<PAGE>
1. U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-Q
[X] Quarterly report Pursuant to section 13
or 15(d) of the Securities and Exchange
act of 1934
For the quarter ended September 30, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities and Exchange act of 1934
For the transition period from ________ to ________
Commission file number
0-23881
COWLITZ BANCORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-152984
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
927 Commerce Ave., Longview, Washington 98632
(Address of principal executive offices) (Zip Code)
(360) 423-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value on October 31, 1999: 4,092,052
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Part I
Financial Statements
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three and Nine months ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Changes in Shareholders' Equity 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
Part II
Other
Changes in Securities and Use of Proceeds 24
Other Information 24
Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
2
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousand of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks........................................... $ 15,173 $ 22,705
Investment securities:
Investments available-for-sale (at fair value, cost of $8,484
and $6,994 at September 30, 1999 and December 31, 1998,
respectively)................................................ 8,462 7,065
Investments held-to-maturity (at amortized cost, fair value of
$4,370 and $4,487 at September 30, 1999 and
December 31, 1998, respectively)............................. 4,564 4,465
--------- ---------
Total investment securities.................................. 13,026 11,530
--------- ---------
Loans............................................................. 140,633 132,046
Allowance for loan losses......................................... (2,094) (1,814)
--------- ---------
Loans, net..................................................... 138,539 130,232
--------- ---------
Premises and equipment, net of accumulated depreciation of $2,311
and $1,837 at September 30, 1999 and December 31, 1998,
respectively................................................... 6,011 5,859
Federal Home Loan Bank stock...................................... 3,035 2,869
Intangible asset, net of accumulated amortization of $717 and $432
at September 30, 1999 and December 31, 1998, respectively...... 5,062 3,110
Other assets...................................................... 1,900 2,040
--------- ---------
Total assets................................................. $ 182,746 $ 178,345
========= =========
LIABILITIES
Deposits:
Demand......................................................... $ 28,099 $ 33,062
Savings and interest-bearing demand............................ 48,520 47,367
Certificates of deposit........................................ 46,241 41,932
--------- ---------
Total deposits............................................... 122,860 122,361
Short-term borrowings............................................. 600 2,275
Long-term borrowings.............................................. 26,327 21,799
Other liabilities................................................. 1,120 990
--------- ---------
Total liabilities............................................ $ 150,907 $147,425
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 as of September 30, 1999
and December 31, 1998; no shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively......... $ - $ -
Common stock, no par value; 25,000,000 authorized as of
September 30, 1999 and December 31, 1998; 4,089,570 and 4,001,999
shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively............................ 18,887 18,251
Additional paid in capital........................................ 1,538 1,538
Retained earnings................................................. 11,428 11,085
Net unrealized gains on investments available-for-sale............ (14) 46
--------- ---------
Total shareholders' equity................................... 31,839 30,920
--------- ---------
Total liabilities and shareholders' equity................... $ 182,746 $ 178,345
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousand of dollars, except number of shares and per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................. $ 4,193 $ 3,504 $ 11,110 $ 10,292
Interest on taxable investment securities.............. 220 243 650 695
Interest on non-taxable investments securities......... 2 1 6 2
Interest from other banks.............................. 172 356 680 1,085
-------- -------- --------- ---------
Total interest income............................... 4,587 4,104 12,446 12,074
-------- -------- --------- ---------
INTEREST EXPENSE
Savings and interest-bearing demand.................... 456 504 1,411 1,422
Certificates of deposit................................ 521 675 1,563 2,433
Short-term borrowings.................................. 16 27 68 64
Long-term borrowings................................... 393 365 1,148 1,035
-------- -------- --------- ---------
Total interest expense.............................. 1,386 1,571 4,190 4,954
-------- -------- --------- ---------
Net interest income before provision for loan losses 3,201 2,533 8,256 7,120
PROVISION FOR LOAN LOSSES.............................. (235) (111) (1,065) (243)
-------- -------- --------- ---------
Net interest income after provision for loan losses. 2,966 2,422 7,191 6,877
-------- -------- --------- ----------
NONINTEREST INCOME
Service charges on deposit accounts................. 183 168 511 487
Gains on loans sold................................. 211 - 294 -
Other income........................................ 155 71 397 242
Net gains/losses on sales of available-for-sale
securities........................................ (5) - (2) 5
-------- -------- --------- ---------
Total noninterest income.......................... 544 239 1,200 734
-------- -------- --------- ---------
NONINTEREST EXPENSE
Salaries and employee benefits...................... 1,914 922 4,228 2,772
Net occupancy and equipment expense................. 424 231 980 655
Business tax expense................................ 78 61 207 184
Amortization of intangibles......................... 117 76 285 215
Other operating expense............................. 755 444 1,799 1,208
-------- -------- --------- ---------
Total noninterest expense......................... 3,288 1,734 7,499 5,034
-------- -------- --------- ---------
Income before income tax expense.................. 222 927 892 2,577
INCOME TAX EXPENSE..................................... 88 315 341 876
-------- -------- --------- ---------
Net income........................................ $ 134 $ 612 $ 551 $ 1,701
======== ======== ========= =========
BASIC EARNINGS PER SHARE............................... $ 0.03 $ 0.15 $ .14 $ .47
DILUTED EARNINGS PER SHARE............................. $ 0.03 $ 0.15 $ .13 $ .44
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................... $ 551 $ 1,701
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization................................ 759 601
Provisions for loan losses................................... 1,065 243
Net losses/gains on sales of investment securities
available-for-sale.......................................... 2 (5)
Net amortization of investment security premiums and
accretion of discounts...................................... (1) (4)
(Increase) decrease in other assets.......................... 278 (582)
Increase (Decrease) in other liabilities..................... (325) 168
Federal Home Loan Bank stock dividends....................... (166) (158)
--------- ---------
Net cash provided by operating activities................ 2,163 1,964
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity............................................. 3,267 1,387
Proceeds from maturities of investment securities
available-for-sale........................................... 2,000 1,000
Purchases of investment securities:
Held-to-maturity............................................. (3,365) (3,565)
Available-for-sale........................................... (3,492) (3,996)
Net (increase) decrease in loans............................... (4,600) (145)
Purchases of premises and equipment............................ (510) (631)
Acquisition of business, net of cash acquired.................. (1,504) (1,575)
--------- ----------
Net cash provided by (used in) investment activities....... (8,204) (7,525)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, savings, and interest-bearing
demand deposits.............................................. (3,810) 229
Net increase (decrease) in certificates of deposit............. 4,309 (17,719)
Dividends paid................................................. (208) (153)
Net increase (decrease) in short-term borrowings............... (1,675) 1,225
Proceeds from long-term borrowings............................. 5,000 -
Repayment of long-term borrowings.............................. (4,766) (1,213)
Repurchase of common stock..................................... (363) (494)
Issuance of common stock for cash, net of amount paid for
fractional shares.......................................... 22 15,019
--------- ---------
Net cash provided by shares financing activities........... (1,491) (3,106)
--------- ---------
Net increase (decrease) in cash and due from banks......... (7,532) (8,667)
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR...................... 22,705 23,109
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD.......................... $ 15,173 $ 14,442
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of dollars, except number of shares)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
------------ Paid-in Retained Comprehensive Shareholders' Comprehensive
Shares Amount Capital Earnings Income Equity Income
------ ------ ---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 2,604,543 $ 3,262 $ 1,538 $ 9,071 $ 16 $ 13,887
Comprehensive Income:
Net income........................... - - - 2,226 - 2,226 $ 2,226
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $16.......... - - - - 30 30 30
--------
Other comprehensive income, net of tax - - - - - - 30
--------
Comprehensive Income................. - - - - - - $ 2,256
========
Issuance of common stock for cash.... 1,396,251 15,019 - - - 15,019
Purchase of treasury stock........... (50,000) (494) - - - (494)
Issuance of common stock for
acquisition.......................... 51,282 465 - - - 465
Cash dividends paid ($.06 per share). - - - (212) - (212)
Cash paid for fractional shares........ (77) (1) - - - (1)
--------- -------- -------- -------- ------ ---------
BALANCE AT DECEMBER 31, 1998 4,001,999 $ 18,251 $ 1,538 $ 11,085 $ 46 $ 30,920
Comprehensive Income:
Net income (unaudited)............... - - - 551 - 551 $ 551
Net change in unrealized gains on
investments available-for-sale, net
of deferred taxes of $33 (unaudited) - - - - (60) (60) (60)
--------
Other comprehensive income, net of tax
(unaudited)....................... - - - - - - (60)
--------
Comprehensive Income (unaudited)..... - - - - - - $ 491
========
Issuance of common stock for cash
(unaudited)....................... 3,261 22 - - - 22
Purchase of treasury stock (unaudited) (64,500) (363) - - - (363)
Issuance of common stock for
Acquisition (unaudited).............. 148,810 977 - - - 977
Cash dividends paid ($.05 per share)
(unaudited)....................... - - - (208) - (208)
--------- -------- -------- -------- ------ ---------
BALANCE AT SEPTEMBER 30, 1999 4,089,570 $ 18,887 $ 1,538 $ 11,428 $ (14) $ 31,839
========= ======== ======== ======== ====== =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
COWLITZ BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Cowlitz Bancorporation (the Company) is a one-bank holding company
headquartered in southwest Washington. The Company's principal subsidiary,
Cowlitz Bank (the Bank), a Washington state-chartered commercial bank, is the
largest community bank headquartered in Cowlitz County and offers commercial
banking services primarily to small and medium-sized businesses, professionals,
and retail customers. In the third quarter of 1999, the Bank expanded its
mortgage operation by acquiring Bay Mortgage of Bellevue, Washington; Bay
Mortgage of Seattle, Washington; and Bay Escrow of Seattle, Washington. In
addition to these acquisitions in 1999, the Bank opened a mortgage and trust
office in Vancouver, Washington and a new branch in Bellevue, Washington that
will operate under the name Bay Bank. During the third quarter of 1998, the
Company acquired Business Finance Corporation (BFC) of Bellevue, Washington.
Business Finance Corporation provides asset based financing to companies
throughout the western United States.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, including normal recurring accruals
necessary for fair presentation of results of operations for the interim periods
included herein have been made. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of results to be
anticipated for the year ending December 31, 1999.
3. Acquisitions
On July 1, 1999, the Company acquired Bay Mortgage, of Bellevue,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $1 million and issuance of common stock with a value
of $977,000. Remaining payments of approximately $1.26 million in cash and
common stock may be issued under the terms of a three-year performance earn-out
agreement. Bay Mortgage specializes in all facets of residential lending from
single family homes to small multi-plexes, including FHA and VA loans,
construction loans and bridge loans. Bay Mortgage will operate as a division of
Cowlitz Bank and serves customers throughout the greater Bellevue/Seattle market
area.
On August 1, 1999, the Company acquired Bay Mortgage, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $675,000. Remaining payments of approximately
$180,000 in cash may be paid under the terms of a three-year performance
earn-out agreement. Bay Mortgage of Seattle and Bay Mortgage of Bellevue will
join together as a division of Cowlitz Bank and serve customers throughout the
greater Bellevue/Seattle market area.
On September 1, 1999, the Company acquired Bay Escrow, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $125,000. Bay Escrow will operate as a division of
Cowlitz Bank and will complete escrow transactions for Bay Mortgage.
7
<PAGE>
The following table reconciles the acquisition of Bay Mortgage of Bellevue,
Washington, Bay Mortgage of Seattle, Washington, and Bay Escrow of Seattle,
Washington. As part of these transactions, $2.3 million was recorded in goodwill
and will be amortized on a straight-line basis over a fifteen year period:
<TABLE>
<CAPTION>
Bay Mortgage Bay Mortgage Bay Escrow
Bellevue Seattle Seattle
--------------- -------------- ------------
<S> <C> <C> <C>
Fair value of assets acquired,
Including goodwill................. $ 6,623 $ 771 $ 132
Less liabilities assumed............. 4,646 96 7
Less stock issued.................... 977 - -
--------------- -------------- ------------
Cash paid for acquisition............ 1,000 675 125
Less cash acquired................... 89 146 61
--------------- -------------- ------------
Net cash paid in acquisition......... $ 911 $ 529 $ 64
=============== ============== ============
</TABLE>
On September 14, 1999, the Company announced a definitive agreement to
acquire Northern Bank of Commerce "NBOC". The acquisition will be accounted for
using the purchase method, including cash and stock. Under the terms of the
definitive agreement the shareholders of NBOC will receive up to .82584 shares
of the Company's stock and $1.63 in cash for each share of NBOC stock. The
amount of stock merger consideration may be reduced if NBOC's shareholders'
equity does not meet specified thresholds immediately prior to closing. The cash
portion of the merger consideration will be deposited in an escrow account, on
behalf of NBOC's shareholders, to indemnify the Company for losses it incurs on
certain specified NBOC loans in excess of established thresholds during a two
year period following the merger. NBOC will operate as a branch of the Bank
under the name Northern Bank of Commerce. The transaction is expected to close
during the first quarter of 2000.
4. Supplemental Cash Flow Information
For purposes of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts in the balance sheet caption "Cash and
due from banks" and included cash on hand, amounts due from banks and federal
funds sold. Federal funds sold generally mature the day following purchase.
5. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
8
<PAGE>
6. Earnings Per Share
The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations:
<TABLE>
<CAPTION>
Weighted Per Share
Net Income Avg Shares Amount
For the three months ended September 30, 1999
<S> <C> <C> <C>
Basic earnings per share $ 134 4,132,932 $ .03
Stock Options 19,218
Diluted earnings per share $ 134 4,152,150 $ .03
<CAPTION>
For the three months ended September 30, 1998
<S> <C> <C> <C>
Basic earnings per share $ 612 4,001,066 $ .15
Stock Options 176,139
Diluted earnings per share $ 612 4,177,205 $ .15
<CAPTION>
For the nine months ended September 30, 1999
<S> <C> <C> <C>
Basic earnings per share $ 551 4,046,872 $ .14
Stock Options 57,377
Diluted earnings per share $ 551 4,104,249 $ .13
<CAPTION>
For the nine months ended September 30, 1998
<S> <C> <C> <C>
Basic earnings per share $ 1,701 3,619,488 $ .47
Stock Options 203,119
Diluted earnings per share $ 1,701 3,822,607 $ .44
</TABLE>
For the periods reported the Company had no reconciling items between net
income and income available to common shareholders.
7. Recently Issued Accounting Standards
SFAS No. 133
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or a liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
The implementation of this Statement is not expected to have a material
impact on the Company's financial position or results of operation.
9
<PAGE>
8. Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income," effective January 1, 1998. This statement
establishes standards for the reporting and display of comprehensive income and
it's components in the financial statements. For the Company, comprehensive
income includes net income reported on the statements of income and changes in
the fair value of its available-for-sale investments reported as a component of
shareholders' equity.
The components of comprehensive income for the periods ended September 30,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Unrealized gain (loss) arising during
the period, net of tax ................. $ (7) $ 55 $ (61) $ 50
Reclassification adjustment for net
realized gains (losses) on securities
available-for-sale included in net
income during the year net of tax of $(2),
$0, $(1), and $2....................... (3) - (1) 3
------- ------- ------- -------
Net unrealized gain (loss) included in
Other comprehensive income.............. $ (4) $ 55 $ (60) $ 47
======= ======= ======= =======
</TABLE>
9. Segments of an Enterprise and Related Information:
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" as of
January 1, 1998. This statement establishes standards for the reporting and
display of information about operating segments in financial statements and
related disclosures.
The Company is principally engaged in community banking activities through
its six Bank branches and corporate offices. The community banking activities
include accepting deposits, providing loans and lines of credit to local
individuals, businesses and governmental entities, investing in investment
securities and money market instruments, and holding or managing assets in a
fiduciary agency capacity on behalf of its customers and their beneficiaries.
Beginning in 1998 with the acquisition of Business Finance Corporation, the
Company provides asset based financing to companies throughout the western
United States. In the third quarter of 1999 the Company acquired Bay Mortgage of
Bellevue, Washington, Bay Mortgage of Seattle, Washington, and Bay Escrow of
Seattle, Washington, these companies specialize in all facets of residential
lending including FHA and VA loans, construction loans and bridge loans.
The community banking, asset based financing activities, and mortgage
banking are monitored and reported by Company management as separate operating
segments. As permitted under the Statement, the six separate banking offices
have been aggregated into a single reportable segment, Community Banking. The
asset based financing and the mortgage banking segments do not meet the
prescribed aggregation or materiality criteria and therefore are reported as
Other in the following table below.
The accounting policies for the Company's segment information provided
below are the same as those described for the Company in the summary of
significant accounting policies footnote included in the Company's 1998 annual
report, except that some operating expenses are not allocated to segments.
10
<PAGE>
Summarized financial information for the three and nine month periods
ending September 30, 1999 and September 1998 concerning the Company's reportable
segments are shown in the following tables.
<TABLE>
<CAPTION>
Three months ended September 30, 1999
Banking Other Intersegment Consolidated
------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 3,588 $ 1,071 $ (72) $ 4,587
Interest expense 1,386 72 (72) 1,386
---------- -------- ----------- -------------
Net interest income 2,202 999 - 3,201
Provision for loan loss 235 - - 235
Noninterest income 313 231 - 544
Noninterest expense 2,112 1,176 - 3,288
---------- -------- ----------- -------------
Income before taxes 168 54 - 222
Provision for income taxes 61 27 - 88
---------- -------- ----------- -------------
Net income $ 107 $ 27 $ - $ 134
========== ======== =========== =============
<CAPTION>
Three months ended September 30, 1998
Banking Other Intersegment Consolidated
------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 3,979 $ 139 $ (14) $ 4,104
Interest expense 1,571 14 (14) 1,571
---------- -------- ----------- -------------
Net interest income 2,408 125 - 2,533
Provision for loan loss 111 - - 111
Noninterest income 239 - - 239
Noninterest expense 1,692 42 - 1,734
---------- -------- ----------- -------------
Income before taxes 844 83 - 927
Provision for income taxes 287 28 - 315
---------- -------- ----------- -------------
Net income $ 557 $ 55 $ - $ 612
========== ======== =========== =============
Nine months ended September 30, 1999
<CAPTION>
Banking Other Intersegment Consolidated
------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 10,927 $ 1,679 $ (160) $ 12,446
Interest expense 4,190 160 (160) 4,190
---------- -------- ----------- -------------
Net interest income 6,737 1,519 - 8,256
Provision for loan loss 717 348 - 1,065
Noninterest income 969 231 - 1,200
Noninterest expense 5,960 1,539 - 7,499
---------- -------- ----------- -------------
Income before taxes 1,029 (137) - 892
Provision for income taxes 362 (21) - 341
---------- -------- ----------- -------------
Net income $ 667 $ (116) $ - $ 551
========== ======== =========== =============
11
<PAGE>
<CAPTION>
Nine months ended September 30, 1999
Banking Other Intersegment Consolidated
------- ----- ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 11,949 $ 139 $ (14) $ 12,074
Interest expense 4,954 14 (14) 4,954
---------- -------- ----------- -------------
Net interest income 6,995 125 - 7,120
Provision for loan loss 243 - - 243
Noninterest income 734 - - 734
Noninterest expense 4,992 42 - 5,034
---------- -------- ----------- -------------
Income before taxes 2,494 83 - 2,577
Provision for income taxes 848 28 - 876
---------- -------- ----------- -------------
Net income $ 1,646 $ 55 $ - $ 1,701
========== ======== =========== =============
</TABLE>
10. Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Conditions and
Results of Operations includes a discussion of certain significant business
trends and uncertainties as well as certain forward-looking statements and is
intended to be read in conjunction with and is qualified in its entirety by
reference to the consolidated financial statements of the Company and
accompanying notes included elsewhere herein.
Results of Operations
Introduction
The Company's subsidiary Cowlitz Bank (the Bank) is the largest community
bank headquartered in Cowlitz County. During the third quarter of 1999, the Bank
has expanded its mortgage operations with the acquisitions of Bay Mortgage of
Bellevue, Washington and Bay Mortgage of Seattle, Washington. Also during this
period the Bank acquired Bay Escrow of Seattle, Washington and opened a new
branch in Bellevue, Washington that will operate under the name of Bay Bank. The
addition of these new divisions has increased the Company's interest yields on
earning assets, although this increase in income has been temporarily offset by
the cost of this expansion.
On September 1, 1998, the Company acquired Business Finance Corporation
(BFC) of Bellevue, Washington. BFC provides asset based lending services to
companies throughout the western United States. Reflecting the more aggressive
lending mix of its portfolio, loans generated at BFC typically yield a higher
rate of interest than those loans generated at the Bank.
Net Income
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The Company's net income of $134,000, or $.03 per diluted share, at
September 30, 1999, reflects a decrease as compared to net income of $612,000,
or $.15 per diluted share, at September 30, 1998. The decrease in third quarter
earnings is primarily a result of the increased operating expenses related to
the company's expansion activities as well as the increase in the provision for
loan losses. Non-interest expense increased to $3.3 million for the three months
ended September 30,1999 compared to $1.7 million for the corresponding period in
1998. The provision for loan losses increased to $235,000 for the three months
ended September 30, 1999 compared to $111,000 during the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net income for the first nine months of 1999 was $551,000 compared to $1.7
million for the comparable period in 1998. Net income for 1999 has decreased as
a result of an increase in non-interest expense of $2.5 million from the nine
month period ended September 30, 1999 compared to the same period in 1998, as
the Company has continued its strategy of growth. The increase in the provision
for loan losses during the first nine months of 1999 has also contributed to the
decline in net income. In the first nine months of 1999, the Company has:
- Opened a loan office in Vancouver, Washington
- Acquired Bay Mortgage of Bellevue, Washington
- Acquired Bay Mortgage of Seattle, Washington
- Acquired Bay Escrow of Seattle, Washington
- Opened a new Branch in Bellevue, Washington to operate under the name
Bay Bank
13
<PAGE>
Net Interest Income
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For financial institutions, the primary component of earnings is net
interest income. Net interest income is the difference between interest income,
principally from loans and investment securities portfolios, and interest
expense, principally on customer deposits. Changes in net interest income result
from changes in "volume," "spread," and "margin." Volume refers to the dollar
level of interest-earning assets and interest-bearing liabilities. Spread refers
to the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest
income to total interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities.
Net interest income for the quarter ended September 30, 1999 was $3.2
million, compared to $2.5 million at September 30, 1998. The overall
tax-equivalent earning asset yield was 11.96% at September 30, 1999 compared to
10.18% at September 30, 1998. The average earning assets have decreased to
$153.4 million at September 30, 1999 from $161.3 million at September 30, 1998.
Average earning assets have declined as the excess funds invested at the FHLB
have decreased, due to the Company's decision to reduce its higher rate, out of
state certificates of deposit in the first two months of the third quarter and
to use its cash to pay for acquisitions during the three month period ending
September 30, 1999. In September 1999, the Company implemented a local marketing
campaign that has increased certificates of deposit, but at generally lower
rates than the out of state certificates of deposit. The funds brought in
through this process have been invested in new loans. Since this initiative
occurred late in the third quarter, average earning assets do not fully reflect
these changes. The increase in interest income was attributable primarily to
interest and fees on loans, which have increased as a result of the addition of
BFC and the two mortgage companies. While average assets have declined, yields
have increased, reflecting the investment of the Company's funds in higher
yielding loans. The mortgage divisions primarily fund loans through
correspondent relationships, in which the loans remain on the Company's balance
sheet for a short period of time, usually under 30 days, until they are sold.
The Company earns interest and fees associated with these loans until they are
sold and uses the sales proceeds to fund new loans, increasing yields.
The average cost of interest-bearing liabilities was 4.99% at September 30,
1999 compared to 5.31% at September 30, 1998. Average interest-bearing
liabilities decreased to $111.2 million at September 30, 1999 as compared to
$118.3 million for the corresponding period in 1998. Interest paid on
certificates of deposit was reduced to $521,000 for the three-month period
ending September 30, 1999 compared to $675,000 during the corresponding period
in 1998. In accordance with its strategy, the Company has not aggressively
priced certain of its higher yielding certificates of deposits, resulting in
these certificates of deposit generally not renewing at maturity. The Bank has
completed this program and has implemented a marketing campaign in its market
areas, which will provide additional liquidity for continued growth and Year
2000 cash management.
14
<PAGE>
Analysis of Net Interest Income
The following table presents information regarding yields and interest
earning assets, expense on interest bearing liabilities, and net yields on
interest earning assets for periods indicated on a tax equivalent basis.
<TABLE>
<CAPTION>
Three Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 1999 1998 (Decrease) Change
-------- --------- ---------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 4,588 $ 4,104 $ 484 11.8%
Interest expense................... 1,386 1,571 (185) (11.8)%
-------- --------- ----------
Net interest income................ $ 3,202 $ 2,533 $ 669 26.4%
======== ========= ==========
Average interest earning assets.... $153,447 $ 161,337 (7,890) (4.9)%
Average interest bearing liabilities $111,172 $ 118,265 (7,093) (6.0)%
Average yields earned (2).......... 11.96% 10.18% 1.78
Average rates paid (2)............. 4.99% 5.31% (.32)
Net interest spread (2)............ 6.97% 4.87% 2.51
Net interest margin (2)............ 8.35% 6.28% 2.07
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the three months ended September 30, 1999 and 1998 have been
annualized.
NINE MONTHS ENDED SEPTEMBER 30,1999 AND 1998
Net interest income for the nine months ended September 30, 1999 was $8.3
million compared to $7.1 million at September 30, 1998. Total interest earning
assets averaged $154.4 million for the nine months ended September 30, 1999,
compared to $163.6 million for the corresponding period in 1998. The average
yield on interest earning assets increased to 10.75% during the first nine
months of 1999 compared to 9.84% for the corresponding period in 1998. This
increase is a result of investing funds in higher yielding loans at BFC, the
Bank's mortgage division, and the new branch in Bellevue, Washington. The loans
at BFC typically yield a higher rate of interest than those loans generated by
the Bank. As shown in the table below, the Bank's average yields have also
increased slightly during the period as a result of the addition of the two
mortgage companies in the third quarter of 1999. The Company has decreased its
interest earning assets, as excess funds at FHLB have declined due to the
Company's decision to reduce its higher rate, out of state certificates of
deposit in the first eight months of the year and to use its cash to pay for
acquisitions during the three month period ending September 30, 1999.
<TABLE>
<CAPTION>
COWLITZ BANK
Nine months ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Interest earned...................... 10,987 11,591
Average interest earning assets...... 152,482 163,365
Average yields earned................ 9.61% 9.46%
</TABLE>
15
<PAGE>
Interest bearing liabilities averaged $111.8 million and $125.6 million
during the first nine months of 1999 and 1998, respectively. The average cost of
these liabilities decreased in the first nine months of 1999 to 5.00% from 5.26%
in the first nine months of 1998. As discussed above, the Company has allowed
certain higher rate certificates of deposit to mature and not be renewed.
Analysis of Net Interest Income
The following table presents information regarding yields and interest
earning assets, expense on interest bearing liabilities, and net yields on
interest earning assets for periods indicated on a tax equivalent basis.
<TABLE>
<CAPTION>
Nine Months Ended
(unaudited) September 30, Increase
(in thousands of dollars) 1999 1998 (Decrease) Change
-------- --------- ---------- ------
<S> <C> <C> <C> <C>
Interest income(1)................ $ 12,448 $ 12,075 $ 373 3.1%
Interest expense................... 4,190 4,954 (764) (15.4)%
-------- --------- ----------
Net interest income................ $ 8,258 $ 7,121 $ 1,137 16.0%
======== ========= ==========
Average interest earning assets.... $154,422 $ 163,630 (9,208) (5.6)%
Average interest bearing liabilities $111,751 $ 125,623 (13,377) (10.7)%
Average yields earned (2).......... 10.75% 9.84% .91
Average rates paid (2)............. 5.00% 5.26% (.26)
Net interest spread (2)............ 5.75% 4.58% 1.17
Net interest margin (2)............ 7.13% 5.80% 1.33
</TABLE>
(1) Interest earned on nontaxable securities has been computed on a 34% tax
equivalent basis.
