POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET, N.E.
SIXTEENTH FLOOR
ATLANTA, GEORGIA 30303
(404 572-6600)
September 23, 1998
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: FLAG Financial Corporation - Registration Statement on Form S-4
Ladies and Gentlemen:
As counsel to FLAG Financial Corporation, a Georgia corporation (the
"Company"), we enclose for filing with the Commission under the Securities Act
of 1933, as amended, the Company's Registration Statement on Form S-4
registering 445,500 shares of its Common Stock for issuance in connection with
the proposed merger of Heart of Georgia Bancshares, Inc. with and into the
Company.
No distribution of the Registration Statement or the related Proxy
Statement/Prospectus will be made prior to effectiveness of the Registration
Statement, except that, as noted below, copies will be furnished to certain bank
regulatory agencies pursuant to their filing requirements.
The transactions described in the Registration Statement are also
subject to certain filings with and approvals by the Federal Reserve Board and
the Georgia Department of Banking and Finance. We will advise you promptly if a
favorable approval is not obtained from any of these entities, although no
difficulty is expected in obtaining such approvals.
If you have any questions or comments concerning the Registration
Statement, please call me at 404/572-4514 or Kathryn L. Knudson at 404/572-6952.
Our fax number is 404/572-5954 or 404/572-6999.
Sincerely,
/s/ Lynn M. Sumlin
For POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
LMS/jtc
Enclosures
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1998
REGISTRATION NO. 333-_____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
--------------------
FLAG FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Georgia 6060 58-2094179
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Organization) Classification Code Number)
101 NORTH GREENWOOD STREET
LAGRANGE, GEORGIA 30240
(706) 845-5000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
J. Daniel Speight, Jr.
President and Chief Executive Officer
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
(706) 845-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Walter G. Moeling, IV Neil E. Grayson, Esq.
Powell, Goldstein, Frazer & Murphy LLP Nelson, Mullins, Riley
Suite 1600 & Scarborough, L.L.P.
191 Peachtree Street, N.E. Suite 1400
Atlanta, Georgia 30303 999 Peachtree Street, N.E.
(404) 572-6600 Atlanta, Georgia 30309
(404) 817-6000
--------------------
Approximate date of commencement of proposed sale of securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| _____________________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ________________
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------- --------------- --------------------- -------------------- ----------------
Title of Each Class Proposed Maximum Proposed Maximum
of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered (1) Per Unit Offering Price (2) Registration
Fee
- ----------------------------------------- --------------- --------------------- -------------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 445,500 N/A $3,196,600 $943.00
=====================================================================================================================
</TABLE>
(1) This Registration Statement covers the maximum number of shares of the
common stock of the Registrant which is expected to be issued in connection
with the Merger.
(2 ) Pursuant to Rule 457(f)(2), the registration fee was computed on the
basis of the aggregate book value of the common stock of Heart of Georgia
Bancshares, Inc. to be exchanged in the Merger. The registrant hereby
amends this registration statement on such date or dates as may be
necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a)
of the Securities Act of 1933 or until the registration statement shall
become effective on such date as the commission, acting pursuant to said
section 8(a), may determine.
<PAGE>
HEART OF GEORGIA BANCSHARES, INC.
101 Railroad Avenue
Mount Vernon, Georgia 30445
To the Shareholders of October __, 1998
Heart of Georgia Bancshares, Inc.
You are cordially invited to attend a Special Meeting of the
Shareholders (the "Special Meeting") of Heart of Georgia Bancshares, Inc.
("Heart") to be held at the main office of Mount Vernon Bank, located at 101
Railroad Avenue, Mount Vernon, Georgia, on ____________, October __, 1998, at
_________, local time, notice of which is enclosed.
At the Special Meeting, you will be asked to consider and vote on a
proposal to approve an Agreement and Plan of Merger, dated as of August 19, 1998
(the "Merger Agreement"), by and between Heart and FLAG Financial Corporation
("FLAG") pursuant to which Heart will merge with and into FLAG (the "Merger").
Upon consummation of the Merger, each share of Heart common stock issued and
outstanding at the effective time of the Merger (except for certain shares held
by Heart or FLAG, or their respective subsidiaries, in each case other than
shares held in a fiduciary capacity or in satisfaction of debts previously
contracted, and excluding shares held by Heart shareholders who perfect their
dissenters' rights) will be exchanged for 2.025 shares of FLAG common stock,
with cash being paid in lieu of issuing fractional shares.
Enclosed are the Notice of Meeting, Proxy Statement/Prospectus and
Proxy, FLAG's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
and FLAG's Amendment No. 1 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1997. The Proxy Statement/Prospectus includes a description
of the proposed Merger and provides other specific information concerning the
Special Meeting. Please read these materials carefully and consider thoughtfully
the information set forth in them.
The Merger Agreement has been approved by your Board of Directors and
is recommended by the Board to you for approval. Your Board believes that, among
other benefits, the Merger will result in a company with greater financial
strength and increased opportunity and flexibility for profitable expansion and
diversification. Consummation of the Merger is subject to certain conditions,
including approval of the Merger Agreement and the transactions contemplated
therein by Heart shareholders and approval of the Merger by various regulatory
agencies.
It is important to understand that approval of the Merger Agreement
will require the affirmative vote of a majority of the issued and outstanding
shares of Heart common stock. Accordingly, whether or not you plan to attend the
special meeting, you are urged to complete, sign, and promptly return the
enclosed proxy card. If you attend the special meeting, you may vote in person
if you wish, even if you previously have returned your proxy card. The proposed
Merger with FLAG is a significant step for Heart shareholders and your vote on
this matter is of great importance.
On behalf of the board of directors, I urge you to vote FOR approval of
the Merger Agreement and the transactions contemplated therein by marking the
enclosed proxy card "FOR" item one.
We look forward to seeing you at the Special Meeting.
Sincerely,
--------------------
Donald M. Thigpen
President and Chief Executive Officer
<PAGE>
HEART OF GEORGIA BANCSHARES, INC.
101 Railroad Avenue
Mount Vernon, Georgia 30445
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER __, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders (the
"Special Meeting") of Heart of Georgia Bancshares, Inc. ("Heart") will be held
at the main office of Mount Vernon Bank, located at 101 Railroad Avenue, Mount
Vernon, Georgia, on ____________, October __, 1998, at ________, local time, for
the following purposes:
1. Merger. To consider and vote upon a proposal to approve an Agreement
and Plan of Merger, dated as of August 19, 1998 (the "Merger Agreement"), by and
between Heart and FLAG Financial Corporation ("FLAG"), pursuant to which, among
other matters, Heart will merge with and into FLAG (the "Merger"). Each share of
Heart common stock issued and outstanding at the effective time of the Merger
will be converted into the right to receive 2.025 shares of FLAG common stock,
as more fully described in the accompanying Proxy Statement/Prospectus. A copy
of the Merger Agreement is set forth as Appendix A to the accompanying Proxy
Statement/Prospectus.
2. Other Business. To transact such other business as may come properly
before the Special Meeting.
Only shareholders of record at the close of business on September __,
1998 will be entitled to receive notice of and to vote at the Special Meeting or
any adjournment or postponement thereof. Approval of the Merger Agreement and
the transactions contemplated therein requires the affirmative vote of a
majority of the issued and outstanding shares of Heart common stock.
The Board of Directors of Heart recommends that shareholders vote FOR
approval of the Merger Agreement.
BY ORDER OF THE BOARD OF DIRECTORS
--------------------
Donald M. Thigpen
President and Chief Executive Officer
Mount Vernon, Georgia
October __, 1998
Whether or not you plan to attend the Special Meeting, please complete,
date, and sign the enclosed form of proxy and promptly return it in
the enclosed postage paid return envelope in order to ensure
that your shares will be represented at the Special Meeting.
--------------------
Each shareholder has the right to dissent from the Merger Agreement and
demand payment of the fair value of his shares in cash if the merger is
consummated. The right of any shareholder to receive such payment is contingent
upon strict compliance with the requirements of Title 14, Chapter 2, Article 13
of the Georgia Business Corporation Code. The full text of Title 14, Chapter 2,
Article 13 setting forth the right to dissent is set forth in Appendix B to the
accompanying Proxy Statement/Prospectus. See "DESCRIPTION OF MERGER--Dissenters'
Rights" in the accompanying Proxy Statement/Prospectus.
<PAGE>
PROSPECTUS
FLAG FINANCIAL CORPORATION
445,500 Shares of Common Stock, $1.00 Par Value Per Share
--------------------
PROXY STATEMENT
HEART OF GEORGIA BANCSHARES, INC.
Special Meeting Of Shareholders
To Be Held On October __, 1998
This Prospectus of FLAG Financial Corporation, a bank holding company
organized and existing under the laws of the State of Georgia ("FLAG"), relates
to up to 445,500 shares of common stock, par value $1.00 per share, of FLAG
("FLAG Common Stock") which are issuable to the shareholders of Heart of Georgia
Bancshares, Inc., a bank holding company organized and existing under the laws
of the State of Georgia ("Heart"), upon consummation of the proposed merger of
Heart with and into FLAG (the "Merger"), pursuant to the terms of the Agreement
and Plan of Merger, dated as of August 19, 1998 (the "Merger Agreement"), by and
between FLAG and Heart.
At the effective time of the Merger (the "Effective Time"), except as
described herein, each issued and outstanding share of common stock, par value
$1.00 per share, of Heart ("Heart Common Stock") will be converted into and
exchanged for 2.025 shares of FLAG Common Stock (the "Exchange Ratio"). See
"DESCRIPTION OF MERGER." Holders of Heart Common Stock who intend to dissent
will lose their dissenters' rights if they vote for the Merger. See "DESCRIPTION
OF MERGER--Dissenters' Rights" and Appendix B.
This Prospectus also serves as a Proxy Statement of Heart, and is being
furnished to the shareholders of Heart in connection with the solicitation of
proxies by the Board of Directors of Heart for use at its special meeting of
shareholders to be held on ____________, October __, 1998 (including any
adjournment or postponement thereof, the "Special Meeting"). At the Special
Meeting, the shareholders of Heart will consider and vote upon the Merger
Agreement and the transactions contemplated thereby. This Proxy
Statement/Prospectus (the "Proxy Statement/Prospectus") is being mailed to
shareholders of Heart on or about October __, 1998.
On May 27, 1998, the last day prior to public announcement of the
proposed merger between FLAG and Heart, the last reported sale price per share
of FLAG Common Stock on The Nasdaq Stock Market's National Market ("Nasdaq
National Market") was $15.167, as adjusted for the 3-for-2 stock split effective
June 3, 1998 (or equivalent pro forma per share of Heart Common Stock (based on
the 2.025 Exchange Ratio) of $30.71). On September __, 1998, the last reported
sale price per share of FLAG Common Stock as reported on the Nasdaq National
Market was $______ (or equivalent pro forma per share of Heart Common Stock of
$______).
For a discussion of the risks associated with an investment in FLAG
Common Stock, please refer to the "RISK FACTORS" section of this Proxy
Statement/Prospectus beginning on page 12.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF A BANK OR
SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is September __, 1998
<PAGE>
AVAILABLE INFORMATION
FLAG is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, is required to file reports, proxy and information statements, and
other information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy and information statements, and other information
can be obtained, at prescribed rates, from the SEC by addressing written
requests for such copies to the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such
reports, proxy and information statements, and other information can be
inspected at the public reference facilities referred to above and at the
regional offices of the SEC at 7 World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. The SEC also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants such as FLAG that file electronically with the SEC. The address of
the SEC Web site is http://www.sec.gov.
This Proxy Statement/Prospectus constitutes part of the Registration
Statement on Form S-4 of FLAG (including any exhibits and amendments thereto,
the "Registration Statement") filed with the SEC under the Securities Act of
1933, as amended (the "Securities Act"), relating to the securities offered
hereby. This Proxy Statement/Prospectus does not include all of the information
contained in the Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the SEC. For further
information about FLAG and the securities offered hereby, reference is made to
the Registration Statement. The Registration Statement may be inspected and
copied, at prescribed rates, at the SEC's public reference facilities at the
addresses set forth above.
Certain financial and other information relating to FLAG is contained
in the documents indicated below under "DOCUMENTS INCORPORATED BY REFERENCE."
All information contained in this Proxy Statement/Prospectus or
incorporated herein by reference with respect to FLAG was supplied by FLAG, and
all information contained in this Proxy Statement/Prospectus with respect to
Heart was supplied by Heart.
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Proxy
Statement/Prospectus, and, if given or made, such information or representation
should not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
an offer to purchase, the securities offered by this Proxy Statement/Prospectus
in any jurisdiction to or from any person to whom it is unlawful to make such an
offer or solicitation in such jurisdiction. Neither the delivery of this Proxy
Statement/Prospectus nor any distribution of the securities being offered
pursuant to this Proxy Statement/Prospectus shall, under any circumstances,
create an implication that there has been no change in the affairs of FLAG or
Heart or the information set forth herein since the date of this Proxy
Statement/Prospectus
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the SEC by FLAG pursuant
to the Exchange Act are hereby incorporated by reference herein:
(a) FLAG's Amendment No. 1 to Annual Report on Form 10-K for the fiscal
year ended December 31, 1997;
i
<PAGE>
(b) FLAG's Annual Report on Form 10-K for the fiscal year ended December
31, 1997;
(c) FLAG's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1998 and June 30, 1998; and
(d) FLAG's Current Reports on Form 8-K dated February 18, 1998, April 18,
1998, May 12, 1998, May 14, 1998, May 18, 1998, May 28, June 1, 1998,
August 10, 1998, August 11, 1998, and August 19, 1998.
