were no limitations imposed on Alex Sheshunoff & Co. by the
Company or its affiliate JI, relating to the firm's fairness opinion or the
scope of its investigation.
The fairness opinion of Alex Sheshunoff & Co. is available for
inspection and copying at the principal executive offices of the Company located
at 2425 East Camelback Road, Phoenix, Arizona, 85016 during the Company's
regular business hours by any interested Shareholder or his or her
representative who has been so designated in writing. A copy of the fairness
opinion will be transmitted by the Company to any interested Shareholder or his
or her representative who has been so designated in writing upon written request
and at the expense of the requesting Shareholder.
Item 2. Issuer and Class of Security Subject to the Transaction
The Company is the issuer of the class of equity securities which is
the subject of the Transaction. The address of the principal executive offices
of the Company is 2425 East Camelback Road, Phoenix, Arizona 85016. The Company
is the bank holding company, parent and sole shareholder of Biltmore Investors
Bank, N.A., a national banking association (the "Bank"). The Bank's main branch
is also located at 2425 East Camelback Road, Phoenix, Arizona 85016.
The class of securities that is the subject of the Transaction is the
Company's common stock, no par value per share which has been previously
referred to as Company Common Stock. As of July 31, 1996, the most recent
practicable date, 16,522,530 shares of Company Common Stock were issued and
outstanding to 324 holders of record of Company Common Stock. Of the 16,522,324
shares of Company Common Stock, all but 492,885 are owned by the Company's
affiliate JI. Although the Company is authorized to issue ten million shares of
preferred stock, no preferred stock has ever been issued by the Company and is
not subject to the Transaction.
There is currently no established trading market for shares of Company
Common Stock. Accordingly, there is no range of high and low bid quotations for
each quarterly period during the last two years.
The Company has paid no dividends to holders of Company Common Stock
since the Company's incorporation on March 19, 1984, and management of the Bank
and the Company intend to follow a policy of retaining earnings to cover capital
requirements and expenses. The fairness opinion of Alex Sheshunoff & Co.
discussed above states that the Company does not anticipate paying a dividend
until 1997. Whether the Company decides to pay a dividend at that time, will
depend among other factors, on the Company's capital requirement and earnings as
well as market and economic trends. The Company's ability to pay dividends is
dependent upon the receipt of dividends
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from the Bank. Currently, the Company has no other sources of revenue. Under
certain circumstances, approval of the Comptroller of the Currency may be
required prior to the Bank's payment of dividends. Arizona law also restricts a
corporation's ability to pay dividends. Under Arizona law, distributions to
shareholders (including distributions arising out of a purchase, redemption or
other acquisition of a corporation's shares) cannot be made if, after giving
effect, either: (1) the corporation would not be able to pay its debts as they
become due in the usual course of business; or (2) the corporation's total
assets would be less than the sum of its total liabilities plus, unless the
articles of incorporation permit otherwise, the amount that would be needed, if
the corporation were to be dissolved at the time of the distribution, to
satisfy the preferential rights on dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. Although
these statutory restrictions do not apply to the Company's current financial
posture, they nonetheless can impact a company's ability to make distributions
if it does not meet the statutory criteria.
Neither the Company nor its affiliated shareholder, JI, has made an
underwritten public offering of Company Common Stock for cash during the past
three years which was registered under the Securities Act of 1933 or exempt from
registration thereunder pursuant to Regulation A.
The Company has not acquired any Company Common Stock since the
commencement of the Company's second full fiscal year [January 1, 1994]
preceding the date of this Information Statement. JI has acquired 21,770 shares
of Company Common Stock since the commencement of the Company's second full
fiscal year preceding the date of this Information Statement. JI paid a range of
$0.85 to $1.00 for the Company Common Stock. The average purchase price of
Company Common Stock for each quarterly period of the Company during this period
was as follows:
Fiscal Quarter Average Purchase Price
-------------- ----------------------
ending March 31, 1994 $ .85
ending June 30, 1994 .85
ending September 30, 1994 .85
ending December 31, 1994 .85
ending March 31, 1995 1.00
ending June 30, 1995 1.00
ending September 30, 1995 1.00
ending December 31, 1995 1.00
ending March 31, 1996 1.00
ending June 30, 1996 1.00
Item 3. Past Contacts, Transactions or Negotiations
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(a)(l). The following transactions and approximate dollar amount, other than
those described below, have occurred since the commencement of the issuer's
second full fiscal year preceding the date of this Information Statement between
JI (including subsidiaries of JI and each executive officer and director of JI;
each person controlling JI; and each executive officer and director or any
corporation ultimately in control of JI) and the issuer:
JI, as a financial services corporation, performs a variety of services for the
issuer. For these services, such as accounting, group purchasing, risk
management, corporate auditing, loan review, human resources, marketing,
information systems, compliance, executive management, and training and
development, JI receives a management fee, payable monthly. The management fees
for 1994 totalled $275,520; for 1995 totalled $428,111; and for the first nine
months ended September 30, 1996, totalled $352,767. The cost of JI's services is
allocated using acceptable and recognized cost accounting techniques, and is
reviewed annually for reasonableness by the Office of the Comptroller of the
Currency (with respect to the Bank) and the Federal Reserve Bank of Chicago
(with respect to the Company).
The Bank also assigns participation interests in loans above the Bank's legal
lending limit to JI upon JI's acceptance of the participation interest. The
Bank's legal lending limit is $2,200,000, and when loans are brought to the Bank
in excess of that limit, the loan is reviewed by JI and, if approved, the excess
is participated to JI.
The Bank owes JI $42,000. This loan is evidenced by an unsecured promissory note
due in May 1997.
JI passes through to the Bank the Bank's pro rata share of costs and expenses
associated with a data processing contract with M&I Data Services, Inc. The Bank
pays JI who, in turn, pays M&I Data Services, Inc. There is no markup or profit
charged the Bank by JI in connection with this contract.
Johnson Heritage Trust Company, a subsidiary of JI, provides trust management
services to the Bank. For these services, the subsidiary charges the Bank $4750
per month.
(a)(2) Beginning in the third quarter of 1995, the Company, through its then
President Mr. LeRoy Gust, reviewed the process of effecting a going private
transaction. At that time, management of the Company engaged in very informal
discussions about the feasibility of effecting such a transaction and the
potential impact the transaction would have on Bank customers who also were
shareholders. Company management elected not to pursue the transaction at that
time because, among other reasons, of the perceived impact on Bank customers and
the Bank's marketing efforts. In or around April 1996, the Company resurrected
these discussions, and contacted Mr. Richard Hansen, the President of JI, about
whether JI might consider acquiring 100% control of the Company through a going
private transaction. At that time, the reverse stock split was thought to be the
only realistic vehicle to effect the going private transaction. Except as
discussed by the Board in connection with the review of the Committee's
recommendations, there have been no other discussions concerning a merger,
consolidation or acquisition, tender offer for or other acquisition of
securities of any class of the issuer; an election of directors of the issuer;
or a sale or other transfer of a material amount of assets of the issuer or any
of its subsidiaries. Mr. Hansen indicated that JI would be interested in
acquiring 100% control of the Company.
Serious negotiations regarding the transaction commenced in June 1996
and continued until July 31, 1996 when the Board of Directors of the Company
appointed the Committee, comprised of four disinterested non-affiliated Board
members, to investigate the feasibility of the reverse stock split transaction.
These negotiations were primarily between Mr. Mark Behrens who is a Senior
Vice-President and Corporate Controller of JI, then acting interim president of
the Company and Mr. Richard Hansen, President and Chief Executive Officer of JI.
The Committee appointed by the Board of Directors consisted of members of the
Board who were not officers or directors of JI. The Committee, by delegation to
Mr. Mark Behrens, arranged for the procurement of the fairness opinion from Alex
Sheshunoff & Co. Investment Banking, the opinion that was used in connection
with the valuation of the shares of Company Common Stock. The Committee met
independently of the Board to consider the fairness opinion and make
recommendations to the Board about whether to effect a reverse stock split,
whether other means, such as a tender offer, would be effective to accomplish
the Company's purpose, and the price per share to be offered to the
shareholders. The price per share was determined after extensive discussion by
members of the Committee. Although the fairness opinion adopted a $.60 per share
value, the Committee decided a value of $1.00 per share would help reduce the
impact on minority Shareholders who acquired their shares for substantially more
than $1.00 per share. To the Company's knowledge, no Shareholder paid less than
$1.00 per share. Furthermore, JI and other shareholders had, in prior stock
purchases, paid other Shareholders up to $1.00 per share. Finally the Committee
wanted to ensure the Bank would not be impacted adversely from a marketing
standpoint, and believed the offer in excess of the value set forth in the
fairness opinion might mitigate against any such adverse impact. After the
independent meeting, the Committee discussed its recommendations with the Board,
which then unanimously adopted the recommendations.
While the fairness opinion was being prepared, the Committee, by delegation to
Mr. Mark Behrens, made direct inquiry of JI about whether JI would be willing to
finance the cost to acquire the fractional interests created by the reverse
stock split. JI, through its Senior Vice President and Chief Financial Officer,
Mr. Dennis Axelson agreed to loan the Company the funds necessary to acquire the
interests. The terms of the loan were negotiated between Mr. Behrens and Mr.
Axelson, and approved first by the disinterested Committee appointed by the
Board, and then by the full Board of the Company.
(b) Except as noted above, there have not been any contacts or negotiations
concerning the matters referred to in Item 3(a)(2) which have been entered into
or which have occurred since the commencement of the issuer's second full fiscal
year preceding the date of this Information Statement (i) between any affiliates
of the issuer of the class of securities which is the subject of the Rule 13e-3
transaction; or (ii) between such issuer or any of its affiliates and any person
who is not affiliated with the issuer and who would have a direct interest in
such matters.