(2) Ratios for the nine months ended September 30, 1999 and 1998 have been
annualized.
Market Risk
Interest rate risk and credit risk are the most significant market risks
impacting the Company's performance. The Company relies on loan reviews, prudent
loan underwriting standards and an adequate allowance for loan losses to
mitigate credit risk. Interest rate risk is managed through the monitoring of
the Company's gap position and sensitivity to interest rate risk by subjecting
the Company's balance sheet to hypothetical interest rate shocks. The Company's
primary objective in managing interest rate risk is to minimize the adverse
impact of changes in interest rates on the Company's net interest income and
capital, while structuring the Company's asset/liability position to obtain the
maximum yield-cost spread on that structure. Management has assessed these risks
and feels that there has been no material change since December 31, 1998.
Non-Interest Income
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Non-interest income was $544,000 for the three months ended September 30,
1999 and $239,000 in the corresponding period in 1998. The expansion of the
Bank's mortgage operations and trust services has added to non-interest income,
in addition to a slight increase in service charges on deposit accounts.
16
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Total non-interest income increased to $1.2 million for the first nine
months of 1999 compared to $734,000 during the same period in 1998.
Non-interest income consists of the following components:
<TABLE>
<CAPTION>
NINE MONTH ENDED
SEPTEMBER 30,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Service charge on deposit accounts............$ 511 $ 487
Net gains on sales of securities.............. (2) 5
Credit Card income............................ 101 85
Fiduciary income.............................. 105 39
ATM income.................................... 41 29
Safe deposit box fees......................... 32 30
Gains on mortgage loans sold.................. 294 -
Underwriting fees............................. 39 -
Other miscellaneous fees and income........... 79 59
------- -------
Total non-interest income.....................$ 1,200 $ 734
======= =======
</TABLE>
The increase in non-interest income is primarily a result of the expansion
in of the Bank's mortgage operations as well as the continued growth of the
trust department. Gains on mortgage loans sold consist of the gains realized
from the sale of mortgage loans and related servicing rights from loans
originated by the Company. The mortgage division established this correspondent
lending program and has expanded this program into the greater Bellevue/Seattle
area with the acquisitions of the two mortgage companies.
Non-Interest Expense
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Non-interest expense consists principally of employees' salaries and
benefits, occupancy costs, data processing and communication expenses, FDIC
(Federal Deposit Insurance Corporation) insurance premium, professional fees,
and other non-interest expenses. Non-interest expenses increased 89.6% to $3.3
million for the quarter ended September 30, 1999 compared to $1.7 million for
the quarter ended September 30, 1998, primarily due to increased staffing costs
and occupancy expenses related to the Company's continued growth during 1999.
Also contributing to this increase are other operating expenses such as
communications expenses, advertising, and other office expenses that have
increased as the Company has expanded into new markets.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
For the nine months ended September 30, 1999, non-interest expense was $7.5
million as compared to $5.0 million for the nine months ended September 30,
1998. Salaries and benefits expense of $4.2 million for the first nine months of
1999 represents an increase of $1.4 million from $2.8 million for the comparable
period in 1998. At September 30, 1999, the Company had 162 full-time equivalent
employees compared to 104 at September 30, 1998. The increase between the
nine-month period in 1999 compared to the corresponding period in 1998 was due
to the addition of employees through acquisitions, as well as salary increases
for existing employees generally ranging from three to six percent annually.
Other operating expenses consisting of communication expenses, advertising, and
other office expenses have increased 48.9% from $1.2 million at September 30,
1999 to $1.8 million at September 30, 1999 as the Company has expanded its
mortgage operations into Vancouver, Washington and the greater Bellevue/Seattle
area.
17
<PAGE>
Net occupancy expenses consist of depreciation on premises, lease costs of
buildings and equipment, maintenance and repair expenses, utilities and related
expenses. The Company's net occupancy expense at September 30, 1999 was $980,000
or 49.6% higher than $655,000 at September 30, 1998. The increase in occupancy
expense in 1999 was due to the amortization of leasehold improvements completed
at branch locations and at the new Vancouver loan office in 1998 and the first
quarter of 1999. Also contributing to this increase are lease payments for the
companies acquired and the branch opened in the third quarter of 1999.
Income Taxes
The provision for income taxes amounts to $341,000 and $876,000 at
September 30, 1999 and 1998, respectively. The provision resulted in an
effective tax rate of 38.2% and 34.0%, respectively. This increase was due to
the amortization of goodwill associated with the BFC acquisition that is not
deductible for income tax purposes.
Loan Losses and Recoveries
The allowance for loan losses represents management's estimate of probable
losses, which exist as of the date of the financial statements. The loan
portfolio is regularly reviewed to evaluate the adequacy of the allowance for
loan losses. In determining the level of the allowance, the Company evaluates
the allowance necessary for specific non-performing loans and estimates losses
inherent in other loan exposures. An important element in determining the
adequacy of an allowance for loan losses is an analysis of loans by loan rating
categories. The risk of a credit is evaluated by the Company's management at
inception of the loan using an established grading system. This grading system
currently includes ten levels of risk. Risk gradings range from "1" for the
strongest credits to "10" for the weakest; a "10" rated loan would normally
represent a loss. These gradings are reviewed annually or when indicators show
that a credit may have weakened, such as operating losses, collateral impairment
or delinquency problems.
The result is an allowance with two components:
Specific Reserves: The amount of specific reserves are established when there
are significant conditions or circumstances related to a loan that would
indicate that a loss would be incurred. Management considers in its analysis
expected future cash flows, the value of collateral and other factors that may
impact the borrower's ability to pay.
General Allowance: The amount of the general allowance is based on loss factors
assigned to the Company's loan exposures based on the internal credit ratings.
These loss factors are determined on the basis of historical charge-off
experience and suggested regulatory guidelines. The general allowance is
composed of two categories. The first component is calculated based upon the
loan balances classified in the five higher risk loan categories of "management
attention", "special mention", "substandard", "doubtful" and "loss" on the
Company's Watch List. Suggested regulatory loss reserve factors are then applied
to each of these categories of classified loan balances, net of the balances of
the loans already considered in management's determination of its specific
reserves. The second component is calculated by applying historical loss factors
to the outstanding loan balance less any loans that are included in the
Company's specific or higher risk allowances discussed above. Three levels of
charge off history are considered by management in arriving at this component of
the general allowance. They are average five-year net charge-offs, the previous
year's actual net charge-offs and an estimated maximum charge-off factor. Each
of these amounts is combined with the first component of the general allowance
yielding a range for the total general allowance. Management selects a general
allowance somewhere within this calculated range. Factors considered by
management in making this decision include the volume and mix of the existing
loan portfolio, including the volume and severity of nonperforming loans and
adversely classified credits; analysis of net charge-offs experienced on
previously classified loans; the nature and value of collateral securing the
loans; the trend in loan growth, including any rapid increase in loan volume
within a relatively short period of time; management's subjective evaluation of
general and local economic and business conditions affecting the collectibility
of the Company's loans; the relationship and trend over the past several years
of recoveries in relation to charge-offs; and available outside information of a
comparable nature regarding the loan portfolios of other banks, including peer
group banks. This decision also reflects management's attempt to ensure that the
overall allowance appropriately reflects a margin for the imprecision
necessarily inherent in estimates of expected loan losses.
18
<PAGE>
The quarterly analysis of specific and general loss components of the
allowance is the principal method relied upon by management to ensure that
changes in estimated loan loss levels are adjusted on a timely basis. The
inclusion of historical loss factors in the process of determining the general
component of the allowance also acts as a self-correcting mechanism of
management's estimation process, as loss experience more remote in time is
replaced by more recent experience. In its analysis of the specific and the
general components of the allowance, management also considers the experience of
peer institutions and regulatory guidance in addition to the Company's own
experience.
Loans and other extensions of credit deemed uncollectable are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for loan losses that is charged to income is the amount necessary to
adjust the allowance to the level determined through the above process. In
accordance with the Company's methodology for assessing the appropriate
allowance for loan losses, the general portion of the allowance increased to
$1.5 million at September 30, 1999 compared to $1.1 million at December 31,
1998. Management believes this increase is prudent given the increase in
non-accrual loans and the level of net charge-offs during the first nine months
of 1999.
At September 30, 1999 approximately $600,000 of the allowance for loan
losses was allocated based on an estimate of the amount that was necessary to
provide for potential losses related to specific loans, compared to
approximately $700,000 at December 31, 1998. Specific reserves declined as those
loans requiring specific reserves have been reduced by either principal payments
or have been charged off.
Management's evaluation of the factors above resulted in allowances for
loan losses of $2.1 million and $1.8 million at September 30, 1999 and December
31, 1998, respectively. The increase in the level of charge offs in 1998, which
were considered by management in its determination of the adequacy of the
allowance for loan losses, is primarily the reason for the increase in the
allowance from December 31, 1998 to September 30, 1999. The allowance as a
percentage of total loans increased to 1.49% at September 30, 1999 from 1.37% at
year-end 1998.
The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts.
Provision for Loan Losses
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The amount of the allowance for loan losses is analyzed by management on a
regular basis to ensure that it is sufficient to cover potential and future
losses. When a provision for loan losses is recorded, the amount is based on
past charge-off experience, a careful analysis of the current portfolio, the
level of nonperforming and impaired loans, evaluation of future economic trends
in the Company's market area, and other relevant factors related to the loan
portfolio. See Loan Losses and Recoveries and Loans disclosures for a more
detailed discussion.
The Company's provision for loan losses was $235,000 and $111,000 for the
three months ended September 30, 1999 and 1998, respectively. The Company has
increased its provision as non-performing loans have increased from $2.7 million
at September 30, 1998 to $3.0 million at September 30, 1999. Also contributing
is the growth in loans late in the third quarter of 1999. Net charge-offs for
the three months ended September 30, 1999 were $47,000, compared to net
charge-offs of $104,000 for the same period in 1998. Total charge-offs were
$82,000 in the third quarter of 1999 compared to $113,000 in the third quarter
of 1998. Management continues to closely monitor the loan quality and existing
relationships. For a more detailed disclosures please see Loans and Loan Losses
and Recoveries.
19
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Provisions for loan losses recorded for the nine months ended September 30,
1999 were $1.1 million as compared to $243,000 at September 30, 1998. Net
charge-offs were $785,000 and $283,000 at September 30, 1999 and 1998,
respectively. Total charges offs were $895,000 at September 30, 1999 and
$305,000 at September 30, 1998. During the first quarter of 1999, the Company
determined that approximately $348,000 in receivables purchased by its
subsidiary BFC may not be collectible. These receivables were charged off during
the first quarter and the Company has increased its provision for loan losses
accordingly. The increase in the provision also reflects the increase in
nonaccrual loans and the level of net charge-offs during the period.
The following table shows the Company's loan loss performance for the
periods indicated:
<TABLE>
<CAPTION>
Nine months
ending
(unaudited) Sept. 30, December 31,
(in thousands of dollars) 1999 1998
--------- ---------
<S> <C> <C>
Loans outstanding at end of period................................ $ 140,633 $ 132,046
Average loans outstanding during the period....................... $ 129,167 $ 131,495
Allowance for loan losses, beginning of period.................... $ 1,814 $ 1,970
Loans charged off:
Commercial..................................................... 767 618
Real Estate.................................................... 42 -
Consumer....................................................... 32 22
Credit Cards................................................... 54 87
--------- ---------
Total loans charged-off...................................... 895 727
--------- ---------
Recoveries:
Commercial..................................................... 94 -
Real Estate.................................................... - 3
Consumer....................................................... 16 4
Credit Cards................................................... - 10
--------- ---------
Total recoveries............................................. 110 17
--------- ---------
Provision for loan losses......................................... 1,065 509
--------- ---------
Allowance for loan losses, end of period.......................... $ 2,094 $ 1,814
========= =========
Ratio of net loans charged-off to average loans outstanding....... .61% .54%
Ratio of allowance for loan losses to loans at end of period...... 1.49% 1.37%
</TABLE>
Loans
Total loans outstanding were $140.6 million and $132.0 at September 30,
1999 and December 31, 1998, respectively. Loan commitments were $19.8 million at
September 30, 1999 and $24.7 million at December 31, 1998.
20
<PAGE>
The following table presents the composition of the Company's loan portfolio at
the dates indicated:
<TABLE>
<CAPTION>
(unaudited) September 30, 1999 December 31, 1998
(in thousands of dollars) Amount Percentage Amount Percentage
------------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial ................................. $ 109,414 77.5% $ 103,473 78.1%
Real estate construction.................... 3,401 2.4 3,206 2.4
Real estate commercial...................... 8,714 6.2 7,026 5.3
Real estate mortgage........................ 14,691 10.4 13,774 10.4
Consumer and other.......................... 5,007 3.5 5,063 3.8
Contracts purchased......................... - - 45 *
---------- ----------- --------- ------------
141,227 100.0% 132,587 100.0%
=========== ============
Deferred loan fees.......................... (594) (541)
---------- ---------
Total loans............................ 140,633 132,046
Allowance for loan losses................... (2,094) (1,814)
---------- ---------
Total loans, net....................... $138,539 $ 130,232
========== =========
</TABLE>
*Less than .1%
During its normal loan review procedures, the Company considers a loan to
be impaired when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A loan is
not considered to be impaired during a period of minimal delay (less than 90
days). The Company measures impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
as a practical expedient, at the loan's observable market price or the fair
market value of the collateral if the loan is collateral dependent. Impaired
loans are charged to the allowance for loan losses when management believes
after considering economic and business conditions, collection efforts, and
collateral position, that the borrowers' financial condition is such that
collection of the principal is not probable.
Generally, no interest is accrued on loans when factors indicate collection
of the interest is doubtful or when the principal or interest payment becomes 90
days past due, unless collection of the principal and interest are anticipated
within a reasonable period of time and the loans are well secured. For such
loans, previously accrued but uncollected interest is charged against current
earnings, and income is only recognized to the extent payments are subsequently
received and the collection of the remaining recorded principal balance is
considered probable.
The Company manages the general risks inherent in the loan portfolio by
following loan policies and underwriting practices designed to result in prudent
lending activities. The following table presents information with respect to
nonperforming assets:
<TABLE>
<CAPTION>
(unaudited) September 30, December 31,
(in thousands of dollars) 1999 1998
--------- ---------
<S> <C> <C>
Loans on nonaccrual status 3,003 2,737
Loans past due greater than 90 days but not on nonaccrual status - 9
Other real estate owned 55 573
Troubled debt restructuring - -
--------- ---------
Total nonperforming assets 3,058 3,319
========= =========
Percentage of nonperforming assets to total assets 1.67% 1.86%
</TABLE>
21
<PAGE>
At September 30, 1999 nonperforming assets were $3.1 million or 1.7% of
total assets compared to $3.3 million at September 30, 1998. Nonaccrual loans
were $3.0 million at September 30, 1999 and $2.7 million at September 30, 1998.
From September 30, 1998 to September 30, 1999, nonaccrual loans increased
primarily in commercial loans secured by real estate. BFC accounted for
approximately $178,000 of the total nonaccrual loans, reflecting the more
aggressive lending mix of its portfolio. It is not unusual in the normal course
of business for BFC to have loans that become more than 90 days past due and are
therefore placed on nonaccrual status, although management does not necessarily
believe that losses are probable on these loans. Approximately $2.0 million of
the remaining non-accrual loans reflect loans primarily secured by real estate.
Any losses on non-accrual loans that are considered probable have been estimated
by management in its regular quarterly assessment of the allowance for loan
losses as discussed in the Loan Losses and Recoveries disclosure. The increase
in the provision for loan losses each year is largely reflective of the
increases in nonaccrual loans and the level of net charge-offs during the
periods. Also contributing is the growth in loans late in the third quarter of
1999. For a more detailed discussion see Loan Losses and Recoveries disclosure.
Other real estate owned decreased to $55,000 as of September 30, 1999
compared to $573,000 at September 30, 1998, as a result of the sale of
properties classified as other real estate owned.
Liquidity
Liquidity represents the ability to meet deposit withdrawals and fund loan
demand, while retaining the flexibility to take advantage of business
opportunities. The Company's primary sources of funds are customers deposits,
loan payments, sales of assets, advances from the FHLB (Federal Home Loan Bank)
and the use of the federal funds market. As of September 30, 1999, approximately
$5.0 million of the securities portfolio matures within one year.
Historically the Company has utilized borrowings from the FHLB as an
important source of funding for its growth. The Company has an established
borrowing line with the FHLB that permits it to borrow up to 25% of the Bank's
assets. Advances from the FHLB have terms ranging from 1 through 15 years and at
September 30, 1999 bear interest at rates from 5.67% to 8.80%. At September 30,
1999, $26.3 million in advances were outstanding from the FHLB and the Company
had additional borrowing capacity for cash advances of $18.1 million. The
Company may increase its percentage of borrowings from the FHLB in the future if
circumstances warrant.
Capital
The Company is required to maintain minimum amounts of capital to "risk
weighted" assets, as defined by banking regulators. The Company is required to
have Tier 1 and Total Capital ratios of 4.0% and 8.0%, respectively. At
September 30, 1999, the Company's ratios were 19.62% and 20.87%, respectively.
At December 31, 1998, the company's ratios were 22.21% and 23.46%, respectively.
The ratio of Tier 1 capital to average assets was 16.00% and 15.81% at September
30, 1999 and December 31, 1998, respectively.
Year 2000
This section constitutes a Year 2000 readiness statement and contains
forward-looking statements that have been prepared on the basis of the Company's
best judgments and currently available information. These forward-looking
statements are inherently subject to significant business, third party and
regulatory uncertainties and contingencies, many of which are beyond the control
of the Company. In addition, these forward-looking statements are based on the
Company's current assessments and remediation plans, which are based on certain
representations of third party service providers and are subject to change.
Accordingly, there can be no assurance that the Company's results of operations
will not be adversely affected by difficulties or delays in the Company's or
third parties' Year 2000 readiness efforts. See "Risks" below for a discussion
of factors that may cause such forward-looking statements to differ from actual
results.
The Company has an active Y2K plan and committee addressing all systems
affected by the millennium issue. The plan includes five phases Awareness,
Assessment, Renovation, Validation, and Implementation.
22
<PAGE>
AWARENESS
The Company's senior management participates on the committee as well as a
representative from each critical area of the Bank. The board of directors is
updated on the progress of the plan on a monthly basis. The awareness phase has
been completed but will continue to be an on going effort in regards to
educating customers and keeping abreast of all new Y2K issues. The Bank has
implemented several awareness programs for customers and has sponsored Year 2000
seminars for its larger business customers.
ASSESSMENT
Assessment of the Company's systems has been completed and all
hardware/software as well as non-hardware/software systems have been identified.
The committee has developed a list of products and systems that could be
affected by the Year 2000 date change. All vendors and suppliers have been
contacted and have been individually assessed for both their criticality to the
operation of the Company and if they are satisfactory in their Year 2000
efforts.
RENOVATION AND VALIDATION
The Company has completed the renovation and validation phases of the
project. All mission critical systems and minor systems have been validated for
Y2K compliance.
IMPLEMENTATION
Any system found to be not in compliance with the Year 2000 date change has
been brought to the attention of senior management and has been upgraded or
replaced. The systems that have been identified are included in the Company's
Year 2000 budget. A budget has been approved and the costs to address the Year
2000 issues at this time are estimated to be $268,000. The Year 2000 related
costs incurred by the Company to date are approximately $226,000.
CONTINGENCY PLAN
A contingency plan has been established that would be carried out in the
event that the preventative measures put in place do not prove successful. Each
area of the Company has completed a mission critical operating plan that would
be initiated using manual processing. In the event that this plan would need to
be implemented, there would be a substantial increase in staffing and related
expenses. This plan addresses business operations to be carried out assuming the
telephone and electrical systems are in working order. The contingency plan will
continue to be updated throughout 1999.
RISKS
The Company has attempted to assess the Year 2000 readiness of its loan and
deposit customers. If these customers were adversely affected by the Year 2000,
no assurance can be given that their ability to repay debt would not be
affected.
Based on its current assessments and remediation plans, the Company does
not expect that it will suffer any material disruption of its business as a
result of Year 2000 issues. Although the Company has no reason to believe that a
material disruption will occur, the most likely worst case scenario would result
from a Y2K failure in the power supply, voice and data transmission systems or
the federal government. If such a failure were to occur, the Company would
implement its contingency plan. In such event, it is likely that there would be
a temporary disruption of customer service, customer inconvenience and
additional costs from the implementation of the contingency plan. It is not
possible to quantify those costs at the present time. Although the Company
believes its contingency plan will satisfactorily address these issues, there
can be no assurance that the Company's contingency plan will function as
anticipated or that the results of operations of the Company will not be
adversely affected in the event of a prolonged disruption of service.
23
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Part II. Other Information
Item 2
Changes in Securities and Use of Proceeds
On March 12, 1998, the Company completed an initial public offering issuing
a total of 1,380,000 shares of common stock at $12.00 per share. After
underwriting discounts of $1.2 million and other offering expenses of $472,000
net proceeds were $14.9 million. Of these proceeds $1.1 million has been used to
repay long-term debt and a subordinated note and $1.8 million was used to
acquire BFC as described below. In addition, $1.8 million was used to acquire
Bay Mortgage of Bellevue, Washington, Bay Mortgage of Seattle, Washington, and
Bay Escrow of Seattle, Washington as described below and the remainder is being
used for working capital. The managing underwriters were Black & Company, Inc.
and Pacific Crest Securities, Inc.
Effective August 31, 1998, the Company acquired Business Finance
Corporation (BFC) of Bellevue, Washington. BFC provides factoring, leasing, and
inventory financing services in Washington, Oregon, California, Nevada, and
Hawaii. The acquisition was accounted for using the purchase method and included
an initial issuance of common stock with a value of $465,000 and a cash payment
in the amount of $1.8 million.
On July 1, 1999, the Company acquired Bay Mortgage, of Bellevue,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $1 million and issuance of common stock with a value
of $977,000. Remaining payments of approximately $1.26 million in cash and
common stock may be issued under the terms of a three-year performance earn-out
agreement. Bay Mortgage specializes in all facets of residential lending from
single family homes to small multi-plexes, including FHA and VA loans,
construction loans and bridge loans. Bay Mortgage will operate as a division of
Cowlitz Bank and serves customers throughout the greater Bellevue/Seattle market
area.
On August 1, 1999, the Company acquired Bay Mortgage, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $675,000. Remaining payments of approximately
$180,000 in cash may be paid under the terms of a three-year performance
earn-out agreement. Bay Mortgage of Seattle and Bay Mortgage of Bellevue will
join together as a division of Cowlitz Bank and serve customers throughout the
greater Bellevue/Seattle market area.
On September 1, 1999, the Company acquired Bay Escrow, of Seattle,
Washington. The acquisition was accounted for using the purchase method,
including a cash payment of $125,000. Bay Escrow will operate as a division of
Cowlitz Bank and will complete escrow transactions for Bay Mortgage.
Item 5
Other Information
On September 14, 1999, the Company announced a definitive agreement to
acquire Northern Bank of Commerce "NBOC". The acquisition will be accounted for
using the purchase method, including cash and stock. Under the terms of the
definitive agreement the shareholders of NBOC will receive up to .82584 shares
of the Company's stock and $1.63 in cash for each share of NBOC stock. The
amount of stock merger consideration may be reduced if NBOC's shareholders'
equity does not meet specified thresholds immediately prior to closing. The cash
portion of the merger consideration will be deposited in an escrow account, on
behalf of NBOC's shareholders, to indemnify the Company for losses it incurs on
certain specified NBOC loans in excess of established thresholds during a two
year period following the merger. NBOC will operate as a branch of the Bank
under the name Northern Bank of Commerce. The transaction is expected to close
during the first quarter of 2000.
Item 6
(a) Exhibits. The list of exhibits is set forth on the Exhibit Index attached
hereto.
(b) On September 17, 1999, the Company filed form 8-K containing item 7
(Exhibits).
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Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cowlitz Bancorporation
(Registrant)
/s/ Charles W. Jarrett
Dated: -------------------------------------
Charles W. Jarrett
President and Chief Operating Officer
/s/ Donna P. Gardner
Dated: ----------------------------------
Donna P. Gardner
Vice-President/Secretary-Treasurer
25
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Exhibit Index
Exhibit No.
2 Agreement and Plan of Merger by and among the Registrant, Cowlitz Bank
and Northern Bank of Commerce, dated September 14, 1999
3.1* Restated and Amended Articles of Incorporation of the Company
3.2* Bylaws of the Company
27 Financial Data Schedule
99 Stock Option Agreement between the Registrant and Northern Bank, dated
September 14,1999
*Incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 333-44355
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of September 14, 1999 (as
amended, supplemented or otherwise modified from time to time, this
"Agreement"), is entered into by and among COWLITZ BANCORPORATION, a Washington
corporation ("Cowlitz"), COWLITZ BANK, a corporation chartered under the banking
laws of the State of Washington ("Cowlitz Bank"), and NORTHERN BANK OF COMMERCE,
a corporation chartered under the banking laws of the State of Oregon
("Northern").
The respective Boards of Directors of each of Cowlitz, Cowlitz Bank and
Northern have determined that it is in the best interests of their respective
companies and the stockholders to consummate the business combination
transaction provided for herein and have approved and adopted this Agreement. It
is the intention of the parties to this Agreement that the business combination
contemplated hereby be treated, if it so qualifies, as a "reorganization" and
that this Agreement be treated as a "plan of reorganization" within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code").
Therefore, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
1. DEFINITIONS
1.1 DEFINED TERMS. The following terms shall have the meanings defined for
such terms in the Sections set forth below:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Agreement Preamble
Aggregate Cash Consideration 3.1
Articles of Merger 2.2
Base Value 2.6(e)
BIF 4.1
Business Day 2.4
Cash Consideration 2.6(a)
Capitalization Adjustment Fraction 2.6(b)
Change of Control 9.1(h)
Closing 2.4
Closing Date 2.4
Closing Escrow Amount 3.2(b)
Code Preamble
Committee 3.2(b)
Common Certificates 2.5(b)
Confidentiality Agreement 7.2(b)
<PAGE>
Cowlitz Preamble
Cowlitz Bank Preamble
Cowlitz Common Stock 2.5(c)
Cowlitz Disclosure Schedule 5.2
Cowlitz Bank Members 3.2(b)
Cowlitz Preferred Stock 5.2
Cowlitz Reports 5.10
Cowlitz Y2K Plan 5.14
CRA 4.27
Dissenting Shares 2.5(d)
DPC Shares 2.5(c)
Effective Date 2.2
Effective Time 2.2
Environmental Laws 4.21
Equity Adjustment Amount 2.6(b)
ERISA 4.11(a)
ERISA Affiliate 4.11(a)
Escrow 3.2(b)
Escrow Agent 3.2(b)
Escrow Agreement 3.2(b)
Escrow Expiration Date 3.2(b)
Escrowed Funds 3.2(b)
Exchange Act 4.6
Exchange Agent 3.1
FDIC 4.1
GAAP 2.6(d)
Governmental Entity 4.4
Identified Loans 2.6(a)
Injunction 8.1(e)
Liens 4.3(b)
Loan Adjustment Factor 3.2(b)
Loan File 4.24(d)
Loans 4.24(a)
Material Adverse Effect (Northern) 4.1
Material Adverse Effect (Cowlitz) 5.1(a)
Merger 2.1
Merger Consideration 2.6(a)
Nasdaq 4.4
Northern Preamble
Northern Automated Systems 4.28
Northern Common Stock 2.5(a)
Northern Contract 4.14(a)
Northern Disclosure Schedule 4.2(a)
2
<PAGE>
Northern Members 3.2(b)
Northern Reports 4.12
Northern Stock Option Plan 2.8
Northern Y2K Plan 4.28
Orders 6.2(o)
Oregon Articles of Merger 2.2
Oregon Director 2.2
PBGC 4.11(c)
Plans 4.11(a)
Proxy Statement/Prospectus 4.4
Regulatory Agreement 4.15
Reimbursable Losses 3.2(b)
REO 4.19(a)
Representatives 6.2(f)
Requisite Regulatory Approvals 8.1(c)
S-4 4.4
SEC 4.4
Securities Act 4.12
Stock Consideration 2.6(a)
Stock Exchange Fund 3.1
Stock Option Agreement 2.12
Subsidiary 2.5(a)
Superior Proposal 9.1(h)
Surviving Bank 2.1
Takeover Proposal 6.2(f)
Tax Returns 4.10(c)
Taxes 4.10(b)
Threshold Amount 3.2(d)
Title 30 2.1
Title 53 2.1
Total Stockholders' Equity 2.6(b)
Trust Account Shares 2.5(c)
Washington Articles of Merger 2.2
Washington Director 2.2
Washington Secretary 2.2
Year 2000 Problem 4.28
</TABLE>
1.2 OTHER DEFINITIONAL PROVISIONS. The meanings given to terms defined
herein shall be equally applicable to both the singular and plural forms of such
terms.