Accompanying this Proxy Statement/Prospectus is a copy of FLAG's
Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and a copy of FLAG's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
This Proxy Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. These documents are
available upon request from Investor Relations, FLAG Financial Corporation, 101
North Greenwood Street, LaGrange, Georgia (telephone: (706) 845-5000). In order
to ensure timely delivery of the documents, any request should be made by
_____________, 1998.
ii
<PAGE>
CONTENTS
Page
SUMMARY.......................................................................1
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.............1
THE PARTIES................................................................2
MEETING OF HEART SHAREHOLDERS; RECORD DATE; VOTE REQUIRED..................3
THE MERGER.................................................................4
RISK FACTORS...............................................................8
COMPARATIVE PER SHARE DATA.................................................8
SELECTED FINANCIAL DATA....................................................9
SELECTED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA..................11
RECENT DEVELOPMENTS.......................................................12
RISK FACTORS.................................................................13
LIMITED MARKET FOR SHARES OF FLAG COMMON STOCK............................13
RESTRICTIONS ON DIVIDENDS.................................................13
POSSIBLE COSTS ASSOCIATED WITH THE INTEGRATION OF FLAG'S
PENDING ACQUISITIONS....................................................13
GOVERNMENTAL REGULATION...................................................13
COMPETITION...............................................................13
CONTROL BY MANAGEMENT.....................................................14
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF FLAG'S
ARTICLES OF INCORPORATION, BYLAWS, AND THE GBCC.........................14
YEAR 2000" ISSUES.........................................................14
MEETING OF HEART SHAREHOLDERS................................................14
DATE, PLACE, TIME, AND PURPOSE............................................14
RECORD DATE, VOTING RIGHTS, REQUIRED VOTE, AND REVOCABILITY OF PROXIES....15
DESCRIPTION OF MERGER........................................................16
GENERAL...................................................................16
BACKGROUND OF AND REASONS FOR THE MERGER..................................16
EFFECTIVE TIME OF THE MERGER..............................................19
DISTRIBUTION OF FLAG CERTIFICATES.........................................19
CONDITIONS TO CONSUMMATION OF THE MERGER..................................20
REGULATORY APPROVALS......................................................21
WAIVER, AMENDMENT, AND TERMINATION........................................22
DISSENTERS' RIGHTS........................................................23
CONDUCT OF BUSINESS PENDING THE MERGER....................................25
MANAGEMENT AND OPERATIONS AFTER THE MERGER; INTERESTS OF
CERTAIN PERSONS IN THE MERGER...........................................27
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................29
ACCOUNTING TREATMENT......................................................31
EXPENSES AND FEES.........................................................31
RESALES OF FLAG COMMON STOCK..............................................31
DESCRIPTION OF FLAG COMMON STOCK.............................................32
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS...............................33
AUTHORIZED CAPITAL STOCK..................................................33
AMENDMENT OF ARTICLES OF INCORPORATION AND BYLAWS.........................34
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING............35
REMOVAL OF DIRECTORS......................................................35
INDEMNIFICATION...........................................................36
iii
<PAGE>
SPECIAL MEETINGS OF SHAREHOLDERS..........................................36
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING.................................37
MERGERS, CONSOLIDATIONS, AND SALES OF ASSETS..............................37
SHAREHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS.........................38
DIVIDENDS.................................................................38
COMPARATIVE MARKET PRICES AND DIVIDENDS......................................38
BUSINESS OF HEART............................................................40
GENERAL...................................................................40
MANAGEMENT STOCK OWNERSHIP................................................40
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS OF HEART.....................41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..............................................41
CERTAIN TRANSACTIONS AND BUSINESS RELATIONSHIPS...........................58
YEAR 2000 ISSUES..........................................................58
BUSINESS OF FLAG.............................................................58
GENERAL...................................................................58
DIRECTORS AND EXECUTIVE OFFICERS..........................................59
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................................65
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION..............................65
SHAREHOLDER PROPOSALS........................................................72
EXPERTS......................................................................72
LEGAL MATTERS................................................................73
OTHER MATTERS................................................................73
HEART FINANCIAL DATA........................................................F-1
APPENDIX A - AGREEMENT AND PLAN OF MERGER, DATED AS OF
AUGUST 19, 1998, BY AND BETWEEN FLAG FINANCIAL
CORPORATION AND HEART OF GEORGIA BANCSHARES, INC..........A-1
APPENDIX B - DISSENTERS' RIGHTS........................................B-1
iv
<PAGE>
SUMMARY
The following is a summary of certain information contained in this
Proxy Statement/Prospectus and the documents incorporated herein by reference.
This summary is not intended to be a complete description of the matters covered
in this Proxy Statement/Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere or incorporated by reference in this
Proxy Statement/Prospectus. Shareholders are urged to read carefully the entire
Proxy Statement/Prospectus, including the Appendices. As used in this Proxy
Statement/Prospectus, the terms "FLAG" and "Heart" refer to those entities,
respectively, and, where the context requires, to those entities and their
respective subsidiaries.
Special Cautionary Notice Regarding Forward-Looking Statements
Certain statements contained in this Proxy Statement/Prospectus, the
exhibits hereto, documents incorporated by reference herein which are not
statements of historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act (the "Act"). In
addition, certain statements in future filings by FLAG with the Securities and
Exchange Commission, in press releases, and in oral and written statements made
by or with the approval of FLAG which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure and other financial items; (ii) statements of
plans and objectives of FLAG or its management or Board of Directors, including
those relating to products or services; (iii) statements of future economic
performance; and (iv) statements of assumptions underlying such statements.
Words such as "believes," "anticipates," "expects," "intends," and "targeted,"
as well as similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from those in such statements. Facts
that could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (i) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (ii) the effects of and changes in trade, monetary and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; (iii) inflation, interest rate, market
and monetary fluctuations; (iv) the timely development of and acceptance of new
products and services and perceived overall value of these products and services
by users; (v) changes in consumer spending, borrowing and saving habits; (vi)
technological changes; (vii) acquisitions; (viii) the ability to increase market
share and control expenses; (ix) the effect of changes in laws and regulations
(including laws and regulations concerning taxes, banking, securities and
insurance) with which FLAG and its subsidiaries must comply; (x) the effect of
changes in accounting policies and practices, as may be adopted by the
regulatory agencies as well as the Financial Accounting Standards Board; (xi)
changes in FLAG's organization, compensation and benefit plans; (xii) the costs
and effects of litigation and of unexpected or adverse outcomes in such
litigation; and (xiii) the success of FLAG at managing the risks involved in the
foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and FLAG undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
1
<PAGE>
The Parties
Heart. Heart is a bank holding company headquartered in Mount Vernon,
Georgia, with one banking office located in Mount Vernon, Georgia. As of June
30, 1998, Heart had total consolidated assets of approximately $33.5 million,
total consolidated deposits of approximately $29.3 million, and total
consolidated shareholders' equity of approximately $3.2 million. Through its
wholly-owned banking subsidiary, Mount Vernon Bank, Heart offers a broad range
of banking and banking-related services.
Mount Vernon Bank was organized under the laws of the State of Georgia
and commenced operations in 1901. Heart is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Heart's
principal executive office is located at 101 Railroad Avenue, Mount Vernon,
Georgia 30445, and its telephone number at such address is (912) 583-2225.
Additional information with respect to Heart and its subsidiaries
is included in this Proxy Statement/Prospectus. See "BUSINESS OF HEART."
FLAG. FLAG is a multi-bank holding company headquartered in LaGrange,
Georgia. FLAG is the sole shareholder of the following depository institutions:
Citizens Bank ("Citizens"), Bank of Milan ("Milan"), and First Federal Savings
Bank of LaGrange ("First Federal"). FLAG acquired Citizens through a merger with
Middle Georgia Bankshares, Inc. and acquired Milan through a merger with Three
Rivers Bancshares, Inc. ("Three Rivers"). These mergers were consummated in
March 1998 and May 1998, respectively. Citizens and Milan are state banks
organized under the laws of the State of Georgia, with ten banking offices
located in the cities of Unadilla, Vienna, Byromville, Montezuma, Oglethorpe,
Cordele, Pinehurst, Milan, and McRae. First Federal is a federal savings bank
organized under the laws of the United States, with five offices located in
LaGrange, Georgia, which serve markets located in western Georgia. As of June
30, 1998, FLAG had total consolidated assets of approximately $442.8 million,
total consolidated deposits of approximately $339.2 million, and total
consolidated shareholders' equity of approximately $38.5 million. FLAG offers a
full array of deposit accounts and retail and commercial banking services,
engages in small business lending, residential and commercial real estate
lending, mortgage banking services, and brokerage services, and performs real
estate appraisal services through its subsidiaries, First Federal, Citizens and
Milan, as well as through First Federal's wholly-owned subsidiary, Piedmont
Mortgage Services, Inc. ("Piedmont"). FLAG indirectly owns CB Financial Group,
Inc. ("CB Financial"), a wholly-owned subsidiary of Citizens, which provides
pawn, title pawn and check cashing services. CB Financial is currently winding
up its business operations.
FLAG was organized under the laws of the State of Georgia and commenced
operations in 1993 as a registered savings and loan holding company under the
Home Owners' Loan Act of 1933, as amended ("HOLA"). FLAG became a registered
bank holding company under the BHC Act in March 1998 upon the merger of Middle
Georgia with and into FLAG. FLAG's principal executive office is located at 101
North Greenwood Street, LaGrange, Georgia 30240, and its telephone number at
such address is (706) 845-5000.
Effective June 3, 1998, FLAG declared a 3-for-2 stock split. All per
share amounts and prices have been adjusted to reflect this stock split.
As a routine part of its business, FLAG evaluates opportunities to
acquire bank holding companies, banks, and other financial institutions. Thus,
at any particular point in time, including the date of this Proxy
Statement/Prospectus, discussions and, in some cases, negotiations and due
diligence activities looking toward or culminating in the execution of
preliminary or definitive documents for potential acquisitions may occur or be
in progress. These transactions may involve FLAG acquiring such financial
2
<PAGE>
institutions in exchange for cash or capital stock and, depending upon the terms
of these transactions, may have a dilutive effect upon the FLAG Common Stock to
be issued to holders of Heart Common Stock in the Merger.
Additional information with respect to FLAG and its subsidiaries is
included in this Proxy Statement/Prospectus and in documents incorporated by
reference in this Proxy Statement/Prospectus. See "AVAILABLE INFORMATION,"
"DOCUMENTS INCORPORATED BY REFERENCE," and "BUSINESS OF FLAG." Meeting Of Heart
Shareholders; Record Date; Vote Required
This Proxy Statement/Prospectus is being furnished to the holders of
Heart Common Stock in connection with the solicitation by the Heart Board of
Directors of proxies for use at the Special Meeting at which Heart shareholders
will be asked to vote upon a proposal to approve the Merger Agreement and the
transactions contemplated therein. The Special Meeting will be held at the main
office of Mount Vernon Bank, located at 101 Railroad Avenue, Mount Vernon,
Georgia, on ____________, October __, 1998, at ______, local time. See "MEETING
OF HEART SHAREHOLDERS--Date, Place, Time, and Purpose."
Heart's Board of Directors has fixed the close of business on September
__, 1998, as the record date (the "Heart Record Date") for determination of the
shareholders entitled to notice of and to vote at the Special Meeting. Only
holders of record of shares of Heart Common Stock on the Heart Record Date will
be entitled to notice of and to vote at the Special Meeting. Each share of Heart
Common Stock is entitled to one vote. Shareholders who execute proxies retain
the right to revoke them at any time prior to their being voted at the Special
Meeting. On the Heart Record Date, there were 220,000 shares of Heart Common
Stock issued and outstanding and entitled to vote at the Special Meeting, which
shares were held by 14 holders of record.
Approval of the Merger Agreement and the transactions contemplated
therein requires the affirmative vote by holders of a majority of the shares of
Heart Common Stock entitled to vote at the Special Meeting. As of the Heart
Record Date, all directors and executive officers of Heart as a group (three
persons) were entitled to vote approximately 154,164 shares of Heart Common
Stock, constituting approximately 70.1% of the total number of shares of Heart
Common Stock outstanding at that date, and have committed to vote their shares
of Heart Common Stock in favor of the Merger. In light of the shares
beneficially owned by Heart's directors and executive officers, Heart
anticipates that the Merger Agreement will be approved by its shareholders. As
of the Heart Record Date, FLAG and its affiliates held no shares of Heart Common
Stock. See "MEETING OF SHAREHOLDERS--Record Date, Voting Rights, Required Vote,
and Revocability of Proxies" and "BUSINESS OF HEART--Management."
HEART'S SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM APPROVAL OF THE
MERGER AGREEMENT AND OBTAIN PAYMENT FOR THE FAIR VALUE OF THEIR SHARES OF HEART
COMMON STOCK BY FOLLOWING THE PROCEDURES DESCRIBED IN TITLE 14, CHAPTER 2,
ARTICLE 13 OF THE GEORGIA BUSINESS CORPORATION CODE ("GBCC"). SEE "DESCRIPTION
OF MERGER--DISSENTERS' RIGHTS" AND APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS.
3
<PAGE>
The Merger
General. The Merger Agreement provides for the acquisition of Heart by
FLAG pursuant to the Merger of Heart with and into FLAG. A copy of the Merger
Agreement is set forth at Appendix A to this Proxy Statement/Prospectus, and the
Merger Agreement is incorporated herein by reference.
Consideration and Exchange Ratio. At the Effective Time, each share of
Heart Common Stock then issued and outstanding (excluding shares held by Heart,
FLAG, or their respective subsidiaries, in each case other than shares held in a
fiduciary capacity or as a result of debts previously contracted, and excluding
shares held by Heart shareholders who perfect their statutory dissenters'
rights) will be converted into and exchanged for the right to receive 2.025
shares of FLAG Common Stock.
No fractional shares of FLAG Common Stock will be issued. Rather, cash
(without interest) will be paid in lieu of any fractional share interest to
which any Heart shareholder would otherwise be entitled upon consummation of the
Merger, in an amount equal to such fractional part of a share of FLAG Common
Stock multiplied by the last sale price of FLAG Common Stock on the Nasdaq
National Market (as reported by The Wall Street Journal or, if not reported
thereby, any other authoritative source selected by FLAG) on the last trading
day preceding the Effective Time. No Heart shareholder who would have been
entitled to receive fractional shares of FLAG Common Stock will be entitled to
dividends, voting rights, or any other rights as a shareholder in respect of any
fractional shares. See "DESCRIPTION OF MERGER--General."