Item 4. Terms of the Transaction
At a meeting held July 31, 1996, the Board of Directors of the Company
appointed the Committee to prepare and present to the Board recommendations
regarding a Rule 13e-3 Transaction and the fairness of any such transaction to
the unaffiliated Shareholders of Company Common Stock.
On September 4, 1996, a Special Meeting of the Board of Directors was
held to evaluate the Committee's recommendations. At that Special Meeting the
Board unanimously adopted a resolution authorizing the submission to the
Shareholders of Company Common Stock an amendment (the "Amendment") to the
Company's Second Amended and Restated Articles of Incorporation reducing the
number of authorized Company Common Stock from Twenty-Five Million to Two
Hundred shares by a reverse stock split of 125,000 to 1. Upon the adoption of
the Amendment (which adoption is assured because JI, the Company's affiliate,
owns 97% of the issued and outstanding shares of Company Common Stock and will
vote in favor of the Amendment), the Amendment will be filed with the State of
Arizona Corporation Commission as soon thereafter as practicable and will become
effective upon that filing. The reclassification of authorized Company Common
Stock will be automatic without any further action by the Company. Fractional
shares of Company Common Stock will not be issued. Instead, to accord the
purpose of the Transaction, the Company will purchase all fractional shares.
At the Special Meeting of the Board of Directors on September 4, 1996,
the Board unanimously adopted the recommendation of the Committee that
Shareholders of fractional shares of Company Common Stock be paid the sum of
$1.00 per share for each share of Company Common Stock held by the Shareholder
prior to the reverse stock split. Because all Shareholders other than JI will,
after the reverse stock split, own only fractional shares, the Company's
purchase of those fractional shares will terminate all current Shareholders
except JI, as Company Shareholders. Accordingly, promptly after the effective
date of the Amendment, the Company will notify each Shareholder of
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record of the effective date of the Amendment and will forward with each notice,
instructions for the surrender of share certificates of fractional shares of
Company Common Stock in exchange for the payment to the Shareholder in cash at
the rate of $1.00 per share for each share of Company Common Stock held by the
Shareholder prior to the reverse stock split.
Item 5. Plans or Proposals of the Issuer or Affiliate
Upon consummation of the Transaction, the Company will file a Form 15
advising the SEC that the Company's duty to file reports pursuant to Section
15(d) of the 1934 Act will be immediately suspended. Because the Company files
reports pursuant to Section 15(d) and not Section 12(b) or 12(g) of the 1934
Act, there is no requirement for deregistration of the Company.
Neither the Company nor its affiliate JI, has any plan or proposal
regarding activities or transactions which are to occur after this Transaction,
except as described below, which would relate to or result in (a) an
extraordinary corporate transaction such as a merger, reorganization or
liquidation, involving the Company or any of its subsidiaries; (b) a sale or
transfer of a material amount of assets of the Company or any of its
subsidiaries; (c) except as noted below, any change in the present Board of
Directors or management of the Company including, but not limited to, any plan
or proposal to change the number or term of directors, to fill any existing
vacancy on the Board or to change any material term of the employment contract
of any executive officer; (d) any material change in the present dividend rate
or policy or indebtedness or capitalization of the Company; (e) any material
change in the Company's corporate structure or business; or (f) a class of
equity securities of the Company becoming eligible for termination or
registration pursuant to Section 12(g)(4) of the 1934 Act.
Unrelated to the Transaction, the Company has recently hired a new
president to replace Mr. LeRoy C. Gust who resigned his positions as President
and Director of both the Bank and the Company on June 27, 1996. His resignation
was not related to the Transaction, nor was his resignation a result of a
disagreement with the Company on any matter relating to the Company's policies,
operations or practices. Mr. Gust has not furnished the Company with any letter
describing such disagreement nor has he requested any such disclosure. Mr. Mark
Behrens has been acting as interim President of the Company. Mr. Ronald R.
Estervig was recently hired to replace the interim President, Mr. Behrens, and
it is anticipated that he also will serve as a member of the Board of Directors
of the Company and the Bank. Mr. Estervig formerly was President and Chief
Executive Officer of Heritage Bank, N.A., in Janesville, Wisconsin. Only Mr.
Richard A. Hansen, President of JI, and Mr. Mark Behrens, interim President of
the Company, participated in the negotiations for the reverse stock split.
Neither Mr. Gust nor Mr. Estervig participated in these negotiations. See page
__. Mr. Estervig had not yet begun serving as President of the Company at the
time of the Sept. 4, 1996 Board Meeting. Mr. Behrens and Mr. Hansen are both
members of the Board and participated in the vote, although neither vote was
necessary for passage because the Board unanimously approved the transaction.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Pub. Law 103-328), relaxed the restrictions imposed on banking institutions and
the rationale behind the creation of bank holding companies such as the Company,
registered under the Bank Holding Company Act of 1956, as amended, are no longer
applicable.
Although not discussed in detail by the Board of the Directors of the
Company, and neither planned nor proposed, it is possible the Company may
consider liquidating the Company at some future
13
<PAGE>
time. Upon approval of the Transaction, JI will control 100% of the issued and
outstanding shares of Company Common Stock. The sole asset of the Company is the
ownership of all stock of the Bank. Accordingly, after consummation of the
Transaction, the Board of Directors may review whether the continued separate
corporate existence of the Company is justifiable. A dissolution of the Company
approximately one year after approval of the Transaction would eliminate the
additional tier of corporate ownership of the Bank. This alternative will be
considered by the Company along with the benefits of continued corporate
existence approximately one year after the consummation of the Transaction.
Item 6. Source and Amounts of Funds or Other Consideration
The funds necessary to purchase the fractional shares created by the
Transaction will be obtained by a loan from JI to the Company. The total amount
of funds necessary to acquire fractional shares at the $1.00 per share purchase
price is $492,885.00. The loan will be evidenced by an unsecured promissory
note. The note will bear interest at the Wall Street Journal (Western Edition)
prime rate, adjusted daily, and will be due and payable two years after the date
of the note. Principal and interest will be due at maturity. The Company has not
made any plans or arrangements to finance or repay such borrowings.
The Company anticipates that it will incur expenses of approximately
$35,500.00 in connection with the Transaction, including legal fees of
approximately $20,000, appraisal fees of approximately $7,500 and printing and
mail fees of approximately $8,000.
Item 7. Interest in Securities of the Issuer
The following table sets forth information as of July 31, 1996, (the
most recent practicable date) concerning shares of Company Common Stock
beneficially owned by each Director of Company and the Bank, by all Executive
Officers and Directors as a group, and by each stockholder known by the Company
to be the beneficial owner of more than five percent (5%) of any class of the
Corporation's voting securities, as required by 17 CFR 229.403.
Title of Name of Amount and Percent of
Class Beneficial Owner Nature of Class
- ----- ---------------- Beneficial -----
Ownership
---------
Common Richard A. Hansen 0 *
Common William G. Ridenour 7,900 *
Common Lawrence L. Stuckey 12,100 *
Common Philip B. Bell 5,000 *
Common John L. Heath 10,500 *
Common Mark C. Behrens 0 *
Common Carrie Louis-Hulburd 2,000 *
Common L. Robert Peterson 2,000 *
Common Kimberley A. Gill-Rimsza 2,000 *
----- -
14
<PAGE>
Executive Officer and Directors as
a group 41,500 *
====== =
Common Johnson International, Inc. 16,029,645 97%
4041 North Main Street
Racine, WI 53402
- ----------------------
* The percentage of shares beneficially owned by each Director individually, and
all Directors and Executive Officers as a group, does not exceed one percent of
the issued and outstanding shares of the Company.
There have been no transactions in Company Common Stock effected during
the past 60 days by the Company or any of the persons or entities described in
the preceding paragraph.
Item 8. Contracts, Arrangements or Understandings With Respect to the Issuer's
Securities
There is no contract, arrangement, understanding or relationship in
connection with the Transaction between the Company or any other person or
entity with respect to shares of Company Common Stock or concerning the voting
of the Company Common Stock except, the Company has been advised that all
persons named in Item 7 above presently intend to vote all shares of Company
Common Stock held by these persons or entities in favor of the Transaction.
Collectively, the persons and entities named in section 7 above own or control
approximately 97% of the issued and outstanding shares of Company Common Stock.
Therefore if these persons or entities vote their shares of Company Common Stock
in favor of the Transaction, approval of the Transaction is assured.
Item 9. Present Intention and Recommendation of Certain Persons With Regard to
the Transaction.
After reasonable inquiry, the Company believes that it is the present
intention of executive officers and directors of the Company and JI, the
Company's affiliate, to vote all shares of the Company Common Stock held by
these persons or entities in favor of the Transaction. Since all executive
officers and directors of the Company hold less than 125,000 shares of Company
Common Stock, the fractional shares held by these persons will be purchased by
the Company as part of the reverse stock split. This will result in the
remaining executive officers and directors of the Company no longer being
Company Shareholders after consummation of the Transaction.
Although the Company will become wholly-owned by JI, in accordance with
12 U.S.C. Section 572, directors of the Company must own shares having an
aggregate per value of not less than $1000.00 or an equivalent interest as
determined by the Comptroller of the Currency. Accordingly, after consummation
of the Transaction, and solely to comply with this statutory requirement,
Directors of the Company each will receive one share of Company
15
<PAGE>
Common Stock to hold during his or her term. After the expiration of the
Director's term, the Director will transfer the share back to JI. The Directors
will not be otherwise permitted to sell, transfer or encumber their shares.
The Board of Directors of the Company has unanimously approved the
Transaction and recommends approval of the Transaction to the Company's
Shareholders.