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<PAGE>
2. THE MERGER
2.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with Title 30 of the Revised Code of Washington ("TITLE 30") and
Title 53 of the Oregon Revised Statutes ("TITLE 53") at the Effective Time (as
defined in Section 2.2 hereof), Northern shall merge (the "MERGER") with and
into Cowlitz Bank. Cowlitz Bank shall be the surviving bank (hereinafter
sometimes called the "SURVIVING BANK") in the Merger, and shall continue its
corporate existence under the laws of the State of Washington. The name of the
Surviving Bank shall be Cowlitz Bank. Upon consummation of the Merger, the
separate corporate existence of Northern shall terminate.
2.2 EFFECTIVE TIME. The Merger shall become effective as set forth in the
articles of merger (the "WASHINGTON ARTICLES OF MERGER") which shall be filed
with the Director of Financial Institutions of the State of Washington (the
"WASHINGTON DIRECTOR") and the Secretary of State of the State of Washington
(the "WASHINGTON SECRETARY") and in the articles of merger (the "OREGON ARTICLES
OF MERGER") which shall be filed with the Director of the Department of Consumer
and Business Services of the State of Oregon (the "OREGON DIRECTOR"), on the
Closing Date (as defined in Section 2.4(b) hereof). The term "EFFECTIVE TIME"
shall mean the date (the "EFFECTIVE DATE") and time when the Merger becomes
effective, as set forth in the Articles of Merger . The term "ARTICLES OF
MERGER" shall mean the "WASHINGTON ARTICLES OF MERGER" and the "OREGON ARTICLES
OF MERGER". The filed Articles of Merger shall include this Agreement.
2.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger
shall have the effects set forth in Chapter 49 of Title 30 and Chapter 711 of
Title 53.
2.4 CLOSING OF THE MERGER. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "CLOSING") will take place at 10:00
a.m. Pacific time, on a date to be specified by the parties, which shall be the
first Business Day following the later of (i) the date which is at least five
Business Days after the satisfaction or waiver (subject to applicable law) of
the latest to occur of the conditions set forth in Section 8 hereof, other than
conditions which by their terms are to be satisfied at Closing or (ii) in the
case that holders of more than 5% of the outstanding shares of Northern Common
Stock have sent or delivered a notice of dissent or voted against the Merger, 35
days following the meeting of the Northern Stockholders to be held pursuant to
Section 7.3, or such other date or time as the parties may mutually agree (the
"CLOSING DATE"). For purposes of this Agreement, a "BUSINESS DAY" shall mean any
day that is not a Saturday, a Sunday or other day on which the office of the
Washington Director, the Washington Secretary or the Oregon Director is closed.
2.5 CONVERSION OF NORTHERN COMMON STOCK. At the Effective Time, without any
action on the part of Cowlitz, Cowlitz Bank, Northern or the holder of any of
the shares of common stock of Northern, the Merger shall be effected in
accordance with the following terms:
(a) Subject to Section 2.5(d), each share of the common stock, par
value $1.00 per share, of Northern (the "Northern Common Stock") issued and
outstanding immediately prior to the Effective Time (other than shares of
Northern Common Stock held (x) in Northern's treasury or (y) directly or
indirectly by Cowlitz or any of its Subsidiaries (as
4
<PAGE>
defined below) (except for Trust Account Shares and DPC Shares, as such terms
are defined below)), shall be converted into the right to receive the Merger
Consideration as provided below, without interest thereon. For purposes of this
Agreement, "SUBSIDIARY" means, with respect to any person, any corporation,
partnership, joint venture, limited liability company or other entity controlled
by such person directly or indirectly through one or more intermediaries.
(b) All of the shares of Northern Common Stock converted into the
right to receive the Merger Consideration pursuant to this Section 2 shall no
longer be outstanding and shall automatically be canceled and shall cease to
exist as of the Effective Time, and each certificate (each a "COMMON
CERTIFICATE") previously representing any such shares shall thereafter represent
solely the right to receive the Merger Consideration. Common Certificates
previously representing shares of Northern Common Stock shall be exchanged for
the Merger Consideration upon the surrender of such Common Certificates in
accordance with Section 3.2 hereof, without any interest thereon.
(c) At the Effective Time, all shares of Northern Common Stock that
are owned by Northern as treasury stock and all shares of Northern Common Stock
that are owned directly or indirectly by Cowlitz, Northern or a Subsidiary of
Cowlitz (other than shares of Northern Common Stock held directly or indirectly
in trust accounts, managed accounts and the like or otherwise held in a
fiduciary or nominee capacity that are beneficially owned by third parties (any
such shares, and shares of common stock, no par value per share, of Cowlitz
("COWLITZ COMMON STOCK") which are similarly held, whether held directly or
indirectly by Cowlitz, Northern or a Subsidiary of Cowlitz, as the case may be,
being referred to herein as "TRUST ACCOUNT SHARES") and other than any shares of
Northern Common Stock held by Cowlitz, Northern or any a Subsidiary of Cowlitz
in respect of a debt previously contracted (any such shares of Northern Common
Stock, and shares of Cowlitz Common Stock which are similarly held, whether held
directly or indirectly by Cowlitz, Northern or any a Subsidiary of Cowlitz,
being referred to herein as "DPC SHARES")) shall be canceled and shall cease to
exist and no Merger Consideration shall be delivered in exchange therefor.
(d) Notwithstanding anything in this Agreement to the contrary, shares
of Northern Common Stock issued and outstanding immediately prior to the
Effective Time held by holders (if any) who have voted against the Merger or
sent or delivered notices of dissent and who are eligible to and who have
demanded appraisal rights with respect thereto in accordance with Sections
711.175-.185 of Title 53 and, as of the Effective Time, shall not have failed to
perfect or shall not have effectively withdrawn or lost their rights to
appraisal and payment under Sections 711.175-.185 of Title 53 (the "DISSENTING
SHARES") shall not be converted into the right to receive the Merger
Consideration as described in Section 2.5(a), but holders of such shares shall
instead be entitled to receive payment of the fair value of such Dissenting
Shares in accordance with the provisions of Sections 711.175-.185 of Title 53,
except that any Dissenting Shares held by a holder which shall have failed to
perfect or shall have effectively withdrawn or lost its right to appraisal and
payment under Sections 711.175-.185 of Title 53 shall thereupon be deemed to
have been converted into the right to receive the Merger Consideration as
described in Section 2.5(a), without interest thereon. Northern shall give
Cowlitz (i) prompt notice of any written demands for appraisal of any shares,
attempted withdrawals of such demands, and any
5
<PAGE>
other instruments served pursuant to Sections 711.175-.185 of Title 53 received
by Northern relating to stockholders' rights of appraisal and (ii) the
opportunity to direct all negotiations and proceedings with respect to demands
for appraisal under Sections 711.175-.185 of Title 53. Northern shall not,
except with the prior written consent of Cowlitz, voluntarily make any payment
with respect to any demands for appraisals of capital stock of Northern, offer
to settle or settle any such demands or approve any withdrawal of any such
demands.
2.6 MERGER CONSIDERATION.
(a) For purposes of this Agreement and subject to the provisions
hereof, the "MERGER CONSIDERATION" shall be $7.05 per share of Northern Common
Stock and shall consist of two components: the Stock Consideration and the Cash
Consideration. The "STOCK CONSIDERATION" shall be $5.42 per share of Northern
Common Stock and shall consist of Cowlitz Common Stock valued at $6.563. The
"CASH CONSIDERATION" shall be $1.63 per share of Northern Common Stock, but
shall be subject to certain loss indemnification provisions described in Section
3.2(b). In addition, the Merger Consideration, the Stock Consideration and the
Cash Consideration are subject to possible adjustment at the Effective Time
pursuant to this Section 2.6.
(b) If the Base Value of Northern, as calculated in accordance with
Section 2.6(e) is less than $4,707,139 but at least $1,150,000, then the Merger
Consideration and Stock Consideration shall be adjusted as of the Effective Time
as follows:
(i) the Merger Consideration shall be reduced by an amount (the
"EQUITY ADJUSTMENT AMOUNT") equal to the product of (A) 1.75 and (B) a
fraction the numerator of which is the difference between $4,707,139 and
the Base Value and the denominator of which is the number of issued and
outstanding shares of Northern Common Stock as of the date of this
Agreement; and
(ii) the Stock Consideration shall be reduced by the Equity
Adjustment Amount.
In such event, there shall be no adjustment made to the Cash Consideration.
(c) If the total number of issued and outstanding shares of Northern
Common Stock as of the Effective Time is greater than the total number of issued
and outstanding shares of Northern Common Stock as of the date of this
Agreement, then the Merger Consideration, Stock Consideration and Cash
Consideration (after making any adjustments required under (b) above, if
applicable) shall be adjusted as of the Effective Time as follows:
(i) the Merger Consideration shall be the amount per share equal
to the amount calculated pursuant to 2.6(a) and (b) multiplied by a
fraction (the "CAPITALIZATION ADJUSTMENT FRACTION"), the numerator of which
is equal to the total number of issued and outstanding shares of Northern
Common Stock as of the date of this Agreement and the denominator of which
is equal to the total number of issued and outstanding shares of Northern
Common Stock as of the Effective Time;
6
<PAGE>
(ii) the Stock Consideration shall be the amount per share equal
to the amount calculated pursuant to 2.6(a) and (b) multiplied by the
Capitalization Adjustment Fraction; and
(iii) the Cash Consideration shall be the amount per share equal
to $1.63 per share multiplied by the Capitalization Adjustment Fraction.
(d) No later than the date which Cowlitz, Cowlitz Bank and Northern in
good faith estimate to be forty-five (45) days prior to the Effective Time.
Cowlitz and Cowlitz Bank shall, at their expense, engage a Loan Examiner to
identify in writing the loans of Northern which in such Loan Examiner's
good-faith judgment should under standard commercial banking practice be
classified as Special Mention, Substandard, Doubtful or Loss (each as defined on
Annex 2.6(d) hereto). The identification and classification of such loans (the
"Identified Loans") shall be delivered by such Loan Examiner to Cowlitz, Cowlitz
Bank and Northern no later than fifteen (15) business days after his engagement.
If Northern does not deliver written notice to Cowlitz of Northern's objection
to such identification and classification of Identified Loans within three (3)
business days after receipt thereof, then such identification and classification
shall be deemed final and binding on the parties. If Northern timely delivers
written notice of its objection, then Northern, Cowlitz and Cowlitz Bank shall
negotiate in good faith for up to three (3) business days thereafter to resolve
such dispute. If such dispute remains unresolved after such period, Northern,
Cowlitz and Cowlitz Bank shall promptly agree on another Loan Examiner to
resolve such dispute. The decision of such other Loan Examiner shall be final
and binding on the parties. The loans established as classified loans pursuant
to this Section 2.6(d) are sometimes herein referred to as the "Identified
Loans." As used herein, Loan Examiner shall mean Fred Singer or any loan
examiner, loan reviewer or loan auditor (other than a current employee, officer
or director of Cowlitz, Cowlitz Bank or Northern) with at least ten (10) years
experience in commercial lending, banking and/or bank examining, including at
least two (2) years as a loan examiner, loan reviewer or loan auditor. Northern
agrees to provide access for the Loan Examiners as provided in Section 7.2(a)
hereof. To the extent permitted by United States generally accepted accounting
principles ("GAAP"), Northern agrees that it will have provided on its books
prior to the Effective Time a reserve for each Identified Loan at least equal to
(A) 5% of the principal amount of each Identified Loan classified as Special
Mention, (B) 15% of the principal amount of each Identified Loan classified as
Substandard, (C) 50% of the principal amount of each Identified Loan classified
as Doubtful and (D) 100% of each Identified Loan classified as Loss, as well as
a general reserve equal to 1 1/2% of the aggregate principal amounts of all
outstanding loans (including without limitation all Identified Loans). Nothing
in the immediately preceding sentence shall be deemed to preclude Northern from
establishing, to the extent permitted by GAAP, reserves allocated to specific
loans in amounts greater than set forth in such preceding sentence.
(e) As used in this Agreement, "Base Value" shall mean difference
between (i) total stockholders' equity of Northern immediately prior to the
Effective Time as calculated in accordance with GAAP applied on a consistent
basis and (ii) an amount equal to the after-tax reduction in such equity that
would be necessary to reflect additional losses or reserves (to the extent not
taken by Northern prior to the Effective Time) so that, for each Identified
Loan,
7
<PAGE>
Northern would have a reserve at the Effective Time equal to (A) 5% of the
principal amount of each Identified Loan classified as Special Mention, (B) 15%
of the principal amount of each Identified Loan classified as Substandard, (C)
50% of the principal amount of each Identified Loan classified as Doubtful and
(D) 100% of the principal amount of each Identified Loan classified as Loss, as
well as a general reserve of 1 1/2% equal to the aggregate principal amounts of
all outstanding loans (including without limitation all Identified Loans).
(f) If prior to the Effective Time the outstanding shares of Northern
Common Stock shall, with the prior written consent of Cowlitz required by
Section 6.2, have been increased, decreased, changed into or exchanged for a
different number or kind of shares or securities as a result of a
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split, or other similar change in Northern Common Stock's
capitalization, then an appropriate and proportionate adjustment shall be made
to the Merger Consideration.
2.7 COWLITZ STOCK; COWLITZ BANK STOCK. At and after the Effective Time,
each share of Cowlitz Common Stock and each share of any preferred stock of
Cowlitz issued and outstanding immediately prior to the Effective Time shall
remain an issued and outstanding share of common stock or preferred stock, as
the case may be, of Cowlitz and shall not be affected by the Merger. Each of the
issued and outstanding shares of common stock of Cowlitz Bank immediately prior
to the Effective Time shall remain issued and outstanding after the Merger as
shares of the Surviving Bank, which shall thereafter constitute all of the
issued and outstanding shares of common stock of the Surviving Bank. No capital
stock of Cowlitz Bank will be issued or used in the Merger. The amount of
capital of the Surviving Bank, the number of shares of the Surviving Bank's
capital stock and the par value thereof are set forth on Annex 2.7.
2.8 OPTIONS. The parties acknowledge and agree that Section 7.1.1 of the
Northern 1994 Stock Option Plan (the "NORTHERN STOCK OPTION PLAN") governs with
respect to the effect of the Merger on each option granted thereunder by
Northern to purchase shares of Northern Common Stock. In accordance with the
Northern Stock Option Plan, holders of such options shall have the right
immediately prior to the Effective Time to exercise such option to the extent
the vesting requirements set forth in the option agreement with respect to such
option have been satisfied. At the Effective Time, each option (vested or
unvested) granted by Northern to purchase shares of Northern Common Stock,
whether under the Northern Stock Option Plan or otherwise, which is outstanding
and unexercised immediately prior thereto shall cease to represent a right to
acquire shares of Northern Common Stock, shall automatically terminate and no
Merger Consideration or any other consideration shall be delivered in exchange
therefor.
2.9 CHARTER. At the Effective Time, the Charter of Cowlitz Bank, as in
effect at the Effective Time, shall be the Charter of the Surviving Bank, until
thereafter amended in accordance with applicable law.
2.10 BYLAWS. At the Effective Time, the Bylaws of Cowlitz Bank, as in
effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Bank until thereafter amended in accordance with applicable law.
8
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2.11 BOARD OF DIRECTORS. At the Effective Time, Cowlitz and Cowlitz Bank
shall take all action necessary to appoint William Spicer to the Surviving
Bank's Board of Directors. Except for such appointment, the directors of Cowlitz
Bank immediately prior to the Effective Time shall continue to be the directors
of the Surviving Bank, each to hold office in accordance with the Charter and
Bylaws of the Surviving Bank, until their respective successors are duly elected
or appointed (as the case may be) and qualified. The names and addresses of the
directors of Cowlitz Bank, as well as the address of Mr. Spicer, are set forth
on Annex 2.11
2.12 OFFICERS. The officers of Cowlitz Bank immediately prior to the
Effective Time shall continue to be officers of the Surviving Bank, each to hold
office in accordance with the Charter and Bylaws of the Surviving Bank and the
terms of their appointment by the Board of Directors. The names and addresses of
the senior officers of Cowlitz Bank are set forth on Annex 2.12.
2.13 OFFICES. The name and location of each office of Cowlitz Bank and
Northern are set forth on Annex 2.13. These will become offices of the Surviving
Bank at the Effective Time. The principal office of Cowlitz Bank will be the
principal office of the Surviving Bank.
2.14 STOCK OPTION AGREEMENT. As an inducement to Cowlitz to continue to
pursue the transactions contemplated by this Agreement, Northern will grant to
Cowlitz an option pursuant to the Stock Option Agreement, substantially in the
form of Exhibit 2.14 hereto (the "STOCK OPTION AGREEMENT")
2.15 TAX CONSEQUENCES. It is intended that, to the extent they so qualify,
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code and this Agreement shall constitute a "plan of
reorganization" as that term is used in Section 354 of the Code.
3. EXCHANGE OF SHARES
3.1 COWLITZ TO MAKE SHARES AVAILABLE. At or prior to the Effective Time,
Cowlitz shall deposit, or shall cause to be deposited, with a bank or trust
company of recognized standing, or Cowlitz's transfer agent (the "EXCHANGE
AGENT"), for the benefit of the holders of Common Certificates, for exchange in
accordance with this Section 3, (i) certificates representing the shares of
Cowlitz Common Stock and an estimated amount of cash that may be payable in lieu
of any fractional shares (such cash, and certificates for shares of Cowlitz
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "STOCK EXCHANGE FUND") to be issued
pursuant to Section 2.5 and paid pursuant to Section 3.2(a) in exchange for
outstanding shares of Northern Common Stock and (ii) cash in an amount (the
"AGGREGATE CASH CONSIDERATION") equal to the product of the Cash Consideration
and the number of shares of Northern Common Stock outstanding at the Effective
Time to be paid pursuant to and in the manner set forth in Section 3.2(b) in
exchange for outstanding shares of Northern Common Stock.
3.2 EXCHANGE OF CERTIFICATES.
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(a) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of a Common Certificate or
Certificates a form of letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Common Certificates shall
pass, only upon delivery of the Common Certificates to the Exchange Agent) and
instructions for use in effecting the surrender of the Common Certificates in
exchange for the Merger Consideration, into which the shares of Northern Common
Stock represented by such Common Certificate or Certificates shall have been
converted pursuant to this Agreement. Subject to Section 2.5(d), upon proper
surrender of a Common Certificate for exchange and cancellation to the Exchange
Agent, together with such properly completed letter of transmittal, duly
executed, the holder of such Common Certificate shall be entitled to receive in
exchange therefor, as applicable, (i) a certificate representing that number of
shares of Cowlitz Common Stock to which such holder of Northern Common Stock
shall have become entitled pursuant to the provisions of Section 2 hereof, and
(ii) a check representing the amount of cash payable in lieu of fractional
shares of Cowlitz Common Stock, if any, which such holder has the right to
receive in respect of the Common Certificate surrendered pursuant to the
provisions of this Section 3, and the Common Certificate so surrendered shall
forthwith be canceled. No interest will be paid or accrued on the cash payable
in lieu of fractional shares.
(b) ESCROW.
(i) In order to ensure that Cowlitz Bank shall be properly
reimbursed for certain losses, the Exchange Agent shall, promptly upon
receipt of the Aggregate Cash Consideration, deliver an amount (the
"ESCROWED FUNDS") equal to the product of (A) the Cash Consideration and
(B) the total number of issued and outstanding shares of Northern Common
Stock as of the Effective Time (excluding all Dissenting Shares), to an
escrow agent (the "ESCROW AGENT") to be held in escrow (the "ESCROW")
pursuant to an escrow agreement in substantially the form attached hereto
as Exhibit 3.2, with such changes as may be reasonably requested by the
Escrow Agent and subject to the addition of Schedule 2 to the Escrow
Agreement in accordance with this Section 3.2(b) (the "ESCROW AGREEMENT").
The Escrow Agent shall be a bank, trust company or other entity mutually
agreed upon by Cowlitz and Northern.
(ii) A committee (the "COMMITTEE") shall be appointed by Northern
and Cowlitz Bank to deliver instructions to the Escrow Agent with respect
to the disbursement of the Escrowed Funds. Northern hereby appoints John
Walrod and Kurt Wollenberg to serve on the Committee as representatives of
the holders of Northern Common Stock (the "NORTHERN MEMBERS") and Cowlitz
Bank hereby appoints Charles Jarrett and Larry Ellis to serve on the
Committee as representatives of Cowlitz Bank (the "COWLITZ BANK MEMBERS").
Cowlitz Bank shall have the right, from time to time and in its sole
discretion, to appoint a substitute Cowlitz Bank Member upon written notice
to the Escrow Agent and the Northern Members. If a Northern Member should
prior to the Effective Time become unable or unwilling to serve on the
Committee, such Northern Member shall give Northern and Cowlitz prompt
prior written notice thereof, and Northern shall have the right, in its
sole discretion, to appoint a substitute Northern Member no later than the
earlier of (A) the Effective Time or (B) five (5) business days
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after delivery of such notice. If a Northern Member should after the
Effective Time become unable or unwilling to continue to serve on the
Committee after the Effective Time, such Northern Member shall give Cowlitz
Bank prior written notice thereof, and within five (5) business days after
delivery of such notice, the remaining Northern Member shall have the
right, in his or her sole discretion, to appoint a substitute Northern
Member; PROVIDED, that such Substitute Northern Member (x) must have been a
Stockholder at the Effective Time , (y) (1) must have been a director or
officer of Northern at the Effective Time or (2) in the remaining Northern
Member's reasonable judgment, must be a sophisticated financial investor
and (z) is not a director, officer or employee of Cowlitz or Cowlitz Bank.
The parties agree that no Northern Member or Cowlitz Bank Member shall have
any liability to any party hereto or any holder of Northern Common Stock
with respect to acts or omissions in his or her capacity as a member of the
Committee, unless it is established in a final judicial determination by
clear and convincing evidence that any decision or action was undertaken
with deliberate intent to injure the holders of Northern Common Stock or
with reckless disregard for the best interest of such holders, and in any
event, the liability shall be limited to actual, proximate, quantifiable
damages.
(iii) The purpose of the Escrow shall be to ensure that Cowlitz
Bank is reimbursed for losses relating to the Identified Loans. Schedule 2
to the Escrow Agreement shall be completed prior to the Effective Time by
listing thereon each Identified Loan (as determined pursuant to Section
2.6(d)) and the Threshold Amount for each Identified Loan. Except as
provided in the immediately succeeding sentence, the "Threshold Amount"
shall mean for each Identified Loan the lesser of (A) the difference
between (i) the reserve for such Identified Loan on the books of Northern
immediately prior to the Effective Time (excluding any portion of the
general reserve for all oustanding loans) and (ii) the Loan Adjustment
Factor and (B) (i) 5% of the outstanding principal amount if the Identified
Loan is classified as Special Mention pursuant to the procedure set forth
in Section 2.6(d), less the Loan Adjustment Factor, (ii) 15% of the
principal amount if the Identified Loan is classified as Substandard, less
the Loan Adjustment Factor, (iii) 50% of the principal amount if the
Identified Loan is classified as Doubtful, less the Loan Adjustment Factor,
and (iv) 100% of the principal amount if the Identified Loan is classified
as Loss, less the Loan Adjustment Factor. Notwithstanding the preceding
sentence, if the Base Value exceeds $4,707,139 and the amount determined
pursuant to clause (A) of the preceding sentence for an Identified Loan
exceeds the amount determined pursuant to clause (B) for such Identified
Loan, then the Threshold Amount for such Identified Loan shall equal the
amount determined pursuant to clause (A) above. "Loan Adjustment Factor"
will be $0 if Northern has on its books immediately prior to the Effective
Time a general reserve equal to at least 1 1/2% of the aggregate principal
amounts of all outstanding loans (including without limitation all
Identified Loans). If such general reserve is less than 1 1/2%, then the
Loan Adjustment Factor will equal the different between (i) 1 1/2% and (ii)
the percentage of the remaining general reserve that would be applicable to
the Identified Loans after moving sufficient general reserves to the
non-Identified Loans so that all non-Identified Loans would have a general
reserve of 1 1/2%.
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(iv) Reimbursements shall be made only for such losses identified
during the period from the Effective Date to the date (the "ESCROW
EXPIRATION DATE") which is 24 months after the Effective Date. Cowlitz Bank
shall be entitled to be reimbursed for any loss on an Identified Loan to
the extent that such loss exceeds the Threshold Amount for such Identified
Loan ("REIMBURSABLE LOSSES"); PROVIDED, HOWEVER, that the aggregate of all
of such reimbursements shall not exceed the Escrowed Funds. The amount of
Reimbursable Losses shall be calculated in the manner set forth in the
Escrow Agreement. Interest earned on the Aggregate Cash Consideration while
held in the Escrow shall remain in the Escrow and shall not be available to
reimburse Cowlitz Bank for Reimbursable Losses. Fees and any other amounts
owed to the Escrow Agent shall be paid, first, out of the interest earned
on the Escrowed Funds and, second, out of the Escrowed Funds.
(v) The Escrow shall terminate upon the later to occur of (x) the
Escrow Expiration Date and (y) the proper reimbursement to Cowlitz Bank of
the Reimbursable Losses. Upon termination of the Escrow, the Escrow Agent
shall deliver all amounts then in Escrow (after deduction for expenses and
costs) to the Exchange Agent (the "CLOSING ESCROW AMOUNT"). Subject to
Section 2.5(d), the Exchange Agent shall promptly pay, to each holder of
record of a Common Certificate who has properly surrendered such Common
Certificate as provided in Section 3.2(a), an amount for each share of
Northern Common Stock represented by such Common Certificate equal to (A)
the Closing Escrow Amount divided by (B) the number of shares of Northern
Common Stock outstanding at the Effective Time
(vi) The Cowlitz Members shall not have any duty to represent the
interests of shareholders of Northern and shall have no liability
whatsoever to such shareholders. The Northern Members will represent the
interests of shareholders of Northern, but no Northern Member shall have
any liability to any holder of Northern Common Stock with respect to his or
her capacity as a member of the Committee, unless it is established in a
final judicial determination by clear and convincing evidence that any
decision or action was undertaken with deliberate intent to injure the
holders of Northern Common Stock or with reckless disregard for the best
interests of such holders, and in any event, the liability shall be limited
to actual, proximate, quantifiable damages.