As of the Heart Record Date, there were 220,000 shares of Heart Common
Stock issued and outstanding. Based on the number of shares of Heart Common
Stock outstanding on the Heart Record Date and the Exchange Ratio of 2.025, it
is anticipated that upon consummation of the Merger, FLAG would issue
approximately 445,500 shares of FLAG Common Stock to holders of Heart Common
Stock. Accordingly, FLAG would then have issued and outstanding approximately
6,744,432 shares of FLAG Common Stock, based on the number of shares of FLAG
Common Stock issued and outstanding on June 30, 1998 and assuming the completion
of FLAG's acquisition of Empire Bank Corp. See "-- Recent Developments."
Following the Merger, and assuming no exercise of dissenters' rights, the
current shareholders of Heart will beneficially own approximately 6.61% of the
FLAG Common Stock that will then be outstanding.
Reasons for the Merger, Recommendation of the Board of Directors of
Heart. The Heart Board of Directors believes that the Merger is in the best
interests of Heart and its shareholders, has unanimously approved the Merger
Agreement, and unanimously recommends that the shareholders vote "FOR" approval
of the Merger Agreement. In deciding to approve the Merger Agreement and the
consummation of the transactions contemplated therein, the Heart Board of
Directors considered a number of factors, including, among other matters, the
diversification of lending risks, increased stock liquidity, the market
characteristics of the markets in which FLAG currently operates, and a shared
vision for future expansion.
The FLAG Board of Directors believes that the Merger is in the best
interests of FLAG and its shareholders and has unanimously approved the Merger
Agreement. In deciding to approve the Merger Agreement and the consummation of
the transactions contemplated therein, including the issuance of shares of FLAG
Common Stock pursuant to the Merger Agreement, the FLAG Board of Directors
considered a number of factors, including the financial condition of Heart, the
likelihood of the Merger being approved by regulatory authorities without undue
conditions or delay, the financial and nonfinancial terms of the Merger, and the
compatibility of the community bank orientation of the operations of FLAG and
Heart.
4
<PAGE>
The Boards of Directors of Heart and FLAG believe that the Merger will
result in a company with expanded opportunities for profitable growth and that
the combined resources and capital of Heart and FLAG will provide an enhanced
ability to compete in the changing and competitive financial services industry.
See "DESCRIPTION OF MERGER--Background of and Reasons for the Merger."
Effective Time. Subject to the conditions to the obligations of the
parties to effect the Merger, the Effective Time will occur on the date and at
the time that the certificate of merger, which is to be executed by FLAG and
filed with the Secretary of State of the State of Georgia relating to the Merger
(the "Certificate of Merger"), becomes effective with the Secretary of State of
the State of Georgia. Unless otherwise agreed upon by Heart and FLAG, and
subject to the terms and conditions contained in the Merger Agreement, the
parties will use their reasonable efforts to cause the Effective Time to occur
on the fifth business day following the last to occur of (i) the effective date
(including the expiration of any applicable waiting period) of the last consent
required by the Merger Agreement of any regulatory authority having authority
over and approving or exempting the Merger, and (ii) the date on which the
shareholders of Heart have approved the Merger Agreement. See "DESCRIPTION OF
MERGER--Effective Time of the Merger," "--Conditions to Consummation of the
Merger," and "--Waiver, Amendment, and Termination."
No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that the other conditions precedent to
the Merger can or will be satisfied. Heart and FLAG anticipate that all
conditions to the consummation of the Merger will be satisfied so that the
Merger can be consummated during the fourth quarter of 1998.
However, delays in the consummation of the Merger could occur.
Exchange of Stock Certificates. Promptly after the Effective Time, FLAG
will cause its transfer agent, acting in its capacity as exchange agent for FLAG
(the "Exchange Agent"), to mail to each holder of record of a certificate or
certificates (collectively, the "Heart Certificates") which, immediately prior
to the Effective Time, represented outstanding shares of Heart Common Stock,
appropriate transmittal materials and instructions for use in effecting the
surrender and cancellation of the Heart Certificates in exchange for
certificates representing shares of FLAG Common Stock ("FLAG Certificates").
Cash will be paid to the holders of Heart Common Stock in lieu of the issuance
of any fractional shares of FLAG Common Stock.
Holders of Heart common stock should not send in their Heart
Certificates until they receive the appropriate transmittal materials and
instructions.
In no event will the holder of any surrendered Heart Certificate be
entitled to receive interest on any cash to be issued to such holder, and in no
event will FLAG or the Exchange Agent be liable to any holder of Heart Common
Stock for any amounts paid or property delivered in good faith to a public
official pursuant to any applicable abandoned property, escheat, or similar law.
Regulatory Approvals and Other Conditions. The Merger is subject to
approval by the Board of Governors of the Federal Reserve System (the "Federal
Reserve") and the Georgia Department of Banking and Finance (the "GDBF").
Applications have been filed with the Federal Reserve and GDBF for the requisite
approvals. There can be no assurance that such regulatory approvals will be
obtained or as to the timing of any such approvals. There also can be no
assurance that any such approvals will not impose conditions or restrictions
that are deemed by FLAG or Heart to materially adversely affect the economic or
business benefits of the transactions contemplated by the Merger Agreement.
Consummation of the Merger is subject to various other conditions,
including receipt of the required approval of the Merger Agreement by Heart
shareholders, receipt of an opinion of counsel as to the tax-free nature of
5
<PAGE>
certain aspects of the Merger, receipt of a letter from the independent
accountants of FLAG that the Merger will qualify for pooling-of-interests
accounting treatment, and certain other conditions. See "DESCRIPTION OF
MERGER--Conditions to Consummation of the Merger."
Conduct of Business Pending the Merger. Each party has agreed in the
Merger Agreement to: (i) operate its business only in the usual, regular and
ordinary course; (ii) preserve intact its business organization and assets and
maintain its rights and franchises; and (iii) take no action that would (a)
materially adversely affect the ability of any party to the Merger Agreement to
obtain any consents required for the transactions contemplated by the Merger
Agreement without the imposition of certain materially adverse conditions or
restrictions as contemplated by the Merger Agreement, or (b) materially
adversely affect the ability of any party to the Merger Agreement to perform its
covenants and agreements under the Merger Agreement. In addition, each party to
the Merger Agreement has agreed not to take certain actions relating to the
operation of their respective businesses pending consummation of the Merger
without the prior written consent of the other party, except as otherwise
permitted by the Merger Agreement. See "DESCRIPTION OF MERGER--Conduct of
Business Pending the Merger."
Waiver, Amendment, and Termination. The Merger Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Time by
mutual consent of Heart and FLAG, or by either Heart or FLAG under certain
circumstances, including if the Merger is not consummated by December 31, 1998,
unless the failure to consummate by such time is due to a breach of the Merger
Agreement by the party seeking to so terminate. Pursuant to the Merger
Agreement, in certain instances, including a breach of a representation,
warranty, covenant or agreement or failure of the Heart shareholders to approve
the Merger Agreement, either FLAG or Heart, as the case may be, will be required
to pay the non-breaching party the lesser of $100,000 or actual costs of the
non-breaching party incurred in connection with the Merger. If for any reason
the Merger is not consummated, FLAG will continue to operate as a bank holding
company under its present management and Heart will continue to operate as a
bank holding company under its present management. See "DESCRIPTION OF
MERGER--Waiver, Amendment, and Termination," and "? Expenses and Fees."
Dissenters' Rights. Each holder of Heart Common Stock who perfects his
rights is entitled to the rights and remedies of a dissenting shareholder under
Title 14, Chapter 2, Article 13 of the GBCC, subject to compliance with the
procedures set forth therein. Among other things, a dissenting shareholder who
has perfected his dissenter's rights is entitled to receive an amount in cash
equal to the "fair value" of such holder's shares. A copy of Title 14, Chapter
2, Article 13 of the GBCC is set forth in Appendix B of this Proxy
Statement/Prospectus and a summary thereof is included under "DESCRIPTION OF
MERGER--Dissenters' Rights." To perfect dissenters' rights, a shareholder must
comply with Title 14, Chapter 2, Article 13 of the GBCC which requires, among
other things, that the shareholder must deliver to Heart, prior to the vote of
the shareholders of Heart at the Special Meeting, written notice of such
holder's intention to demand payment for his shares if the Merger is effectuated
and that such shareholder not vote such holder's shares in favor of the Merger
Agreement. Any Heart shareholder who returns a signed proxy but fails to provide
instructions as to the manner in which such holder's shares are to be voted or
to revoke such proxy will be deemed to have voted in favor of the Merger
Agreement and thus will not be entitled to assert dissenters' rights.
Interests of Certain Persons in the Merger. Certain members of Heart's
management and Board of Directors have interests in the Merger in addition to
their interests as shareholders of Heart generally. Promptly after the Effective
Time, Donald M. Thigpen and Robert E. Thigpen, Jr., both directors of Heart,
will become members of FLAG's Board of Directors. Donald Thigpen will continue
to serve as President of Mount Vernon and will receive a signing bonus, which
will be paid over four years beginning upon consummation of the Merger. In
addition, Donald Thigpen and FLAG will execute a Separation Agreement that
provides that Mr. Thigpen will receive severance payments upon the occurrence of
6
<PAGE>
certain events and that Mr. Thigpen will not compete with FLAG during the term
of the Separation Agreement and for a 12-month period following the termination
of the Separation Agreement. The Merger Agreement contains provisions relating
to the indemnification of Heart directors and officers by FLAG, and provisions
relating to the eligibility of the officers and employees of Heart for certain
FLAG employee benefits. As of the Heart Record Date, none of the directors and
officers of Heart beneficially owned any shares of FLAG Common Stock. See
"DESCRIPTION OF MERGER--Management and Operations After the Merger; Interests of
Certain Persons in the Merger."
Certain Federal Income Tax Consequences of the Merger. Consummation of
the Merger is conditioned on the receipt by Heart and FLAG of an opinion of
Powell, Goldstein, Frazer & Murphy LLP, counsel to FLAG, to the effect that,
among other things, (i) the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) the exchange in the Merger of Heart Common Stock for shares of
FLAG Common Stock will not result in gain or loss to the shareholders of Heart,
except that gain or loss will be recognized to the extent of any cash received
by such Heart shareholders in the Merger, and (iii) Heart shareholders who
perfect their dissenters' rights and receive solely cash in redemption of their
Heart Common Stock will be subject to federal income tax on any income or gain
recognized. For a further discussion of the federal income tax consequences of
the Merger, see "DESCRIPTION OF MERGER--Certain Federal Income Tax
Consequences."
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH SHAREHOLDER AND OTHER CIRCUMSTANCES, EACH
HOLDER OF HEART COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISORS
TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS).
Accounting Treatment. It is intended that the Merger will be accounted for
as a pooling-of-interests for accounting and financial reporting purposes. See
"DESCRIPTION OF MERGER--Accounting Treatment."
Certain Differences in Shareholders' Rights. At the Effective Time,
Heart shareholders, whose rights are governed by Heart's Articles of
Incorporation and Bylaws and by the GBCC, will automatically become FLAG
shareholders, and their rights as FLAG shareholders will be determined by FLAG's
Articles of Incorporation and Bylaws and by the GBCC. The rights of FLAG
shareholders differ from the rights of Heart shareholders in certain important
respects, some of which constitute additional anti-takeover provisions provided
for in FLAG's governing documents. See "EFFECT OF THE MERGER ON RIGHTS OF
SHAREHOLDERS."
Comparative Market Prices of Common Stock; Dividends. FLAG Common Stock
is traded in the over-the-counter market and quoted on the Nasdaq National
Market under the symbol "FLAG." Heart Common Stock is not traded in any
established market. On May 27, 1998, the last day prior to public announcement
of the proposed merger between FLAG and Heart, the last reported sale price per
share of FLAG Common Stock on the Nasdaq National Market was $15.167, as
adjusted for the 3-for-2 stock split effective June 3, 1998, and the resulting
equivalent pro forma price per share of Heart Common Stock (based on the 2.025
Exchange Ratio) was $30.71. On September __, 1998, the latest practicable date
prior to the mailing of this Proxy Statement/Prospectus, the last reported sale
price per share of FLAG Common Stock on the Nasdaq National Market was $______,
and the resulting equivalent pro forma price per share of Heart Common Stock was
$______. The equivalent per share price of a share of Heart Common Stock at each
specified date represents the closing sale price of a share of FLAG Common Stock
7
<PAGE>
on such date multiplied by the Exchange Ratio of 2.025. To the knowledge of
Heart, the most recent trade of Heart Common Stock prior to May 27, 1998, the
last day prior to public announcement that FLAG and Heart had executed the
Merger Agreement, was in December 1995 at $12.00 per share. To the knowledge of
Heart, there have been no trades since the announcement of the Merger. There can
be no assurance as to what the market price of the FLAG Common Stock will be if
and when the Merger is consummated. See "COMPARATIVE MARKET PRICES AND
DIVIDENDS."
Risk Factors
In considering whether to approve the Merger Agreement and the
transactions contemplated thereby, the shareholders of Heart should consider the
various risks associated with an investment in FLAG Common Stock. For a
discussion of the risks associated with the Merger and the securities associated
therewith, see "RISK FACTORS."
Comparative Per Share Data
The following table sets forth certain unaudited comparative per share
data relating to income, cash dividends, and book value on (i) an historical
basis for FLAG and Heart; (ii) a pro forma combined basis per share of FLAG
Common Stock, giving effect to the Merger; and (iii) an equivalent pro forma
basis per share of Heart Common Stock, giving effect to the Merger. The Heart
and FLAG pro forma combined information and the Heart pro forma equivalent
information give effect to the Merger on a pooling-of-interests accounting basis
and reflects the Exchange Ratio of 2.025 shares of FLAG Common Stock for each
share of Heart Common Stock. See "DESCRIPTION OF MERGER - Accounting Treatment."
The pro forma data are presented for information purposes only and are not
necessarily indicative of the results of operations or combined financial
position that would have resulted had the Merger been consummated at the dates
or during the periods indicated, nor are they necessarily indicative of future
results of operations or combined financial position. Heart was formed in June
1995 and became the bank holding company for Mount Vernon Bank in October 1995.