Item 10. Other Provisions of the Transaction
The Transaction triggers statutory dissenters' rights of appraisal for
the Company's Shareholders pursuant to the Company's Second Amended and Restated
Articles of Incorporation and under Arizona corporate law. Arizona Revised
Statutes (A. R. S.) section 10-1301 et. seq. provides dissenting shareholders
who oppose certain actions taken by a company, as approved by the shareholders,
with certain rights to require the company to purchase the dissenter's shares of
the company's stock. Under Arizona law, Shareholders who oppose the reverse
stock split transaction, have certain specific rights to require the Company to
pay to the Shareholder, the "fair value" of their shares of Company Common
Stock, provided certain criteria are met by the dissenting Shareholder and the
Transaction is approved.
A Shareholder is entitled to dissent from and obtain payment of the
fair value (as that term is defined in the Arizona Revised Statutes) of the
Shareholder's shares if the Shareholder is a Shareholder of record of the
Company on the Record Date set by the Company (September 13, 1996), delivers to
the Company before the vote is taken, written notice of the Shareholder's intent
to demand payment for the Shareholder's shares if the proposed action is
effectuated, and does not vote the shares in favor of Amendment to the Second
Amended and Restated Articles of Incorporation which, upon adoption, will effect
the reverse stock split.
No later that ten (10) days after approval of the Transaction, the
Company shall deliver a written dissenters' notice to all Shareholders who are
entitled to dissent. The dissenters' notice shall: 1) state where the payment
demand must be sent and where and when certificates for certificated shares of
Company Common Stock shall be deposited; 2) inform holders of uncertificated
shares to what extent transfer of the shares will be restricted after the
payment demand is received; 3) supply a form for demanding payment that includes
the date of the first announcement to shareholders of the terms of the reverse
stock split transaction requiring that the person asserting dissenters' rights
certify whether of not the person acquired beneficial ownership of the shares
before that date; 4) set a date by which the Company must receive the payment
demand, (which date shall be a least thirty but not more that sixty days after
the date the notice to dissenters is delivered); and 5) be accompanied by a copy
of A.R.S. Section 10-1301 et. seq.
Upon receipt of the notice to dissenters, dissenting Shareholders shall demand
payment, certify whether the Shareholder acquired beneficial ownership of the
shares before the date
16
<PAGE>
required to be set forth in the dissenters' notice and deposit the Shareholder's
certificates of Company Common Stock with the Company in accordance with the
terms of the dissenters' notice. A Shareholder who does not demand payment or
does not deposit the Shareholder's certificates, each by the date set in the
dissenters' notice is not entitled to payment for the Shareholder's shares of
Company Common Stock.
As soon as the Transaction is completed, the Company shall pay each valid
dissenter, the amount the Company estimates to be the fair value of the
dissenter's shares plus accrued interest. At the time of payment, the Company
will provide to dissenting Shareholders: 1) the Company's balance sheet as of
the end of the Company's fiscal year, an income statement for that year, a
statement of changes in shareholder's equity for that year and the latest
available interim financial statements, if any; 2) a statement of the Company's
estimate of the fair value of the shares; 3) an explanation of how the interest
was calculated; 4) a statement of the dissenters' right to demand payment if the
Shareholder is dissatisfied with the payment or offer, and; 5) a copy of A.R.S.
Section 10-1301.
A dissenting Shareholder may notify the Company in writing of the
dissenters' own estimate of the fair value of the dissenter's shares and the
amount of interest due and either demand payment of the dissenter's estimate,
(less any payment made by the Company) or reject the Company's offer and demand
payment of the fair value of the dissenter's shares and interest due, if either:
1) the dissenter believes that the amount paid by or offered by the Company is
less than the fair value of the dissenter's shares or that the interest is
incorrectly calculated; or 2) the Company fails to make payment within sixty
(60) days after the date set for demanding payment or fails to take the proposed
action and does not return the deposited certificates within sixty (60) days. A
dissenting Shareholder waives the right to demand payment unless the dissenter
notifies the Company of the dissenter's demand in writing within thirty (30)
days after the Company makes or offers payment for the dissenter's shares.
If a demand for payment by a dissenting Shareholder remains unsettled, the
Company shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the Superior Court of Maricopa County,
Arizona, to determine the fair value of the dissenters shares of Company Common
Stock and accrued interest. If the Company fails to commence the action within
sixty days, the Company shall pay each dissenter whose demand remains unsettled
the amount demanded.
All dissenters, whether or not residents of Arizona, whose demands
remain unsettled shall be parties to the proceeding as an action against their
shares of Company Common Stock. All parties shall be served with a copy of the
petition. Non-residents of Arizona may be served by certified mail or by
publication as allowed by the Arizona rules of civil procedure. In any such
appraisal proceeding, there is no right to trial by jury. The superior court may
appoint a master to have the powers and
17
<PAGE>
authorities as are conferred on masters by law, by the Arizona rules of civil
procedure or by the order of appointment. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
Each dissenter made a party to the proceeding is entitled to judgment
either: 1) for the amount, if any, by which the superior court finds the fair
value of his or her shares plus interest exceeds the amount paid by the Company,
or; 2) for the fair value plus accrued interest of the dissenter's
after-acquired shares for which the Company elected to withhold payment.
In any such appraisal proceeding, the superior court shall determine
all costs of the proceeding, including the reasonable compensation and expenses
of any master appointed by the court. The court shall assess the costs against
the Company, except that the court shall assess costs against all or some of the
dissenters to the extent the court finds that the fair value does not materially
exceed the amount offered by the Company or that the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment.
The superior court may also assess the fees and expenses of attorneys
and experts for the respective parties in amounts that the court finds equitable
either: 1) against the Company and in favor of any or all dissenters if the
court finds that the Company did not substantially comply with Arizona law; 2)
against the dissenters and in favor of the Company if the court finds that the
fair value does not materially exceed that amount offered by the Company, or; 3)
against either the Company or a dissenter if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously
or not in good faith.
If the superior court finds that the services of an attorney for any
dissenter were of substantial benefit to other dissenters similarly situated and
that the fees for those services should not be assessed against the Company, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who benefitted.
ARIZONA REVISED STATUTES SECTION 10-1301 ET. SEQ. SETS FORTH IN DETAIL
THE MECHANICS OF DISSENTERS' RIGHTS. SHAREHOLDERS ARE ADVISED TO REVIEW THE
ARIZONA REVISED STATUTES WITH COUNSEL IF THEY INTEND TO PURSUE THEIR RIGHTS OF
DISSENT AND APPRAISAL.
No arrangements have been made by the Company or any affiliate of the
Company in relation to the Transaction to allow unaffiliated Shareholders to
obtain access to the files of the Company or its affiliate other than any such
rights granted to Shareholders under Arizona law. No provisions have been made
by the Company or any affiliate to obtain counsel or appraisal services at the
expense of the Company for the benefit of Shareholders relating to the reverse
stock split transaction.
Item 12. Financial Information
18
<PAGE>
[ARTHUR ANDERSEN LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of Biltmore Bank Corp.:
We have audited the accompanying consolidated balance sheets of Biltmore Bank
Corp. and subsidiary (the "Company") as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1995, 1994 and 1993. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biltmore Bank Corp.
and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years ended December 31, 1995, 1994, and
1993, in conformity with generally accepted accounting principles.