(c) No dividends or other distributions with a record date after the
Effective Time with respect to Cowlitz Common Stock shall be paid to the holder
of any unsurrendered Common Certificate entitled to receive shares of Cowlitz
Common Stock hereunder until the holder thereof shall surrender such Common
Certificate in accordance with this Section 3. After the surrender of a Common
Certificate in accordance with this Section 3, the record holder thereof shall
be entitled to receive any such dividends or other distributions, without any
interest thereon, which theretofore had become payable with respect to shares of
Cowlitz Common Stock represented by such Common Certificate.
(d) If any certificate representing shares of Cowlitz Common Stock is
to be issued in the name of or cash is to be paid to a person other than the
registered holder of the
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Common Certificate surrendered in exchange therefor, it shall be a condition of
the issuance thereof that the Common Certificate so surrendered shall be
properly endorsed (or accompanied by an appropriate instrument of transfer) and
otherwise in proper form for transfer, and that the person requesting such
exchange shall pay to the Exchange Agent in advance any transfer or other taxes
required by reason of the issuance of a certificate representing shares of
Cowlitz Common Stock in the name of and payment of cash to any person other than
the registered holder of the Common Certificate surrendered, or required for any
other reason, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not payable.
(e) At or after the Effective Time, there shall be no transfers on the
stock transfer books of Northern of the shares of Northern Common Stock which
were issued and outstanding immediately prior to the Effective Time. If, after
the Effective Time, Common Certificates representing such shares are presented
for transfer to the Exchange Agent, they shall be canceled and exchanged for
certificates representing shares of Cowlitz Common Stock and payment of cash as
provided in this Section 3.
(f) Notwithstanding anything to the contrary contained herein, no
certificates or scrip representing fractional shares of Cowlitz Common Stock
shall be issued upon the surrender for exchange of Common Certificates, no
dividend or distribution with respect to Cowlitz Common Stock shall be payable
on or with respect to any fractional share, and such fractional share interests
shall not entitle the owner thereof to vote or to any other rights of a
stockholder of Cowlitz. In lieu of the issuance of any such fractional share,
Cowlitz shall pay to each former holder of Northern Common Stock who otherwise
would be entitled to receive such fractional share an amount in cash determined
by multiplying (i) the Market Value of Cowlitz Common Stock as of the Effective
Date by (ii) the fraction of a share of Cowlitz Common Stock to which such
holder would otherwise be entitled to receive pursuant to Section 2.5 hereto.
For purposes of determining any such fractional share interests, all shares of
Northern Common Stock owned by any Northern stockholder shall be combined so as
to calculate the maximum number of shares of Cowlitz Common Stock issuable to
such holder of Northern Common Stock and no such holder shall receive cash in an
amount equal to or greater than the Stock Consideration per share.
(g) Any portion of the Stock Exchange Fund that remains unclaimed by
the stockholders of Northern for twelve months after the Effective Time shall be
paid, at the request of Cowlitz, to Cowlitz. Any stockholders of Northern who
have not theretofore complied with this Section 3 shall thereafter look only to
Cowlitz for payment of the shares of Cowlitz Common Stock, cash in lieu of any
fractional shares and unpaid dividends and distributions on the Cowlitz Common
Stock deliverable in respect of each share of Northern Common Stock held by such
stockholder at the Effective Time as determined pursuant to this Agreement, in
each case, without any interest thereon. After the Exchange Agent has received
the Closing Escrow Amount and made the payments to former holders of Northern
Common Stock as required by Section 3(b), any unpaid amounts shall promptly be
delivered by the Exchange Agent to Cowlitz. Any holders of Northern Common Stock
who have not theretofore complied with this Section 3 shall thereafter look only
to Cowlitz for payment of the Cash Consideration (as adjusted by the amounts
paid to Cowlitz Bank from the Escrow with respect to Reimbursable Losses) to
which
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they are entitled pursuant to this Agreement, without any additional interest
thereon. Notwithstanding anything to the contrary contained herein, none of
Cowlitz, Northern, the Exchange Agent or any other person shall be liable to any
former holder of shares of Northern Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(h) In the event any Common Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Common Certificate to be lost, stolen or destroyed and, if
required by Cowlitz, the posting by such person of a bond in such amount as
Cowlitz may determine is reasonably necessary as indemnity against any claim
that may be made against it with respect to such Common Stock Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed Common
Certificate the shares of Cowlitz Common Stock and cash (including cash in lieu
of fractional shares) deliverable in respect thereof pursuant to this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF NORTHERN
Northern hereby represents and warrants to Cowlitz and Cowlitz Bank as
follows:
4.1 CORPORATE ORGANIZATION. Northern is a banking corporation duly
organized and validly existing under the laws of the State of Oregon. Northern
has the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is duly
licensed or qualified to do business in each jurisdiction in which the nature of
the business conducted by it or the character or location of the properties and
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to be so licensed or qualified would not have nor
reasonably be expected to have a Material Adverse Effect (as defined below) on
Northern. As used in this Agreement, the term "MATERIAL ADVERSE EFFECT" means,
with respect to Northern, a material adverse effect on the business, results of
operations, financial condition or prospects of Northern or a material adverse
effect on Northern's ability to consummate the transactions contemplated hereby
on a timely basis; PROVIDED, HOWEVER, that a Material Adverse Effect on Northern
shall not be deemed to have occurred as a result of (i) any changes in laws,
regulations or GAAP or (ii) any changes in general economic conditions affecting
commercial banking businesses generally. The deposits of Northern are insured by
the Federal Deposit Insurance Corporation (the "FDIC") through the Bank
Insurance Fund (the "BIF") to the fullest extent permitted by law. The copies of
the Charter and Bylaws of Northern which have previously been made available to
Cowlitz are true, complete and correct copies of such documents as in effect as
of the date of this Agreement. Northern has no Subsidiaries.
4.2 CAPITALIZATION.
(a) The authorized capital stock of Northern consists of 10,000,000
shares of Northern Common Stock and no shares of preferred stock. At the close
of business on August 31, 1999, there were 1,225.597 shares of Northern Common
Stock outstanding and no shares of Northern Common Stock held in Northern's
treasury. As of September 13, 1999, no shares of Northern Common Stock were
reserved for issuance, except for 868,032 shares of Northern
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Common Stock reserved for issuance upon the exercise of stock options pursuant
to the Northern Stock Option Plan, 738,211 shares of Northern Common Stock
reserved for issuance upon exercise of the stock options set forth in Section
4.2(a) of the disclosure schedule of Northern delivered to Cowlitz concurrently
herewith (the "NORTHERN DISCLOSURE SCHEDULE"), and 243,893 shares of Northern
Common Stock reserved for issuance upon exercise of the Option (as defined in
the Stock Option Agreement). All of the issued and outstanding shares of
Northern Common Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. As of the date of this Agreement, except (i)
as set forth in Section 4.2(a) of the Northern Disclosure Schedule, (ii) the
Option and (iii) as set forth elsewhere in this Section 4.2(a), Northern does
not have and is not bound by any outstanding subscriptions, options, warrants,
calls, commitments or agreements of any character calling for the purchase or
issuance of any shares of Northern Common Stock or Northern Preferred Stock or
any other equity securities of Northern or any securities representing the right
to purchase or otherwise receive any shares of Northern Common Stock or Northern
Preferred Stock. Except as set forth in Section 4.2(a) of the Northern
Disclosure Schedule, since August 31, 1999, Northern has not issued any shares
of its capital stock or any securities convertible into or exercisable for any
shares of its capital stock, other than the exercise of employee stock options
granted prior to such date and as disclosed in Section 4.2(a) of the Northern
Disclosure Schedule. Northern has no stockholder rights plan, anti-takeover
plan, "poison pill" or other similar plan.
(b) Except as disclosed in Section 4.2(b) of the Northern Disclosure
Schedule, Northern does not beneficially own or control, directly or indirectly,
any shares of stock or other equity interest in any depository institution (as
defined in 12 U.S.C. Sections 1813(c)), corporation, firm, partnership, joint
venture or other entity.
4.3 AUTHORITY; NO VIOLATION.
(a) Northern has full corporate power and authority to execute and
deliver this Agreement and the Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Stock Option Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly and validly approved
by the Board of Directors of Northern. The Board of Directors of Northern has
directed that this Agreement and the Merger be submitted to Northern's
stockholders for approval at a meeting of such stockholders and, except for the
approval of this Agreement and the Merger by the affirmative vote of the holders
of two-thirds of the voting power represented by the outstanding shares of
Northern Common Stock, no other corporate proceedings on the part of Northern
are necessary to approve this Agreement or the Stock Option Agreement or to
consummate the transactions contemplated hereby and thereby. This Agreement and
the Stock Option Agreement have been duly and validly executed and delivered by
Northern and (assuming due authorization, execution and delivery by Cowlitz and
Cowlitz Bank) each constitutes a valid and binding obligation of Northern,
enforceable against Northern in accordance with its terms, except as enforcement
may be limited by general principles of equity whether applied in a court of law
or a court of equity and by bankruptcy,
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insolvency, fraudulent transfer, receivership, or conservatorship and similar
laws affecting creditors' rights and remedies generally.
(b) Except as set forth in Section 4.3(b) of the Northern Disclosure
Schedule, neither the execution and delivery of this Agreement or the Stock
Option Agreement by Northern nor the consummation by Northern of the
transactions contemplated hereby or thereby, nor compliance by Northern with any
of the terms or provisions hereof or thereof, will (i) violate any provision of
the Charter or Bylaws of Northern or (ii) assuming that the consents and
approvals referred to in Section 4.4 are duly obtained, (x) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Northern or any of its properties or assets, or (y) violate,
conflict with, result in a breach of any provision of or the loss of any benefit
under, constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, result in the termination of or a right
of termination or cancellation under, accelerate the performance required by, or
result in the creation of any liens, charges, pledges, encumbrances, mortgages,
adverse rights or claims, or security interests whatsoever ("LIENS") upon any of
the properties or assets of Northern under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Northern is a party,
or by which Northern or any of its properties or assets may be bound or
affected, except (in the case of clause (y) above) for such violations,
conflicts, breaches or defaults which, either individually or in the aggregate,
will not have and would not reasonably be expected to have a Material Adverse
Effect on Northern.
4.4 CONSENTS AND APPROVALS. Except for (i) the approval of this Agreement
and the Merger by the FDIC, the Washington Director and the Oregon Director,
(ii) approval of the listing of Cowlitz Common Stock to be issued in the Merger
on The Nasdaq National Market ("NASDAQ"), (iii) the filing with the Securities
and Exchange Commission (the "SEC") and the FDIC of a proxy statement in
definitive form relating to the meetings of Northern's and Cowlitz's
stockholders to be held to vote on approval of this Agreement and the Merger
(the "PROXY STATEMENT/PROSPECTUS") and the filing and declaration of
effectiveness of the registration statement on Form S-4 (the "S-4") in which the
Proxy Statement/Prospectus will be included as a prospectus and any filings or
approvals under applicable state securities laws, (iv) the filing of the
Articles of Merger with the Washington Director, the Washington Secretary and
the Oregon Director, (v) the approval of this Agreement and the Merger by the
requisite votes of the stockholders of Northern, the approval of the issuance of
the shares of Cowlitz Common Stock in the Merger by the shareholders of Cowlitz
and the approval of this Agreement and the Merger by the sole shareholder of
Cowlitz Bank, (vi) the consents and approvals set forth in Section 4.4 of the
Northern Disclosure Schedule, and (vii) the consents and approvals of third
parties which are not Governmental Entities (as defined below), the failure of
which to obtain will not have and would not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect, no consents or
approvals of, or filings or registrations with, any court, administrative agency
or commission or other governmental authority or instrumentality or
self-regulatory organization (each a "GOVERNMENTAL ENTITY") or with any third
party are necessary in connection with (A) the execution and delivery by
Northern of this Agreement and (B) the consummation by Northern of the Merger
and the other transactions contemplated hereby.
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4.5 REPORTS. Northern has timely filed all material reports, registrations
and statements, together with any amendments required to be made with respect
thereto, that they were required to file since January 1, 1996 with any
Governmental Entity and have paid all fees and assessments due and payable in
connection therewith. Except for normal examinations conducted by a Governmental
Entity in the regular course of the business of Northern or as set forth in
Section 4.5 of the Northern Disclosure Schedule, no Governmental Entity has
initiated any proceeding or, to the best knowledge of Northern, threatened an
investigation into the business or operations of Northern since January 1, 1996.
Except as set forth in Section 4.5 of the Northern Disclosure Schedule, there is
no material unresolved violation, criticism or exception by any Governmental
Entity with respect to any report or statement relating to any examinations of
Northern.
4.6 FINANCIAL STATEMENTS. Northern has previously made available to Cowlitz
copies of (a) the balance sheets of Northern, as of December 31, for the fiscal
years 1997 and 1998, and the related statements of operations, stockholders'
equity and cash flows for the fiscal years 1996 through 1998, inclusive, as
reported in Northern's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 filed with the FDIC under the Securities Exchange Act of 1934,
as amended (the "EXCHANGE ACT"), in each case accompanied by the audit report of
Moss Adams LLP, independent auditors with respect to Northern, (b) the unaudited
balance sheets of Northern as of June 30, 1998 and June 30, 1999 and the related
unaudited statements of operations, stockholders, equity and cash flows for the
three-month periods then ended, as reported in Northern's Quarterly Report on
Form 10-QSB for the period ended June 30, 1999 filed with the FDIC under the
Exchange Act and (c) the amended and restated financial statements on and for
the period ended June 30, 1999 as reported in Northern's Amended Quarterly
Report on Form 10-QSB/A filed with the FDIC under the Exchange Act. Each of the
financial statements referred to in this Section 4.6 (including the related
notes, where applicable) fairly present, and the financial statements referred
to in Section 7.11 hereof (including the related notes, where applicable) will
fairly present (subject, in the case of the unaudited statements, to normal
recurring adjustments, none of which are expected to be material in nature or
amount), the results of the operations and changes in stockholders' equity and
financial position of Northern for the respective fiscal periods or as of the
respective dates therein set forth. Each of such financial statements (including
the related notes, where applicable) complies, and the financial statements
referred to in Section 7.11 hereof (including the related notes, where
applicable) will comply, in all material respects with applicable accounting
requirements and with the published rules and regulations of the FDIC with
respect thereto and each of such financial statements (including the related
notes, where applicable) has been, and the financial statements referred to in
Section 7.11 (including the related notes, where applicable) will be, prepared
in accordance with GAAP consistently applied during the periods involved, except
in each case as indicated in such statements or in the notes thereto or, in the
case of unaudited statements, as permitted by Form 10-QSB. The books and records
of Northern have been, and are being, maintained in all material respects in
accordance with GAAP and any other applicable legal and accounting requirements
and reflect only actual transactions.
4.7 BROKER'S FEES. Except as set forth in Section 4.7 of the Northern
Disclosure Schedule, neither Northern nor any of its officers or directors has
employed any broker or finder
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or incurred any liability for any broker's fees, commissions or finder's fees in
connection with any of the transactions contemplated by this Agreement. Copies
of all agreements with each broker or finder listed in Section 4.7 of the
Northern Disclosure Schedule have previously been furnished to Cowlitz.
4.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as publicly disclosed in the Northern Reports (as defined
in Section 4.12) filed prior to the date hereof, or as set forth in Section
4.8(a) of the Northern Disclosure Schedule, since December 31, 1998, no event
has occurred which has had or would reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on Northern.
(b) Except as publicly disclosed in the Northern Reports filed prior
to the date hereof, or as set forth in Section 4.8(b) of the Northern Disclosure
Schedule, since December 31, 1998, Northern has carried on its business in all
material respects in the ordinary course of business, and Northern has not (i)
except for normal increases in the ordinary course of business consistent with
past practice and except as required by applicable law, increased the wages,
salaries, compensation, pension or other fringe benefits or perquisites payable
to any officer or director, other than persons newly hired for or promoted to
such position, from the amount thereof in effect as of December 31, 1998, or
granted any severance or termination pay, entered into any contract to make or
grant any severance or termination pay, or paid any bonus, in each case to any
such officer or director, other than pursuant to preexisting agreements,
arrangements or bonus plans, or (ii) suffered any strike, work stoppage,
slow-down or other labor disturbance.
4.9 LEGAL PROCEEDINGS.
(a) Except as set forth in Section 4.9(a) of the Northern Disclosure
Schedule, Northern is not a party to any, and there are no pending or, to the
best of Northern's knowledge, threatened legal, administrative, arbitral or
other proceedings, claims, actions or governmental or regulatory investigations
of any nature against Northern or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a significant
possibility of an adverse determination and which, if adversely determined,
would, individually or in the aggregate, have or reasonably be expected to have
a Material Adverse Effect on Northern.
(b) Except as set forth in Section 4.9(b) of the Northern Disclosure
Schedule, there is no injunction, order, judgment, decree or regulatory
restriction specifically imposed upon Northern or its assets which has had, or
would reasonably be expected to have, a Material Adverse Effect on Northern or
the Surviving Bank.
4.10 TAXES.
(a) Except as set forth in Section 4.10(a) of the Northern Disclosure
Schedule: (i) Northern has (A) duly and timely filed (including pursuant to
applicable extensions
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granted without penalty) all Tax Returns (as hereinafter defined) required to be
filed at or prior to the Effective Time, and such Tax Returns are true, correct
and complete, and (B) paid in full on a timely basis, or established an adequate
reserve (excluding reserves for deferred taxes) in the financial statements of
Northern (in accordance with GAAP) for all Taxes (as hereinafter defined) with
respect to items or periods covered by such Tax Returns (whether or not shown or
reportable on such Tax Returns); (ii) no deficiencies for any Taxes (as
hereinafter defined) have been proposed, asserted or assessed against or with
respect to Northern and no audit by any taxing authority is in process, pending
or threatened ; (iii) there are no liens for Taxes upon the assets of Northern
except for statutory liens for current Taxes not yet due; (iv) Northern is not
and has never been a party to any tax sharing agreement; (v) Northern has not
waived any statute of limitations with respect to any Taxes or Tax Returns or
agreed to any extension of time with respect to the assessment of Taxes or
deficiencies; (vi) Northern has withheld and paid over all Taxes required to
have been withheld and paid over and complied with all information reporting and
backup withholding requirements, including maintenance of required records with
respect thereto, in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party; and (vii) Northern has
never been a member of an "affiliated group" within the meaning of Section 1504
of the Code filing a consolidated federal income Tax Return (other than a group
the common parent of which was Northern) or has any liability for the Taxes of
any other person (other than Northern) under Treasury Regulations Section
1.1502-6 (or any similar provision of state, local or foreign law) as a
transferee or successor, by contract or otherwise.
(b) For purposes of this Agreement, "TAXES" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any federal,
state, local or foreign taxing authority, including, but not limited to income,
excise, property, sales, transfer, franchise, payroll, withholding, social
security or other similar taxes, including any interest or penalties, additions
to tax or additional amounts attributable thereto.
(c) For purposes of this Agreement, "TAX RETURN" shall mean any
return, report, information return or other document (including any related or
supporting information) with respect to Taxes, including without limitation all
information returns or reports with respect to backup withholding and other
payments to third parties.
(d) Northern has not filed a consent to the application of Section
341(f) of the Code.
(e) Northern has made available to Cowlitz true and complete copies of
all income tax audit reports and closing or other agreements related to Taxes
and all federal and state income or franchise tax returns Northern has filed
since its inception.
(f) Northern does not do business in or derive income from any state,
local, territorial or foreign taxing jurisdiction other than those for which all
Tax Returns have been furnished.
(g) Northern is not and has never been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code.
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(h) Northern has not entered into any agreement that would require it
to make any payment that is not deductible pursuant to Section 280G, 404 or 162
of the Code.
(i) Northern has not executed a power of attorney with respect to
Taxes.
(j) Northern has not agreed, and is not required to make, any
adjustment under Section 481 of the Code by reason of a change in accounting
method.
4.11 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Section 4.11(a) of the Northern Disclosure Schedule sets forth a
true and complete list of each material employee benefit plan, arrangement or
agreement and any amendments or modifications thereof (including, without
limitation, all stock purchase, stock option, severance, employment,
change-in-control, health/welfare and Code Section 125 plans, fringe benefit,
bonus, incentive, deferred compensation and other agreements, programs, policies
and arrangements, whether or not subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) that is maintained as of the date of
this Agreement (the "PLANS") by Northern or by any trade or business, whether or
not incorporated (an "ERISA AFFILIATE"), all of which together with Northern
would be deemed a "single employer' within the meaning of Section 4001 of ERISA.
(b) Northern has previously made available to Cowlitz true and
complete copies of each of the Plans and all related documents, including but
not limited to (i) the actuarial reports for each Plan (if applicable) for each
of the last two years, and (ii) the most recent determination letter from the
Internal Revenue Service (if applicable) for each Plan.
(c) Except as set forth in Section 4.11(c) of the Northern Disclosure
Schedule, (i) each of the Plans has been operated and administered in all
material respects in accordance with applicable laws, including but not limited
to ERISA and the Code, (ii) each of the Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code has been determined to be so qualified
by the Internal Revenue Service or will be submitted for such determination
within the applicable remedial amendment period, (iii) with respect to each Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such Plan, based upon the actuarial assumptions used for funding purposes
in the most recent actuarial report prepared by such Plan's actuary with respect
to such Plan, did not, as of its latest valuation date, exceed the then current
value of the assets of such Plan allocable to such accrued benefits, (iv) no
Plan provides benefits, including without limitation death or medical benefits
(whether or not insured), with respect to current or former employees of
Northern or any ERISA Affiliate beyond their retirement or other termination of
service, other than (w) coverage mandated by applicable law, (x) death benefits
or retirement benefits under any "employee pension plan," as that term is
defined in Section 3(2) of ERISA, (y) deferred compensation benefits accrued as
liabilities on the books of Northern or any ERISA Affiliates or (z) benefits the
full cost of which is borne by the current or former employee (or his
beneficiary), (v) to the best knowledge of Northern no liability under Title IV
of ERISA has been incurred by Northern or any ERISA Affiliate that has not been
satisfied in full (other than payment of premiums not yet due to the Pension
Benefit Guaranty Corporation (the "PBGC")), and no condition exists that
presents a
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material risk to Northern or any ERISA Affiliate of incurring a material
liability thereunder, (vi) no Plan is a "multi-employer pension plan," as such
term is defined in Section 3(37) of ERISA, (vii) to the best knowledge of
Northern all contributions or other amounts payable by Northern as of the
Effective Time with respect to each Plan in respect of current or prior plan
years have been paid or accrued in accordance with GAAP and Section 412 of the
Code, (viii) to the best knowledge of Northern neither Northern nor any ERISA
Affiliate has engaged in a transaction in connection with which Northern or any
ERISA Affiliate could be subject to either a material civil penalty assessed
pursuant to Section 409 or 502(i) of ERISA or a material tax imposed pursuant to
Section 4975 or 4976 of the Code, and (ix) to the best knowledge of Northern
there are no pending, threatened or anticipated claims (other than routine
claims for benefits) by, on behalf of or against any of the Plans or any trusts
related thereto which would, individually or in the aggregate, have or be
reasonably expected to have a Material Adverse Effect on Northern.
(d) Except as set forth in Section 4.11(d) of the Northern Disclosure
Schedule, no Plan exists which provides for or could result in the payment to
any Northern employee of any money or other property or rights or accelerate the
vesting or payment of such amounts or rights to any Northern employee as a
result of the transactions contemplated by this Agreement, including the Merger,
whether or not such payment or acceleration would constitute a parachute payment
within the meaning of Code Section 280G. Except as set forth in Section 4.11(d)
of the Northern Disclosure Schedule, since December 31, 1998, Northern has not
taken any action that would result in the payment of any amounts, or the
accelerated vesting of any rights or benefits, under any Plan set forth in
Section 4.11(d) of the Northern Disclosure Schedule.
(e) To the best knowledge of Northern, except as set forth in Section
4.11(e) of the Northern Disclosure Schedule, Northern is not a party to and is
not bound by any contract, arrangement or understanding (whether written or
oral) (i) with any consultants receiving in excess of $50,000 annually or (ii)
with respect to the term of employment or compensation of any employees. To the
best knowledge of Northern, except as provided under the Plans set forth in
Sections 4.11(d) and (e) of the Northern Disclosure Schedule and other
agreements or arrangements set forth in Sections 4.11(d) and (e) of the Northern
Disclosure Schedule, consummation of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional acts
or events) result in any payment (whether of severance pay or otherwise)
becoming due from Northern to any officer or employee thereof. Northern has
previously delivered or made available to Cowlitz true and complete copies of
all consulting agreements calling for payments in excess of $50,000 annually and
employment and deferred compensation agreements (or forms thereof) that are in
writing to which Northern is a party.
(f) Except as set forth in Section 4.11(f) of the Northern Disclosure
Schedule, no current employee of Northern received aggregate remuneration
(bonus, salary and commission) in excess of $100,000 for 1998 or would
reasonably be expected to receive aggregate remuneration (excluding severance or
other payments which, pursuant to an agreement or arrangement set forth in
Section 4.11(e) of the Northern Disclosure Schedule, are made as a
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result of consummation of the transactions contemplated by this Agreement,
either alone or upon the occurrence of any additional acts or events) in excess
of $100,000 in 1999.
4.12 FDIC REPORTS. Northern has previously made available to Cowlitz an
accurate and complete copy of each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since January 1, 1996 and
prior to the date hereof by Northern or any of its Subsidiaries with the FDIC
pursuant to the Securities Act of 1933, as amended (the "SECURITIES ACT"), or
the Exchange Act (the "NORTHERN REPORTS"), and no such registration statement,
offer circular, prospectus, report, schedule or proxy statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading.
Northern has timely filed all Northern Reports and other documents required to
be filed by them under the Securities Act and the Exchange Act, and, as of their
respective dates, all Northern Reports complied in all material respects with
the published rules and regulations of the FDIC with respect thereto.
4.13 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section 4.13 of
the Northern Disclosure Schedule, Northern holds, and has at all times held, all
licenses, franchises, permits and authorizations necessary for the lawful
conduct of its business under and pursuant to all, and has complied with and is
not in violation in any material respect under any, applicable law, statute,
order, rule, regulation, policy and/or guideline of any Governmental Entity
relating to Northern, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or violation would not,
individually or in the aggregate, have or reasonably be expected to have a
Material Adverse Effect on Northern, and Northern does not know of, and has not
received notice of, any violations of any of the above which, individually or in
the aggregate, would have or would reasonably be expected to have a Material
Adverse Effect on Northern.
4.14 CERTAIN CONTRACTS.
(a) Except as publicly disclosed in the Northern Reports filed prior
to the date hereof or as set forth in Section 4.14(a) of the Northern Disclosure
Schedule, Northern is not a party to or bound by any contract, arrangement,
commitment or understanding (whether written or oral) (i) which is a material
contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be
performed after the date of this Agreement, (ii) which limits the freedom of
Northern to compete in any line of business, in any geographic area or with any
person, or (iii) with or to a labor union or guild (including any collective
bargaining agreement). Each contract, arrangement, commitment or understanding
of the type described in this Section 4.14(a), whether or not publicly disclosed
in the Northern Reports filed prior to the date hereof or set forth in Section
4.14(a) of the Northern Disclosure Schedule, is referred to herein as a
"NORTHERN CONTRACT," and Northern does not know of, and has not received notice
of, any violation of the above by any of the other parties thereto which,
individually or in the aggregate, would have or would reasonably be expected to
have a Material Adverse Effect on Northern. Northern has made available all
contracts which involved payments by Northern in fiscal year 1998 of more
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than $100,000 or which could reasonably be expected to involve payments during
fiscal year 1999 of more than $100,000.