Mount Vernon Bank was formed in 1901. The financial information for Heart in the
following sections includes information from the date Heart was formed.
Comparative Per Share Data
<TABLE>
<CAPTION>
As of and for the
Six Months Ended
June 30, Year Ended December 31,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Per Common Share
FLAG Historical $ .41 $ .38 $ .73 $ .25 $ .68
Heart historical .76 .56 1.24 1.38 .14
FLAG and Heart pro forma combined (1) .41 .37 .72 .29 .63
Heart pro forma equivalent (2) .83 .75 1.46 .59 1.28
Dividends Declared Per Common Share
FLAG historical $ .11 $ .08 $ .15 $ .14 $ .13
Heart historical - - - - -
FLAG and Heart pro forma combined (1) (4) .11 .08 .15 .14 .13
Heart pro forma equivalent (3) .22 .16 .30 .28 .26
Book Value Per Common Share (period end)
FLAG historical $ 7.52 $ 6.77 $ 7.11 $ 6.47 $ 6.48
Heart historical 14.53 12.73 13.63 11.97 10.82
FLAG and Heart pro forma combined (1) 7.43 6.73 7.08 6.43 6.39
Heart pro forma equivalent (2) 15.05 13.63 14.34 13.02 12.94
</TABLE>
8
<PAGE>
(1) Represents the pro forma combined information of FLAG and Heart as if the
Merger were consummated at the beginning of the period, and were accounted
for as a pooling-of-interests.
(2) Represents the pro forma combined per common share amounts multiplied by
the Exchange Ratio of 2.025 shares of FLAG Common Stock for each share of
Heart Common Stock.
(3) Represents historical dividends declared per share by FLAG multiplied by
the Exchange Ratio of 2.025 shares of FLAG Common Stock for each share of
Heart Common Stock.
(4) Represents historical dividends paid by FLAG, as it is assumed that FLAG
will not change its dividend policy as a result of the Merger.
Selected Financial Data
The following tables present certain selected historical financial
information for FLAG and Heart and are derived from the respective consolidated
financial statements of FLAG and Heart, including the respective notes thereto,
contained or incorporated by reference herein. The data should be read in
conjunction with the historical financial statements, including the respective
notes thereto, and other financial information concerning FLAG and Heart
contained or incorporated by reference herein. Interim unaudited data for the
six month periods ended June 30, 1998 and 1997 of FLAG and Heart reflect, in the
opinion of the respective managements of FLAG and Heart, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the six month periods ended June 30, 1998
and 1997 are not necessarily indicative of results which may be expected for any
other interim period or for the year as a whole. See "AVAILABLE INFORMATION,"
"DOCUMENTS INCORPORATED BY REFERENCE," and "HEART FINANCIAL DATA."
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months
Ended June 30, As of and For the Year Ended December 31,
-------------- -----------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
FLAG
Balance Sheet Data
Total assets $442,879 $370,141 $ 411,285 $ 350,519 $ 337,857 $ 326,229 $ 293,935
Loans, net 306,527 254,849 279,286 239,652 216,204 207,715 191,029
Deposits 339,245 312,461 324,852 294,420 270,853 251,828 242,062
Shareholders' equity 38,889 34,936 36,771 33,415 32,254 28,741 28,785
Statement of Earnings Data
Net interest income $ 8,996 $ 7,684 $ 15,997 $ 14,757 $ 13,933 $ 11,824 $ 10,253
Provision for loan losses 444 407 765 3,744 775 490 955
Noninterest income 3,718 2,562 5,332 4,637 3,706 2,915 2,938
Noninterest expense 9,226 6,941 15,020 14,018 11,687 9,578 8,400
Net earnings 2,115 1,948 3,749 1,286 3,472 3,117 3,175
Per Share Data
Book value (period end) $ 7.52 $ 6.77 $ 7.11 $ 6.47 $ 6.48 $ 5.61 $ 5.60
Net earnings .41 .38 .73 .25 .68 .61 .62
Dividends .11 .08 .15 .14 .13 .13 .11
Total shares outstanding 5,175 5,162 5,172 5,164 4,979 5,120 5,143
Weighted average shares outstanding 5,172 5,164 5,167 5,121 5,088 5,110 5,143
Ratios
Return on average assets .99% 1.08% 1.01% .39% 1.05% 1.00% 1.12%
Return on average shareholders' equity 11.23 11.40 10.68 3.97 11.07 10.76 11.42
Average equity to average assets 8.82 9.48 9.49 9.72 9.53 9.28 9.7
Average loans to average deposits 88.21 81.48 83.81 81.92 82.62 83.47 85.00
</TABLE>
9
<PAGE>
Summary Consolidated Financial Information
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months As of and For the
Ended June 30, Year Ended December 31,
-------------- -----------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Heart
Balance Sheet Data
Total assets $ 33,497 $ 30,942 $ 32,647 $ 29,822 $ 24,931
Loans, net 21,209 16,878 19,710 16,490 12,126
Deposits 29,274 27,239 28,644 26,080 21,463
Shareholders' equity 3,197 2,801 2,999 2,634 2,379
Statement of Earnings Data
Net interest income $ 624 $ 521 $ 1,107 $ 992 $ 162
Provision for loan losses 12 12 24 25 -
Noninterest income 149 149 312 375 33
Noninterest expense 525 481 1,000 929 150
Net earnings 167 124 273 303 31
Per Share Data
Book value (period end) $ 14.53 $ 12.73 $ 13.63 $ 11.97 $ 10.82
Net earnings .76 .56 1.24 1.38 .14
Dividends - - - - -
Total shares outstanding 220 220 220 220 220
Weighted average shares outstanding 220 220 220 220 220
Ratios
Return on average assets 1.01% .83% .89% 1.07% .24%
Return on average shareholders' equity 10.79 9.13 9.70 12.09 2.45
Average equity to average assets 9.36 9.10 9.17 8.86 9.64
Average loans to average deposits 71.44 64.04 65.33 60.86 50.72
</TABLE>
10
<PAGE>
Selected Condensed Consolidated Pro Forma Financial Data
The following selected unaudited pro forma financial data give effect to the
Merger as of the dates and for the periods indicated, assuming the Merger is
accounted for as a pooling of interests. The selected unaudited pro forma
financial data are presented for informational purposes only and are not
necessarily indicative of the combined financial position or results of
operations which actually would have occurred if the transactions had been
consummated at the date and for the periods indicated or which may be obtained
in the future. The information should be read in conjunction with the unaudited
pro forma financial information appearing elsewhere in this Joint Proxy
Statement/Prospectus. See "COMPARATIVE PER SHARE DATA" and "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION."
Selected Pro Forma Financial Data
(Dollars in thousands, except per share amounts)
For the
Six Months Ended For the Year Ended
June 30, December 31,
-------- ------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Earnings Data
Interest income $ 18,998 $ 15,621 $ 33,098 $ 30,198 $ 27,651
Interest expense 9,378 7,415 15,994 14,450 13,557
Net interest income 9,620 8,205 17,104 15,749 14,094
Provision for loan losses 456 419 789 3,769 775
Noninterest income 3,866 2,710 5,644 5,012 3,739
Noninterest expense 9,750 7,423 16,020 14,947 11,837
Income taxes 998 1,003 1,917 456 1,720
Net earnings 2,282 2,071 4,022 1,589 3,502
Earnings per common share .41 .37 .72 .29 .63
As of
June 30, 1998
-------------
Balance Sheet Data
Total assets $476,376
Federal funds sold 10,950
Investment securities 83,434
Loans, net 327,736
Deposits 368,518
Other borrowings 56,350
Shareholders' equity 41,779
11
<PAGE>
Recent Developments
FLAG's Pending Acquisitions. Effective July 24, 1998, FLAG and The
Brown Bank ("Brown") entered into an Agreement and Plan of Merger (the "Brown
Agreement") pursuant to which Brown will merge with and into FLAG's wholly-owned
bank subsidiary, Citizens. The Brown Agreement provides that FLAG will exchange
1.5 shares of FLAG Common Stock for each share of Brown Common Stock
outstanding, with approximately 262,500 shares of FLAG Common Stock expected to
be issued to Brown shareholders. The parties expect the merger to be accounted
for as a pooling-of-interests and expect to consummate the transaction during
the fourth quarter of 1998, subject to approval of Brown shareholders in
accordance with applicable law, approval of various regulatory authorities, and
other customary conditions of closing.
Brown is a privately-held federally-chartered savings bank located in
Cobbtown, Georgia. Brown has three offices located in Cobbtown, Reidsville and
Metter, Georgia.
Effective July 30, 1998, FLAG and Empire Bank Corp. ("Empire") entered
into an Agreement and Plan of Merger (the "Empire Agreement") pursuant to which
Empire will merge with and into FLAG. The Empire Agreement provides that FLAG
will exchange 42.5 shares of FLAG Common Stock for each share of Empire Common
Stock outstanding, with approximately 1,124,125 shares of FLAG Common Stock
expected to be issued to Empire shareholders. The parties expect the merger to
be accounted for as a pooling-of-interests and expect to consummate the
transaction during the third quarter of 1998, subject to approval of Empire
shareholders in accordance with applicable law, approval of various regulatory
authorities, and other customary conditions of closing.
Empire is a privately-held bank holding company located in Homerville,
Georgia and is the sole shareholder of Empire Banking Company, a state chartered
bank. Empire Banking Company has two offices located in Homerville and Waycross,
Georgia.
Additional information with respect to the Brown and Empire
transactions is set forth in FLAG's Current Reports on Form 8-K dated May 14,
1998, June 4, 1998, August 10, 1998 and August 11, 1998 (the "FLAG 8-Ks"). The
FLAG 8-Ks include or incorporate by reference certain forward looking
statements, estimates, and projections concerning the transactions with Brown
and Empire which are subject to various uncertainties and risks. Estimates and
projections concerning the future financial performance of FLAG following the
transactions with Brown and Empire are predicated on certain assumptions and
depend upon future events, the course of which cannot be ascertained with
certainty, and therefore such estimates and projections should be considered
only as estimates and understood to be uncertain and subject to risks of
inaccuracy. Future events may cause FLAG's actual experience to differ
materially from such estimates and projections.
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RISK FACTORS
IN CONSIDERING WHETHER TO APPROVE THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, THE SHAREHOLDERS OF HEART SHOULD CONSIDER THE
VARIOUS RISKS ASSOCIATED WITH AN INVESTMENT IN FLAG COMMON STOCK, INCLUDING BUT
NOT LIMITED TO THE FOLLOWING:
Limited Market For Shares Of FLAG Common Stock
While FLAG Common Stock is listed and traded on the Nasdaq National
Market, there has only been limited trading activity of FLAG Common Stock. The
average daily trading volume of FLAG Common Stock over the six-month period
ending June 30, 1998 was approximately 5,720 shares, and on some days the
trading volume for shares of FLAG Common Stock was zero. FLAG does not
anticipate that the merger of Heart with and into FLAG will cause any
significant change in the average daily trading volumes for FLAG Common Stock.
Restrictions On Dividends
Although FLAG has regularly paid cash dividends in the past, dividends
will be payable on FLAG Common Stock only when, as, and if declared by the Board
of Directors of FLAG out of funds available therefor. Any dividends to be
declared by the FLAG Board of Directors must comply with the GBCC and the
applicable rules and regulations of the appropriate regulatory authorities. In
addition, FLAG's only source of income will be dividends and other payments made
to FLAG by First Federal, Citizens Bank, Bank of Milan, Mount Vernon and the
other subsidiaries of FLAG and Heart, and certain statutory and regulatory
restrictions exist on the payment of dividends by those subsidiaries.
Possible Costs Associated With The Integration Of FLAG's Pending Acquisitions
The ability of FLAG, as the surviving corporation, to perform with
financial success is dependent upon the integration of Heart, Empire, and Brown
and their subsidiaries into FLAG, as the surviving corporation. There may be
significant, unanticipated costs associated with the integration of these
companies with and into FLAG. See "SUMMARY -- Recent Developments."
Governmental Regulation
FLAG, Heart, and their respective subsidiaries are currently subject to
extensive governmental regulation. FLAG and Heart, as bank holding companies,
are primarily regulated by the Federal Reserve. Citizens Bank and Bank of Milan
are primarily regulated by the Federal Deposit Insurance Corporation (the
"FDIC") and the GDBF. First Federal, as a savings bank, is primarily regulated
by the Office of Thrift Supervision (the "OTS"). The Federal and State
regulators of these entities have the ability, should the situation so require,
to place significant regulatory and operational burdens upon FLAG and its
subsidiaries, which could affect the profitability of those entities.
Competition
FLAG and its subsidiaries compete directly with financial institutions
which are well established, many of which have significantly greater resources
and lending limits than FLAG and its subsidiaries. As a result of those greater
resources, the large financial institutions with which FLAG competes may be able
to provide a broader range of services to their customers than FLAG, may be able
to afford newer and more sophisticated technology than FLAG, and may be able to
provide more funds to borrowers than FLAG. The long-term success of FLAG is
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dependent on the ability of its subsidiaries to compete successfully with other
financial institutions in their service areas.
Control By Management
The directors and executive officers of FLAG beneficially own
approximately 1,336,463 shares of FLAG Common Stock, or approximately 24.6% of
the total outstanding shares and, as a result, FLAG's management has significant
control of FLAG.
Anti-Takeover Effects Of Certain Provisions Of FLAG's Articles Of Incorporation,
Bylaws, And The GBCC
The Board of Directors of FLAG is empowered to issue preferred stock
without shareholder action. The existence of this ability could render more
difficult or discourage an attempt to obtain control of FLAG by means of a
tender offer, merger, proxy contest or otherwise. See "DESCRIPTION OF FLAG
COMMON STOCK" and "EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS -- Authorized
Capital Stock." FLAG's Articles of Incorporation and Bylaws divide the Board of
Directors of FLAG into three classes, as nearly equal in size as possible, with
staggered three-year terms. One class is elected each year. The classification
of the Board of Directors could have the effect of making it more difficult for
a third party to acquire control of FLAG. See "EFFECT OF THE MERGER ON RIGHTS OF
SHAREHOLDERS -- Classified Board of Directors and Absence of Cumulative Voting."