As discussed in Note 16 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investments in debt and equity securities.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
February 23, 1996
F-2
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 1995 AND 1994
--------------------------
<TABLE>
<CAPTION>
ASSETS
------
1995 1994
------------- -------------
<S> <C> <C>
CASH AND DUE FROM BANKS (Note 3) $ 6,336,967 $ 7,932,020
FEDERAL FUNDS SOLD -- 5,628,000
------------- -------------
Total cash and cash equivalents 6,336,967 13,560,020
INVESTMENT SECURITIES AVAILABLE FOR SALE (Notes 2 and 4) 36,808,353 36,442,647
LOANS, less allowance for credit losses of $2,362,310 and
$2,422,513 in 1995 and 1994, respectively (Note 5) 89,152,249 86,862,577
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS 1,936,204 2,697,702
PREMISES AND EQUIPMENT, net (Notes 6 and 9) 1,616,411 1,605,453
OTHER REAL ESTATE OWNED (Note 2) 103,015 --
INTANGIBLE ASSETS (Notes 1 and 12) 1,562,662 1,676,594
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
LIABILITIES AND SHAREHOLDERS'
-----------------------------
EQUITY
DEPOSITS:
Demand-
Noninterest-bearing $ 23,984,474 $ 27,261,963
Interest-bearing 28,098,433 39,968,012
Time certificates of deposit, $100,000 and over (Note 7) 13,689,910 14,089,586
Other time certificates and individual retirement accounts 30,266,899 29,076,926
Savings 20,317,051 18,831,535
------------- -------------
116,356,767 129,228,022
ACCRUED INTEREST PAYABLE 199,316 218,540
SHORT TERM BORROWINGS (Note 8) 6,340,500 603,000
OTHER LIABILITIES 848,600 949,103
------------- -------------
123,745,183 130,998,665
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13) -- --
SHAREHOLDERS' EQUITY (Notes 1, 10 and 11):
Preferred stock, no par value:
Authorized and unissued, 10,000,000 shares -- --
Common stock, no par value (stated value $.50)
Authorized, 25,000,000 shares; issued and outstanding,
16,522,530 shares in 1995 and 1994 8,261,265 8,261,265
Additional paid-in capital 4,417,304 4,415,407
Retained earnings 930,377 215,096
Net unrealized gain (loss) on securities, net of tax 161,732 (1,045,440)
------------- -------------
Total shareholders' equity 13,770,678 11,846,328
------------- -------------
$ 137,515,861 $ 142,844,993
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 7,888,928 $ 6,229,328 $ 4,282,422
Other interest income (Note 14) 2,281,255 2,254,621 1,981,449
------------ ------------ ------------
Total interest income 10,170,183 8,483,949 6,263,871
INTEREST EXPENSE (Note 15) 4,399,030 3,369,868 3,284,495
------------ ------------ ------------
Net interest income 5,771,153 5,114,081 2,979,376
PROVISION FOR CREDIT LOSSES (Note 5) (98,868) (75,632) (218,573)
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 5,870,021 5,189,713 3,197,949
------------ ------------ ------------
CUSTOMER SERVICE FEES 506,796 458,651 338,738
NET GAIN ON SALE OF SECURITIES 28,261 10,715 6,607
INCOME FROM "LINK" BROKERAGE OFFICE 113,748 126,207 56,824
TRUST REVENUES 189,746 113,892 51,204
NET GAIN ON SALE OF OTHER REAL ESTATE OWNED -- -- 56,150
------------ ------------ ------------
838,551 709,465 509,523
------------ ------------ ------------
OPERATING EXPENSES:
Salaries and wages, net of deferred loan
origination costs of $137,630, $143,409 and
$89,869 at December 31, 1995, 1994 and 1993 2,229,621 1,681,001 1,105,838
Employee benefits 423,424 357,766 342,885
Occupancy expense 649,738 585,077 359,500
Equipment expense 354,970 299,044 181,433
Business development expense 130,302 102,275 38,450
FDIC deposit insurance 143,115 284,866 218,005
Management fee expense (Note 20) 428,111 275,520 175,783
Amortization of intangibles 172,566 128,957 27,609
Data processing 314,371 317,516 168,431
Supplies and printing 180,160 185,055 96,817
Other expenses 711,824 544,159 243,467
------------ ------------ ------------
5,738,202 4,761,236 2,958,218
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE,
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 970,370 1,137,942 749,254
(PROVISION FOR) BENEFIT FROM INCOME TAXES (255,089) 219,433 --
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 715,281 1,357,375 749,254
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 16) -- -- 700,000
------------ ------------ ------------
NET INCOME $ 715,281 $ 1,357,375 $ 1,449,254
============ ============ ============
NET INCOME PER COMMON SHARE:
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .04 $ .08 $ .05
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- .04
------------ ------------ ------------
NET INCOME PER COMMON SHARE $ .04 $ .08 $ .09
============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 16,522,530 16,522,530 16,522,530
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
(NOTES 11 and 12)
<TABLE>
<CAPTION>
Net Unrealized
Common Stock Additional Retained Gains (Losses)
------------------------- Paid-in Earnings on Securities
Shares Amount Capital (Deficit) Net of Tax
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 16,522,530 $ 8,261,265 $ 4,412,078 ($2,591,533) $ --
Net Income -- -- -- 1,449,254 --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993 16,522,530 $ 8,261,265 $ 4,412,078 ($1,142,279) --
Adoption of SFAS 115,
"Accounting for Certain
Investments in Debt and
Equity Securities" -- -- -- -- 272,212
Net Income -- -- -- 1,357,375 --
Net Change in Unrealized
Gains (Losses) on
Securities, net
of Tax -- -- -- -- (1,317,652)
Other -- -- 3,329 -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 16,522,530 $ 8,261,265 $ 4,415,407 $ 215,096 ($1,045,440)
Net Income -- -- -- 715,281 --
Net Change in Unrealized
Gains (Losses) on
Securities, net
of Tax -- -- -- -- 1,207,172
Other -- -- 1,897 -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 16,522,530 $ 8,261,265 $ 4,417,304 $ 930,377 $ 161,732
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
BILTMORE BANK CORP.
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 715,281 $ 1,357,375 $ 1,449,254
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses (98,868) (75,632) (218,573)
Depreciation and amortization 361,600 274,336 98,472
Net amortization and accretion of investment
securities premiums and discounts 54,040 154,621 163,991
Net gain on sale of other real estate owned -- -- (56,150)
Net gains on sale of securities (28,261) (10,715) (6,607)
Net loss (gain) on sale of fixed assets 489 6,112 (8,452)
Recognition of preacquisition net operating
loss carryforward -- 257,173 95,000
Decrease (increase) in accrued interest
receivable and other assets 123,012 (498,570) (209,987)
(Decrease) increase in accrued interest payable
and other liabilities (125,709) (123,717) (95,225)
Cumulative effect of change in accounting
principle -- -- (700,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,001,584 1,340,983 511,723
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities 9,448,103 2,980,313 1,005,625
Proceeds from maturities of investment securities 7,000,000 15,300,000 12,050,000
Purchase of investment securities (15,040,700) (17,045,301) (19,456,854)
Net increase in loans (2,190,804) (4,876,134) (485,356)
Purchase of bank premises and equipment (321,810) (378,501) (127,566)
Proceeds from sale of bank premises and equipment 8,329 -- 12,624
Proceeds from sales of other real estate owned -- -- 509,500
Cash and cash equivalents of banks acquired,
net of payment for purchase -- 6,462,168 --
------------ ------------ ------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (1,096,882) 2,442,545 (6,492,027)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits
and savings (13,661,552) 2,553,678 12,334,463
Net increase (decrease) in time certificates
of deposit 790,297 (133,669) (5,548,283)
Net increase (decrease) in securities sold under
agreement to repurchase 5,743,500 603,000 (300,000)
------------ ------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (7,127,755) 3,023,009 6,486,180
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,223,053) 6,806,537 505,876
CASH AND CASH EQUIVALENTS, beginning of year 13,560,020 6,753,483 6,247,607
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 6,336,967 $ 13,560,020 $ 6,753,483
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 4,399,030 $ 3,379,954 $ 3,373,013
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
BILTMORE BANK CORP.
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1995, 1994 AND 1993
--------------------------------
(1) ORGANIZATION:
------------
Biltmore Bank Corp. (the Company), the holding company for Biltmore Investors
Bank (the Bank) (formerly Biltmore National Bank), was incorporated in Arizona
on March 19, 1984. On August 22, 1985, the Company acquired all of the issued
stock of the Bank and the Bank commenced banking operations. In 1989, Johnson
International Inc. (JI), a Wisconsin-based company owned primarily by Samuel C.
Johnson and family members, acquired approximately 76% of the Company's
outstanding common stock. As a result, the Company became a subsidiary of JI. In
a November 26, 1990 stock offering, JI acquired shares which increased its
ownership percentage to approximately 93%.
As per the 1989 Stock Purchase and Investment Agreement, based primarily upon
the level of loan losses from the time of its acquisition in 1989 through
December 31, 1991, JI was entitled to and did receive 7,570,896 additional
shares of stock in 1993. This transaction, combined with purchases of shares of
stock from other shareholders, increased JI's ownership to approximately 97%.
Since JI's effective ownership exceeded 95%, the goodwill recorded by JI at the
time of its acquisition of the Company was required to be "pushed down" to the
Company. Therefore, goodwill was recorded on the Company's Balance Sheet as of
January 1, 1992. Additional disclosure of this transaction is included in
footnotes (11) and (12).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, the Bank. All material intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
The consolidated financial statements of the Company are prepared in accordance
with generally accepted accounting principles. The following is a description of
the Company's significant accounting policies.
Estimates-
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure or
contingent assets and
F-7
<PAGE>
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents-
-------------------------
Cash and cash equivalents, for purposes of reporting cash flows, include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Investment Securities-
---------------------
In May 1993, the FASB issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115). SFAS 115 requires, among
other things, that securities classified as available for sale be carried at
market value, however, market value adjustments and the related income tax
effects, are excluded from earnings and reported separately as a component of
stockholders' equity. This new standard was adopted by the Company on January 1,
1994. Prior to this, investment securities available for sale were carried at
the lower of cost or market value.
Securities, when purchased, are designated as investment securities held to
maturity or investment securities available for sale and remain in that category
until they are sold or mature. The specific identification method is used in
determining the cost of securities sold. The Company does not engage in the
trading of securities, and does not hold any securities classified as held to
maturity.
Investment securities available for sale are carried at market value, determined
on an aggregate basis. While the Company has no current intention to sell these
securities, they may not be held to maturity.
Loans-
-----
Loans are reported at the principal amount outstanding, net of deferred loan
origination fees and costs. Interest income on loans is credited to operating
income as earned based on the principal amount outstanding. Accrual of interest
is suspended on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
Loan Fees-
---------
Loan origination fees and certain related direct loan origination costs are
offset and the resulting net amount is deferred and
F-8
<PAGE>
amortized over the life of the related loans as an adjustment to the yield of
such loans.
In addition, commitment fees are offset against related loans and amortized as a
yield adjustment if the commitment is exercised or, if the commitment expires
unexercised, it is recognized upon expiration of the commitment.
Allowance for Credit Losses-
---------------------------
The loan portfolio and other extensions of credit are regularly reviewed to
determine the adequacy of the allowance for credit losses which is established
through a provision for credit losses charged to expense. The impact of economic
conditions on the credit worthiness of borrowers is given major consideration in
determining the adequacy of the reserve.
A charge against the allowance for credit losses is made when management
believes that the collectability of the loan principal is unlikely. Management
believes the allowance is adequate to absorb losses inherent in existing loans
and commitments to extend credit, based on evaluations of the collectability and
prior loss experience of loans and commitments to extend credit. The evaluations
take into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments and current and anticipated economic conditions that may
affect the borrower's ability to pay. Ultimate losses may vary from current
estimates and the amount of the provision, which is a current expense, may be
either greater or less than actual net charge-offs. Recoveries of loans
previously charged off are added back to the allowance.
Premises and Equipment-
----------------------
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is charged to expense over the estimated useful life
of the asset computed on the straight-line method. Leasehold improvements are
amortized over the life of the lease, including optional renewal periods, or the
estimated useful life of the asset, whichever is shorter.
Other Real Estate Owned-
-----------------------
Other real estate owned, which represents real estate acquired in settlement of
loans, is initially recorded at the lower of the recorded investment in the loan
or the fair value of the real estate.
Prior to foreclosure, the value of the underlying loan is written down to the
fair value of the real estate to be acquired by a charge to the allowance for
credit losses, if necessary. Any subsequent write downs to reflect declines, if
any, in net
F-9
<PAGE>
realizable value of the property are charged to expense.