(b) Except as set forth in Section 4.14(b) of the Northern Disclosure
Schedule, each Northern Contract is valid and binding and in full force and
effect, (ii) Northern has in all material respects performed all obligations
required to be performed by it to date under each Northern Contract, and (iii)
no event or condition exists which constitutes or, after notice or lapse of time
or both, would constitute a material default on the part of Northern under any
such Northern Contract, except, in each case, where such invalidity, failure to
be binding, failure to so perform or default, individually or in the aggregate,
would not have or reasonably be expected to have a Material Adverse Effect on
Northern.
4.15 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in Section
4.15 of the Northern Disclosure Schedule, Northern is not subject to any
cease-and-desist or other order issued by, or is a party to any written
agreement, consent agreement or memorandum of understanding with, or is a party
to any commitment letter or similar undertaking to, or is subject to any order
or directive by, or has adopted any board resolutions at the request of (each,
whether or not set forth in Section 4.15 of the Northern Disclosure Schedule, a
"REGULATORY AGREEMENT"), any Governmental Entity that restricts the conduct of
its business or that in any manner relates to its capital adequacy, its credit
policies, its management or its business, nor has Northern been advised by any
Governmental Entity that it is considering issuing or requesting any Regulatory
Agreement.
4.16 UNDISCLOSED LIABILITIES. Except (i) for those liabilities that are
fully reflected or reserved against on the balance sheet of Northern included in
the Northern Form 10-KSB for the year ended December 31, 1998, (ii) for
liabilities incurred in the ordinary course of business consistent with past
practice since December 31, 1998, or (iii) for those liabilities set forth in
Section 4.16 of the Northern Disclosure Schedule, Northern has not incurred any
liability of any nature whatsoever (whether absolute, accrued or contingent or
otherwise and whether due or to become due) that, either alone or when combined
with all the liabilities not described in clause (i), (ii) or (iii), has had, or
would be reasonably expected to have, a Material Adverse Effect on Northern.
4.17 ANTI-TAKEOVER PROVISIONS. The Board of Directors of Northern has taken
all necessary action so that any applicable provisions of the takeover laws of
any state do not and will not apply to this Agreement, the Merger or the
transactions contemplated hereby, the Stock Option Agreement or the exercise of
the Option, including without limitation, the adoption by the Board of Directors
of Northern of resolutions specifically approving this Agreement, the Merger and
the transactions contemplated hereby, the Stock Option Agreement and the
exercise of the Option.
4.18 NORTHERN INFORMATION. The information relating to Northern and its
Subsidiaries to be provided by Northern for inclusion in the Proxy
Statement/Prospectus and the S-4, or in any other document filed with any other
Governmental Entity in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary
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to make the statements therein, in light of the circumstances in which they are
made, not misleading. The Proxy Statement/Prospectus (except for such portions
thereof as relate only to Cowlitz or any of its Subsidiaries) will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
4.19 TITLE TO PROPERTY.
(a) REAL PROPERTY. Section 4.19(a) of the Northern Disclosure Schedule
contains a description of all interests in real property (other than real
property security interests received in the ordinary course of business or real
property acquired through foreclosure or deed in lieu thereof or other
realization proceedings ("REO")), whether owned, leased or otherwise claimed,
including a list of all leases of real property, in which Northern thereof has
or claims in interest as of the date of this Agreement and any guarantees of any
such leases by any of such parties. True and complete copies of such leases have
previously been delivered or made available to Cowlitz, together with all
amendments, modifications, agreements or other writings related thereto which
are in the possession of Northern. Except as disclosed on Section 4.19(a) of the
Northern Disclosure Schedule, to the best knowledge of Northern, each such lease
is valid and binding as between Northern and the other party or parties thereto,
and the occupant is a tenant or possessor in good standing thereunder, free of
any default or breach whatsoever (except as otherwise disclosed on Section
4.19(a) of the Northern Disclosure Schedule) and quietly enjoys the premises
provided for therein. Except as disclosed on Section 4.19(a) of the Northern
Disclosure Schedule, Northern has owner's policies of title insurance insuring
it to be the owner of all real property owned by it on the date of this
Agreement, free and clear of all Liens, except Liens for current taxes not yet
due and payable and other standard exceptions commonly found in title policies
in the jurisdiction where such real property is located, and such encumbrances
and imperfections of title, if any, as do not materially detract from the value
of the properties and do not materially interfere with the present or proposed
use of such properties or otherwise materially impair such operations. All real
property and fixtures material to the business, operations of financial
condition of Northern are in substantially good condition and repair.
(b) PERSONAL PROPERTY. Northern has good, valid and marketable title
to all tangible personal property owned by it on the date hereof, free and clear
of all Liens, except as publicly disclosed in the Northern Reports filed prior
to the date hereof or as disclosed on Section 4.19(b) of the Northern Disclosure
Schedule. With respect to personal property used in the business of Northern
which is leased rather than owned, Northern is not in default under the terms of
any such lease the loss of which would have a Material Adverse Effect on
Northern.
4.20 INSURANCE. Section 4.20 of the Northern Disclosure Schedule contains a
true and complete list and a brief description (including name of insurer,
agent, coverage, premium and expiration date) of all insurance policies in force
on the date hereof with respect to the business and assets of the Northern
(other than insurance policies under which Northern thereof is named as a loss
payee, insured or additional insured as a result of its position as a secured
lender on specific Loans and mortgage insurance policies on specific Loans).
Northern is in compliance with all of the material provisions of their insurance
policies and are not in default under any of the material terms thereof. Each
such policy is outstanding and in full force and
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effect and, except as set forth on Section 4.20 of the Northern Disclosure
Schedule, Northern is the sole beneficiary of such policies. All premiums and
other payments due under any such policy have been paid.
4.21 ENVIRONMENTAL LIABILITY. Except as set forth in Section 4.21 of the
Northern Disclosure Schedule, there are no legal, administrative, arbitral or
other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose, or that reasonably could be expected to result in the
imposition of, on Northern any liability or obligation arising under common law
standards relating to environmental protection, human health or safety, or
arising under any local, state or federal environmental statute, regulation or
ordinance, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (collectively, the
"ENVIRONMENTAL LAWS"), pending or, to the knowledge of Northern, threatened
against Northern, which liability or obligation would have or would reasonably
be expected to have a Material Adverse Effect on Northern. To the knowledge of
Northern, there is no reasonable basis for any such proceeding, claim, action or
governmental investigation that would impose any liability or obligation that
would have or would reasonably be expected to have a Material Adverse Effect on
Northern. To the knowledge of Northern, during or prior to the period of (i) its
ownership or operation of any of their respective current properties, (ii) its
participation in the management of any property, or (iii) its holding of a
security interest or other interest in any property, there were no releases or
threatened releases of hazardous, toxic, radioactive or dangerous materials or
other materials regulated under Environmental Laws in, on, under or affecting
any such property which would reasonably be expected to have a Material Adverse
Effect on Northern. Northern is not subject to any agreement, order, judgment,
decree, letter or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any material liability or obligation
pursuant to or under any Environmental Law that would have or would reasonably
be expected to have a Material Adverse Effect on Northern.
4.22 OPINION OF FINANCIAL ADVISOR. Northern has received the opinion of
D.A. Davidson & Co., dated September 10, 1999, to the effect that, as of such
date, the Merger Consideration is fair from a financial point of view to the
holders of Northern Common Stock. A true and complete copy of such opinion has
been delivered to Cowlitz on or prior to the date of this Agreement.
4.23 PATENTS, TRADEMARKS, ETC. Northern owns or possesses all legal rights
to use all proprietary rights, including without limitation all trademarks,
trade names, service marks and copyrights, that are material to the conduct of
its existing business. Except for the agreements listed on Section 4.23 of the
Northern Disclosure Schedule, Northern is not bound by or a party to any
options, licenses or agreements of any kind with respect to any trademarks,
service marks or trade names which it claims to own. Northern has not received
any communications alleging that it has violated or would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity.
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4.24 LOAN MATTERS.
(a) All evidences of indebtedness ("LOANS") reflected as assets on the
books and records of Northern were, as of June 30, 1999 and will be as of the
Closing Date, in all respects legal, valid and binding obligations of the
respective obligors named therein and no such indebtedness is subject to any
defenses which have been or may be asserted, except for defenses arising from
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights generally and general principles of equity.
(b) Except as disclosed in Section 4.24(b) of the Northern Disclosure
Schedule, each Loan outstanding at any time since January 1, 1996 and each
commitment to extend credit has been solicited and originated and is
administered and serviced in all material respects in accordance with the
relevant loan documents, Northern's underwriting standards and in material
compliance with all applicable requirements of federal, state and local laws,
regulations and rules.
(c) Except as disclosed in Section 4.24(c) of the Northern Disclosure
Schedule, no loan, all or any part of which is an asset of Northern was, as of
June 30, 1999, more than 30 days delinquent as to principal or interest.
(d) Except as disclosed in Section 4.24(d) of the Northern Disclosure
Schedule, to the knowledge of Northern, the documentation for each loan (the
"LOAN FILE") is correct and complete to the extent that all Loan Files contain
those documents necessary for Northern to enforce the loans and realize upon the
security, if any, therefor, including but not limited to properly executed notes
or credit agreements and security documents. In addition, Except as disclosed in
Section 4.24(d) of the Northern Disclosure Schedule, the Loan Files for all
loans secured primarily by real property also contain evidence of property
casualty insurance (or are covered by a mortgage protection policy) and, where
required by the FDIC or other governmental regulators, appraisals, policies of
title insurance (or, in the case of loans closed within the past three months,
commitments therefor) and policies of flood insurance.
(e) Except as disclosed on Section 4.24(e) of the Northern Disclosure
Schedule, none of the loans Northern has sold or in which Northern has sold
participation interests has any buy-back or guarantee obligations. The
percentage of interest retained by Northern in any sold participation interest
is not subordinated to the percentage of interest sold.
(f) There are no employee, officer, director or other affiliate loans
on which the borrower is paying a rate other than that reflected on the note or
the relevant credit agreement.
(g) With respect to loans secured by commercial real estate, Northern
has a Phase I environmental study in its files in those instances where prudent
lending practice would require a lender to have such a study, and each such
Phase I environmental study shows the property to be free of any underground
storage tanks, asbestos, ureaformaldehyde, uncontained polychlorinated
biphenyls, or releases of hazardous substances as such terms are defined by any
applicable federal, state or local environmental protection laws and
regulations, or if such Phase I
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environmental study shows the property to contain any underground storage tanks,
asbestos, ureaformaldehyde, uncontained polychlorinated biphenyls, or releases
of hazardous substances, then such Phase I environmental study affirmatively
recommends that no Phase II environmental study or further investigation is
necessary.
(h) To Northern's knowledge, there are no loans outstanding to
individuals who are not residents of the United States except for loans secured
by collateral located in the United States with a current fair market value
equal to 100 percent of the loan amount. There are no loans outstanding to
corporations or other entities headquartered outside of the United States except
for loans that are either (a) guaranteed by individuals who are residents of the
United States, or (b) secured by collateral located in the United Sates with a
current fair market value equal to 100 percent of the loan amount. To Northern's
knowledge, there are no commitments outstanding to nonresident individuals or
entities to make loans or advances which, when made, would not be in compliance
with the preceding two sentences.
4.25 POWERS OF ATTORNEY. Northern has no powers of attorney outstanding
other than those issued pursuant to the requirements of regulatory authority or
in the ordinary course of business with respect to routine matters.
4.26 BENEFIT PLANS INVESTED IN COMMON STOCK. No shares of Northern Common
Stock are available to individuals, directly or indirectly, through any Benefit
Plan, and no Benefit Plan is invested in Northern Common Stock.
4.27 COMMUNITY REINVESTMENT ACT COMPLIANCE. Northern is in substantial
compliance with the applicable provisions of the Community Reinvestment Act of
1977 and the regulations promulgated thereunder (collectively, "CRA"). Northern
has not been advised of the existence of any fact or circumstance or set of
facts or circumstances which, if true, would cause Northern to fail to be in
substantial compliance with such provisions or to have its current rating
lowered. Any change in the current rating which would prohibit the Merger from
being consummated shall be a Material Adverse Effect on Northern.
4.28 YEAR 2000 COMPLIANCE. Northern has completed an assessment of
Northern's computerized application programs, files, databases and computer and
computer communication services (collectively, the "NORTHERN AUTOMATED
SYSTEMS"), and has implemented a plan to resolve issues arising or expected to
arise in connection with the deficient processing by the Northern Automated
Systems of date-related information containing dates on, during and after
January 1, 2000 (each such deficiency, a "YEAR 2000 PROBLEM"). Northern's Year
2000 plan (the "NORTHERN Y2K PLAN") consists of assessing, testing for, and
implementing all steps necessary to preclude material Year 2000 Problems. As of
the date of this Agreement, Northern has substantially completed the necessary
assessment and testing processes and is conducting follow-up activities as a
result of Year 2000 Problems identified as of such date. Northern has no reason
to believe that any Year 2000 Problem, individually or in the aggregate, would
have or would reasonably be expected to have a Material Adverse Effect on
Northern.
4.29 LABOR MATTERS. Northern is not a party to and is not bound by any
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor
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organization, nor is Northern the subject of a proceeding asserting that it has
committed an unfair labor practice (within the meaning of the National Labor
Relations Act) or seeking to compel Northern to bargain with any labor
organization as to wages or conditions of employment, nor is there any strike or
other material labor dispute or disputes involving it pending, or to Northern's
knowledge, threatened, nor is Northern aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in other
organizational activity.
5. REPRESENTATIONS AND WARRANTIES OF COWLITZ
Cowlitz hereby represents and warrants to Northern as follows:
5.1 CORPORATE ORGANIZATION.
(a) Cowlitz is a corporation duly organized and validly existing under
the laws of the State of Washington. Cowlitz has the corporate power and
authority to own or lease all of its properties and assets and to carry on its
business as it is now being conducted, and is duly licensed or qualified to do
business in each jurisdiction in which the nature of the business conducted by
it or the character or location of the properties and assets owned or leased by
it makes such licensing or qualification necessary, except where the failure to
be so licensed or qualified would not have or reasonably be expected to have a
Material Adverse Effect (as defined below) on Cowlitz. As used in this
Agreement, the term "MATERIAL ADVERSE EFFECT" means, with respect to Cowlitz, a
material adverse effect on the business, results of operations, financial
condition or prospects of Cowlitz and its Subsidiaries taken as a whole or a
material adverse effect on Cowlitz's ability to consummate the transactions
contemplated hereby on a timely basis; PROVIDED, HOWEVER, that a Material
Adverse Effect on Cowlitz shall not be deemed to have occurred as a result of
(i) any changes in laws, regulations or GAAP or (ii) any changes in general
economic conditions affecting banks, savings associations or their holding
companies generally. Cowlitz is duly registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended. The copies of the Articles of
Incorporation and Bylaws of Cowlitz which have previously been made available to
Northern are true, complete and correct copies of such documents as in effect as
of the date of this Agreement. Cowlitz's only Subsidiaries are Cowlitz Bank and
Business Finance Corporation.
(b) Cowlitz Bank is a bank duly chartered and validly existing under
the laws of the State of Washington. All of the issued and outstanding capital
stock of Cowlitz Bank is owned free and clear of all liens by Cowlitz. Deposits
in Cowlitz Bank are insured by the FDIC through the BIF to the fullest extent
permitted by law. Cowlitz Bank has no Subsidiaries.
5.2 CAPITALIZATION. The authorized capital stock of Cowlitz consists of
25,000,000 shares of Cowlitz Common Stock and 5,000,000 shares of preferred
stock, no par value ("COWLITZ PREFERRED STOCK"). At the close of business on
July 30, 1999, there were 4,154,070 shares of Cowlitz Common Stock outstanding
and no shares of Cowlitz Preferred Stock outstanding. As of August 1, 1999,
783,829 shares of Cowlitz Common Stock or Cowlitz Preferred Stock were reserved
for issuance. All of the issued and outstanding shares of Cowlitz Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof. As of
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the date of this Agreement, except (i) as set forth in Section 5.2(a) of the
disclosure schedule of Cowlitz delivered to Northern concurrently herewith (the
"COWLITZ DISCLOSURE SCHEDULE"), and (ii) as set forth elsewhere in this Section
5.2(a), Cowlitz does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of Cowlitz Common Stock or Cowlitz
Preferred Stock or any other equity securities of Cowlitz or any securities
representing the right to purchase or otherwise receive any shares of Cowlitz
Common Stock or Cowlitz Preferred Stock. The shares of Cowlitz Common Stock to
be issued pursuant to the Merger will be duly authorized and validly issued and,
at the Effective Time, all such shares will be fully paid, nonassessable and
free of preemptive rights, with no personal liability attaching to the ownership
thereof.
5.3 AUTHORITY; NO VIOLATION.
(a) Cowlitz has full corporate power and authority to execute and
deliver this Agreement and the Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Stock Option Agreement and the consummation of the
transactions contemplated hereby (including the issuance of the Cowlitz Common
Stock constituting Merger Consideration) and thereby have been duly and validly
approved by the Board of Directors of Cowlitz. The Board of Directors of Cowlitz
will direct that the issuance of shares of Cowlitz Common Stock in the Merger be
submitted to Cowlitz's shareholders for approval at a meeting of such
shareholders and, except for the approval of such issuance by the affirmative
vote of a majority of the votes cast at such a meeting, no other corporate
proceedings on the part of Cowlitz are necessary to approve this Agreement or
the Stock Option Agreement or to consummate the transactions contemplated hereby
and thereby. This Agreement and the Stock Option Agreement have been duly and
validly executed and delivered by Cowlitz and (assuming due authorization,
execution and delivery by Northern) each constitutes a valid and binding
obligation of Cowlitz, enforceable against Cowlitz in accordance with its terms,
except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and
similar laws affecting creditors' rights and remedies generally.
(b) Cowlitz Bank has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby has been duly and validly approved by the Board
of Directors of Cowlitz Bank and will be duly and validly approved by the sole
shareholder of Cowlitz Bank, and, upon such approval, no other corporate
proceeding on the part of Cowlitz Bank will be necessary to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Cowlitz Bank and (assuming due authorization,
execution and delivery by Northern) constitutes a valid and binding obligation
of Cowlitz Bank, enforceable against Cowlitz Bank in accordance with its terms,
except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency,
fraudulent transfer, receivership, conservatorship and similar laws affecting
creditors' rights and remedies generally.
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(c) Except as set forth in Section 5.3(c) of the Cowlitz Disclosure
Schedule, neither the execution and delivery of this Agreement or the Stock
Option Agreement by Cowlitz or Cowlitz Bank, nor the consummation by Cowlitz or
Cowlitz Bank of the transactions contemplated hereby or thereby, nor compliance
by Cowlitz or Cowlitz Bank with any of the terms or provisions hereof or
thereof, will (i) violate any provision of the Articles of Incorporation or
Bylaws of Cowlitz or any of the similar governing documents of any of its
Subsidiaries or (ii) assuming that the consents and approvals referred to in
Section 5.4 are duly obtained, (x) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to Cowlitz or
any of its Subsidiaries or any of their respective properties or assets, or (y)
violate, conflict with, result in a breach of any provision of or the loss of
any benefit under, constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, result in the termination of
or a right of termination or cancellation under, accelerate the performance
required by, or result in the creation of any Lien upon any of the respective
properties or assets of Cowlitz or any of its Subsidiaries under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which
Cowlitz or any of its Subsidiaries is a party, or by which they or any of their
respective properties or assets may be bound or affected, except (in the case of
clause (y) above) for such violations, conflicts, breaches or defaults which
either individually or in the aggregate will not have and would not reasonably
be expected to have a Material Adverse Effect on Cowlitz.
5.4 CONSENTS AND APPROVALS. Except for (i) the approval of this Agreement
and the Merger by the FDIC, the Washington Director and the Oregon Director,
(ii) approval of the listing of the Cowlitz Common Stock to be issued in the
Merger on Nasdaq, (iii) the filing with the FDIC and the SEC of the Proxy
Statement/Prospectus and the filing and declaration of effectiveness of the S-4,
(iv) the filing of the Articles of Merger with the Washington Secretary, the
Washington Director and the Oregon Director, (v) the approval of this Agreement
and the Merger by the requisite votes of the stockholders of Northern, the
approval of the issuance of shares of Cowlitz Common Stock in the Merger by
shareholders of Cowlitz and the approval of this Agreement and the Merger by the
sole shareholder of Cowlitz Bank, (vi) the consents and approvals set forth in
Section 5.4 of the Cowlitz Disclosure Schedule, and (vii) the consents and
approvals of third parties which are not Governmental Entities, the failure of
which to obtain will not have and would not be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect, no consents or
approvals of, or filings or registrations with, any Governmental Entity or any
third party are necessary in connection with (A) the execution and delivery by
Cowlitz of this Agreement and (B) the consummation by Cowlitz of the Merger and
the other transactions contemplated hereby.
5.5 REPORTS. Cowlitz and each of its Subsidiaries have timely filed all
material reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file since
January 1, 1997 with any Governmental Entities, and have paid all fees and
assessments due and payable in connection therewith. Except as set forth in
Section 5.5 of the Cowlitz Disclosure Schedule and except for normal
examinations conducted by a Governmental Entity in the regular course of the
business of Cowlitz and its Subsidiaries, no Governmental Entity has initiated
any proceeding or, to the best
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knowledge of Cowlitz, investigation into the business or operations of Cowlitz
or any of its Subsidiaries since January 1, 1997. There is no material
unresolved violation, criticism, or exception by any Government Entity with
respect to any report or statement relating to any examinations of Cowlitz or
any of its Subsidiaries.
5.6 FINANCIAL STATEMENTS. Cowlitz has previously made available to Northern
copies of (a) the consolidated balance sheets of Cowlitz and its Subsidiaries,
as of December 31, for the fiscal years 1997 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the fiscal years 1996 through 1998, inclusive, as reported in
Cowlitz's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
filed with the SEC under the Exchange Act, in each case accompanied by the audit
report of Arthur Andersen LLP, independent public accountants with respect to
Cowlitz, and (b) the unaudited consolidated balance sheets of Cowlitz and its
Subsidiaries as of June 30, 1998 and June 30, 1999 and the related unaudited
consolidated statements of income, cash flows and changes in stockholders'
equity for the three-month periods then ended, as reported in Cowlitz's
Quarterly Report on Form 10-Q for the period ended June 30, 1999 filed with the
SEC under the Exchange Act. Each of the financial statements referred to in this
Section 5.6 (including the related notes, where applicable) fairly present, and
the financial statements referred to in Section 7.11 hereof (including the
related notes, where applicable) will fairly present (subject, in the case of
the unaudited statements, to normal recurring adjustments, none of which are
expected to be material in nature and amount), the results of the consolidated
operations and changes in stockholders' equity and consolidated financial
position of Cowlitz and its Subsidiaries for the respective fiscal periods or as
of the respective dates therein set forth. Each of such financial statements
(including the related notes, where applicable) complies, and the financial
statements referred to in Section 7.11 hereof (including the related notes,
where applicable) will comply, in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto; and each of such financial statements (including the
related notes, where applicable) has been, and the financial statements referred
to in Section 7.11 (including the related notes, where applicable) will be,
prepared in accordance with GAAP consistently applied during the periods
involved, except in each case as indicated in such statements or in the notes
thereto or, in the case of unaudited statements, as permitted by Form 10-Q. The
books and records of Cowlitz and its Subsidiaries have been, and are being,
maintained in all material respects in accordance with GAAP and any other
applicable legal and accounting requirements and reflect only actual
transactions.
5.7 BROKER'S FEES. Except as set forth in Section 5.7 of the Cowlitz
Disclosure Schedule, neither Cowlitz nor any Subsidiary thereof nor any of their
respective officers or directors has employed any broker or finder or incurred
any liability for any broker's fees, commissions or finder's fees in connection
with any of the transactions contemplated by this Agreement.
5.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as publicly disclosed in
Cowlitz Reports (as defined in Section 5.10) filed prior to the date hereof or
as set forth in Section 5.8 of the Cowlitz Disclosure Schedule, since June 30,
1999, no event has occurred
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which has had or would reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Cowlitz.
5.9 LEGAL PROCEEDINGS.
(a) Neither Cowlitz nor any of its Subsidiaries is a party to any, and
there are no pending or, to the best of Cowlitz's knowledge, threatened legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against Cowlitz or any of its
Subsidiaries or challenging the validity or propriety of the transactions
contemplated by this Agreement as to which there is a significant possibility of
an adverse determination and which, if adversely determined, would, individually
or in the aggregate, have or reasonably be expected to have a Material Adverse
Effect on Cowlitz.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Cowlitz, any of its Subsidiaries or the assets of
Cowlitz or any of its Subsidiaries which has had, or would reasonably be
expected to have, a Material Adverse Effect on Cowlitz or the Surviving Bank.
5.10 SEC REPORTS. Cowlitz has previously made available to Northern an
accurate and complete copy of each final registration statement, prospectus,
report, schedule and definitive proxy statement filed since January 1, 1998 and
prior to the date hereof by Cowlitz with the SEC pursuant to the Securities Act
or the Exchange Act (the "COWLITZ REPORTS"), and no such registration statement,
prospectus, report, schedule or proxy statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances in which they were made, not misleading. Cowlitz has timely filed
all Cowlitz Reports and other documents required to be filed by it under the
Securities Act and the Exchange Act, and, as of their respective dates, all
Cowlitz Reports complied in all material respects with the published rules and
regulations of the SEC with respect thereto.
5.11 COMPLIANCE WITH APPLICABLE LAW. Except as disclosed in Section 5.11 of
the Cowlitz Disclosure Schedule, Cowlitz and each of its Subsidiaries hold, and
have at all times held, all material licenses, franchises, permits and
authorizations necessary for the lawful conduct of their respective businesses
under and pursuant to all, and have complied with and are not in default in any
material respect under any, applicable law, statute, order, rule, regulation,
policy and/or guideline of any Governmental Entity relating to Cowlitz or any of
its Subsidiaries, except where the failure to hold such license, franchise,
permit or authorization or such noncompliance or default would not, individually
or in the aggregate, have or reasonably be expected to have a Material Adverse
Effect on Cowlitz, and neither Cowlitz nor any of its Subsidiaries knows of, or
has received notice of, any material violations of any of the above which,
individually or in the aggregate, would have or reasonably be expected to have a
Material Adverse Effect on Cowlitz.
5.12 AGREEMENTS WITH REGULATORY AGENCIES. Except as set forth in Section
5.12 of the Cowlitz Disclosure Schedule, neither Cowlitz nor any of its
Subsidiaries is subject to any Regulatory Agreement that restricts the conduct
of its business or that in any manner relates to its capital adequacy, its
credit policies, its management or its business, nor has Cowlitz or any of its
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Subsidiaries been advised by any Governmental Entity that it is considering
issuing or requesting any Regulatory Agreement.
5.13 COWLITZ INFORMATION. The information relating to Cowlitz and its
Subsidiaries to be provided by Cowlitz to be contained in the Proxy
Statement/Prospectus and the S-4, or in any other document filed with any other
Governmental Entity in connection herewith, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The Proxy Statement/Prospectus (except for such portions thereof
that relate only to Northern) will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder. The S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
5.14 YEAR 2000 COMPLIANCE. Cowlitz has completed an assessment of Cowlitz's
computerized application programs, files, databases and computer and computer
communication services, and has implemented a plan (the "COWLITZ Y2K PLAN") to
resolve issues arising or expected to arise in connection with any Year 2000
Problems. The Cowlitz Y2K Plan consists of assessing, renovating, validating and
implementing all steps necessary to preclude material Year 2000 Problems. As of
the date of this Agreement, Cowlitz has completed the assessment, renovation and
validation phases and is currently in the implementation phase of the Cowlitz
Y2K Plan. Cowlitz has no reason to believe that any Year 2000 Problem,
individually or in the aggregate, would have or would reasonably be expected to
have a Material Adverse Effect on Cowlitz.