FLAG is also subject to certain provisions of the GBCC and the FLAG Articles of
Incorporation which relate to business combinations with interested
shareholders. See "EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS -- Mergers,
Consolidations, and Sales of Assets."
Year 2000 Issues
It is possible that FLAG's and Heart's currently installed computer
systems, software products, or other business systems, or those of FLAG's or
Heart's suppliers or customers, will not always accept input of, store,
manipulate, and output dates in the years 1999, 2000, or thereafter without
error or interruption. FLAG and Heart have conducted reviews of their business
systems, including their computer systems, to attempt to identify ways in which
their systems could be affected by problems in correctly processing date
information. In addition, FLAG and Heart are requesting assurances from all
software vendors from which they have purchased or from which they may purchase
software that the software sold to FLAG and Heart will correctly process all
date information at all times, and FLAG and Heart are querying their customers
and suppliers about their progress in identifying and addressing problems that
their computer systems will face in correctly processing date information as the
year 2000 approaches and is reached. However, there can be no assurance that
FLAG and Heart will identify all date-handling problems in their business
systems in advance of their occurrence, or that FLAG and Heart will be able to
successfully remedy problems that are discovered. The expenses of FLAG's and
Heart's efforts to identify and address such problems, or the expenses or
liabilities to which FLAG and Heart may become subject as a result of such
problems, could have a material adverse effect on FLAG's results of operations
and financial condition.
MEETING OF HEART SHAREHOLDERS
Date, Place, Time, And Purpose
This Proxy Statement/Prospectus is being furnished to the holders of
Heart Common Stock in connection with the solicitation by the Heart Board of
Directors of proxies for use at the Special Meeting at which Heart shareholders
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will be asked to vote upon a proposal to approve the Merger Agreement. The costs
associated with the solicitation of proxies for the Special Meeting will be
borne by Heart. The Special Meeting will be held at the main office of Mount
Vernon Bank, located at 101 Railroad Avenue, Mount Vernon, Georgia, on
____________, October __, 1998, at _________, local time.
Record Date, Voting Rights, Required Vote, And Revocability Of Proxies
The close of business on September ___, 1998 has been fixed as the
Heart Record Date for determining holders of outstanding shares of Heart Common
Stock entitled to notice of and to vote at the Special Meeting. Only holders of
Heart Common Stock of record on the books of Heart at the close of business on
the Heart Record Date are entitled to notice of and to vote at the Special
Meeting. As of the Heart Record Date, there were 220,000 shares of Heart Common
Stock issued and outstanding and entitled to vote at the Special Meeting, which
shares were held by 14 holders of record.
Holders of Heart Common Stock are entitled to one vote on each matter
considered and voted upon at the Special Meeting for each share of Heart Common
Stock held of record as of the Heart Record Date. The vote required for the
approval of the Merger Agreement is a majority of the issued and outstanding
shares of Heart Common Stock entitled to vote at the Special Meeting.
Consequently, with respect to the proposal to approve the Merger Agreement,
abstentions and broker non-votes will be counted as part of the base number of
votes to be used in determining if the proposal has received the requisite
number of base votes for approval. Thus, an abstention or a broker non-vote will
have the same effect as a vote against such proposal.
Shares of Heart Common Stock represented by properly executed proxies,
if such proxies are received in time and not revoked, will be voted in
accordance with the instructions indicated on the proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT
AND, IN THE DISCRETION OF THE PROXY HOLDER, AS TO ANY OTHER MATTER WHICH MAY
PROPERLY COME BEFORE THE SPECIAL MEETING, AND THE HOLDERS WILL NOT BE ENTITLED
TO ASSERT DISSENTERS' RIGHTS. SEE "DESCRIPTION OF MERGER -- DISSENTERS' RIGHTS."
If necessary, the proxy holder may vote in favor of a proposal to adjourn the
Special Meeting in order to permit further solicitation of proxies in the event
there are not sufficient votes to approve the foregoing proposal at the time of
the Special Meeting. No proxy that is voted against the approval of the Merger
Agreement will be voted in favor of an adjournment of the Special Meeting in
order to permit further solicitation of proxies.
FAILURE EITHER TO VOTE BY PROXY OR IN PERSON AT THE SPECIAL MEETING
WILL HAVE THE EFFECT OF A VOTE CAST AGAINST APPROVAL OF THE MERGER AGREEMENT.
A Heart shareholder who has given a proxy may revoke it at any time
prior to its exercise at the Special Meeting by (i) giving written notice of
revocation to the Secretary of Heart, (ii) properly submitting to Heart a duly
executed proxy bearing a later date, or (iii) attending the Special Meeting and
voting in person. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed as follows: Heart of
Georgia Bancshares, Inc., 101 Railroad Avenue, Mount Vernon, Georgia 30445;
Attention: Donald M. Thigpen.
As of the Heart Record Date, all directors and executive officers of
Heart as a group (three persons) were entitled to vote approximately 154,164
shares of Heart Common Stock, constituting approximately 70.1% of the total
number of shares of Heart Common Stock outstanding at that date, and have
committed to vote their shares of Heart Common Stock in favor of the Merger
Agreement. In light of the shares beneficially owned by Heart's directors and
executive officers, Heart anticipates that the Merger Agreement will be approved
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by its shareholders. None of FLAG or any of its directors and executive officers
beneficially owned, as of the Heart Record Date, any shares of Heart Common
Stock. See "BUSINESS OF HEART -- Management."
DESCRIPTION OF MERGER
The following information describes certain aspects of the Merger. This
description does not purport to be complete and is qualified in its entirety by
reference to the Appendices hereto, including the Merger Agreement, which is
attached as Appendix A to this Proxy Statement/Prospectus and incorporated
herein by reference. All shareholders are urged to read the Appendices in their
entirety.
General
Upon consummation of the Merger, Heart will merge with and into FLAG.
FLAG will survive the Merger and the separate existence of Heart will cease.
Mount Vernon Bank will become a wholly-owned subsidiary of FLAG following the
consummation of the Merger. At the Effective Time, each share of Heart Common
Stock then issued and outstanding (excluding shares held by Heart, FLAG, or
their respective subsidiaries, in each case other than shares held in a
fiduciary capacity or in satisfaction of debts previously contracted, and
excluding shares held by Heart shareholders who perfect their dissenters'
rights) will be converted into and exchanged for the right to receive 2.025
shares of FLAG Common Stock.
No fractional shares of FLAG Common Stock will be issued. Rather, cash
(without interest) will be paid in lieu of any fractional share interest to
which any Heart shareholder would otherwise be entitled upon consummation of the
Merger, in an amount equal to such fractional part of a share of FLAG Common
Stock multiplied by the last sale price of FLAG Common Stock on the Nasdaq
National Market (as reported by The Wall Street Journal or, if not reported
thereby, any other authoritative source selected by FLAG) on the last trading
day preceding the Effective Time.
As of the Heart Record Date, Heart had 220,000 shares of Heart Common
Stock issued and outstanding. Based on the number of shares of Heart Common
Stock outstanding on the Heart Record Date and the Exchange Ratio of 2.025, it
is anticipated that upon consummation of the Merger, FLAG would issue
approximately 445,500 shares of FLAG Common Stock to holders of Heart Common
Stock. Accordingly, FLAG would then have issued and outstanding approximately
6,744,432 shares of FLAG Common Stock based on the number of shares of FLAG
Common Stock issued and outstanding on June 30, 1998 and assuming the completion
of FLAG's Acquisition of Empire Bank Corp. See "SUMMARY -- Recent Developments."
Following the Merger, and assuming no exercise of dissenters' rights, the
current shareholders of Heart will beneficially own approximately 6.61% of the
FLAG Common Stock that will then be outstanding.
Background Of And Reasons For The Merger
Background of the Merger.
Executive officers of FLAG and Heart began exploring the possibility of
a combination in early May 1998. Representatives from FLAG met with the Board of
Directors of Heart on May 19, 1998 to discuss the merger.
In negotiating the final Exchange Ratio, the parties considered the
relative book value and earnings of each entity, as well as certain special
factors relating to historical performance, market growth potential, ancillary
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businesses and future growth plans. The parties did not follow a precise formula
in the negotiation of the final Exchange Ratio, which was based on mutual
determination by management of each institution that the Exchange Ratio fairly
represented equivalent value for the shareholders of each institution.
The Board of Directors of FLAG met on July 20, 1998 to discuss the
Merger Agreement and related agreements. After review of the matters considered
by the Board of Directors and Executive Committee of FLAG, the Board of
Directors of FLAG unanimously approved the Merger Agreement and authorized the
President and Chief Executive Officer of FLAG to take the appropriate actions
necessary to execute the Merger Agreement in substantially the form approved by
the Board.
The Board of Directors of Heart met on May 27, 1998 to discuss the
Merger Agreement and related agreements that were finalized on that date. After
review of the matters considered by the Board of Directors and Executive
Committee of Heart, the Board of Directors of Heart unanimously approved the
Merger Agreement and authorized the Chief Executive Officer of Heart to take the
appropriate actions necessary to execute the Merger Agreement.
The Merger Agreement was executed as of August 19, 1998. FLAG and Heart
each conducted a due diligence review of the material financial, operating and
legal information relating to the other party.
Heart's Reasons for the Merger and Recommendation of Directors. The
Heart Board of Directors evaluated the financial, legal and market
considerations bearing on the decision to recommend the Merger to the
shareholders of Heart. In reaching its conclusion that the Merger Agreement is
in the best interests of Heart and its shareholders, the Heart Board of
Directors carefully considered the following material factors:
(a) the business, operations, earnings and financial
condition, including the capital levels and asset quality, of FLAG on
an historical, prospective, and pro forma basis and in comparison to
other financial institutions in the area;
(b) the demographic, economic and financial characteristics of
the markets in which FLAG operates, including existing competition,
history of the market areas with respect to financial institutions, and
average demand for credit, on an historical and prospective basis;
(c) the results of Heart's due diligence review of FLAG and a
variety of factors affecting and relating to the overall strategic focus
of Heart, including Heart's desire to expand into markets outside the
general vicinity of its core markets;
(d) the potential increases in access to the public capital
markets and stock liquidity;
(e) the vision shared by Heart and FLAG relating to future
expansion;
(f) the similar community banking cultures and business
philosophies of FLAG and Heart, particularly with respect to community
lending philosophy, customer satisfaction, and efficiency and credit
quality; and
(g) the lack of any impact of the proposed Merger on the
employees and customers of Heart and its subsidiary, on the communities
in which Heart presently conducts its business, and on Heart's other
constituencies in view of FLAG's commitment to community banking.
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While each member of the Heart Board of Directors individually
considered the foregoing and other factors, the Heart Board of Directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination with respect to any individual factor. The
Heart Board of Directors collectively made its determination with respect to the
Merger based on the unanimous conclusion reached by its members, in light of the
factors that each of them consider as appropriate, that the Merger is in the
best interests of the Heart shareholders.
The terms of the Merger, including the Exchange Ratio, were the result
of arm's-length negotiations between representatives of Heart and
representatives of FLAG. Based upon its consideration of the foregoing factors,
the Board of Directors of Heart approved the Merger Agreement and the Merger as
being in the best interests of Heart and its shareholders.
THE HEART BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HEART
SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
FLAG's Reasons for the Merger. Since the completion of the merger of
Middle Georgia with FLAG in March 1998, FLAG has explored opportunities that
would further FLAG's goal of building a strong presence in Georgia through a
partnership of community banks. The FLAG Board of Directors evaluated the
financial, legal, and market considerations relating to the Merger. In reaching
its conclusion that the Merger Agreement is in the best interests of FLAG and
its shareholders, the FLAG Board of Directors carefully considered the following
material factors:
(a) the information presented to the directors by the
management of FLAG concerning the business, operations, earnings, asset
quality, and financial condition of Heart, including the composition of
the earning assets portfolio of Heart;
(b) the financial terms of the Merger, including the
relationship of the value of the consideration issuable in the Merger
to the market value, tangible book value, and earnings per share of
Heart Common Stock;
(c) the nonfinancial terms of the Merger, including the
treatment of the Merger as a tax-free exchange of Heart Common Stock
for FLAG Common Stock for federal income tax purposes;
(d) the likelihood of the Merger being approved by applicable
regulatory authorities without undue conditions or delay;
(e) the opportunity for reducing the noninterest expense of
the operations of Heart and the ability of the operations of Heart
after the Effective Time to contribute to the earnings of FLAG;
(f) the attractiveness of the Heart franchise, the market
position of Heart in Mount Vernon, the compatibility of the franchise
of Heart with the operations of FLAG, and the ability of Heart to
contribute to the business strategy of FLAG;
(g) the compatibility of the community bank orientation of the
operations of Heart to that of FLAG; and
(h) the opportunity to leverage the infrastructure of FLAG.
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While each member of the FLAG Board of Directors individually
considered the foregoing and other factors, the Board of Directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination with respect to any individual factor. The
FLAG Board of Directors collectively made its determination with respect to the
Merger based on the unanimous conclusion reached by its members, in light of the
factors that each of them consider as appropriate, that the Merger is in the
best interests of the FLAG shareholders.
The terms of the Merger, including the Exchange Ratio, were the result
of arm's-length negotiations between representatives of FLAG and representatives
of Heart. Based upon its consideration of the foregoing factors, the Board of
Directors of FLAG approved the Merger Agreement and the Merger as being in the
best interests of FLAG and its shareholders.
Effective Time Of The Merger
Subject to the conditions to the obligations of the parties to effect
the Merger, the Effective Time will occur on the date and at the time that the
Certificate of Merger is declared effective with the Secretary of State of the
State of Georgia. Unless otherwise agreed upon in writing by Heart and FLAG, and
subject to the conditions to the obligations of the parties to effect the
Merger, the parties will use their reasonable efforts to cause the Effective
Time to occur on the fifth business day following the last to occur of (i) the
effective date (including expiration of any applicable waiting period) of the
last required consent of any regulatory authority having authority over and
approving or exempting the Merger, and (ii) the date on which the shareholders
of Heart have approved the Merger Agreement.