Net Income Per Common Share-
---------------------------
Net income per common share is calculated by dividing net income by the weighted
average number of shares of common stock outstanding during the year. These
shares give consideration to outstanding stock options when such effect is
dilutive.
Reclassifications-
-----------------
Certain reclassifications have been made to conform to the classifications used
in the 1995 financial statements.
(3) CASH AND DUE FROM BANKS:
-----------------------
Cash includes deposits with the Federal Reserve Bank of $758,648 and $343,000
maintained to satisfy federal regulatory requirements at December 31, 1995 and
1994, respectively.
F-10
<PAGE>
(4) INVESTMENT SECURITIES:
---------------------
The amortized cost and market value of investment securities available for sale
as of December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States Treasury
securities $19,858,248 $20,054,063 $20,071,091 $19,198,458
Obligations of United States
government agencies 15,713,723 15,762,224 17,001,257 16,297,264
Corporate bonds 500,000 502,350 500,000 492,625
Certificate of deposit 100,000 98,866 100,000 100,000
Federal Reserve Bank stock 390,850 390,850 354,300 354,300
----------- ----------- ----------- -----------
$36,562,821 $36,808,353 $38,026,648 $36,442,647
=========== =========== =========== ===========
</TABLE>
At December 31, 1995, and 1994 the Company's investment portfolio included
unrealized gains of approximately $347,000 and $5,000 respectively, and
unrealized losses of approximately $101,000 and $1,589,000 respectively.
Gross realized gains and losses amounted to $34,527 and $6,266 in 1995, and
$27,249 and $16,534 in 1994, and $6,607 and $0 in 1993, respectively.
The following table presents the amortized cost and carrying amounts by maturity
distribution of the investment portfolio for investments with a stated maturity
date:
<TABLE>
<CAPTION>
Maturity Distribution at December 31, 1995
Amortized Amortized Amortized
Cost Cost Cost
Within Market One to Market Over Market
One Year Value Five Years Value Five Years Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States
Treasury
securities $ 2,014,602 $ 2,017,814 $17,843,646 $18,036,249 $ -- $ --
Obligations of
United States
government
agencies 2,985,311 2,990,000 11,045,357 11,105,274 1,683,055 1,666,950
Corporate bonds 500,000 502,350 -- -- -- --
Certificate of
deposit 100,000 98,866 -- -- -- --
Federal Reserve
Bank Stock -- -- -- -- 390,850 390,850
----------- ----------- ----------- ----------- ----------- -----------
$ 5,599,913 $ 5,609,030 $28,889,003 $29,141,523 $ 2,073,905 $ 2,057,800
=========== =========== =========== =========== =========== ===========
</TABLE>
F-11
<PAGE>
The Company had $6,000,000 available under federal funds lines of credit with
correspondent banks as of both December 31, 1995 and 1994. The Company has
assigned a United States Treasury security with a carrying value of $1,982,500
to secure a portion of one of the federal funds lines of credit. There were no
borrowings under this line at December 31, 1995 or 1994.
The Company has a Letter of Credit Line of $750,000 available with a
correspondent bank as of December 31, 1995 and 1994. There were no borrowings
under this line.
At December 31, 1995, the Company had assigned a United States Treasury security
with a carrying value of $1,013,750 to secure a Treasury, Tax and Loan account
with the Federal Reserve Bank. Also at December 31, 1995, the Company had
assigned a United States Treasury Security with a carrying value of $1,006,562
to secure trust account deposits.
(5) LOANS:
-----
Loans, which all arise from domestic operations, are summarized as of December
31 as follows:
1995 1994
------------ ------------
Commercial and industrial $ 45,379,732 $ 42,243,407
Real estate - construction 2,158,172 1,134,611
Consumer loans 3,313,321 4,049,441
Residential mortgage 40,896,989 42,082,311
------------ ------------
91,748,214 89,509,770
Less - Allowance for credit losses (2,362,310) (2,422,513)
Deferred loan origination fees (233,655) (224,680)
------------ ------------
$ 89,152,249 $ 86,862,577
============ ============
At December 31, 1995 and 1994, the Company had outstanding $624,704 and
$244,090, respectively, of loans made to directors, executive officers and
related parties. All such loans were made in the ordinary course of business.
The activity in related party loans for the years ended December 31 is
summarized as follows:
1995 1994
--------- ---------
Balance, beginning of year $ 244,090 $ 275,577
Loan disbursements 521,639 166,662
Loan payments received (141,025) (198,149)
--------- ---------
Balance, end of year $ 624,704 $ 244,090
========= =========
F-12
<PAGE>
The Company has evaluated its loan portfolio as of December 31, 1995 in
accordance with its normal practices and has given consideration to the factors
creating potential credit losses. While management believes that the allowance
for credit losses provides for all currently anticipated problems, management
recognizes that the Company may incur additional losses which cannot currently
be estimated, but which may be substantial.
Changes in the allowance for credit losses for the years ended December 31 were
as follows:
1995 1994 1993
----------- ----------- -----------
Balance, beginning of year $ 2,422,513 $ 1,776,129 $ 1,913,793
Reserve acquired in acquisition -- 806,141 --
Provision credited to operations (98,868) (75,632) (218,573)
Loans charged off (66,513) (141,822) (21,157)
Recoveries 105,178 57,697 102,066
----------- ----------- -----------
Balance, end of year $ 2,362,310 $ 2,422,513 $ 1,776,129
=========== =========== ===========
In May 1993 and October 1994, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118, an amendment to SFAS No. 114
(collectively "SFAS 114"). These new standards require that a loan's value be
measured, and if appropriate a valuation reserve established, when it has been
determined that the loan is impaired and loss is probable. At December 31, 1995,
the Corporation's recorded investment in impaired loans is approximately
$110,000. Management has determined that the entire amount of impaired loans
will be excluded from evaluation under SFAS 114 as these are smaller-balance
homogeneous loans. This amount is net of previous direct writedowns and
applications of cash interest payments against the loan balance outstanding.
The average recorded investment in total impaired loans and leases for the year
ended December 31, 1995, was not material.
Interest payments received on impaired loans and leases are recorded as interest
income unless collection of the remaining recorded investment is doubtful at
which time payments received are recorded as reductions of principal. During
1995, interest income recognized on total impaired loans was not material. The
gross income that would have been recognized had such loans and leases been
performing in accordance with their original terms would have not been material
for the same period.
At December 31, 1995, there were no commitments to lend additional funds to
borrowers whose loans are classified as nonaccrual or renegotiated.
Substantially all the loans contained in the portfolio are to individuals and
businesses located in the Phoenix metropolitan area.
F-13
<PAGE>
(6) PREMISES AND EQUIPMENT:
----------------------
Major classifications of premises and equipment as of December 31 were as
follows:
1995 1994
----------- -----------
Land $ 400,000 $ 400,000
Building 193,299 65,000
Equipment and furniture 1,288,483 940,248
Leasehold improvements 762,471 895,950
----------- -----------
2,644,253 2,301,198
Less- Accumulated depreciation and
amortization (1,027,842) (695,745)
----------- -----------
$ 1,616,411 $ 1,605,453
=========== ===========
(7) DEPOSITS:
--------
Time certificates of deposit with balances of $100,000 and over and their
remaining maturities as of December 31 were as follows:
1995 1994
----------- -----------
Less than three months $ 3,497,647 $ 2,086,262
Three to twelve months 7,326,066 4,609,937
One year to five years 2,866,197 7,393,387
Over five years -- --
----------- -----------
$13,689,910 $14,089,586
=========== ===========
(8) SHORT TERM BORROWINGS:
---------------------
Short term borrowings at December 31, were as follows:
1995 1994
---------- ----------
Federal funds purchased $1,200,000 $ --
Securities sold under agreement to
repurchase 5,140,500 603,000
---------- ----------
$6,340,500 $ 603,000
========== ==========
As of December 31, 1995, securities sold under agreement to repurchase of
$5,000,000 were with Heritage Bank and Trust, Racine, WI, a Johnson
International Company.
F-14
<PAGE>
(9) COMMITMENTS AND CONTINGENCIES:
-----------------------------
In 1988, the Company signed a ten-year lease agreement to lease approximately
10,300 square feet for its current banking offices. The lease was subsequently
amended to commence on October 15, 1989 and terminate on June 30, 1999. The
Company assigned the lease to the Bank effective December 29, 1989. The lease
agreement requires rental payments to be escalated in the seventh year of the
lease by a minimum of 20% and a maximum of 30% as determined by a formula based
upon the consumer price index, and then to remain constant through the remaining
term of the lease. Additionally, the lease requires the Bank to pay an allocated
percentage of the direct expenses of the building and project in excess of
specified levels. The lease agreement provides renewal options for two five-year
periods at fair-market rent at the renewal date.
On February 2, 1994, Biltmore Investors Bank acquired substantially all the
assets and liabilities of American National Bank (See note 18). As a result of
the acquisition, Biltmore Investors Bank signed a five year lease for a branch
location in Scottsdale, Arizona. The lease agreement provides renewal options
for two five-year periods.
Total rental expense under the aforementioned leases for the years ended
December 31, 1995, 1994 and 1993 was approximately $573,000, $522,000, and
$314,000, respectively. Future minimum rental payments required under the lease
agreements at December 31, 1995 were as follows:
Year Ending
December 31,
------------
1996 616,116
1997 616,116
1998 618,223
1999 210,636
Thereafter --
----------
$2,061,091
==========
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are not reflected in the
accompanying consolidated financial statements. These commitments and contingent
liabilities include various guarantees and commitments to extend credit arising
from normal business activities. At December 31, 1995 and 1994, commitments to
extend credit under loan agreements, net of participations sold, aggregated
approximately $28,770,000 and $24,745,000, respectively. Commitments to extend
credit under letter of credit agreements, net of participations sold, aggregated
approximately $567,000 and $495,000 at December 31, 1995 and 1994, respectively.