5.15 OPINION OF FINANCIAL ADVISOR. Cowlitz has received the opinion of Sage
Capital LLC, dated September 14, 1999, to the effect that, as of such date, the
Merger Consideration is fair from a financial point of view to the holders of
Cowlitz Common Stock. A true and complete copy of such opinion has been
delivered to Northern on or prior to the date of this Agreement
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6. COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME.
(a) Except as set forth in Section 6.1 or 6.2 of the Northern
Disclosure Schedule, as expressly contemplated or permitted by this Agreement,
or as required by applicable law, rule or regulation, during the period from the
date of this Agreement to the Effective Time, Northern shall (i) conduct its
business in the usual, regular and ordinary course consistent with past
practice, (ii) use reasonable best efforts to maintain and preserve intact its
business organization, employees and advantageous business relationships and
retain the services of its officers and key employees and (iii) take no action
which would reasonably be expected to adversely affect or delay its ability to
obtain any approvals of any Governmental Entity required to consummate the
transactions contemplated hereby or to consummate the transactions contemplated
hereby.
(b) Northern shall file (or cause to be filed) at its own expense, on
or before the due date thereof, all Tax Returns required to be filed for all Tax
periods ending on or before the Effective Time provided, however, that Northern
shall not file any such Tax Return, or other returns, elections, claims for
refund or information statements with respect to any liabilities for Taxes
(other than federal, state or local sales, use, property, withholding or
employment Tax Returns) for any Tax period until Cowlitz has had a reasonable
opportunity to review such Tax Returns. Northern shall provide Cowlitz with a
copy of appropriate workpapers, schedules, drafts and final copies of each
federal and state income tax return of Northern (including returns of all Plans)
at least ten (10) days before filing such Tax Return and shall reasonably
cooperate with any request by Cowlitz in connection therewith.
(c) Northern shall use its reasonable best efforts to sell all or part
of its obligations under its accounts receivable financing program under the
name of Business Manager prior to the Effective Time.
(d) Northern hereby agrees to obtain Cowlitz's prior written approval
with respect to those matters set forth in Sections 6.1 and 6.2 of the Northern
Disclosure Schedule that expressly require Cowlitz's prior written approval
(e) In the event that Northern's dispute with Fiserv Solutions, Inc.
described in Section 4.9(a) of the Northern Disclosure Schedule has not been
resolved prior to the Effective Time, Northern agrees to establish prior to the
Effective Time a reasonable reserve for such dispute. In the event that
Northern's dispute with Albina State Bank described in Section 4.9(a) of the
Northern Disclosure Schedule has not been resolved prior to the Effective Time,
Northern agrees to establish prior to the Effective Time a reasonable reserve
for such dispute.
6.2 NORTHERN FORBEARANCES. Except as set forth in Section 6.2 of the
Northern Disclosure Schedule, as expressly contemplated or permitted by this
Agreement, or as required by applicable law, rule or regulation, during the
period from the date of this Agreement to the Effective Time, Northern shall not
without the prior written consent of Cowlitz:
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(a) adjust, split, combine or reclassify any capital stock; set any
record or payment dates for the payment of any dividends or distributions on its
capital stock except in the ordinary and usual course of business consistent
with past practice; make, declare or pay any dividend or make any other
distribution on, or directly or indirectly redeem, purchase or otherwise
acquire, any shares of its capital stock or any securities or obligations
convertible into or exchangeable for any shares of its capital stock, or except
as otherwise permitted by this paragraph (a) grant any stock appreciation rights
or grant any individual, corporation, joint venture or other entity any right to
acquire any shares of its capital stock; or issue any additional shares of
capital stock except pursuant to the exercise of stock options outstanding as of
the date hereof;
(b) incur any indebtedness for borrowed money, other than deposit
liabilities and short-term borrowings pursuant to credit facilities in effect on
the date of this Agreement or any replacement facilities with commercially
reasonable terms as credit facilities existing as of the date hereof, or sell,
transfer, mortgage, encumber or otherwise dispose of any of its assets or
properties to any individual, corporation or other entity, or cancel, release or
assign any indebtedness to any such person or any claims held by any such
person, in each case that is material to such party, except (i) in the ordinary
course of business consistent with past practice or (ii) as expressly required
by the terms of any contracts or agreements in force at the date of this
Agreement and set out in Section 6.2 of the Northern Disclosure Schedule;
(c) form any Subsidiary, or make any acquisition or investment,
whether by purchase or other acquisition of stock or other equity interests, by
merger, consolidation or other business combination, or by contributions to
capital, or make any property transfers or material purchases of any property or
assets, in or from any other individual, corporation, joint venture or other
entity;
(d) enter into, renew or terminate any contract or agreement, other
than loans made in the ordinary course of business, that calls for aggregate
annual payments of $50,000 and which is not either (i) terminable at will on 60
days or less notice without payment of a penalty in excess of $20,000 or (ii)
has a term of less than one year; or make any material change in any of its
leases or contracts, other than renewals of contracts or leases for a term of
one year or less without material adverse changes to the terms thereof;
(e) other than general salary increases consistent with past practices
for employees other than executive officers, increase in any material respect
the compensation or fringe benefits of any of its employees or pay any pension
or retirement allowance not required by any existing plan or agreement to any
such employees or become a party to, amend (other than amendments required by
law) or commit itself to any pension, retirement, profit-sharing or welfare
benefit plan or agreement or employment agreement with or for the benefit of any
employee or accelerate the vesting of any stock options or other stock-based
compensation;
(f) authorize or permit any of its officers, directors, employees,
representatives or agents (collectively, "REPRESENTATIVES") to directly or
indirectly solicit, initiate or encourage any inquiries relating to or that may
reasonably be expected to lead to, or the
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making of any proposal which constitutes, a Takeover Proposal (as defined
below), or recommend or endorse any Takeover Proposal, or participate in any
discussions or negotiations, or provide third parties with any nonpublic
information, relating to any such Takeover Proposal or otherwise facilitate any
effort or attempt to make or implement a Takeover Proposal; PROVIDED, HOWEVER,
that, at any time prior to the time its stockholders shall have voted to approve
this Agreement and the Merger, Northern may, and may authorize and permit its
Representatives to, provide third parties with nonpublic information and
participate in discussions and negotiations with any third party in response to
a Takeover Proposal which was not solicited subsequent to the date hereof, if
Northern's Board of Directors, based on the advice of its financial advisers and
outside counsel, has determined in its reasonable good faith judgment that the
failure to do so would constitute a breach of its fiduciary duties. Northern
shall (i) advise Cowlitz orally (within one day) and in writing (as promptly as
practicable) of the receipt after the date hereof of any Takeover Proposal by it
or any of its Representatives and (ii) unless its Board of Directors, based on
the advice of its financial advisers and outside counsel, has determined in its
reasonable good faith judgment that such action would constitute a breach of its
fiduciary duties, inform Cowlitz orally and in writing, as promptly as
practicable after the receipt thereof, of the material terms and conditions of
any such Takeover Proposal (including the identity of the party making such
inquiry or proposal) and shall keep Cowlitz informed of the status (including
any changes in the material terms and conditions) thereof. Northern shall not
furnish any nonpublic information to any other party pursuant to this Section
6.2(f) except pursuant to the terms of a confidentiality agreement containing
terms substantially identical to the terms contained in the Confidentiality
Agreement (as defined in Section 7.2(b) hereof). Northern will immediately cease
and cause to be terminated any activities, discussions or negotiations conducted
prior to the date of this Agreement with any parties other than Cowlitz with
respect to any Takeover Proposal and require the return (or if permitted by the
terms of the applicable confidentiality agreement, the certified destruction) of
all confidential information previously provided to such parties. As used in
this Agreement, "TAKEOVER PROPOSAL" shall mean any inquiry, proposal or offer
relating to any tender or exchange offer, proposal for a merger, consolidation
or other business combination involving Northern or the acquisition in any
manner of 25% or more of the voting stock or equity, or a substantial portion of
the assets, of Northern, other than the transactions contemplated by this
Agreement;
(g) make any capital expenditures in excess of (A) $50,000 per project
or related series of projects or (B) $50,000 in the aggregate, other than
expenditures necessary to maintain existing assets in good repair;
(h) except in the ordinary course of business, make application for
the opening, relocation or closing of any, or open, relocate or close any,
branch, office or loan production or servicing facility;
(i) make or acquire any loan or issue a commitment for any loan except
for loans and commitments that are made in the ordinary course of business
consistent with past practice at rates not less than the prevailing market
rates, or issue or agree to issue any letters of credit or otherwise guarantee
or agree to guarantee the obligations of any other persons except for letters of
credit issued in the ordinary course of business consistent with past practice;
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(j) except as otherwise expressly permitted elsewhere in this Section
6.2, engage or participate in any material transaction or incur or sustain any
material obligation not in the ordinary course of business;
(k) except as otherwise expressly permitted hereby, foreclose upon or
otherwise acquire (whether by deed in lieu of foreclosure or otherwise) any real
property (other than 1-to-4 family residential properties in the ordinary course
of business);
(l) settle any claim, action or proceeding involving monetary damages,
except in the ordinary course of business consistent with past practice, or
agree or consent to the issuance of any injunction, decree, order or judgment
restricting its business or operations;
(m) amend its charter, bylaws or similar governing documents;
(n) except in the ordinary course of business consistent with past
practice, materially change its investment securities portfolio policy, or the
manner in which the portfolio is classified or reported;
(o) except as expressly required to comply with the Consent to Entry
of Order to Cease and Desist and Order to Cease and Desist between the FDIC and
Northern dated July 19, 1999, and the Order to Cease and Desist between the
Oregon Department of Financial Institutions and Northern dated July 19, 1999
(collectively, the "Orders"), make any material changes in its policies and
practices with respect to (i) underwriting, pricing, originating, acquiring,
selling, servicing, or buying or selling rights to service loans, (ii) hedging
its loan positions or commitments or (iii) any other material banking policies;
(p) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the
Effective Time, or in any of the conditions to the Merger set forth in Section 8
not being satisfied or in a violation of any provision of this Agreement,
except, in every case, as may be required by applicable law;
(q) take any action (other than permitted herein) that would prevent
the Merger from qualifying as a "reorganization" within the meaning of Section
368(a) of the Code, make any changes in its accounting methods, practices or
policies, except as may be required under law, rule, regulation or GAAP, in each
case as concurred in by Northern's independent public accountants;
(r) except as expressly required to comply with the Orders, increase
the number of full-time equivalent employees of Northern from the number as of
June 30, 1999; or
(s) except as expressly required to comply with the Orders, agree to,
or make any commitment to, take any of the actions prohibited by this Section
6.2.
6.3 NO FUNDAMENTAL COWLITZ CHANGES. Except as expressly contemplated or
permitted by this Agreement, or as required by applicable law, rule or
regulation, during the
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period from the date of this Agreement to the Effective Time, Cowlitz shall not,
without the prior written consent of Northern, amend its articles of
incorporation or bylaws in a manner that would materially and adversely affect
the economic benefits of the Merger to the holders of Northern Common Stock, or
agree to, or make any commitment to, take any such action.
7. ADDITIONAL AGREEMENTS
7.1 REGULATORY MATTERS.
(a) Cowlitz and Northern shall promptly prepare and file with the FDIC
and SEC the Proxy Statement/Prospectus and the S-4, in which the Proxy
Statement/Prospectus will be included as a prospectus. Each of Cowlitz and
Northern shall use all reasonable efforts to have the S-4 declared effective
under the Securities Act as promptly as practicable after such filing, and
Northern and Cowlitz shall thereafter mail the Proxy Statement/Prospectus to
their respective stockholders.
(b) Subject to the other provisions of this Agreement, the parties
hereto shall cooperate with each other and use reasonable best efforts to
promptly prepare and file all necessary documentation, to effect all
applications, notices, petitions and filings, to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including without limitation
the Merger) and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such third parties and
Governmental Entities.
(c) Cowlitz and Northern shall, upon request, furnish each other with
all information concerning themselves, their respective Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with the Proxy Statement/Prospectus, the S-4 or any
other statement, filing, notice or application made by or on behalf of Cowlitz,
Northern or any of their respective Subsidiaries to any Governmental Entity in
connection with the merger and the other transactions contemplated by this
Agreement.
(d) Cowlitz and Northern shall promptly advise each other upon
receiving any communication from any Governmental Entity whose consent or
approval is required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any Requisite Regulatory Approval (as defined in Section 8.1(c)
below) will not be obtained or that the receipt of any such approval will be
materially delayed.
7.2 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, Northern shall afford access to the officers,
employees, accountants, counsel and other Representatives of Cowlitz and any
Loan Examiners appointed pursuant to Section 2.6(d), during normal business
hours during the period prior to the Effective Time, to all
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its properties, books, contracts, commitments and records, and to its officers,
employees, accountants, counsel and other representatives and, during such
period, Northern shall make available to Cowlitz (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of Federal securities laws or
Federal or state banking, mortgage lending, real estate or consumer finance or
protection laws (other than reports or documents which Northern is not permitted
to disclose under applicable law) and (ii) all other information concerning its
business, properties and personnel as such other party may reasonably request.
Northern shall not be required to provide access to or to disclose information
where such access or disclosure would violate or prejudice the rights of its
customers, jeopardize the attorney-client privilege of the institution in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(b) Cowlitz shall hold all information furnished by Northern or any of
its Representatives pursuant to Section 7.2(a) in confidence to the extent
required by, and in accordance with, the provisions of the Confidentiality
Agreement dated May 13, 1999, between Cowlitz and Northern (the "CONFIDENTIALITY
AGREEMENT").
(c) No investigation by Cowlitz or its Representatives shall affect
the representations, warranties, covenants or agreements of Northern set forth
herein.
(d) No investigation by Northern or its Representatives shall affect
the representations, warranties, covenants or agreements of Cowlitz set forth
herein.
7.3 STOCKHOLDER APPROVAL. Each of Northern and Cowlitz shall duly call,
give notice of, convene and hold a meeting of its stockholders to be held as
soon as practicable following the date hereof for the purpose of obtaining the
requisite stockholder approval required in connection with this Agreement and
the Merger. Northern shall, through its Board of Directors, recommend to its
stockholders approval of the Merger and Cowlitz shall, through its Board of
Directors, recommend to its shareholders approval of the issuance of the shares
of Cowlitz Common Stock in the Merger as required by Nasdaq; PROVIDED, HOWEVER,
that this Section 7.3 shall not prohibit accurate disclosure by Northern of
information that is required in the Proxy Statement/Prospectus or any other
document required to be filed with the SEC (including without limitation a
disclosure statement on Schedule 14D-9) or otherwise required by applicable law
or regulation or the rules of Nasdaq to be publicly disclosed.
7.4 LEGAL CONDITIONS TO MERGER.
(a) Subject to the terms and conditions of this Agreement, each of
Cowlitz and Northern shall, and shall cause its Subsidiaries to, use their
reasonable best efforts (i) to take, or cause to be taken, all actions
necessary, proper or advisable to comply promptly with all legal requirements
which may be imposed on such party or its Subsidiaries with respect to the
Merger and, subject to the conditions set forth in Section 8 hereof, to
consummate the transactions contemplated by this Agreement and (ii) to obtain
(and to cooperate with the other party to
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obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and any other third party which is required to be
obtained by Northern or Cowlitz or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
(b) Subject to the terms and conditions of this Agreement, each of
Cowlitz and Northern agrees to use reasonable best efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable to consummate and make effective, as soon as practicable
after the date of this Agreement, the transactions contemplated hereby,
including, without limitation, using reasonable best efforts to (i) modify or
amend any contracts, plans or arrangements to which Cowlitz or Northern is a
party (to the extent permitted by the terms thereof) if necessary in order to
satisfy the conditions to closing set forth in Section 8 hereof, (ii) lift or
rescind any injunction or restraining order or other order adversely affecting
the ability of the parties to consummate the transactions contemplated hereby,
and (iii) defend any litigation seeking to enjoin, prevent or delay the
consummation of the transactions contemplated hereby or seeking material
damages.
7.5 AFFILIATES. Northern shall use its reasonable best efforts to cause
each director, executive officer and other person who is an "affiliate" (for
purposes of Rule 145 under the Securities Act) of Northern to deliver to
Cowlitz, as soon as practicable after the date of this Agreement, and in any
event prior to the date of the stockholders meeting called by Northern pursuant
to Section 7.3 hereof, a written agreement, in the form and substance reasonably
satisfactory to Cowlitz, relating to required transfer restrictions on the
Cowlitz Common Stock received by them in the Merger.
7.6 STOCK LISTING. Cowlitz shall use its best efforts to cause the shares
of Cowlitz Common Stock to be issued in the Merger to be approved for listing on
Nasdaq, subject to official notice of issuance, prior to the Effective Time.
7.7 EMPLOYEES; EMPLOYEE BENEFIT PLANS.
(a) Cowlitz shall, from and after the Effective Time, (i) comply with
the Plans in accordance with their terms, (ii) provide former employees of
Northern who remain as employees of Cowlitz or its Subsidiaries credit for years
of service with Northern prior to the Effective Time for the purpose of
eligibility and vesting and (iii) cause any and all pre-existing condition
limitations (to the extent such limitations did not apply to a pre-existing
condition under comparable Plans) and eligibility waiting periods under group
health plans of Cowlitz to be waived with respect to former employees of
Northern who remain as employees of Cowlitz or its Subsidiaries (and their
eligible dependents) and who become participants in such group health plans.
Nothing in this Section 7.7 shall be interpreted as preventing Cowlitz or its
Subsidiaries from amending, modifying or terminating any Plans or other
contracts, arrangements, commitments or understandings, in a manner consistent
with their terms and applicable law.
(b) Northern agrees to amend its 401(k) plan prior to the Effective
Time so that participant loans are no longer available.
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(c) If in the reasonable opinion of Cowlitz's outside counsel it is
necessary under the SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, SEC No-Action
Letter, Fed. Sec. L. Rep. (CCH) P. 77,515 (Jan. 12, 1999), for Cowlitz's Board
of Directors to approve the Merger to permit the acquisition of Cowlitz Common
Stock and options to purchase Cowlitz Common Stock by directors, officers or
employees of Northern who become directors or officers of Cowlitz following the
Effective Time to be exempt from Section 16(b) of the Exchange Act pursuant to
Rule 16b-3(d), then Cowlitz's Board of Directors shall adopt appropriate
resolutions prior to the Effective Time.
7.8 INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. Cowlitz shall
cooperate with the persons serving as officers and officers and directors of
Northern so that such persons are, to the extent available, covered by the
directors' and officers' liability insurance policy maintained by Northern (or a
replacement policy therefor) that serves to reimburse such officers and
directors with respect to claims against such officers and directors from facts
or events occurring at or prior to the Effective Time, which insurance shall
contain at least substantially the same coverage and amounts, and contain terms
and conditions substantially no less advantageous, as that coverage currently
provided by Northern; PROVIDED, HOWEVER, that in no event will Cowlitz be
required to expend in any one year an amount in excess of 100% of the annual
premiums currently paid by Northern for such insurance as set forth in Section
4.20 of the Northern Disclosure Schedule (the "INSURANCE AMOUNT") to maintain or
procure such coverage or pay for premiums with respect to any period more than
three years after the Effective Time unless, in either case, a policy providing
lifetime coverage is available for an amount not to exceed $20,000; PROVIDED
FURTHER, that if the parties are unable to maintain or obtain the insurance
called for by this Section 7.8, they shall use its reasonable best efforts to
obtain as much comparable insurance as is available for the Insurance Amount;
PROVIDED FURTHER, that such officers and directors of Northern may be required
to make application and provide customary representations and warranties to
Cowlitz's insurance carrier for the purpose of obtaining such insurance. Neither
Cowlitz nor Cowlitz Bank shall have an obligation to indemnify any of such
officers and directors except to the extent of such insurance coverage.
7.9 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement (including, without limitation, any merger between a Subsidiary of
Cowlitz and Northern) or to vest the Surviving Bank with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary action
as may be reasonably requested by Cowlitz.
7.10 ADVICE OF CHANGES. Cowlitz and Northern shall promptly advise the
other party of any change or event which, individually or in the aggregate with
other such changes or events, has a Material Adverse Effect on it or which it
believes would or would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants contained herein.
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7.11 SUBSEQUENT INTERIM AND ANNUAL FINANCIAL STATEMENTS.
(a) As soon as reasonably available, but in no event more than 45 days
after the end of each fiscal quarter (other than the fourth quarter of a fiscal
year) or 90 days after the end of each fiscal year ending after the date of this
Agreement, each party will deliver to the other party its Quarterly Report on
Form 10-QSB or Form 10-Q or its Annual Report on Form 10-KSB or Form 10-K, as
the case may be, as filed with the FDIC or the SEC under the Exchange Act.
(b) As soon as reasonably practicable and as soon as they are
available, but in no event more than 30 days, after the end of each calendar
month ending after the date of this Agreement, Northern shall furnish to Cowlitz
(i) financial statements (including balance sheet, statement of operations and
stockholders' equity) of Northern as of and for such month then ended, (ii)
servicing reports regarding cash flows, delinquencies and foreclosures on asset
pools serviced or master serviced by Northern, and (iii) any internal management
reports relating to the foregoing. All information furnished by Northern to
Cowlitz pursuant to this Section 7.11(b) shall be held in confidence by Cowlitz
to the extent required by, and in accordance with, the provisions of the
Confidentiality Agreement.
7.12 DISCLOSURE SUPPLEMENTS.
(a) On the date five (5) business days prior to the Effective Date,
Northern shall supplement or amend the Northern Disclosure Schedule with respect
to any matter existing or known to Northern which (i) if existing, occurring or
known at the date of this Agreement would have been required to be set forth or
described in the Northern Disclosure Schedule or (ii) is necessary to correct
any information therein which has been rendered inaccurate thereby so that the
Northern Disclosure Schedule is accurately supplemented or amended as of the
Effective Date. For the purpose of this Section 7.12(a), each reference to the
date of this Agreement or an earlier date, as the case may be, in the
representations and warranties of Northern contained in this Agreement shall be
deemed to refer to the Effective Date. Notwithstanding this provision, no
supplement or amendment to the Northern Disclosure Schedule shall be deemed to
modify any representation or warranty for the purpose of determining
satisfaction of the conditions set forth in Sections 8.2(a) and (b).
(b) On the date five (5) business days prior to the Effective Date,
Cowlitz shall supplement or amend the Cowlitz Disclosure Schedule with respect
to any matter existing or known to Cowlitz which (i) if existing, occurring or
known at the date of this Agreement would have been required to be set forth or
described in the Cowlitz Disclosure Schedule or (ii) is necessary to correct any
information therein which has been rendered inaccurate thereby so that the
Cowlitz Disclosure Schedule is accurately supplemented or amended as of the
Effective Date. For the purpose of this Section 7.12(b), each reference to the
date of this Agreement or an earlier date, as the case may be, in the
representations and warranties of Cowlitz contained in this Agreement shall be
deemed to refer to the Effective Date. Notwithstanding this provision, no
supplement or amendment to the Cowlitz Disclosure Schedule shall be deemed to
modify any
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representation or warranty for the purpose of determining satisfaction of the
conditions set forth in Section 8.3(a).
8. CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVALS. The Merger and this Agreement shall have
been approved and adopted by the requisite affirmative vote of the stockholders
of Northern entitled to vote thereon. The issuance of the shares of Cowlitz
Common Stock in the Merger shall have been approved by the requisite affirmative
vote of the shareholders of Cowlitz entitled to vote thereon. The Merger and
this Agreement shall have been approved by the sole shareholder of Cowlitz Bank.
(b) NASDAQ LISTING. The shares of Cowlitz Common Stock which shall be
issued to the stockholders of Northern upon consummation of the Merger shall
have been authorized for listing on Nasdaq, subject to official notice of
issuance.
(c) OTHER APPROVALS. All regulatory approvals required to consummate
the transactions contemplated hereby shall have been obtained and shall remain
in full force and effect and all statutory waiting periods in respect thereof,
shall have expired or been terminated (all such approvals and the expiration or
termination of all such waiting periods being referred to herein as the
"REQUISITE REGULATORY APPROVALS").
(d) S-4 EFFECTIVENESS. The S-4 shall have become effective under the
Securities Act, no stop order suspending the effectiveness of the S-4 shall have
been issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "INJUNCTION") preventing the consummation of the
Merger or any of the other transactions contemplated by this Agreement shall be
in effect. No statute, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits or makes illegal the consummation of the Merger.
8.2 CONDITIONS TO OBLIGATIONS OF COWLITZ. The obligations of Cowlitz to
effect the Merger are also subject to the satisfaction or waiver by Cowlitz at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Northern set forth in this Agreement shall be true and correct in all
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date; PROVIDED, HOWEVER, that for
purposes of determining the satisfaction of this condition, no effect shall be
given to any
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exception in such representations and warranties relating to materiality or a
Material Adverse Effect, and PROVIDED, FURTHER, that, for purposes of this
condition, such representations and warranties (other than the representations
and warranties contained in Section 4.2(a), which shall be true and correct in
all material respects) shall be deemed to be true and correct in all respects
unless the failure or failures of such representations and warranties to be so
true and correct, individually or in the aggregate, results or would reasonably
be expected to result in a Material Adverse Effect on Northern. Cowlitz shall
have received a certificate signed on behalf of Northern by the Chief Executive
Officer and Chief Financial Officer of Northern to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF NORTHERN. Northern shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Cowlitz shall have
received a certificate signed on behalf of Northern by the Chief Executive
Officer and the Chief Financial Officer of Northern to such effect.
(c) BURDENSOME CONDITION. There shall not be any action taken, or any
statute, rule, regulation, order, directive, memorandum of understanding or
similar restriction enacted, entered, enforced or deemed applicable to Northern
or the transactions contemplated by this Agreement, by any Governmental Entity,
in connection with the grant of a Requisite Regulatory Approval or otherwise,
which imposes any restriction or condition which would be reasonably likely to
have or result in a Material Adverse Effect on the Surviving Bank or Cowlitz or
prevent the Surviving Bank or Cowlitz from realizing substantially all of the
contemplated benefits of the transactions contemplated by this Agreement.
(d) DIRECTOR RESIGNATIONS. Cowlitz shall have received resignations
from each director of Northern, except to the extent otherwise requested by
Cowlitz.
(e) EMPLOYMENT AGREEMENT. The employment agreement entered into at the
date of this Agreement between Cowlitz Bank and the Northern executive set forth
on Annex 8.2(e) shall be in full force and effect and there shall have been no
default by such employee thereunder.
(f) NONCOMPETITION AGREEMENTS; OPTION AGREEMENTS. Each of the
noncompetition agreements and option agreements entered into at the date of this
Agreement between Cowlitz and the Northern directors set forth on Annex 8.2(f)
shall be in full force and effect and there shall have been no default by any
employee thereunder.
(g) DISSENTERS. The number of shares of Northern Common Stock with
respect to which dissenters' rights have been perfected and not withdrawn shall
not exceed 5% of the total outstanding shares of Northern Common Stock.
(h) LEGAL PROCEEDINGS. There shall not be any pending or threatened
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Northern,
Cowlitz or any Subsidiary of Cowlitz or challenging the validity or propriety of
the transactions contemplated by this Agreement as to
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which there is a significant possibility of an adverse determination and which,
if adversely determined, would, individually or in the aggregate, have or
reasonably be expected to have a Material Adverse Effect on Northern, Cowlitz or
the Surviving Bank.