No assurance can be provided that the necessary shareholder and
regulatory approvals can be obtained or that other conditions precedent to the
Merger can or will be satisfied. Heart and FLAG anticipate that all conditions
to consummation of the Merger will be satisfied so that the Merger can be
consummated during the fourth quarter of 1998. However, delays in the
consummation of the Merger could occur.
The Board of Directors of either Heart or FLAG generally may terminate
the Merger Agreement if the Merger is not consummated by December 31, 1998,
unless the failure to consummate by that date is the result of a breach of the
Merger Agreement by the party seeking termination. See "-- Conditions to
Consummation of the Merger" and "-- Waiver, Amendment, and Termination."
Distribution Of FLAG Certificates
Promptly after the Effective Time, FLAG will cause its transfer agent,
acting in its capacity as Exchange Agent, to mail to each former Heart
shareholder appropriate transmittal materials and instructions for use in
effecting the surrender and cancellation of the Heart Certificates in exchange
for FLAG Certificates representing shares of FLAG Common Stock.
Holders of Heart Common Stock should NOT send in their Heart
Certificates until they receive the appropriate transmittal materials and
instructions.
Upon surrender to the Exchange Agent of Heart Certificates, together
with the properly completed transmittal materials, there will be issued and
mailed to each holder of Heart Common Stock (other than shares as to which
holders have perfected dissenters' rights) surrendering such items a FLAG
Certificate or Certificates representing the number of shares of FLAG Common
Stock to which such holder is entitled, if any, and a check for the amount to be
paid in lieu of any fractional shares (without interest), together with all
undelivered dividends or distributions in respect of such shares (without
interest thereon).
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After the Effective Time, to the extent permitted by law, holders of
Heart Common Stock of record as of the Effective Time will be entitled to vote
at any meeting of FLAG shareholders the number of whole shares of FLAG Common
Stock into which their shares of Heart Common Stock have been converted,
regardless of whether such shareholders have surrendered their Heart
Certificates. Whenever a dividend or other distribution is declared by FLAG on
FLAG Common Stock, the record date for which is at or after the Effective Time,
the declaration will include dividends or other distributions on all shares
issuable pursuant to the Merger Agreement, but no dividend or other distribution
payable after the Effective Time with respect to FLAG Common Stock will be paid
to the holder of any unsurrendered Heart Certificate until the holder duly
surrenders such Heart Certificate. Upon surrender of such Heart Certificate,
however, both the FLAG Certificate, together with all undelivered dividends or
other distributions (without interest) and any undelivered cash payments to be
paid in lieu of fractional shares (without interest), will be delivered and paid
with respect to each share represented by such Heart Certificate. In no event
will the holder of any surrendered Heart Certificate be entitled to receive
interest on any cash to be issued to such holder, and in no event will FLAG or
the Exchange Agent be liable to any holder of Heart Common Stock for any amounts
paid or property delivered in good faith to a public official pursuant to any
applicable abandoned property, escheat, or similar law.
After the Effective Time, no transfers of shares of Heart Common Stock
on Heart's stock transfer books will be recognized. If Heart Certificates are
presented for transfer after the Effective Time, they will be canceled and
exchanged for the shares of FLAG Common Stock and a check for the amount due in
lieu of fractional shares, if any, deliverable in respect thereof.
After the Effective Time, holders of Heart Certificates will have no
rights with respect to the shares of Heart Common Stock formerly represented
thereby other than the right to surrender such Heart Certificates and receive in
exchange therefor the shares of FLAG Common Stock, if any, to which such holders
are entitled, as described above, or the right to perfect their dissenters'
rights.
If any FLAG Certificate is to be issued in a name other than that in
which the Heart Certificate surrendered for exchange is issued, the Heart
Certificate so surrendered shall be properly endorsed and otherwise in proper
form for transfer, and the person requesting such exchange shall affix any
requisite stock transfer tax stamps to the Heart Certificates surrendered, shall
provide funds for the purchase of any stock transfer tax stamps, or shall
establish to the exchange agent's satisfaction that such taxes are not payable.
Conditions To Consummation Of The Merger
Consummation of the Merger is subject to various conditions, including:
(a) approval of the Merger Agreement by the shareholders of Heart as
required by any law or by the provisions of any governing
instruments of Heart;
(b) receipt of certain regulatory approvals required for consummation
of the Merger (see "-- Regulatory Approvals");
(c) receipt of all consents required for consummation of the Merger
or for the preventing of any default under any contract or permit
which, if not obtained or made, is reasonably likely to have,
individually or in the aggregate, a material adverse effect;
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(d) the absence of any law or order or any action taken by any court,
governmental, or regulatory authority prohibiting, restricting,
or making illegal the consummation of the transactions
contemplated by the Merger Agreement;
(e) the Registration Statement being declared effective and the
receipt of all necessary SEC and state approvals relating to the
issuance or trading of the shares of FLAG Common Stock issuable
pursuant to the Merger Agreement;
(f) approval of the shares of FLAG Common Stock issuable pursuant to
the Merger Agreement for listing on the Nasdaq National Market;
(g) receipt of an opinion of Powell, Goldstein, Frazer & Murphy LLP
as to the qualification of the Merger as a tax-free
reorganization (see "-- Certain Federal Income Tax
Consequences");
(h) the accuracy, as of the date of the Merger Agreement and as of
the Effective Time, of the representations and warranties of
Heart and FLAG as set forth in the Merger Agreement;
(i) the performance of all agreements and the compliance with all
covenants of Heart and FLAG as set forth in the Merger Agreement;
(j) receipt by FLAG of a letter from Porter Keadle Moore, LLP to the
effect the Merger will qualify for pooling-of-interests
accounting treatment; and
(k) satisfaction of certain other conditions, including the receipt
of certain agreements of the affiliates of Heart, the execution
of certain claims letters by the directors and officers of Heart,
the receipt of certain opinion letters from counsel for FLAG and
counsel for Heart, and receipt of various certificates from the
officers of Heart and FLAG.
No assurance can be provided as to when or if all of the conditions
precedent to the Merger can or will be satisfied or waived by the party
permitted to do so. In the event the Merger is not effected on or before
December 31, 1998, the Merger Agreement may be terminated and the Merger
abandoned by either Heart or FLAG, unless the failure to consummate the Merger
by that date is the result of a breach of the Merger Agreement by the party
seeking termination. See "-- Waiver, Amendment, and Termination."
Regulatory Approvals
The Merger may not be consummated in the absence of the receipt of the
requisite regulatory approvals. There can be no assurance regarding whether or
when such regulatory approvals will be obtained. There also can be no assurance
that any such approvals will not impose conditions or be restricted in a manner
(including requirements relating to the raising of additional capital or the
disposition of assets) which in the reasonable judgment of the Board of
Directors of FLAG or Heart would so materially adversely impact the economic or
business benefits of the transactions contemplated by the Merger Agreement that,
had such condition or requirement been known, either of FLAG or Heart would not,
in its reasonable judgment, have entered into the Merger Agreement.
Heart and FLAG are not aware of any material governmental approvals or
actions that are required for consummation of the Merger, except as described
below. Should any other approval or action be required, it presently is
contemplated that such approval or action would be sought.
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The Merger will require the prior approval of the Federal Reserve,
pursuant to Section 3 of the BHC Act. FLAG has filed all required applications
with the Federal Reserve. In evaluating the Merger, the Federal Reserve must
consider, among other factors, the financial and managerial resources and future
prospects of the institutions and the convenience and needs of the communities
to be served. The relevant statutes prohibit the Federal Reserve from approving
the Merger if (i) it would result in a monopoly or be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any part of the United States or (ii) its effect in any section of
the country may be to substantially lessen competition or to tend to create a
monopoly, or if it would be a restraint of trade in any other manner, unless the
Federal Reserve finds that any anticompetitive effects are outweighed clearly by
the public interest and the probable effect of the transaction in meeting the
convenience and needs of the communities to be served. The Merger may not be
consummated until the 30th day (which the Federal Reserve may reduce to 15 days)
following the date of the Federal Reserve approval, during which time the United
States Department of Justice may challenge the transaction on antitrust grounds.
The commencement of any antitrust action would stay the effectiveness of the
approval of the agencies, unless a court of competent jurisdiction specifically
orders otherwise. There can be no assurance regarding whether or when the
approval of the Federal Reserve will be obtained or as to the timing or
conditions of any such approval.
The Merger will also require the prior approval of the GDBF pursuant to
the Financial Institutions Code of Georgia. FLAG has filed all applications
required to be filed with the GDBF in connection with the Merger. There can be
no assurance that the approval of the GDBF will be obtained or as to the timing
or conditions of any such approval.
Waiver, Amendment, And Termination
To the extent permitted by applicable law, Heart and FLAG may amend the
Merger Agreement by written agreement at any time before approval of the Merger
Agreement by the Heart shareholders. After the Heart shareholders approve the
Merger Agreement, no amendment shall be made to the Merger Agreement that,
pursuant to Sections 14-2-1101 and 14-2-1103 of the GBCC, requires further
approval by such shareholders, unless such approval is obtained. In addition,
prior to or at the Effective Time, either Heart or FLAG, or both, acting through
their respective Boards of Directors, chief executive officers, or other
authorized officers may waive any default in the performance of any term of the
Merger Agreement by the other party, may waive or extend the time for the
compliance or fulfillment by the other party of any and all of its obligations
under the Merger Agreement, and may waive any of the conditions precedent to the
obligations of such party under the Merger Agreement, except any condition that,
if not satisfied, would result in the violation of any applicable law or
governmental regulation. No such waiver will be effective unless written and
unless signed by a duly authorized officer of Heart or FLAG, as the case may be.
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time (i) by the mutual consent of Heart and FLAG or
(ii) by Heart or FLAG (a) in the event of any material breach of any
representation or warranty of the other party contained in the Merger Agreement
which cannot be or has not been cured within 30 days after giving written notice
to the breaching party of such inaccuracy and which breach is reasonably likely,
in the opinion of the non-breaching party, to have, individually or in the
aggregate, a Heart or FLAG Material Adverse Effect (as defined in the Merger
Agreement), as applicable, on the breaching party (provided that the terminating
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party is not then in material breach of any representation, warranty, covenant,
or other agreement contained in the Merger Agreement), (b) in the event of a
material breach by the other party of any covenant or agreement contained in the
Merger Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching party of such breach (provided that
the terminating party is not then in material breach of any representation,
warranty, covenant, or other agreement contained in the Merger Agreement), (c)
if the Merger is not consummated by December 31, 1998, provided that the failure
to consummate is not due to a breach by the party electing to terminate, or (d)
provided that the terminating party is not then in material breach of any
representation, warranty, covenant, or other agreement contained in the Merger
Agreement, if (1) any approval of any regulatory authority required for
consummation of the Merger and the other transactions contemplated by the Merger
Agreement has been denied by final nonappealable action, or if any action taken
by such authority is not appealed within the time limit for appeal or (2) the
shareholders of Heart fail to vote their approval of the matters submitted for
the approval by such shareholders at the Special Meeting.
If the Merger is terminated as described in this Section, the Merger
Agreement will become void and have no effect, except that certain provisions of
the Merger Agreement, including those relating to the obligations to maintain
the confidentiality of certain information obtained, will survive. In addition,
termination of the Merger Agreement will not relieve any breaching party from
liability for any uncured willful breach of a representation, warranty,
covenant, or agreement giving rise to such termination.
Dissenters' Rights
If the Merger Agreement and the transactions contemplated thereby are
consummated, any shareholder of Heart who properly dissents from the Merger in
connection with the Special Meeting may be entitled to receive in cash the fair
value of such shareholder's shares of Heart Common Stock determined immediately
prior to the Merger, excluding any appreciation or depreciation in anticipation
of the Merger. FAILURE TO COMPLY WITH THE PROCEDURES PRESCRIBED BY APPLICABLE
LAW WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
Any shareholder of Heart entitled to vote on the Merger Agreement has
the right to receive payment of the fair value of his or her shares of Heart
Common Stock upon compliance with the applicable provisions of the GBCC. A
record shareholder may assert dissenters' rights as to fewer than all of the
shares registered in his name only if he dissents with respect to all shares
beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf he
asserts dissenters' rights. The rights of a partial dissenter under Section
14-2-1303 of the GBCC are determined as if the shares as to which he dissents
and his other shares were registered in the names of different shareholders. Any
Heart shareholder intending to enforce the right to dissent (i) may not vote in
favor of the Merger Agreement, and (ii) must file a written notice of intent to
demand payment for his or her shares (the "Objection Notice") with Heart of
Georgia Bancshares, Inc., 101 Railroad Avenue, Mount Vernon, Georgia 30445
(telephone: (912) 583-2225, Attention: Donald M. Thigpen), before the vote on
the proposal to approve the Merger Agreement is taken at the meeting. The
Objection Notice must state that the shareholder intends to demand payment for
his or her shares of Heart Common Stock if the Merger is effected. A vote
against approval of the Merger Agreement, in and of itself, will not constitute
an Objection Notice satisfying the requirements of the GBCC.
If the Merger Agreement is approved by Heart's shareholders at the
Special Meeting, each shareholder who has properly filed an Objection Notice and
who has not voted in favor of the Merger Agreement will be notified by Heart of
such approval within ten days of the Special Meeting ("Dissenters' Notice").
Such Dissenters' Notice shall contain the following information: (i) where the
payment demand must be sent and where and when the Certificates representing the
Heart Common Stock must be deposited; (ii) the extent to which the transfer of
uncertificated shares will be restricted after the payment demand is received;
(iii) the date by which Heart must receive the payment demand (which date may
not be fewer than 30 nor more than 60 days after the Dissenters' Notice is
delivered); and (iv) a copy of Title 14, Chapter 2, Article 13 of the GBCC
(relating to dissenters' rights).