The Bank
F-15
<PAGE>
does not anticipate any material loss as a result of these transactions.
(10) STOCK OPTIONS:
-------------
The Company has adopted four stock option plans, the terms of which are
summarized as follows:
The 1984 Nonstatutory Stock Option Plan (the "Nonstatutory Plan")
provides for the issuance of a maximum of 20,000 options for the
purchase of one share of common stock each. All full-time salaried
officers, key employees and directors are eligible to receive options
under the Nonstatutory Plan. The option price is $10 per share. Options
are exercisable in 25% increments each year subsequent to the first
anniversary of the date of grant and expire six years from the date of
grant.
The Incentive Stock Option Plan (the "Incentive Plan") provides for the
issuance of a maximum of 40,000 options for the purchase of one share of
common stock each. The exercise price of the option may not be less than
the fair market value of the stock at the date of grant. Options may be
granted under the Incentive Plan to any director, officer or employee of
the Company or the Bank. Options granted under the Incentive Plan expire
ten years from date of grant and are exercisable at the option of the
holder. All options under this plan were forfeited in 1994.
The Founding Directors Nonstatutory Stock Option Plan (the "Founding
Directors Plan") provides for the issuance of a maximum of 60,000
options for the purchase of one share of common stock each. The six
founding directors are the only participants in the Founding Directors
Plan. Each founding director has been granted options to purchase 10,000
shares of common stock at a purchase price of $12 per share. All options
under this plan expired in 1994.
On September 26, 1989, the Company executed an amendment to the Stock
Purchase Agreement with JI (see Note 10) which included an agreement to
issue an additional $150,000 in options to a new employee of the Bank,
at the per share investment price of the JI transaction. The option plan
was approved in 1990 as the 1990 Incentive Stock Option Plan. The JI
transaction closed on December 29, 1989 at $2.57 per share which equated
to 58,366 shares under the option agreement. As of December 31, 1995,
390 of the options had been granted and exercised.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") was issued in October 1995 by the
Financial Accounting Standards Board and is required to be adopted in
1996. FAS 123 establishes financial accounting and reporting standards
for
F-16
<PAGE>
stock-based employee compensation. Currently the Company does not
recognize compensation cost on options issued under Accounting
Principal Board Opinion No. 25 "Accounting For Stock Issued to
Employees" ("APB 25") as the exercise price is the same as or higher
than the fair market value at time of issuance. FAS 123 permits the
Company to continue to follow this treatment as long as pro-forma
disclosures of net income and earnings per share are presented as if
the fair value based method of accounting defined in FAS 123 had been
applied. The fair value based method requires measurement of
compensation cost on the grant date based on the fair value of the
award using an option pricing model. Management has not yet determined
whether it will adopt the fair value based method defined by FAS 123 or
continue to use the APB 25 method.
F-17
<PAGE>
The following summarizes the activity in stock options under the four plans for
each of the years in the two-year period ended December 31, 1995 and 1994:
Outstanding Option Exercisable
Options Price Options
------- ----- -------
BALANCE, December 31, 1993 71,400 $10 - $13 11,400
Options expired (60,000) $12 -
Options forfeited (9,400) $13 (9,400)
------- -------
BALANCE, December 31, 1994 2,000 $10 2,000
Options expired (2,000) $10 (2,000)
------- -------
BALANCE, December 31, 1995 0 0
======= =======
(11) STOCK OFFERINGS AND COMMON STOCK:
--------------------------------
On March 2, 1989, the Company signed a definitive agreement with JI which
allowed them to acquire a controlling interest in the Company (Note 1). The
agreement was to purchase approximately $3,000,000 of newly-issued stock at the
December 31, 1988, book value per share. In September 1989, an amendment was
signed by the Company and JI to change the price per share to the unaudited book
value per share of the Company's common shares as of the end of November, 1989,
which both parties agreed was $2.57. The purchase, which was consummated on
December 29, 1989 and which required regulatory approval, gave JI ownership of
approximately 76% of the Company's outstanding stock.
The definitive agreement contained a warrant purchase agreement granting to JI
the right to purchase warrants at the price of $.01 per warrant and to purchase
common stock equal in number and option price with respect to other shares
eligible to be purchased under all of the Company's option plans. The warrants
contain anti-dilution provisions providing for the issuance of additional
warrants or changes to the warrant prices, as the case may be, should the
Company take any action in the future to issue options, rights, warrants or
other securities convertible into common stock, or take any other action which
will or may have the effect of diminishing JI's proportionate interest in the
Company's common stock.
During 1990, pursuant to the terms of the agreement, the Company issued a common
stock offering to its stockholders. As a result of this offering, 7,414,345
shares of stock were sold for $8,600,640. JI purchased 7,181,106 shares in the
1990 offering, increasing its ownership of the Company from 76% to 93%. In
addition to the stock offering, 390 stock options were exercised at $2.57 per
share by an employee of the Bank.
Under the terms of the 1989 definitive agreement, JI would pay additional cash
to the Company or receive additional shares of common stock of the Company
depending primarily upon losses in the loan portfolio from the date of the
agreement in 1989 through December 31, 1991. Based upon
F-18
<PAGE>
actual loan losses incurred, 7,570,896 additional shares were due and payable to
JI as of December 31, 1991. The shares were issued to JI on April 30, 1992. A
reclassification was made to Common Stock from Additional Paid-in Capital for
the stated value of the shares.
This transaction, combined with purchases of shares of common stock from other
shareholders, increased JI's ownership of the Company to approximately 97%.
(12) INTANGIBLE ASSETS:
-----------------
Because the stock to be issued under the terms of the 1989 definitive agreement
was due and payable as of December 31, 1991, JI's effective ownership exceeded
95%. Therefore, the remaining unamortized goodwill, which was originally
recorded by JI at the time of JI's acquisition of the Company, was required to
be "pushed down" to the Company.
Accordingly, goodwill in the amount of $640,094 was recorded on the Company's
Balance Sheet as of January 1, 1992 with an offsetting amount recorded to
retained earnings. The goodwill is being amortized using the straight-line
method over 25 years, and had approximately 23 years remaining when it was
"pushed down" to the Company from JI.
As per Accounting Principles Board Opinion No. 16 (APB 16), retained earnings of
the Company was required to be restated on the date of application of pushdown
accounting. The restated retained earnings included the remaining minority
ownership's percentage of the retained earnings (accumulated deficit at the
time), plus JI's recorded equity in the income and losses of the Company from
the time of the original acquisition, less all amortization of the goodwill
recorded by JI relating to the acquisition of the Company. Therefore, a
reclassification of $2,639,069 was made from retained earnings to additional
paid-in capital on January 1, 1992
Additional goodwill in the amount of $10,431 was "pushed down" to the Company
from JI in 1992 relating to additional shares purchased by JI from other
shareholders during the year.
Goodwill was $114,059 and $65,294 at December 31, 1995 and 1994 respectively.
The core deposit intangible resulting from the acquisition of ANB, as described
in note 17, was $1,384,584 and $1,611,300 at December 31, 1995 and 1994
respectively. The core deposit intangible is amortized over 10 years.
Negative goodwill generated from a previous acquisition was $163,449 and
$224,773 at December 31, 1995 and 1994, respectively.
F-19
<PAGE>
(13) REGULATORY MATTERS:
------------------
The activities of the Bank are regulated by the Office of the Comptroller of the
Currency (the OCC). Approval by the OCC may be required prior to payment of
dividends by the Bank to the Company under certain circumstances. Additionally,
regulations prevent the Bank from transferring funds to the Company for reasons
other than the payment of dividends or the purchase of services and supplies.
Therefore, included in the balance sheet at December 31, 1995 and 1994, are
$13,714,000 and $11,527,000 respectively, of net assets restricted to use by the
Bank only.
The Federal Reserve Board has adopted capital regulations which require the Bank
to maintain two separate minimum capital ratios. Included are the Tier 1 Capital
Ratio and the Total Risk-Weighted Capital Ratio. The Bank's capital ratios are
shown, along with the minimum required ratios as of December 31, 1995, and 1994
respectively, in the following table:
Total Risk-
Tier 1 Weighted
Capital Capital
------- -------
Capital Ratio at December 31, 1995 13.57% 16.16%
Capital Ratio at December 31, 1994 12.96% 14.23%
Regulatory Capital Requirement 4.00% 8.00%
The federal banking agencies have also adopted leverage capital guidelines which
banking organizations must meet. Under these guidelines, the most highly rated
banking organizations must meet a leverage ratio of at least 3% Tier 1 capital
to total assets, while lower rated banking organizations must maintain a ratio
of at least 4% to 5%. The Bank's leverage ratios for the years ended December
31, 1995 and 1994 were 8.88% and 7.12% respectively.
At December 31, 1995 and 1994, due to OCC Regulations, the Bank had no retained
earnings available for distribution as dividends to the Company.
(14) OTHER INTEREST INCOME:
---------------------
Other interest income for the years ended December 31 is summarized as follows:
1995 1994 1993
---------- ---------- ----------
Interest on federal funds sold $ 216,886 $ 142,360 $ 106,913
Interest on deposits in other
financial institutions 2,775 2,500 2,329
Interest on investment
securities 2,061,594 2,109,761 1,872,207
---------- ---------- ----------
$2,281,255 $2,254,621 $1,981,449
========== ========== ==========
F-20
<PAGE>
(15) INTEREST EXPENSE:
----------------
Interest expense for the years ended December 31 is summarized as follows:
1995 1994 1993
---------- ---------- ----------
Demand deposits and savings $1,778,941 $1,371,399 $ 939,280
Time certificates of deposit,
$100,000 and over 824,972 604,580 521,449
Other time deposits 1,714,099 1,389,057 1,820,239
Securities sold under
agreement to repurchase 59,883 4,832 3,527
Federal funds purchased 21,135 -- --
---------- ---------- ----------
$4,399,030 $3,369,868 $3,284,495
========== ========== ==========
(16) INCOME TAXES:
------------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which was issued by
the Financial Accounting Standards Board. Under this method, deferred tax assets
and liabilities are recognized for future tax consequences relating to
differences between the book and tax accounting treatment of existing assets and
liabilities as of the balance sheet dates. Deferred tax assets and liabilities
are calculated using enacted tax rates expected to apply to taxable income in
the years in which the book-to-tax accounting differences are expected to be
reversed.