(i) ORDERS. Cowlitz or Cowlitz Bank shall have received oral or
written assurances, in form and substance reasonably satisfactory to Cowlitz,
from the FDIC and/or the Oregon Director that the Orders shall not be applicable
to the Surviving Bank.
(j) YEAR 2000 PROBLEMS. Northern shall have addressed all Year 2000
Problems identified in the Northern Y2K Plan on or before December 31, 1999 and
as of the Closing Date, no Year 2000 Problem shall have occurred which,
individually or in the aggregate, have or would reasonably be expected to have a
Material Adverse Effect on Northern.
(k) DEPOSITS. At the Effective Time, Northern shall have total
deposits in an amount no less than 80% of the total deposits as of June 30,
1999, and such deposits shall bear substantially the same interest rates and be
in substantially the same mix as the deposits as of June 30, 1999, other than
such changes in the interest rates and/or mix that reflect changes affecting
commercial banking businesses generally.
(l) STOCKHOLDERS' EQUITY. The Total Stockholders' Equity of Northern
as of the Effective Time is at least $1,150,000.
(m) AUDITOR'S OPINION. Cowlitz shall have received an opinion of
Arthur Andersen LLP, dated as of the Effective Date, in a form and substance
reasonably satisfactory to Cowlitz, to the effect that amounts received by
Cowlitz Bank from the Escrow with respect to Reimbursable Losses will be treated
as income which would offset the relevant loss applicable to such Reimbursable
Losses.
(n) DIRECTORS' AND OFFICERS' INSURANCE. Cowlitz shall have received,
in a form and substance reasonably satisfactory to Cowlitz, the written
agreement of each of the persons serving as officers and directors of Polar
Beach immediately prior to the Effective Time to the terms and conditions set
forth in Section 7.8.
8.3 CONDITIONS TO OBLIGATIONS OF NORTHERN. The obligation of Northern to
effect the Merger is also subject to the satisfaction or waiver by Northern at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Cowlitz set forth in this Agreement shall be true and correct in all respects
as of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date; PROVIDED, HOWEVER, that for purposes of
determining the satisfaction of this condition, no effect shall be given to any
exception in such representations and warranties relating to materiality or a
Material Adverse Effect, and PROVIDED, FURTHER, that, for purposes of this
condition, such representations and warranties shall be deemed to be true and
correct in all respects unless the failure or failures of such representations
and warranties to be so true and correct, individually or in the aggregate,
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results or would reasonably be expected to result in a Material Adverse Effect
on Cowlitz and its Subsidiaries taken as a whole. Northern shall have received a
certificate signed on behalf of Cowlitz by the Chief Executive Officer and the
Chief Financial Officer of Cowlitz to the foregoing effect.
(b) PERFORMANCE OF OBLIGATIONS OF COWLITZ. Cowlitz shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and Northern shall have
received a certificate signed on behalf of Cowlitz by the Chief Executive
Officer and the Chief Financial Officer of Cowlitz to such effect.
(c) LEGAL PROCEEDINGS. There shall not be any pending or threatened
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Cowlitz or any
Subsidiary of Cowlitz or challenging the validity or propriety of the
transactions contemplated by this Agreement as to which there is a significant
possibility of an adverse determination and which, if adversely determined,
would, individually or in the aggregate, have or reasonably be expected to have
a Material Adverse Effect on Cowlitz or the Surviving Bank.
9. TERMINATION AND AMENDMENT
9.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time:
(a) by mutual consent of Cowlitz and Northern in a written instrument,
if the Board of Directors of each so determines;
(b) by either Cowlitz or Northern if (i) any Governmental Entity which
must grant a Requisite Regulatory Approval has denied approval of the Merger and
such denial has become final and nonappealable or (ii) any Governmental Entity
of competent jurisdiction shall have issued a final nonappealable order
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement;
(c) by either Cowlitz or Northern if the Effective Time shall not have
occurred on or before March 31, 2000, unless the failure of the Effective Time
to occur by such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements of
such party set forth herein; PROVIDED, HOWEVER, if the failure of the Effective
Time to occur by March 31, 2000 is solely due to the failure to satisfy the
condition set forth in Section 8.1(c), then the termination right set forth in
this Section 9.1(c) shall not be exercisable until June 30, 2000;
(d) by either Cowlitz or Northern (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained herein) if the other party shall have breached (i) any
of the covenants or agreements made by such other party herein or (ii) any of
the representations or warranties made by such other party herein, and in either
case, such breach (x) is not cured within 30 days following written notice to
the party committing such breach, or which breach, by its nature, cannot be
cured prior to the
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Closing and (y) would entitle the non-breaching party not to consummate the
transactions contemplated hereby under Section 8 hereof;
(e) by either Cowlitz or Northern if any approval of the stockholders
of Northern contemplated by this Agreement shall not have been obtained by
reason of the failure to obtain the required vote at a duly held meeting of
stockholders or at any adjournment or postponement thereof;
(f) by the Board of Directors of Cowlitz, if the Board of Directors of
Northern shall have withdrawn, modified or changed in a manner adverse to
Cowlitz its approval or recommendation of this Agreement and the transactions
contemplated hereby or if a Change of Control (as defined below) of Northern
shall have occurred;
(g) by either Cowlitz or Northern if any approval of the shareholders
of Cowlitz contemplated by this Agreement shall not have been obtained by reason
of the failure to obtain the required vote at a duly held meeting of
shareholders or at any adjournment or postponement thereof;
(h) by the Board of Directors of Northern, if the Board of Directors
of Cowlitz shall have withdrawn, modified or changed in a manner adverse to
Northern its approval or recommendation of the issuance of Cowlitz Common Stock
in the Merger
(i) by the Board of Directors of Cowlitz if a tender offer or exchange
offer for 25% or more of the outstanding shares of Northern Common Stock is
commenced (other than by Cowlitz or a Subsidiary thereof), and the Board of
Directors of Northern recommends that the stockholders of Northern tender their
shares in such tender or exchange offer or otherwise fails to recommend that
such stockholders reject such tender offer or exchange offer within 10 Business
Days after the commencement thereof (which, in the case of an exchange offer,
shall be the effective date of the registration statement relating to such
exchange offer);
(j) by the Board of Directors of Northern prior to the date on which
the stockholders of Northern shall have voted to approve this Agreement and the
Merger, if (i) any person or entity shall have made (and shall not have
withdrawn) a Takeover Proposal that is determined by the Northern Board of
Directors to constitute a Superior Proposal (as defined below), and (ii) the
Northern Board of Directors determines in its good faith reasonable judgment,
after consultation with outside counsel, that failure to terminate this
Agreement in order to accept the Superior Proposal would constitute a breach of
fiduciary duty; PROVIDED, HOWEVER, that Northern may not terminate this
Agreement pursuant to this Section 9.1(j) unless it has given Cowlitz 10
Business Days prior written notice of its intention to so terminate this
Agreement (which notice must specify all material terms and conditions of such
Superior Proposal and the identity of the person or persons (or entity or
entities, as the case may be) making such Superior Proposal and must be
accompanied by a copy of the agreements setting forth such Superior Proposal)
and has offered Cowlitz the opportunity to amend the terms and conditions of
this Agreement so that the failure of the Northern Board of Directors to
terminate this Agreement, as so amended, in order to accept the Superior
Proposal would not constitute a breach of fiduciary duty; and PROVIDED, FURTHER,
that the Northern Board of Directors may not
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terminate this Agreement pursuant to this Section 9.1(j) unless simultaneously
with such termination Northern pays to Cowlitz the amounts specified in Section
9.2(b) and enters into a definitive acquisition, merger or similar agreement to
effect and consummate such Superior Proposal with the person or entity making
such Superior Proposal.
For purposes of this Agreement, (A) a "SUPERIOR PROPOSAL" shall mean any BONA
FIDE Takeover Proposal made by an unaffiliated third party that the Northern
Board of Directors determines in its good faith reasonable judgment (based on
the advice of an independent financial advisor) represents superior value to the
holders of Northern Common Stock than the transactions contemplated by this
Agreement and for which any required financing is either committed or is, in the
good faith reasonable judgment of Northern's Board of Directors (based on the
advice of such independent financial advisor), reasonably capable of being
obtained on a timely basis by the person making such Takeover Proposal; and (B)
a "CHANGE OF CONTROL" shall mean the acquisition, directly or indirectly, by any
person or entity, together with its affiliates (as defined in Rule 12b-2 under
the Exchange Act), or any other group (as defined in Section 13(d) of the
Exchange Act), including through the formation of any such group or the
affiliation of any such persons or entities, of, or of the right to acquire or
direct the exercise of, 30% or more of the voting power of the capital stock of
Northern entitled to approve this Agreement and the Merger or to elect directors
of Northern; or
(k) by Cowlitz if a Subsequent Triggering Event (as defined in the
Stock Option Agreement) has occurred.
9.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement by either Cowlitz or
Northern as provided in Section 9.1, this Agreement shall forthwith become void
and have no effect, and none of Cowlitz, Northern, any of their respective
Subsidiaries or any of the officers or directors of any of them shall have any
liability of any nature whatsoever hereunder, or in connection with the
transactions contemplated hereby, except that (i) Sections 7.2(b), 9.2, and 10.2
shall survive any termination of this Agreement and (ii) notwithstanding
anything to the contrary contained in this Agreement, neither Cowlitz nor
Northern shall be relieved or released from any liabilities or damages arising
out of its willful breach of any provision of this Agreement.
(b) If this Agreement is terminated (i) by Cowlitz pursuant to Section
9.1(f) or (i), (ii) by Cowlitz or Northern pursuant to Section 9.1(e) because of
a failure to obtain the required approval of the stockholders of Northern after
a Takeover Proposal for Northern shall have been publicly disclosed, or any
person or entity shall have publicly disclosed an intention (whether or not
conditional) to make a Takeover Proposal, (iii) by Northern pursuant to Section
9.1(j), (iv) by Cowlitz pursuant to Section 9.1(k) or (v) by Cowlitz pursuant to
Section 9.1(d) if the breach giving rise to such termination was willful and, at
or prior to such termination, a Takeover Proposal shall have been made known to
Northern or shall have been publicly disclosed to Northern's stockholders, or
any person or entity shall have made known to Northern or otherwise publicly
disclosed an intention (whether or not conditional) to make a Takeover
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Proposal, and regardless of whether such Takeover Proposal shall have been
rejected by Northern or withdrawn prior to the time of such termination, then in
any such case Northern shall (A) pay to Cowlitz a termination fee of $425,000
and (B) in addition to such termination fee, reimburse Cowlitz and Cowlitz Bank
for their documented and reasonable out-of-pocket expenses incurred by each of
them in connection with this Agreement and the transactions contemplated hereby
(including without limitation, filing fees, printing costs and fees and expenses
of legal, accounting and financial advisors). In the event Cowlitz has exercised
all or any part of the Option, then Cowlitz shall not be entitled to the
termination fee set forth in (A) above, but Northern shall nonetheless pay any
reimbursement amounts due to Cowlitz and Cowlitz Bank in accordance with (B)
above.
(c) Any termination fee and/or reimbursement amount that becomes
payable pursuant to Section 9.2(b) shall be paid by wire transfer of immediately
available funds to an account designated by Cowlitz within one Business Day
following the termination of this Agreement, except that any termination fee or
reimbursement amount that is payable as a result of the termination of this
Agreement pursuant to Section 9.1(i) or Section 9.1(j) shall be paid
simultaneously with such termination. Notwithstanding the foregoing, in no event
shall Northern be obligated to pay any such fees to Cowlitz if immediately prior
to the termination hereof Northern was entitled to terminate this Agreement
pursuant to Section 9.1(d).
(d) Northern and Cowlitz agree that the agreements contained in
paragraphs (b) and (c) above are an integral part of the transactions
contemplated by this Agreement, that without such agreements Cowlitz would not
have entered into this Agreement, and that such amounts do not constitute a
penalty. If Northern fails to pay Cowlitz the amounts due under paragraph (b)
above within the time periods specified in paragraph (c) above, Northern shall
pay the costs and expenses (including legal fees and expenses) incurred by
Cowlitz in connection with any action, including the filing of any lawsuit,
taken to collect payment of such amounts, together with interest on the amount
of any such unpaid amounts at the publicly announced prime rate of The Chase
Manhattan Bank from the date such amounts were required to be paid.
9.3 AMENDMENT. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by their
respective Boards of Directors, at any time before or after approval of the
matters presented in connection with the Merger by the stockholders of Northern;
PROVIDED, HOWEVER, that after any approval of the transactions contemplated by
this Agreement by Northern's stockholders, there may not be, without further
approval of such stockholders, any amendment of this Agreement which reduces the
amount or changes the form of the consideration to be delivered to the Northern
stockholders hereunder other than as contemplated by this Agreement. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
hereto may, to the extent legally allowed, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto
49
<PAGE>
and (c) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party, but such extension or waiver or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
10. GENERAL PROVISIONS
10.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for those covenants and agreements contained herein and therein
which by their terms apply in whole or in part after the Effective Time.
10.2 EXPENSES. Except as provided in Section 9.2 hereof, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expense; PROVIDED,
HOWEVER, that notwithstanding anything to the contrary contained in this
Agreement, neither Cowlitz nor Northern shall be relieved or released from any
liabilities or damages arising out of its willful breach of any provision of
this Agreement.
10.3 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Cowlitz or Cowlitz Bank, to:
Cowlitz Bancorporation
927 Commerce Avenue
Longview, Washington 98632
Fax: (360) 423-5461
Attn: Charles W. Jarrett, President & COO
and:
Cowlitz Bank
927 Commerce Avenue
Longview, Washington 98632
Fax: (360) 423-5461
Attn: Charles W. Jarrett, President & CEO
50
<PAGE>
with a copy to:
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104
Fax: (206) 447-0849
Attn: Bernard L. Russell
(b) if to Northern, to:
Northern Bank of Commerce
1001 Southwest Fifth Avenue
Suite 250
Portland, Oregon 97204
Fax: (503) 306-5407
Attn: William Spicer, Chairman
with a copy to:
Davis Wright Tremaine LLP
Suite 2300
1300 SW Fifth Avenue
Portland, OR 97201
Fax (503) 778-5299
Attn: David C. Baca
10.4 INTERPRETATION. The words "hereof," "herein" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Article and
Section references are to this Agreement unless otherwise specified. Whenever
the words "include," "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation." The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. No provision of this Agreement shall be construed to require
Northern, Cowlitz or any of their respective Subsidiaries or affiliates to take
any action which would violate or conflict with any applicable law (whether
statutory or common), rule or regulation.
10.5 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
10.6 ENTIRE AGREEMENT. This Agreement (together with the documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior
51
<PAGE>
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, other than the Confidentiality Agreement.
10.7 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Washington, without regard to any
applicable conflicts of law.
10.8 SEVERABILITY. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
10.9 PUBLICITY. Cowlitz and Northern shall consult with each other before
issuing any press release with respect to the Merger or this Agreement and shall
not issue any such press release or make any such public statement without the
prior consent of the other party, which shall not be unreasonably withheld;
PROVIDED, HOWEVER, that a party may, without the prior consent of the other
party (but after prior consultation, to the extent practicable in the
circumstances) issue such press release or make such public statement as may
upon the advice of outside counsel be required by law or the rules and
regulations of Nasdaq. Without limiting the reach of the preceding sentence,
Cowlitz and Northern shall cooperate to develop all public announcement
materials and make appropriate management available at presentations related to
the transactions contemplated by this Agreement as reasonably requested by the
other party. In addition, Northern and its Subsidiaries shall (a) consult with
Cowlitz regarding communications with customers, stockholders, prospective
investors and employees related to the transactions contemplated hereby, (b)
provide Cowlitz with stockholder lists of Northern and (c) allow and facilitate
Cowlitz contact with stockholders of Northern and other prospective investors.
10.10 ASSIGNMENT; THIRD PARTY BENEFICIARIES. Neither this Agreement nor any
of the rights, interests or obligations of any party hereunder shall be assigned
by any of the parties hereto (whether by operation of law or otherwise) without
the prior written consent of the other party. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and permitted assigns. Except as
otherwise specifically provided in Section 7.8 hereof, this Agreement (including
the documents and instruments referred to herein) is not intended to confer upon
any person other than the parties hereto any rights or remedies hereunder.
52
<PAGE>
IN WITNESS WHEREOF, Cowlitz, Cowlitz Bank and Northern have caused this
Agreement to be executed by their respective officers hereunto duly authorized
as of the date first above written.
COWLITZ BANCORPORATION
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
COWLITZ BANK
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
NORTHERN BANK OF COMMERCE
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
53
<PAGE>
ANNEX 2.6(d)
Classification Description
- -------------- -----------
Special Mention Marginally acceptable business credit; some potential
weakness. Generally undesirable business constituting an
undue and unwarranted credit risk but not to the point of
justifying a Substandard classification. While the asset is
currently protected, it is potentially weak. No loss of
principal or interest is envisioned. Potential weaknesses
might include a weakening financial condition, an
unrealistic repayment program, inadequate sources of funds,
or lack of adequate collateral, credit information, or
documentation. Company is undistinguished and mediocre.
Substandard Unacceptable business credit, normal repayment in jeopardy.
While no loss of principal or interest is envisioned, there
is a positive and well-defined weakness which jeopardizes
collection of debt. The asset is inadequately protected by
the current sound net worth and paying capacity of the
obligor or pledged collateral. There may already have been a
partial loss of interest.
Doubtful Full payment questionable. Serious problems exist to the
point where a partial loss of principal is likely.
Weaknesses are so pronounced that on the basis of current
information, conditions and values, collection is highly
improbable.
Loss Expected total loss. An uncollectible asset or one of such
little value it does not warrant classification as an active
asset. Such an asset may, however, have recovery or salvage
value, but not to the point where a write-off should be
deferred, even though a partial recovery may occur in the
future.
<PAGE>
ANNEX 8.2(e)
EMPLOYMENT AGREEMENT UNDER SECTION 8.2(e)
John Holloway, Jr.
2
<PAGE>
ANNEX 8.2(f)
NONCOMPETITION AND OPTION AGREEMENTS UNDER SECTION 8.2(f)
John Holloway, Jr.
William Spicer
Chris Brown
John Walrod
Kurt Wollenberg
3
<PAGE>
AGREEMENT AND PLAN OF MERGER
By and Among
COWLITZ BANCORPORATION,
COWLITZ BANK
and
NORTHERN BANK OF COMMERCE
Dated as of September 14, 1999
<PAGE>
<TABLE>
<S> <C>
1. DEFINITIONS................................................................1
1.1 Defined Terms....................................................1
1.2 Other Definitional Provisions....................................3
2. THE MERGER.................................................................4
2.1 The Merger.......................................................4
2.2 Effective Time...................................................4
2.3 Effects of the Merger............................................4
2.4 Closing of the Merger............................................4
2.5 Conversion of Northern Common Stock..............................4
2.6 Merger Consideration.............................................6
2.7 Cowlitz Stock; Cowlitz Bank Stock................................8
2.8 Options..........................................................8
2.9 Charter..........................................................8
2.10 Bylaws..........................................................8
2.11 Board of Directors..............................................9
2.12 Officers........................................................9
2.13 Offices.........................................................9
2.14 Stock Option Agreement..........................................9
2.15 Tax Consequences................................................9
3. EXCHANGE OF SHARES.........................................................9
3.1 Cowlitz to Make Shares Available.................................9
3.2 Exchange of Certificates.........................................9
4. REPRESENTATIONS AND WARRANTIES OF NORTHERN................................14
4.1 Corporate Organization..........................................14
4.2 Capitalization..................................................14
4.3 Authority; No Violation.........................................15
4.4 Consents and Approvals..........................................16
4.5 Reports.........................................................17
4.6 Financial Statements............................................17
4.7 Broker's Fees...................................................17
4.8 Absence of Certain Changes or Events............................18
4.9 Legal Proceedings...............................................18
4.10 Taxes..........................................................18
4.11 Employees; Employee Benefit Plans..............................20
4.12 FDIC Reports...................................................22
4.13 Compliance with Applicable Law.................................22
4.14 Certain Contracts..............................................22
i
<PAGE>
4.15 Agreements with Regulatory Agencies............................23
4.16 Undisclosed Liabilities........................................23
4.17 Anti-takeover Provisions.......................................23
4.18 Northern Information...........................................23
4.19 Title to Property..............................................24
4.20 Insurance......................................................24
4.21 Environmental Liability........................................25
4.22 Opinion of Financial Advisor...................................25
4.23 Patents, Trademarks, Etc.......................................25
4.24 Loan Matters...................................................26
4.25 Powers of Attorney.............................................27
4.26 Benefit Plans Invested in Common Stock.........................27
4.27 Community Reinvestment Act Compliance..........................27
4.28 Year 2000 Compliance...........................................27
4.29 Labor Matters..................................................27
5. REPRESENTATIONS AND WARRANTIES OF COWLITZ.................................28
5.1 Corporate Organization..........................................28
5.2 Capitalization..................................................28
5.3 Authority; No Violation.........................................29
5.4 Consents and Approvals..........................................30
5.5 Reports.........................................................30
5.6 Financial Statements............................................31
5.7 Broker's Fees...................................................31
5.8 Absence of Certain Changes or Events............................31
5.9 Legal Proceedings...............................................32
5.10 SEC Reports....................................................32
5.11 Compliance with Applicable Law.................................32
5.12 Agreements with Regulatory Agencies............................32
5.13 Cowlitz Information............................................33
5.14 Year 2000 Compliance...........................................33
5.15 Opinion of Financial Advisor...................................33
6. COVENANTS RELATING TO CONDUCT OF BUSINESS.................................34
6.1 Conduct of Businesses Prior to the Effective Time...............34
6.2 Northern Forbearances...........................................34
6.3 No Fundamental Cowlitz Changes..................................37
7. ADDITIONAL AGREEMENTS.....................................................38
7.1 Regulatory Matters..............................................38
7.2 Access to Information...........................................38
7.3 Stockholder Approval............................................39
ii
<PAGE>
7.4 Legal Conditions to Merger......................................39
7.5 Affiliates......................................................40
7.6 Stock Listing...................................................40
7.7 Employees; Employee Benefit Plans...............................40
7.8 Indemnification; Directors'and Officers'Insurance...............41
7.9 Additional Agreements...........................................41
7.10 Advice of Changes..............................................41
7.11 Subsequent Interim and Annual Financial Statements.............42
7.12 Disclosure Supplements.........................................42
8. CONDITIONS PRECEDENT......................................................43
8.1 Conditions to Each Party's Obligation to Effect the Merger......43
8.2 Conditions to Obligations of Cowlitz............................43
8.3 Conditions to Obligations of Northern...........................45
9. TERMINATION AND AMENDMENT.................................................46
9.1 Termination.....................................................46
9.2 Effect of Termination...........................................48
9.3 Amendment.......................................................49
9.4 Extension; Waiver...............................................49
10. GENERAL PROVISIONS.......................................................50
10.1 Nonsurvival of Representations, Warranties and Agreements......50
10.2 Expenses.......................................................50
10.3 Notices........................................................50
10.4 Interpretation.................................................51
10.5 Counterparts...................................................51
10.6 Entire Agreement...............................................51
10.7 Governing Law..................................................52
10.8 Severability...................................................52
10.9 Publicity......................................................52
10.10 Assignment; Third Party Beneficiaries.........................52
</TABLE>
EXHIBITS
Exhibit 2.14 - Stock Option Agreement
Exhibit 3.2 - Escrow Agreement
ANNEXES
Annex 2.6(d) - Loan Classifications
Annex 2.7 - Surviving Bank's Capital
Annex 2.11 - Surviving Bank's Directors
Annex 2.12 - Surviving Bank's Officers
Annex 2.13 - Surviving Bank's Offices
iii
<PAGE>
Annex 8.2(e) - Employment Agreement under Section 8.2(e)
Annex 8.2(f) - Noncompetition and Option Agreements under
Section 8.2(f)
iv
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS OF COWLITZ BANCORPORATION AND SUBSIDIARIES AS OF SEPT 30,
1999 AND DEC 31, 1988 AND RELATED CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN
SHAREHOLDERS' EQUITY AND CASH FLOWS FOR EACH OF THE PERIOD ENDED SEPT 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 15,173
<INT-BEARING-DEPOSITS> 94,761
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,462
<INVESTMENTS-CARRYING> 4,564
<INVESTMENTS-MARKET> 4,370
<LOANS> 140,633
<ALLOWANCE> 2,094
<TOTAL-ASSETS> 182,746
<DEPOSITS> 122,860
<SHORT-TERM> 600
<LIABILITIES-OTHER> 1,120
<LONG-TERM> 26,327
0
0
<COMMON> 18,887
<OTHER-SE> 12,952
<TOTAL-LIABILITIES-AND-EQUITY> 182,746
<INTEREST-LOAN> 11,110
<INTEREST-INVEST> 517
<INTEREST-OTHER> 819
<INTEREST-TOTAL> 12,446
<INTEREST-DEPOSIT> 2,974
<INTEREST-EXPENSE> 1,216
<INTEREST-INCOME-NET> 8,256
<LOAN-LOSSES> 1,065
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,499
<INCOME-PRETAX> 892
<INCOME-PRE-EXTRAORDINARY> 892
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 551
<EPS-BASIC> .14
<EPS-DILUTED> .13
<YIELD-ACTUAL> 10.75
<LOANS-NON> 3,003
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,814
<CHARGE-OFFS> 895
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 2,094
<ALLOWANCE-DOMESTIC> 2,094
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
THE TRANSFER OF THIS AGREEMENT IS SUBJECT TO CERTAIN PROVISIONS CONTAINED
HEREIN AND TO RESALE RESTRICTIONS UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
STOCK OPTION AGREEMENT, dated September 14, 1999, between Northern Bank of
Commerce, a corporation chartered under the banking laws of the State of Oregon
("ISSUER"), and Cowlitz Bancorporation, a Washington corporation ("GRANTEE").
WITNESSETH:
WHEREAS, Grantee, Issuer and Cowlitz Bank have entered into an Agreement
and Plan of Merger of even date herewith (the "MERGER AGREEMENT"), which
agreement has been executed by the parties hereto immediately prior to this
Stock Option Agreement (this "AGREEMENT"); and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. GRANT OF OPTION.
(a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "OPTION") to purchase, subject to the terms hereof, up to an
aggregate of 243,893 fully paid and nonassessable shares of Issuer's Common
Stock, par value $1.00 per share ("COMMON STOCK"), at a price of $4.625 per
share (the "OPTION PRICE"); provided, however, that in no event shall the number
of shares of Common Stock for which this Option is exercisable exceed 19.9% of
the Issuer's issued and outstanding shares of Common Stock without giving effect
to any shares subject to or issued pursuant to the Option. The number of shares
of Common Stock that may be received upon the exercise of the Option and the
Option Price are subject to adjustment as herein set forth.
(b) In the event that any shares of Common Stock are either (i) issued
or otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5 hereof) or (ii) redeemed, repurchased, retired or otherwise cease to
be outstanding after the date of this Agreement, the number of shares of Common
Stock subject to the Option shall be increased or decreased, as appropriate, so
that, after such issuance or such redemption, repurchase, retirement or other
action, such number equals 19.9% of the number of shares of Common Stock then
issued and outstanding without giving effect to any shares subject to or issued
pursuant to the Option. Nothing contained in this Section 1(b) or elsewhere in
this Agreement shall be deemed to authorize Issuer or Grantee to issue, redeem,
repurchase or retire shares in breach of any provision of the Merger Agreement.