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Following the receipt of such Dissenters' Notice, any shareholder
electing to dissent must demand payment of the fair value of such shares and
deposit the Certificates representing the Heart Common Stock in accordance with
the terms of, and by the date set out in, the Dissenters' Notice. Such
shareholder will retain all other rights of a shareholder until those rights are
canceled or modified by the consummation of the Merger. A record shareholder who
does not demand payment or deposit such holder's share Certificates where
required, each by the date set out in the Dissenters' Notice, is not entitled to
payment for such holder's shares under Title 14, Chapter 2, Article 13 of the
GBCC.
Except as described below, within ten days of the later of the
Effective Time, or the date of receipt of a payment demand, Heart must, by
written notice, offer to each shareholder who has properly filed a payment
demand, and who has deposited his or her Heart Certificates representing the
Heart Common Stock, to pay an amount Heart estimates to be a fair value for the
shareholder's shares, plus accrued interest from the Effective Time. Such offer
of payment must be accompanied by (i) certain of Heart's recent financial
statements, (ii) a statement of Heart's estimate of the fair value of the shares
involved, (iii) an explanation of how the interest was calculated, (iv) a
statement of the dissenter's right to demand payment under Section 14-2-1327 of
the GBCC, and (v) a copy of Title 14, Chapter 2, Article 13 of the GBCC. Any
shareholder who accepts such offer by written notice to Heart within 30 days of
the offer, or who is deemed to have accepted such offer due to his or her
failure to respond to such offer within 30 days, shall receive payment for the
dissenting shareholder's shares within 60 days of such offer to pay or
consummation of the Merger, whichever is later. If the Merger is not consummated
within 60 days following the date set for demanding payment and depositing share
Certificates, Heart must return the deposited Certificates and release the
transfer restrictions imposed on uncertified shares. If Heart then consummates
the Merger, it must send a new Dissenters' Notice and repeat the payment demand
procedure.
In the event that Heart fails to make any payment offer within ten days
of the later of the date the proposed corporate action is taken or the date of
receipt of a payment demand, Heart must provide certain information to the
shareholder (the financial statements and other information required to
accompany Heart's payment offer) within ten days after receipt of a written
demand from such dissenting shareholder for such information. Additionally, such
dissenting shareholder may, at any time within the three years following the
consummation of the Merger, notify Heart of his own estimate of the fair value
of his shares and the interest due thereon, and demand payment of such amounts.
If (i) a dissenting shareholder is dissatisfied with an offer for payment made
by Heart within the time period set forth above, or (ii) Heart, having failed to
effect the Merger, does not return the deposited Heart Certificates or release
the transfer restrictions imposed on uncertificated shares within 60 days after
the date set for demanding payment, such dissenting shareholder may notify Heart
in writing of his own estimate of the fair value of his shares and the interest
due thereon, and demand payment of such amounts. A dissenting shareholder waives
such holder's right to demand payment under Section 14-2-1327 of the GBCC unless
such holder notifies Heart of such holder's demand in writing within 30 days
after Heart makes or offers payment for such holder's shares.
If such a demand for payment from any dissenting shareholder remains
unsettled within 60 days following the receipt by Heart of such demand for
payment, Heart must institute proceedings in the superior court of the county
where Heart's registered office is located requesting a nonjury equitable
determination of the fair value of such dissenting shareholder's shares and the
accrued interest owed to such dissenting shareholder. If Heart fails to file
such action within the 60-day period, Heart must pay each dissenting shareholder
whose demand remains unsettled the amount demanded by such dissenting
shareholder. Heart is required to make all dissenting shareholders whose demands
remain unsettled parties to the proceeding and to serve a copy of the petition
upon each such dissenting shareholder. The court may, in its discretion, appoint
an appraiser to receive evidence and recommend a decision on the question of
fair value. Each dissenting shareholder made a party to the proceeding will be
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entitled to judgment for the amount which the court finds to be the fair value
of his or her shares, plus interest to the date of judgment.
The court will determine and assess the costs and expenses of such
proceeding (including reasonable compensation for and the expenses of the
appraiser, but excluding fees and expenses of counsel and experts) against
Heart, except that the court may assess such costs and expenses as it deems
appropriate against any or all of the dissenting shareholders if it finds that
their demand for additional payment was arbitrary, vexatious, or otherwise not
in good faith. The court may award fees and expenses of counsel and experts in
amounts the court finds equitable: (i) against Heart, if Heart did not
substantially comply with the requirements of the corporation as set out in
Title 14, Chapter 2, Article 13, Part 2 of the GBCC; (ii) against either Heart
or the dissenting shareholder, if the court finds that either party's actions
were arbitrary, vexatious, or otherwise not in good faith; or (iii) if the court
finds that the services of attorneys for any dissenting shareholder were of
substantial benefit to other dissenting shareholders similarly situated, and
that the fees for those services should not be assessed against Heart, the court
may award those attorneys reasonable fees out of the amounts awarded the
dissenting shareholders who were benefited. No action by any dissenting
shareholder to enforce dissenters' rights may be brought more than three years
after the corporate action was taken, regardless of whether notice of the
corporate action and of the right to dissent was given by Heart in compliance
with the Dissenters' Notice and payment offer requirements of Sections 14-2-1320
and 14-2-1322 of the GBCC.
The foregoing summary of the applicable provisions of Title 14, Chapter
2, Article 13 of the GBCC is not intended to be a complete statement of such
provisions, and is qualified in its entirety by reference to such sections,
which are included as Appendix B to this Proxy Statement/Prospectus. The
provisions of the statutes are technical in nature and complex. FLAG and Heart
suggest that any shareholder who desires to exercise the right to object to the
Merger Agreement consult counsel. Failure to comply with the provisions of the
statute may defeat a shareholder's right to dissent. No further notice of the
events giving rise to dissenters' rights or any steps associated therewith will
be furnished to Heart shareholders, except as indicated above or otherwise
required by law.
Any dissenting Heart shareholder who perfects such holder's right to be
paid the value of such holder's shares will recognize taxable gain or loss upon
receipt of cash for such shares for federal income tax purposes. See "-- Certain
Federal Income Tax Consequences."
Conduct Of Business Pending The Merger
Pursuant to the Merger Agreement, Heart and FLAG have agreed that
unless the prior written consent of the other party has been obtained, and
except as otherwise expressly contemplated in the Merger Agreement, each of
Heart and FLAG will, and will cause its respective subsidiaries to (i) operate
its business only in the usual, regular, and ordinary course, (ii) preserve
intact its business organization and assets and maintain its rights and
franchises, and (iii) take no action which would (a) materially adversely affect
the ability of any party to obtain any consents required for the transactions
contemplated by the Merger Agreement without the imposition of a condition or
restriction of the type referred to in the last sentences of Section 9.1(b) or
9.1(c) of the Merger Agreement, or (b) materially adversely affect the ability
of any party to perform its covenants and agreements under the Merger Agreement.
In addition, Heart has agreed that, from the date of the Merger
Agreement until the earlier of the Effective Time or the termination of the
Merger Agreement, unless FLAG has given prior written consent, and except as
otherwise expressly contemplated by the Merger Agreement, Heart will not do or
agree or commit to do, or permit any of its subsidiaries to do or agree or
commit to do, any of the following:
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(a) amend the Articles of Incorporation, Bylaws, or other governing
instruments of any Heart entity;
b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a Heart entity to another Heart entity)
in excess of an aggregate of $100,000 (for the Heart entities on a
consolidated basis) except in the ordinary course of the business of the
Heart subsidiaries consistent with past practices (which shall include, for
Heart subsidiaries that are depository institutions, creation of deposit
liabilities, purchases of federal funds, advances from the Federal Reserve
Bank or Federal Home Loan Bank, and entry into repurchase agreements fully
secured by U.S. government or agency securities), or impose, or suffer the
imposition, on any asset of any Heart entity of any lien or permit any such
lien to exist (other than in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business, the satisfaction of legal
requirements in the exercise of trust powers, and liens in effect as of the
date of the Merger Agreement that were previously disclosed to FLAG by
Heart);
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of
the capital stock of any Heart entity, or declare or pay any dividend or
make any other distribution in respect of Heart's capital stock;
(d) except for the Merger Agreement, or pursuant to the exercise of stock
options outstanding as of the date thereof and pursuant to the terms
thereof in existence on the date thereof, or as previously disclosed to
FLAG by Heart, issue, sell, pledge, encumber, authorize the issuance of,
enter into any contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional
shares of Heart Common Stock or any other capital stock of any Heart
entity, or any stock appreciation rights, or any option, warrant, or other
equity right;
(e) adjust, split, combine or reclassify any capital stock of any Heart
entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of Heart Common Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber any asset
having a book value in excess of $100,000 other than in the ordinary course
of business for reasonable and adequate consideration or any shares of
capital stock of any Heart subsidiary (unless any such shares of stock are
sold or otherwise transferred to another Heart entity);
(f) enter into or amend any employment contract between any Heart entity
and any person having a salary thereunder in excess of $50,000 per year
(unless such amendment is required by law) that the Heart entity does not
have the unconditional right to terminate without liability (other than
liability for services already rendered), at any time on or after the
Effective Time of the Merger;
(g) except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities,
contributions to capital, asset transfers, or purchase of any assets, in
any entity other than a wholly-owned Heart subsidiary, or otherwise acquire
direct or indirect control over any entity, other than in connection with
(i) foreclosures in the ordinary course of business, (ii) acquisitions of
control by a depository institution subsidiary in its fiduciary capacity,
or (iii) the creation of new wholly-owned subsidiaries organized to conduct
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or continue activities otherwise permitted by the Merger Agreement;
(h) grant any increase in compensation or benefits to the employees or
officers of any Heart entity, except in accordance with past practice
previously disclosed to FLAG by Heart or as required by law; pay any
severance or termination pay or any bonus other than pursuant to written
policies or written contracts in effect on the date of the Merger Agreement
and previously disclosed to FLAG by Heart; enter into or amend any
severance agreements with officers of any Heart entity; grant any material
increase in fees or other increases in compensation or other benefits to
directors of any Heart entity except in accordance with past practice
previously disclosed to FLAG by Heart; or voluntarily accelerate the
vesting of any stock options or other stock-based compensation or employee
benefits or other equity rights;
(i) adopt any new employee benefit plan of any Heart entity or terminate or
withdraw from, or make any material change in or to, any existing employee
benefit plans of any Heart entity other than any such change that is
required by law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan, or make
any distributions from such employee benefit plans, except as required by
law, the terms of such plans or consistent with past practice;
(j) make any significant change in any tax or accounting methods or systems
of internal accounting controls, except as may be appropriate to conform to
changes in tax laws or regulatory accounting requirements or GAAP;
(k) commence any litigation other than in accordance with past practice or
except as previously disclosed to FLAG by Heart, settle any litigation
involving any liability of any Heart entity for material money damages or
restrictions upon the operations of any Heart entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material contract (including any loan contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any
material rights or claims.
The Merger Agreement also provides that from the date of the Merger
Agreement until the earlier of the Effective Time or the termination of the
Merger Agreement, unless Heart has given prior written consent, and except as
otherwise expressly contemplated by the Merger Agreement, FLAG will not amend
the Articles of Incorporation or Bylaws of FLAG in any manner adverse to the
holders of Heart Common Stock or take any action that will materially adversely
impact the ability of the FLAG entities to consummate the Merger.
Management And Operations After The Merger; Interests Of Certain Persons
In The Merger
FLAG will be the surviving corporation resulting from the Merger.
Certain members of Heart's management and the Heart Board of Directors have
interests in the Merger in addition to their interests as shareholders of Heart
generally. These include, among other things, provisions in the Merger Agreement
relating to indemnification of directors and officers and eligibility for
certain FLAG employee benefits. Promptly after the Effective Time, Donald M.
Thigpen and Robert E. Thigpen, Jr., both directors of Heart, will become members
of FLAG's Board of Directors. In addition, Donald Thigpen will continue to serve
as President of Mount Vernon Bank and will execute a Separation Agreement with
FLAG. Donald Thigpen will receive a signing bonus equal to $100,000 to be paid
annually in 20% increments beginning on the date of the consummation of the
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Merger. As of the Heart Record Date, none of the directors and officers of Heart
beneficially owned any shares of FLAG Common Stock.
Indemnification and Advancement of Expenses. The Merger Agreement
provides that FLAG will indemnify, defend, and hold harmless each person
entitled to indemnification from a Heart entity against all liabilities arising
out of actions or omissions occurring at or prior to the Effective Time
(including the transactions contemplated by the Merger Agreement) to the fullest
extent permitted under Georgia law and by Heart's Articles of Incorporation and
Bylaws as in effect on the date of the Merger Agreement, including provisions
relating to advances of expenses incurred in the defense of any litigation.
Without limiting the foregoing, in any case in which approval by FLAG is
required to effectuate any indemnification, FLAG will direct, at the election of
the indemnified party, that the determination of any such approval shall be made
by independent counsel mutually agreed upon between FLAG and the indemnified
party.
Separation Agreement. The Merger Agreement states that, as a condition
to consummating the Merger, FLAG and Donald M. Thigpen, President and Chief
Executive Officer of Heart, will enter into a Separation Agreement. Pursuant to
the terms of the Separation Agreement, Mr. Thigpen will receive certain
severance payments equal to 2.99 times his annual base salary and bonus paid
over the previous three fiscal years ("Annual Compensation") in the event Mr.
Thigpen is (i) involuntarily terminated, as such term is defined in the
Separation Agreement, or (ii) resigns following a change of control, as such
term is defined in the Separation Agreement. The Separation Agreement further
provides that Mr. Thigpen will receive an amount equal to one times his Annual
Compensation following the occurrence of certain events, including Mr. Thigpen
resigning within certain stated time periods. In addition, pursuant to the terms
of the Separation Agreement, Mr. Thigpen will make certain covenants not to
compete with FLAG during the term of the Separation Agreement and for a 12-month
period following the termination of the Separation Agreement.