The following is a reconciliation between the amount of the provision for income
taxes and the amount of tax computed by applying the statutory Federal income
tax rate of 34% for each year:
1995 1994
----------- ---------
Tax computed at statutory rate $ 329,926 $ 386,900
Other (74,837) (42,333)
Adjustment of valuation allowance - (564,000)
----------- ---------
Total income tax expense (benefit) $ 255,089 $(219,433)
=========== =========
F-21
<PAGE>
The tax effects of temporary differences that give rise to significant elements
of the deferred tax assets and deferred tax liabilities for each year, are as
follows:
1995 1994
----------- -----------
Deferred tax assets:
Allowance for credit losses $ 803,185 $ 549,576
Mortgage loan premium 13,283 168,960
Net deferred loan fees 79,443 76,392
Net operating loss carryforwards 377,526 847,676
Net unrealized depreciation on
investment securities available for sale -- 538,560
Other 16,229 90,049
----------- -----------
Total deferred tax assets $ 1,289,666 $ 2,271,213
----------- -----------
Deferred tax liabilities:
Fixed assets, primarily due to
depreciation $ (31,516) $ (100,713)
Discount accretion on bonds (71,120) (43,120)
Net unrealized depreciation on
investment securities available for sale (83,800) --
Other (301,162) (42,120)
----------- -----------
Total deferred tax liabilities (487,598) (185,953)
----------- -----------
802,068 2,085,260
Valuation Allowance -- (352,000)
----------- -----------
Net deferred tax assets $ 802,068 $ 1,733,260
=========== ===========
Changes in the valuation allowance were as follows:
1995 1994
----------- -----------
Balance, beginning of year $ 352,000 $ 1,817,000
Expiration of State NOL (352,000) (624,000)
Recognition of previously generated
federal NOLs -- (841,000)
----------- -----------
Balance, end of year $ -- $ 352,000
=========== ===========
F-22
<PAGE>
The Company has a tax NOL carryforwards of approximately $1.1 million for
federal income taxes as of December 31, 1995. The $1.1 million federal NOL
carryforward is comprised of prechange NOLs (before JI purchased a 76% ownership
on December 29, 1989) and postchange NOLs (from December 29, 1989 to November
26, 1990 when JI became a 93% owner of the Company).
The federal prechange NOL approximates $201,000, and must be utilized by the
Company (it cannot be used by JI) no later than the year 2003. The postchange
federal NOL, which approximates $910,000, must be utilized by the Company (but
not by JI) in full by no later than the year 2004. The Company has fully
benefitted all NOL's existing at December 31, 1995.
The cumulative effect of adopting SFAS 109 at January 1, 1993, was $700,000
representing the recognition of the net deferred tax assets at January 1, 1993
plus the Company's estimate of the amount of postchange NOLs it reasonably
expected to realize at the time.
(17) NEW PRONOUNCEMENTS:
------------------
In March, 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of."
This standard, which must be adopted in 1996, requires long-lived impaired
assets to be carried at fair value and all long-lived assets to be disposed of
to be reported at the lower of carrying amount or fair value less cost to sell.
SFAS 121 prescribes a cash flow test for recoverability whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For purposes of SFAS 121, assets include certain identifiable
intangibles and goodwill if the asset tested for recoverability was acquired in
a business combination accounted for using the purchase method.
The Corporation does not anticipate that SFAS 121 will have a material impact on
the consolidated financial statements.
F-23
<PAGE>
(18) BUSINESS COMBINATION:
--------------------
On February 1, 1994, the Bank acquired substantially all of the assets and
liabilities of American National Bank (ANB), which had one office in Scottsdale,
Arizona and one office in Phoenix, Arizona. The acquisition was funded through
available capital of the Bank at a cost of approximately $1.1 million.
The transaction was accounted for as a purchase and is included in the Company's
results of operations as of February 1, 1994. The following table shows the fair
value of assets acquired, fair value of liabilities assumed, and net cash paid:
Fair Value of Assets Acquired $32,422,667
Fair Value of Liabilities Assumed 31,335,419
------------
Cash Paid for Acquisitions 1,087,248
Cash Received in Acquisition (7,549,416)
-----------
Net Cash and Cash Equivalents Received $6,462,168
===========
The pro-forma impact on the Company's results of operations for the year ended
December 31, 1994, assuming ANB had been acquired as of the beginning of the
year, are not materially different than the Company's actual results. The
unaudited pro-forma impact on the Company's results of operation for the year
ended December 31, 1993 had the ANB transaction described above been consummated
January 1, 1993 is as follows:
For the Year Ended
December 31, 1993
(Unaudited)
Net Interest Income $4,253,000
Provision for Loan Losses $ 219,000
Net Income $1,119,000
Net Income per Share $ .07
F-24
<PAGE>
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The following tables present the estimated fair values of financial instruments
as of December 31, 1995 and 1994:
1995
---------------------------
Carrying Fair
Value Value
------------ ------------
Financial Assets:
Cash and Cash Equivalents $ 6,337,000 $ 6,337,000
Investments Securities Available
for Sale 36,808,000 36,808,000
Net Loans 89,152,000 89,199,000
Interest Receivable 1,109,000 1,109,000
Financial Liabilities:
Deposits 116,357,000 116,919,000
Short Term Borrowings 6,341,000 6,201,000
Interest Payable 199,000 199,000
1994
---------------------------
Carrying Fair
Value Value
------------ ------------
Financial Assets:
Cash and Cash Equivalents $ 13,560,000 $ 13,560,000
Investments Securities Available
for Sale 36,443,000 36,443,000
Net Loans 86,863,000 81,382,000
Interest Receivable 1,018,000 1,018,000
Financial Liabilities:
Deposits 129,228,000 121,281,000
Short Term Borrowings 603,000 603,000
Interest Payable 219,000 219,000
Where readily available, quoted market prices were utilized by the Company. If
quoted market prices were not available, fair values were based on estimates
using present value or other valuation techniques. These techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The calculated fair value estimates, therefore,
cannot be substantiated by comparison to independent markets and may not be
realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used in estimating the fair value for
financial instruments.
F-25
<PAGE>
Cash and cash equivalents, interest receivable, securities sold under agreements
- --------------------------------------------------------------------------------
to repurchase, and interest payable
- -----------------------------------
The carrying amounts reported for these financial instruments are a reasonable
estimate of fair value.
Investment securities available for sale
- ----------------------------------------
Fair value is based on quoted market prices or dealer quotes.
Loans
- -----
Loans that reprice or mature within three months of year end were assigned fair
values based on their carrying values. For remaining loans, fair value was
estimated by discounting the expected future cash flows using current interest
rates at which similar loans would be made to borrowers of comparable
creditworthiness.
Deposits
- --------
The fair value of fixed-maturity time deposits was estimated based on discounted
cash flows using rates currently offered for deposits of similar remaining
maturities.
Though demand and savings deposits may have duration characteristics which could
justify fair value estimation using methods similar to those used for
fixed-maturity time deposits, their fair value was considered to be carrying
value pursuant to the disclosure requirements.
(20) MANAGEMENT FEE:
--------------
The Company pays its allocable portion of expenses to JI in an arrangement
similar to all of JI's subsidiaries. The arrangement calls for partial payment
of allocable expenses in the early years after becoming a subsidiary of JI.
In 1993, the Company paid $175,783 in management fees, equalling 63% of its
allocable portion of expenses. In 1994, the Company paid $275,520 in management
fees, equalling 83% of its allocable portion of expenses. In 1995, the Company
paid $428,111 in management fees, equaling 88% of its allocable portion of
expenses.
Future payments as a percentage of the Company's allocable portion of expenses
are expected to be 100% in 1996.
F-26
<PAGE>
(21) CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
-----------------------------------------------------
CONDENSED BALANCE SHEETS DECEMBER 31 1995 1994
----------- -----------
ASSETS:
CASH $ 424 $ 120
DEFERRED TAXES -- 257,173
INVESTMENT IN BILTMORE INVESTORS BANK 13,714,165 11,527,411
PREPAID EXPENSES 1,826 2,160
GOODWILL 64,019 65,294
----------- -----------
TOTAL ASSETS $13,780,434 $11,852,158
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
OTHER LIABILITIES $ 9,756 $ 5,830
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 13,770,678 11,846,328
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $13,780,434 $11,852,158
=========== ===========
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME FOR THE YEARS
ENDED DECEMBER 31: 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
EQUITY IN NET INCOME OF BILTMORE
INVESTORS BANK $ 722,418 $ 1,376,788 $ 771,879
EXPENSES:
General and administrative 6,009 10,334 2,926
Amortization of goodwill 3,172 9,079 19,699
----------- ----------- -----------
TOTAL EXPENSES (9,181) (19,413) (22,625)
----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING ACCOUNTING PRINCIPAL 713,237 1,357,375 749,254
BENEFIT FROM INCOME TAXES (2,044) -- --
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 715,281 1,357,375 749,254\ CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- 700,000
----------- ----------- -----------
NET INCOME $ 715,281 $ 1,357,375 $ 1,449,254
=========== =========== ===========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
RECONCILIATION OF NET INCOME TO NET CASH
USED BY OPERATING ACTIVITIES:
Net income $ 715,281 $ 1,357,375 $ 1,449,254
Adjustments to reconcile net income to
net cash provided (used) by operating activities-
Equity in net income of Biltmore
Investors Bank (722,418) (1,376,788) (771,879)
Amortization of goodwill 3,172 9,079 19,699
Recognition of preacquisition net
operating loss carryforward -- 257,173 95,000
Cumulative effect of a change in
accounting principal -- -- (700,000)
Increase in investment in Biltmore
Investors Bank due to utilization of
preacquisition net operating loss
carryforward -- (257,173) (95,000)
(Decrease) increase in other
liabilities 3,934 (621) (12,888)
Decrease in other assets 335 518 278
----------- ----------- -----------
Net cash provided (used) by operating
activities 304 (10,437) (15,536)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES: -- -- --
CASH FLOWS FROM FINANCING ACTIVITIES: -- -- --
DECREASE IN CASH AND CASH EQUIVALENTS 304 (10,437) (15,536)
CASH AND CASH EQUIVALENTS,
beginning of period 120 10,557 26,093
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 424 $ 120 $ 10,557
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 176 $ -- $ --
=========== =========== ===========
NON-CASH TRANSACTION:
Pushdown of goodwill from Parent $ 1,897 $ 3,329 $ --
=========== =========== ===========
</TABLE>
F-28
<PAGE>
Item 13. Persons and Assets Employed, Retained or Utilized
William G. Ridenour, is a member of the Board of Directors of the
Company and is a founding shareholder of the law firm Ridenour, Swenson, Cleere
& Evans, P.C. (RSC&E). RSC&E has in the past and continues to provide legal
services to the Company, including providing legal representation to the Company
in connection with the Transaction. The Company is charged and has agreed to pay
RSC&E for its legal services on an hourly basis at the rate of $125.00 per hour.