<PAGE>
2. EXERCISE OF OPTION.
(a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, and from time to time, if both an Initial Triggering Event (as
hereinafter defined) and a Subsequent Triggering Event (as hereinafter defined)
shall have occurred prior to the occurrence of an Exercise Termination Event (as
hereinafter defined); provided, that the Holder shall have sent written notice
of such exercise (as provided in subsection (e) of this Section 2) within 90
days following such Subsequent Triggering Event (or such longer period as
provided in Section 10); provided further, however, that if the Option cannot be
exercised on any day because of any injunction, order or similar restraint
issued by a court of competent jurisdiction, the period during which the Option
may be exercised shall be extended so that the Option shall expire no earlier
than on the tenth business day after such injunction, order or restraint shall
have been dissolved or when such injunction, order or restraint shall have
become permanent and no longer subject to appeal, as the case may be. Each of
the following shall be an "EXERCISE TERMINATION EVENT": (i) the Effective Time
(as defined in the Merger Agreement); (ii) termination of the Merger Agreement
in accordance with the provisions thereof if such termination occurs prior to
the occurrence of an Initial Triggering Event, except a termination by Grantee
pursuant to Section 9.1(d) of the Merger Agreement (unless the breach by Issuer
giving rise to such right of termination is non-volitional); (iii) the passage
of 12 months after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a termination by
Grantee pursuant to Section 9.1(d) of the Merger Agreement (unless the breach by
Issuer giving rise to such right of termination is non-volitional); provided,
that if the Initial Triggering Event continues or occurs beyond such termination
and prior to the passage of such 12-month period, the Exercise Termination Event
shall be 12 months from the expiration of the Last Triggering Event (as
hereinafter defined) but in no event more than 18 months after such termination;
or (iv) delivery of a written request for payment of termination fees pursuant
to Section 9.2 of the Merger Agreement (provided that no such Exercise
Termination Event shall be deemed to have occurred unless such termination fees
and any reimbursement amounts are paid in accordance with such Section 9.2). For
purposes of this Agreement, (A) "HOLDER" shall mean the holder or holders of the
Option and (B) "Last Triggering Event" shall mean the last Initial Triggering
Event to expire. Notwithstanding anything to the contrary herein, (i) the Option
may not be exercised at any time when Grantee shall be in breach of any of its
representations, warranties, covenants or agreements contained in the Merger
Agreement such that Issuer would be entitled to terminate the Merger Agreement
pursuant to Section 9.1(d) thereof and (ii) this Agreement shall automatically
terminate upon the termination of the Merger Agreement pursuant to Section
9.1(d) thereof as a result of the breach by Grantee of its representations,
warranties, covenants or agreements contained in the Merger Agreement.
(b) The term "INITIAL TRIGGERING EVENT" shall mean any of the
following events or transactions occurring after the date hereof:
(i) Issuer or any of its Significant Subsidiaries, as defined in
Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (each an "ISSUER SUBSIDIARY"), without having received Grantee's
prior written consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as hereinafter defined) with any person (the
2
<PAGE>
term "person" for purposes of this Agreement having the meaning assigned thereto
in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "1934 ACT"), and the rules and regulations thereunder) other than
Grantee or any of its Subsidiaries (each a "GRANTEE SUBSIDIARY") or the Board of
Directors of Issuer shall have recommended that the stockholders of Issuer
approve or accept any Acquisition Transaction with any person other than Grantee
or a Subsidiary of Grantee. For purposes of this Agreement, "ACQUISITION
TRANSACTION" shall mean (x) a merger or consolidation, or any similar
transaction, involving Issuer or any Issuer Subsidiary, (y) a purchase, lease or
other acquisition or assumption of all or a substantial portion of the assets or
deposits of Issuer or any Issuer Subsidiary, or (z) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of securities representing 10% or more of the voting power of Issuer;
provided, however, that in no event shall any merger, consolidation, purchase or
similar transaction involving only Issuer and one or more of Issuer Subsidiaries
or involving only two or more of Issuer Subsidiaries, be deemed to be an
Acquisition Transaction, provided that any such transaction is not entered into
in violation of the terms of the Merger Agreement;
(ii) (A) Issuer or any Issuer Subsidiary, without having received
Grantee's prior written consent, shall have authorized, recommended, proposed or
publicly announced its intention to authorize, recommend or propose, to engage
in an Acquisition Transaction with any person other than Grantee or a Grantee
Subsidiary, or (B) the Board of Directors of Issuer shall have failed to make
its recommendation that the stockholders of Issuer approve the transactions
contemplated by the Merger Agreement, or (C) the Board of Directors of Issuer
shall have publicly withdrawn or modified, or publicly announced its interest to
withdraw or modify, in any manner adverse to Grantee, its recommendation that
the stockholders of Issuer approve the transactions contemplated by the Merger
Agreement;
(iii) Any person, other than Grantee, any Grantee Subsidiary or
any Issuer Subsidiary acting in a fiduciary capacity in the ordinary course of
its business, shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common Stock,
except that the beneficial ownership by Irwin Holtzman and his affiliates of up
to 15% of the outstanding shares of Common Stock shall be excluded from this
clause (iii) (the term "BENEFICIAL OWNERSHIP" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the 1934 Act, and the
rules and regulations thereunder);
(iv) After any person other than Grantee or any Grantee
Subsidiary shall have made a bona fide proposal to Issuer or its stockholders by
public announcement or written communication that is or becomes the subject of
public disclosure to engage in an Acquisition Transaction, the approval of
Issuer's stockholders required by Section 8.1(a) of the Merger Agreement is not
obtained;
(v) After an overture is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction (whether such overture
becomes the subject of public disclosure or not), Issuer shall have willfully
breached any covenant or obligation contained in the Merger Agreement or
willfully breached any representation or warranty
3
<PAGE>
contained in the Merger Agreement and such breach (x) would entitle Grantee to
terminate the Merger Agreement and (y) shall not have been cured prior to the
Notice Date (as defined below);
(vi) Any person other than Grantee or any Grantee Subsidiary,
other than in connection with a transaction to which Grantee has given its prior
written consent, shall have filed an application or notice with the Federal
Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board, or other
federal or state bank regulatory authority, which application or notice has been
accepted for processing, for approval to engage in an Acquisition Transaction;
or
(vii) Any person other than Grantee or any Grantee Subsidiary
commences or publicly announces its intention to commence a tender offer or
exchange offer for securities representing 10% or more of the voting power of
Issuer.
(c) The term "SUBSEQUENT TRIGGERING EVENT" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person of beneficial ownership of 25%
or more of the then outstanding shares of Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
Section 2(b)(i) hereof, except that the percentage referred to in subsection (z)
thereof shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Ini ial Triggering Event or Subsequent Triggering Event of which it has
notice, it being understood that the giving of such notice by Issuer shall not
be a condition to the right of the Holder to exercise the Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being herein
referred to as the "NOTICE DATE") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "CLOSING DATE"); provided that if prior
notification to or approval of any regulatory or antitrust agency is required in
connection with such purchase, the Holder shall promptly file the required
notice or application for approval, shall promptly notify Issuer of such filing
and shall expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which any
required notification periods have expired or been terminated or such approvals
have been obtained and any requisite waiting period or periods shall have
passed. Any exercise of the Option shall be deemed to occur on the Notice Date
relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
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(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Agreement for an Option evidencing the rights of
the Holder thereof to purchase the balance of the shares purchasable hereunder,
and the Holder shall deliver to Issuer this Agreement and a letter agreeing that
the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.
(h) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. CERTAIN ISSUER ACTIONS. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock so that the Option may be exercised without
additional authorization of Common Stock after giving effect to all other
options, warrants, convertible securities and other rights to purchase Common
Stock; (ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other
voluntary act, avoid or seek to avoid the observance or performance of any of
the covenants, stipulations or conditions to be observed or performed
hereunder by Issuer; (iii) promptly to take all action as may from time to
time be required (including (x) complying with all premerger notification,
reporting and waiting period requirements specified in 15 U.S.C. Section 18a
and regulations promulgated thereunder and (y) in the event, under any
federal or state law or regulation, prior approval of or notice to any
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or notices
and providing such information to such regulatory authority as they may
require) in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto; and (iv)
promptly to take all action provided herein to protect the rights of the
Holder against dilution.
4. EXCHANGE. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase, on the same terms and subject to the same conditions as are
set forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "AGREEMENT" and "OPTION" as used herein include
any Stock Option Agreements and related Options for which this Agreement (and
the Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or
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destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Agreement, if mutilated, Issuer will execute and deliver a
new Agreement of like tenor and date. Any such new Agreement executed and
delivered shall constitute an additional contractual obligation on the part of
Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.
5. ADJUSTMENT OF SHARES. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option pursuant
to Section 1 of this Agreement, the number of shares of Common Stock purchasable
upon the exercise of the Option and the Option Price shall be subject to
adjustment from time to time as provided in this Section 5. In the event of any
change in, or distributions in respect of, the Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares, distributions on or in respect of the Common
Stock that would be prohibited under the terms of the Merger Agreement, or the
like, the type and number of shares of Common Stock purchasable upon exercise
hereof and the Option Price shall be appropriately adjusted in such manner as
shall fully preserve the economic benefits provided hereunder and proper
provision shall be made in any agreement governing any such transaction to
provide for such proper adjustment and the full satisfaction of Issuer's
obligations hereunder.
6. REGISTRATION RIGHTS. If the Option Shares (as hereinafter defined) are
not exempt from the registration requirements of the Securities Act of 1933, as
amended (the "1933 ACT"), upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the request
of Grantee (whether on its own behalf or on behalf of any subsequent holder of
this Option (or part thereof) or any of the shares of Common Stock issued
pursuant hereto) deliver within six months of such Subsequent Triggering Event
(or such longer period as provided in Section 10), promptly prepare, file and
keep current a shelf registration statement under the 1933 Act covering this
Option and any shares issued and issuable pursuant to this Option and shall use
its reasonable best efforts to cause such registration statement to become
effective and remain current in order to permit the sale or other disposition of
this Option and any shares of Common Stock issued upon total or partial exercise
of this Option ("OPTION SHARES") in accordance with any plan of disposition
requested by Grantee, unless, in the written opinion of securities counsel to
Issuer, addressed to Grantee or any transferee, registration under the 1933 Act
or any other applicable federal or state securities laws is not otherwise
required for the sale and distribution of such Option Shares. Issuer will use
its reasonable best efforts to cause such registration statement first to become
effective and thereafter to remain effective for such period not in excess of
180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
foregoing notwithstanding, if, at the time of any request by Grantee for
registration of the Option or Option Shares as provided above, Issuer is in
registration with respect to an underwritten public offering of shares of Common
Stock, and if in the good faith judgment of the managing underwriter or managing
underwriters, or, if none, the sole underwriter or underwriters, of such
offering the inclusion of the Option or Option Shares would interfere with the
successful marketing of the shares of Common Stock offered by Issuer, the number
of Option Shares otherwise to be covered in the registration statement
contemplated
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hereby may be reduced; provided, however, that after any such required reduction
the number of Option Shares to be included in such offering for the account of
the Holder shall constitute at least 25% of the total number of shares to be
sold by the Holder and Issuer in the aggregate; and provided further, however,
that if such reduction occurs, then Issuer shall file a registration statement
for the balance as promptly as practicable and no reduction shall thereafter
occur. Each such Holder shall provide all information reasonably requested by
Issuer for inclusion in any registration statement to be filed hereunder. If
requested by any such Holder in connection with such registration, Issuer shall
become a party to any underwriting agreement relating to the sale of such
shares, but only to the extent of obligating itself in respect of
representations, warranties, indemnities and other agreements customarily
included in secondary offering underwriting agreements for Issuer.
Upon receiving any request under this Section 6 from any Holder, Issuer
agrees to send a copy thereof to any other person known to Issuer to be entitled
to registration rights under this Section 6, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than two registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Grantee as a result of any assignment or division of this Agreement.
7. REPURCHASE RIGHT.
(a) (i) Following the occurrence of a Repurchase Event (as defined
below), and following a request of the Holder delivered prior to an Exercise
Termination Event, Issuer (or any successor thereto) shall repurchase the Option
from the Holder at a price (the "OPTION REPURCHASE PRICE") equal to the amount
by which (A) the Market/Offer Price (as defined below) exceeds (B) the Option
Price, multiplied by the number of shares for which this Option may then be
exercised; and (ii) at the request of the owner of Option Shares from time to
time (the "OWNER"), delivered within 90 days of such occurrence (or such longer
period as provided in Section 10), Issuer shall repurchase such number of the
Option Shares from the Owner as the Owner shall designate at a price (the
"OPTION SHARE REPURCHASE PRICE") equal to the Market/Offer Price multiplied by
the number of Option Shares so designated.
The term "MARKET/OFFER PRICE" shall mean the highest of (i) the price per
share of Common Stock at which a tender offer or exchange offer therefor has
been made, (ii) the price per share of Common Stock to be paid by any third
party pursuant to an agreement with Issuer, (iii) the highest closing price for
shares of Common Stock within the six-month period immediately preceding the
date the Holder gives notice of the required repurchase of the Option or the
Owner gives notice of the required repurchase of Option Shares, as the case
maybe, or (iv) in the event of a sale of all or a substantial portion of
Issuer's assets, the sum of the price paid in such sale for such assets and the
current market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Common Stock of Issuer outstanding at the time of such sale.
In determining the Market/Offer Price, the value of consideration other than
cash shall be determined by a nationally
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recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to Issuer.
(b) The Holder or the Owner, as the case may be, may exercise its
right to require Issuer to repurchase the Option or any Option Shares pursuant
to this Section 7 by surrendering for such purpose to Issuer, at its principal
office, this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that the Holder or the Owner,
as the case may be, elects to require Issuer to repurchase the Option and/or the
Option Shares in accordance with the provisions of this Section 7. As promptly
as practicable, and in any event within five business days after the surrender
of the Option and/or certificates representing Option Shares and the receipt of
such notice or notices relating thereto, Issuer shall deliver or cause to be
delivered to the Holder the Option Repurchase Price and/or to the Owner the
Option Share Repurchase Price therefor or the portion thereof that Issuer is not
then prohibited under applicable law and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation from repurchasing the Option and/or the Option Shares in full, Issuer
shall immediately so notify the Holder and/or the Owner and thereafter deliver
or cause to be delivered, from time to time, to the Holder and/or the Owner, as
appropriate, the portion of the Option Repurchase Price and the Option Share
Repurchase Price, respectively, that it is no longer prohibited from delivering,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at anytime after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 7 is prohibited
under applicable law or regulation or through commencement of regulatory
enforcement action from delivering to the Holder and/or the Owner, as
appropriate, the Option Repurchase Price and the Option Share Repurchase Price,
respectively, in full (and Issuer hereby undertakes to use its best efforts to
obtain all required regulatory and legal approvals and to file any required
notices as promptly as practicable in order to accomplish such repurchase), the
Holder or the Owner may revoke its notice of repurchase of the Option or the
Option Shares either in whole or to the extent of the prohibition, whereupon, in
the latter case, Issuer shall promptly (i) deliver to the Holder and/or the
Owner, as appropriate, that portion of the Option Repurchase Price or the Option
Share Repurchase Price that Issuer is not prohibited from delivering; and (ii)
deliver, as appropriate, either (A) to the Holder, a new Agreement evidencing
the right of the Holder to purchase that number of shares of Common Stock
obtained by multiplying the number of shares of Common Stock for which the
surrendered Agreement was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Option Repurchase Price
less the portion thereof theretofore delivered to the Holder and the denominator
of which is the Option Repurchase Price, or (B) to the Owner, a certificate for
the Option Shares it is then so prohibited from repurchasing.
(d) For purposes of this Section 7, a Repurchase Event shall be deemed
to have occurred (i) upon the consummation of any merger, consolidation or
similar transaction involving Issuer or any purchase, lease or other acquisition
of all or a substantial portion of the assets of Issuer, other than any such
transaction which would not constitute an Acquisition Transaction pursuant to
the provisos to the final sentence of Section 2(b)(i) hereof or (ii) upon the
acquisition by any person of beneficial ownership of 50% or more of the then
outstanding
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shares of Common Stock, provided that no such event shall constitute a
Repurchase Event unless a Subsequent Triggering Event shall have occurred prior
to an Exercise Termination Event.
8. SUBSTITUTE OPTION.
(a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding voting shares and voting share
equivalents of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "SUBSTITUTE
OPTION"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
(b) The following terms have the meanings indicated:
(1) "ACQUIRING CORPORATION" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving person, or (iii) the transferee of all or substantially all of
Issuer's assets.
(2) "SUBSTITUTE COMMON STOCK" shall mean the common stock issued
by the issuer of the Substitute Option upon exercise of the Substitute
Option.
(3) "ASSIGNED VALUE" shall mean the Market/Offer Price, as
defined in Section 7.
(4) "AVERAGE PRICE" shall mean the average closing price of a
share of the Substitute Common Stock for the one year immediately preceding
the consolidation, merger or sale in question, but in no event higher than
the closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person, as
the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided, that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to the Holder. The
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issuer of the Substitute Option shall also enter into an agreement with the then
Holder or Holders of the Substitute Option in substantially the same form as
this Agreement (after giving effect for such purpose to the provisions of
Section 9), which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to the Assigned Value multiplied
by the number of shares of Common Stock for which the Option is then
exercisable, divided by the Average Price. The exercise price of the Substitute
Option per share of Substitute Common Stock shall then be equal to the Option
Price multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock for which the Option is then exercisable and the
denominator of which shall be the number of shares of Substitute Common Stock
for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing subsections, shall
the Substitute Option be exercisable for more than 19.9% of the shares of
Substitute Common Stock outstanding prior to exercise of the Substitute Option.
In the event that the Substitute Option would be exercisable for more than
19.9% of the shares of Substitute Common Stock outstanding prior to exercise but
for this subsection (e), the issuer of the Substitute Option (the "SUBSTITUTE
OPTION ISSUER") shall make a cash payment to the Holder equal to the excess of
(i) the value of the Substitute Option without giving effect to the limitation
in this subsection (e) over (ii) the value of the Substitute Option after giving
effect to the limitation in this subsection (e). This difference in value shall
be determined by a nationally recognized investment banking firm selected by the
Holder or the Owner, as the case may be, and reasonably acceptable to the
Acquiring Corporation.
(f) Issuer shall not enter into any transaction described in
subsection (a) of this Section 8 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. REPURCHASE OF SUBSTITUTE OPTION.
(a) At the request of the holder of the Substitute Option (the
"SUBSTITUTE OPTION HOLDER") delivered prior to an Exercise Termination Event,
the Substitute Option Issuer shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "SUBSTITUTE OPTION REPURCHASE PRICE")
equal to the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised, and at the request of the owner (the "SUBSTITUTE SHARE
OWNER") of shares of Substitute Common Stock (the "SUBSTITUTE SHARES"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price (the
"SUBSTITUTE SHARE REPURCHASE PRICE") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "HIGHEST
CLOSING PRICE" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder
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gives notice of the required repurchase of the Substitute Option or the
Substitute Share Owner gives notice of the required repurchase of the Substitute
Shares, as applicable.
(b) The Substitute Option Holder or the Substitute Share Owner, or
both, as the case may be, may exercise its respective right to require the
Substitute Option Issuer to repurchase the Substitute Option or the Substitute
Shares, as applicable, pursuant to this Section 9 by surrendering for such
purpose to the Substitute Option Issuer, at its principal office, the agreement
for such Substitute Option (or, in the absence of such an agreement, a copy of
this Agreement) and/or certificates for Substitute Shares accompanied by a
written notice or notices stating that the Substitute Option Holder or the
Substitute Share Owner, as the case may be, elects to require the Substitute
Option Issuer to repurchase the Substitute Option and/or the Substitute Shares
in accordance with the provisions of this Section 9. As promptly as practicable,
and in any event within five business days after the surrender of the Substitute
Option and/or certificates representing Substitute Shares and the receipt of
such notice or notices relating thereto, the Substitute Option Issuer shall
deliver or cause to be delivered to the Substitute Option Holder the Substitute
Option Repurchase Price and/or to the Substitute Share Owner the Substitute
Share Repurchase Price therefor or, in either case, the portion thereof which
the Substitute Option Issuer is not then prohibited under applicable law and
regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited
under applicable law or regulation or through commencement of regulatory
enforcement action from repurchasing the Substitute Option and/or the Substitute
Shares in part or in full, the Substitute Option Issuer following a request for
repurchase pursuant to this Section 9 shall immediately so notify the Substitute
Option Holder and/or the Substitute Share Owner and thereafter deliver or cause
to be delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and Substitute Share Repurchase Price, respectively, which it
is no longer prohibited from delivering, within five business days after the
date on which the Substitute Option Issuer is no longer so prohibited; provided,
however, that if the Substitute Option Issuer is at any time after delivery of a
notice of repurchase pursuant to subsection (b) of this Section 9 prohibited
under applicable law or regulation or through commencement of regulatory
enforcement action from delivering to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price
and the Substitute Share Repurchase Price, respectively, in full (and the
Substitute Option Issuer shall use its best efforts to receive all required
regulatory and legal approvals as promptly as practicable in order to accomplish
such repurchase), the Substitute Option Holder or the Substitute Share Owner may
revoke its notice of repurchase of the Substitute Option or the Substitute
Shares either in whole or to the extent of the prohibition, whereupon, in the
latter case, the Substitute Option Issuer shall promptly (i) deliver to the
Substitute Option Holder or the Substitute Share Owner, as appropriate, that
portion of the Substitute Option Repurchase Price or the Substitute Share
Repurchase Price that the Substitute Option Issuer is not prohibited from
delivering; and (ii) deliver, as appropriate, either (A) to the Substitute
Option Holder, a new Substitute Option evidencing the right of the Substitute
Option Holder to purchase that number of shares of the Substitute Common Stock
obtained by multiplying the number of shares of the Substitute Common Stock for
which the surrendered
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Substitute Option was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Substitute Option
Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the
Substitute Shares it is then so prohibited from repurchasing.
10. EXTENSION OF CERTAIN PERIODS. The 90-day or six-month period, as the
case may be, for exercise of certain rights under each of Sections 2, 6, 7 and
14 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights (for so long as the Holder, Owner,
Substitute Option Holder or Substitute Share Owner, as the case may be, is using
its reasonable best efforts to obtain such regulatory approval) and for the
expiration of all statutory waiting periods; and (ii) to the extent necessary to
avoid liability under Section 16(b) of the 1934 Act by reason of such exercise.
11. ISSUER REPRESENTATIONS AND WARRANTIES. Issuer hereby represents and
warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all action (including, if required, redeeming all
of the Rights or amending or terminating the Polar Bear Rights Agreement) so
that the entering into of this Agreement, the acquisition of shares of Common
Stock hereunder and the other transactions contemplated hereby do not and will
not result in the grant of any rights to any person under the Polar Bear Rights
Agreement or enable or require the Polar Bear Rights to be exercised,
distributed or triggered.
12. GRANTEE REPRESENTATIONS AND WARRANTIES. Grantee hereby represents and
warrants to Issuer that:
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(a) Grantee has all requisite corporate power and authority to enter
into this Agreement and, subject to any approvals or consents referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Grantee. This Agreement has been duly executed and delivered by Grantee.
(b) The Option is not being, and any shares of Common Stock or other
securities acquired by Grantee upon exercise of the Option will not be, acquired
with a view to the public distribution thereof and will not be transferred or
otherwise disposed of except in a transaction registered or exempt from
registration under the 1933 Act.
13. LIMITATION ON TOTAL PROFIT.
(a) Notwithstanding anything to the contrary contained herein, in no
event shall Grantee's Total Profit (as defined in subsection (c) of this Section
13) exceed $425,000.
(b) Notwithstanding anything to the contrary contained herein, the
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined in subsection (d) of
this Section 13) of more than $425,000.
(c) As used herein, the term "TOTAL PROFIT" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7 hereof, (ii) (x) the amount received by Grantee pursuant to
Issuer's repurchase of Option Shares pursuant to Section 7 hereof, less (y)
Grantee's purchase price for such Option Shares, (iii) (x) the net cash amounts
received by Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to any
unaffiliated party, less (y) Grantee's purchase price for such Option Shares,
(iv) any amounts received by Grantee on the transfer of the Option (or any
portion thereof) to any unaffiliated party, (v) any equivalent amount with
respect to the Substitute Option, including pursuant to Section 8(e); and (vi)
the amount of any termination fee (which is exclusive of any reimbursement
amounts) actually received by Grantee pursuant to Section 9.2 of the Merger
Agreement. For purposes of this Section 13, references to Grantee shall be
deemed to include references to any affiliate of the Grantee.
(d) As used herein, the term "NOTIONAL TOTAL PROFIT" with respect to
any number of shares as to which Grantee may propose to exercise the Option
shall be the Total Profit determined as of the date of such proposed exercise
assuming that the Option were exercised on such date for such number of shares
and assuming that such shares, together with all other Option Shares held by
Grantee and its affiliates as of such date, were sold for cash at the closing
market price for the Common Stock as of the close of business on the preceding
trading day (less customary brokerage commissions).
14. ASSIGNMENT. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering
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Event shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part its
rights and obligations hereunder within 90 days following such Subsequent
Triggering Event (or such longer period as provided in Section 10); provided,
however, that until the date 15 days following the date on which the Federal
Reserve Board, the FDIC, and/or any other federal or state bank regulatory
authority, as applicable, approves an application by Grantee to acquire the
shares of Common Stock subject to the Option (if such approval is required by
law), Grantee may not assign its rights under the Option except in (i) a widely
dispersed public distribution, (ii) a private placement in which no one person
acquires the right to purchase in excess of 2% of the voting shares of Issuer,
(iii) an assignment to a single person (e.g., a broker or investment banker) for
the purpose of conducting a widely dispersed public distribution on Grantee's
behalf, or (iv) any other manner approved by the Federal Reserve Board, the
FDIC, and/or any other federal or state bank regulatory authority, as
applicable.
15. FILINGS. Each of Grantee and Issuer will use its best efforts to make
all filings with, and to obtain consents of, all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement, including without limitation making application to list the
shares of Common Stock issuable hereunder on the Nasdaq Stock Market upon
official notice of issuance and applying to the Federal Reserve Board, the FDIC,
and/or any other federal or state bank regulatory authority, as applicable, for
approval to acquire the shares issuable hereunder, but Grantee shall not be
obligated to apply to state banking authorities for approval to acquire the
shares of Common Stock issuable hereunder until such time, if ever, as it deems
appropriate to do so.
16. EQUITABLE REMEDIES. The parties hereto acknowledge that damages would
be an inadequate remedy for a breach of this Agreement by either party hereto
and that the obligations of the parties hereto shall be enforceable by either
party hereto through injunctive or other equitable relief.
17. VALIDITY. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or 5
hereof), it is the express intention of Issuer to allow the Holder to acquire or
to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
18. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be deemed to have been duly given when delivered
in person, by cable, telegram, telecopy or telex, or by registered or certified
mail (postage prepaid, return receipt requested) at the respective addresses of
the parties set forth in the Merger Agreement.
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19. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oregon, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
20. COUNTERPARTS. This Agreement may be executed in two counterparts, each
of which shall be deemed to be an original, but all of which shall constitute
one and the same agreement.
21. EXPENSES. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees and expenses of its own financial consultants, investment bankers,
accountants and counsel.
22. ENTIRE AGREEMENT. Except as otherwise expressly provided herein or in
the Merger Agreement, this Agreement contains the entire agreement between the
parties with respect to the transactions contemplated hereunder and supersedes
all prior arrangements or understandings with respect thereof, written or oral.
The terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective successors and permitted
assigns. Nothing in this Agreement, expressed or implied, is intended to confer
upon any party, other than the parties hereto, and their respective successors
and permitted assigns, any rights, remedies, obligations or liabilities under or
by reason of this Agreement, except as expressly provided herein.
23. CAPITALIZED TERMS. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
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NORTHERN BANK OF COMMERCE
By:
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Name:
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Title:
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COWLITZ BANCORPORATION
By:
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Name:
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Title:
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