It is anticipated that the legal fees of RSC&E in connection with the
Transaction will be the sum of $20,000.00.
Item 14. Additional Information
None.
Item 15. Exhibits
Item 16. Other Matters
The Company knows of no other matters to be submitted to the Meeting.
If any other matter properly comes before the Meeting, it is the intention of
the Company to consider and vote on any such matters as the Board of Directors
may recommend.
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: November 7, 1996
Biltmore Bank Corp.
By:_____________________
Name: Mark A. Behrens
Title: Executive Vice President
Johnson International, Inc.
By: _______________________
Name: Dennis Axelson
Title: Senior Vice President
and Chief Financial
Officer
19
<PAGE>
Item 17
Exhibit E
(See Item 13 to Schedule 13e-3)
<PAGE>
Item 17
Exhibit F
Industry Peer Analysis
Return on Equity Average
---------------- -------
AZ Bank 12.06% 15.58%
Bank of AZ 17.99% 15.58%
Casa Grande 16.75% 15.58%
BILTMORE INVESTORS 6.57% 15.58%
Community 19.05% 15.58%
County 15.06% 15.58%
First Nat'l Bank of AZ 19.04% 15.58%
First AR Metropolitan 17.35% 15.58%
Founders 39.14% 15.58%
Frontier State 18.34% 15.58%
Harris Trust 14.26% 15.58%
Heritage 2.86% 15.58%
Liberty 24.33% 15.58%
M&I Thunderbird 17.39% 15.58%
Mohave State 18.21% 15.58%
Nat'l Bank of AZ 13.05% 15.58%
Northern Trust 29.50% 15.58%
Republic National 20.68% 15.58%
Rocky Mountain 12.85% 15.58%
The Stockmen's 17.83% 15.58%
The Sun City 11.28% 15.58%
Valley Bank of AZ -12.64% 15.58%
Valley Commerce 7.48% 15.58%
<PAGE>
BILTMORE BANK CORP.
2425 East Camelback Road
Phoenix, Arizona 85016
Dear Shareholder:
On ______, 1996, a Special Meeting of Shareholders of Biltmore Bank
Corp. an Arizona corporation, (the "Company") was held to consider and vote upon
an Amendment to the Company's Second Amended and Restated Articles of
Incorporation (the "Amendment") reducing the number of authorized shares of
common stock resulting from Twenty-Five million to Two Hundred effecting a
125,000 to 1 reverse stock split of the Company's common stock. A majority of
the Company's Shareholders present at the special meeting approved the Amendment
and the Amendment was filed with the Arizona Corporation Commission on ________
__, 1996 thereby consummating the reverse stock split transaction.
As a result of the transaction, the Company is required to purchase all
fractional shares of Company Common Stock held by Company Shareholders. This
letter advises how you will be paid for your fractional interests.
All Shareholders of Company Common Stock as of __________ , 1996, are
requested to deliver all original share certificates of Company Common Stock to
___________ at Biltmore Bank Corp. 2425 East Camelback Road, Phoenix, Arizona
85016, anytime from ________ , 1996, through _________ 27, 1996, between the
hours of 9:00 a.m. and 6:00 p.m. Mountain Standard Time, for surrender and
cancellation. The share certificates must be duly endorsed on the reverse side
of the certificate by all stock certificate owners. Alternatively, the share
certificates may be delivered with the enclosed stock power form. Please note
that all persons listed upon the Company Common Stock certificate must be
present at the time of surrender of the certificate with a photo identification
or have their signature guaranteed by an appropriate signature guarantor. If
share certificates are delivered by mail, they should be sent by certified mail.
If share certificates are lost, please contact the undersigned for further
instructions.
Upon surrender of a Company Common Stock Certificate, the
Shareholder(s) will be paid from the Reverse Stock Split Exchange Account
established at Biltmore Investors Bank, 2425 East Camelback Road, Phoenix,
Arizona, the sum of $1.00 for each share of Company Common Stock held by the
Shareholder(s) (subject to any federal backup withholding tax requirements the
Shareholder may be subject to).
<PAGE>
Enclosed with this letter is a copy of Internal Revenue Service Form
____. The Company is required by federal income tax law to deduct and withhold
the tax on payments made for the fractional interests if (i) the Shareholder
fails to furnish a taxpayer identification number (TIN) to the Company or fails
to certify under penalty of perjury that such TIN is correct; (ii) the Internal
Revenue Service (IRS) notifies the Company that the TIN furnished by the Share
holder is incorrect; (iii) the IRS notifies the Company that the Shareholder has
failed to report interest, dividends or original issue discount in the past; or
(iv) there has been a failure by the Shareholder to certify under penalty of
perjury that such Shareholder is not subject to the backup withholding tax,
requesting your TIN and certification by you that you are not subject to any
Federal backup withholding tax. Unless an executed copy of Form No.___ is
delivered to the Company upon surrender of your Company Common Stock
Certificates, the Company is required by the Internal Revenue Service to
withhold 31% of the amount otherwise distributable to you for your shares of
Company Common Stock.
Should you have any questions regarding the reverse stock split
transaction or the redemption of your shares of Company Common Stock, please
call __________________, Vice-President, Biltmore Bank Corp. at (602)
381-_______ or at 1-800_____________, 2425 East Camelback Road, Phoenix, Arizona
85016, during normal business hours, 9:00 a.m. to 6:00 p.m. Mountain Standard
Time.
<PAGE>
BILTMORE BANK CORP.
2425 East Camelback Road
Phoenix, Arizona 85015
- --------------------------------------------------------------------------------
Notice of Special Meeting of Shareholders
____________ , 1996
- --------------------------------------------------------------------------------
Notice is hereby given that the Special Meeting of Shareholders of
Biltmore Bank Corp., an Arizona corporation (the "Company") will be held at 2:00
p.m., Mountain Standard Time, on _______ , __________ , 1996, at the Company's
corporate office, 2425 East Camelback Road, Phoenix, Arizona, for the following
purposes:
1. To consider and vote on an amendment to the Company's Second Amended
and Restated Articles of Incorporation (the "Amendment") reducing the amount of
authorized shares of the Company Common Stock from Twenty-Five Million to Two
Hundred shares, a copy of the Amendment is attached as Exhibit ___ to the
Information Statement.
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The effect of the adoption of the Amendment is to cause all
shareholders holding fewer than one hundred twenty five thousand shares to be
the holders of fractional shares of Company Common Stock, which must be
surrendered to and will be acquired by the Company according to the terms set
forth in the Information Statement accompanying this Notice and the Schedule
13e-3 filed with the Securities Exchange Commission, a copy of which is
available by contacting ________________.
Only Company shareholders of record at the close of business on
___________ , 1996, are entitled to notice of and to vote at the meeting.
All shareholders are cordially invited to attend the meeting in person.
To assure your representation at the meeting, however, you are urged to mark,
sign, date and return the enclosed ballot as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any shareholder attending
the meeting may vote in person even if he or she has previously returned a
ballot.
<PAGE>
Shareholders of Company Common Stock are entitled to dissent from the
Rule 13e-3 transaction and to receive the payment determined in a judicial
appraisal proceeding if they comply with certain procedures specified in the
Arizona Revised Statutes and described in the accompanying Information Statement
and the Schedule 13e-3.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------
Secretary
Phoenix, Arizona
November __, 1996
<PAGE>
AMENDMENT TO SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BILTMORE BANK CORP.
Pursuant to the provisions of Section 10-1006, Arizona Business
Corporation Act, Biltmore Bank Corp. hereby submits the following Articles of
Amendment:
The Articles of Incorporation of Biltmore Bank Corp. is hereby amended
as follows:
1. The name of the corporation is Biltmore Bank Corp.
2. The reference to TWENTY-FIVE MILLION (25,000,000) shares of Common
Stock in the first paragraph of Article 5 Authorized Capital is deleted, and TWO
HUNDRED (200) shares is substituted in its place.
3. The Shareholders adopted the amendment on November __, 1996.
4. The corporation has 16,522,530 shares of stock outstanding and all
shares are entitled to vote on this Amendment.
5. ____ outstanding shares voted for the Amendment and ____ outstanding
shares voted against the Amendment, and _____ outstanding shares abstained.
6. In all other respects, the Second Amended and Restated Articles of
Incorporation remains in force.
Dated ________________, 1996.
By:______________________________
President
By:______________________________
Secretary