Other Matters Relating to Employee Benefit Plans. The Merger Agreement
also provides that, after the Effective Time, FLAG will either (i) continue to
provide to officers and employees of the Heart entities employee benefits under
Heart's existing employee benefit and welfare plans or, (ii) if FLAG determines
to provide to officers and employees of the Heart entities employee benefits
under other employee benefit plans and welfare plans, provide generally to
officers and employees of the Heart entities employee benefits under employee
benefit and welfare plans, on terms and conditions which when taken as a whole
are substantially similar to those currently provided by the FLAG entities to
their similarly situated officers and employees. For purposes of participation
and vesting (but not accrual of benefits) under FLAG's employee benefit plans,
(i) service under any qualified defined benefit plan of Heart will be treated as
service under FLAG's defined benefit plan, if any, (ii) service under any
qualified defined contribution plans of Heart will be treated as service under
FLAG's qualified defined contribution plans, and (iii) service under any other
employee benefit plans of Heart will be treated as service under any similar
employee benefit plans maintained by FLAG. With respect to officers and
employees of the Heart entities who, at or after the Effective Time, become
employees of a FLAG entity and who, immediately prior to the Effective Time, are
participants in one or more employee welfare benefit plans maintained by the
Heart entities, FLAG will cause each comparable employee welfare benefit plan
which is substituted for a Heart welfare benefit plan to waive any evidence of
insurability or similar provision, to provide credit for such participation
prior to such substitution with regard to the application of any pre-existing
condition limitation, and to provide credit towards satisfaction of any
deductible or out-of-pocket provisions for expenses incurred by such
participants during the period prior to such substitution, if any, that overlaps
with the then current plan year for each such substituted employee welfare
benefit plan. FLAG also will cause the surviving corporation and its
subsidiaries to honor in accordance with their terms all employment, severance,
consulting and other compensation contracts previously disclosed to FLAG by
Heart between any Heart entity and any current or former director, officer, or
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employee thereof, and all provisions for vested benefits or other vested amounts
earned or accrued through the Effective Time under the Heart benefit plans.
Certain Federal Income Tax Consequences
The following is a summary of the material anticipated federal income
tax consequences of the Merger. This summary is based on the federal income tax
laws now in effect and as currently interpreted; it does not take into account
possible changes in such laws or interpretations, including amendments to
applicable statutes or regulations or changes in judicial decisions or
administrative rulings, some of which may have retroactive effect. This summary
does not purport to address all aspects of the possible federal income tax
consequences of the Merger and is not intended as tax advice to any person. In
particular, and without limiting the foregoing, this summary does not address
the federal income tax consequences of the Merger to shareholders in light of
their particular circumstances or status (for example, as foreign persons,
tax-exempt entities, dealers in securities, and insurance companies, among
others). Nor does this summary address any consequences of the Merger under any
state, local, estate, or foreign tax laws. Shareholders, therefore, are urged to
consult their own tax advisors as to the specific tax consequences to them of
the Merger, including tax return reporting requirements, the application and
effect of federal, foreign, state, local, and other tax laws, and the
implications of any proposed changes in the tax laws.
A federal income tax ruling with respect to this transaction was not
requested from the Internal Revenue Service ("IRS"). Instead, Powell, Goldstein,
Frazer & Murphy LLP, counsel to FLAG, will render an opinion to Heart and FLAG
concerning material federal income tax consequences of the proposed Merger under
federal income tax law. It is such firm's opinion that, based upon the
assumption the Merger is consummated in accordance with the Merger Agreement and
the representations made by the management of Heart and FLAG, the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
Assuming the Merger does qualify as a reorganization pursuant to
Section 368(a) of the Code, the shareholders of Heart will have the following
federal income tax consequences:
(a) The shareholders of Heart will recognize no gain or loss
upon the exchange of all of their Heart Common Stock solely for shares
of FLAG Common Stock.
(b) The aggregate tax basis of the FLAG Common Stock received
by the Heart shareholders in the Merger will, in each instance, be the
same as the aggregate tax basis of the Heart Common Stock surrendered
in exchange therefor, less the basis of any fractional share of FLAG
Common Stock settled by cash payment.
(c) The holding period of the FLAG Common Stock received by
the Heart shareholders will, in each instance, include the period
during which the Heart Common Stock surrendered in exchange therefor
was held, provided that the Heart Common Stock was held as a capital
asset on the date of the exchange.
(d) The payment of cash to Heart shareholders in lieu of
fractional share interests of FLAG Common Stock will be treated for
federal income tax purposes as if the fractional shares were
distributed as part of the exchange and then were redeemed by FLAG.
These cash payments will be treated as having been received as
distributions in full payment in exchange for the stock redeemed.
Generally, any gain or loss recognized upon such exchange will be
capital gain or loss, provided the fractional share would constitute a
capital asset in the hands of the exchanging shareholder.
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(e) Where solely cash is received by a Heart shareholder in
exchange for Heart Common Stock pursuant to the exercise of dissenters'
rights, the former Heart shareholder will be subject to federal income
tax as a result of such transaction. The cash will be treated as having
been received as a redemption in exchange for such holder's Heart
Common Stock, subject to the provisions and limitations of Section 302
of the Code.
Upon the subsequent sale or exchange of FLAG Common Stock, a holder of
such stock generally will recognize capital gain or loss equal to the difference
between the amount of cash and the fair market value of any property received
upon the sale or exchange and such holder's adjusted tax basis in the FLAG
Common Stock. Under recently enacted legislation, capital gains recognized by
certain non-corporate holders of FLAG Common Stock generally will be subject to
a maximum federal income tax rate of 20% if the shares sold or exchanged are
held for more than 18 months, and to a maximum federal income tax rate of 28% if
such shares are held for more than one year but are not held for more than 18
months. Tax consequences to dealers in FLAG Common Stock, non-United States
holders of FLAG Common Stock, or others who have a special tax status
(including, without limitation, financial institutions, insurance companies and
tax-exempt entities), or to persons who received their shares through the
exercise of employee stock options or otherwise as compensation, may be
different and such persons should consult their tax advisors as to the tax
consequences of a sale or exchange of FLAG Common Stock.
Each Heart shareholder who receives FLAG Common Stock in the Merger
will be required to attach a statement to such shareholder's federal income tax
return for the year of the Merger which describes the facts of the Merger,
including the shareholder's basis in the Heart Common Stock exchanged, and the
number of shares of FLAG Common Stock received in exchange for Heart Common
Stock. Each shareholder should also keep as part of such shareholder's permanent
records information necessary to establish such shareholder's basis in, and
holding period for, the FLAG Common Stock received in the Merger.
If the Merger fails to qualify as a tax-free reorganization for any
reason, the principal federal income tax consequences, under currently
applicable law, would be as follows: (i) gain or loss would be recognized to
Heart as a result of the Merger; (ii) gain or loss would be recognized by the
holders of Heart Common Stock upon the exchange of such shares in the Merger for
shares of FLAG Common Stock; (iii) the tax basis of the FLAG Common Stock to be
received by the holders of Heart Common Stock in the Merger would be the fair
market value of such shares of FLAG Common Stock at the Effective Time; and (iv)
the holding period of such shares of FLAG Common Stock to be received by Heart
shareholders pursuant to the Merger would begin the day after the Effective
Time. If the condition of receiving this tax opinion is waived by Heart, Heart
will resolicit its shareholders prior to proceeding with the Merger.
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH SHAREHOLDER AND OTHER CIRCUMSTANCES, EACH
HOLDER OF HEART COMMON STOCK IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISORS
TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE MERGER
(INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS).
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Accounting Treatment
It is anticipated that the Merger will be accounted for as a pooling of
interests. Under the pooling-of-interests method of accounting, the recorded
amounts of the assets and liabilities of Heart will be carried forward at their
previously recorded amounts.
In order for the Merger to qualify for pooling-of-interests accounting
treatment, substantially all (90% or more) of the outstanding Heart Common Stock
must be exchanged for FLAG Common Stock with substantially similar terms. There
are certain other criteria that must be satisfied in order for the Merger to
qualify as a pooling of interests, some of which criteria cannot be satisfied
until after the Effective Time.
For information concerning certain conditions to be imposed on the
exchange of Heart Common Stock for FLAG Common Stock in the Merger by affiliates
of Heart and certain restrictions to be imposed on the transferability of the
FLAG Common Stock received by those affiliates in the Merger in order, among
other things, to ensure the availability of pooling-of-interests accounting
treatment, see "-- Resales of FLAG Common Stock."
Expenses And Fees
The Merger Agreement provides that each of the parties will bear and
pay all direct costs and expenses incurred by it or on its behalf in connection
with the transactions contemplated by the Merger Agreement, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
In the event the Merger Agreement is terminated by FLAG as a result of
a material breach by Heart of any representation, warranty, covenant or
agreement, which cannot be or has not been cured within 30 days after FLAG has
given Heart written notice of such breach, and which, in the opinion of FLAG, is
reasonably likely to have a material adverse effect, or if the Heart
shareholders do not approve the Merger Agreement, then Heart shall pay to FLAG
an amount equal to the lesser of $100,000 or FLAG's actual out of pocket
expenses incurred in connection with the Merger.
In the event that the Merger Agreement is terminated by Heart as a
result of a material breach by FLAG of any representation, warranty, covenant or
agreement, which cannot or has not been cured within 30 days after Heart has
given FLAG written notice of such breach, and which, in the opinion of Heart, is
reasonably likely to have a material adverse effect, then FLAG shall pay to
Heart an amount equal to the lesser of $100,000 and Heart's actual out of pocket
expenses incurred in connection with the Merger transaction.
Resales Of FLAG Common Stock
The issuance of FLAG Common Stock to shareholders of Heart in
connection with the Merger will be registered under the Securities Act. All
shares of FLAG Common Stock received by holders of Heart Common Stock and all
shares of FLAG Common Stock issued and outstanding immediately prior to the
Effective Time will be freely transferable by those shareholders of Heart and
FLAG not deemed to be "Affiliates" of Heart or FLAG. "Affiliates" generally are
defined as persons or entities who control, are controlled by, or are under
common control with Heart or FLAG at the time of the Special Meeting (generally,
directors, executive officers and 10% shareholders).
Rule 145 promulgated under the Securities Act restricts the sale of
FLAG Common Stock received in the Merger by Affiliates and certain of their
family members and related interests. Generally speaking, during the one-year
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period following the Effective Time, Affiliates of Heart or FLAG may resell
publicly the FLAG Common Stock received by them in the Merger within certain
limitations as to the amount of FLAG Common Stock sold in any three-month period
and as to the manner of sale. After this one-year period, such Affiliates of
Heart who are not Affiliates of FLAG may resell their shares without
restriction. The ability of Affiliates to resell shares of FLAG Common Stock
received in the Merger under Rule 144 or 145 as summarized herein generally will
be subject to FLAG's having satisfied its Exchange Act reporting requirements
for specified periods prior to the time of sale. Affiliates will receive
additional information regarding the effect of Rules 144 and 145 on their
ability to resell FLAG Common Stock received in the Merger. Affiliates also
would be permitted to resell FLAG Common Stock received in the Merger pursuant
to an effective registration statement under the Securities Act or an available
exemption from the Securities Act registration requirements. This Proxy
Statement/Prospectus does not cover any resales of FLAG Common Stock received by
persons who may be deemed to be Affiliates of Heart or FLAG.
Heart has agreed to use its reasonable efforts to cause each person who
may be deemed to be an Affiliate of Heart to execute and deliver to FLAG, prior
to the Effective Time, an agreement (each, a "Heart Affiliate Agreement")
providing that such Affiliate will not sell, pledge, transfer, or otherwise
dispose of any FLAG Common Stock obtained as a result of the Merger (i) except
in compliance with the Securities Act and the rules and regulations of the SEC
thereunder and (ii) in any case, until after results covering 30 days of
post-Merger operations of FLAG have been published. The receipt of the Heart
Affiliate Agreements by FLAG is also a condition to FLAG's obligations to
consummate the Merger. Heart Certificates surrendered for exchange by any person
who is an Affiliate of Heart for purposes of Rule 145(c) under the Securities
Act shall not be exchanged for FLAG Certificates until FLAG has received such a
written agreement from such person. Prior to publication of such results, FLAG
will not transfer on its books any shares of FLAG Common Stock received by an
Affiliate pursuant to the Merger. The stock certificates representing FLAG
Common Stock issued to Affiliates in the Merger may bear a legend summarizing
the foregoing restrictions. See "-- Conditions to Consummation of the Merger."
DESCRIPTION OF FLAG COMMON STOCK
FLAG's authorized capital stock consists of 20,000,000 shares of $1.00
par value common stock, and 10,000,000 shares of preferred stock. The holders of
the FLAG Common Stock have unlimited voting rights and are entitled to one vote
per share for all purposes. Subject to such preferential rights as may be
determined by the Board of Directors of FLAG in connection with the future
issuance of shares of FLAG preferred stock, holders of FLAG Common Stock are
entitled to such dividends, if any, as may be declared by the Board of Directors
of FLAG in compliance with the provisions of the GBCC and the regulations of the
appropriate regulatory authorities, and to receive the net assets of the
corporation upon dissolution. The FLAG Common Stock does not have any preemptive
rights with respect to acquiring additional shares of FLAG Common Stock, and the
shares are not subject to any conversion, redemption or sinking fund provisions.
The outstanding shares of FLAG Common Stock are, and the shares to be issued by
FLAG in connection with the Merger Agreement will be, when issued, fully-paid
and nonassessable. The FLAG Board of Directors is divided into three classes, as
nearly equal in number as possible. FLAG Common Stock does not have cumulative
voting rights in the election of FLAG directors.
The Board of Directors is authorized to determine the series,
preferences, limitations, and relative rights, including par value, of any
authorized but unissued shares of FLAG preferred stock. No shares of FLAG
preferred stock are presently outstanding, and although such shares may be
issued in the future, FLAG has no present plans to issue any preferred stock.
The FLAG preferred stock was authorized for future flexibility, and could be
issued in a manner that could have an anti-takeover effect by discouraging a
third party from seeking to acquire FLAG. FLAG knows of no present attempts to
acquire FLAG.
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In order to approve certain "business combinations" with certain
"interested shareholders" (10% or more shareholders), or to amend the provisions
in the FLAG Articles of Incorporation relating to such business combinations,
the affirmative vote of two-thirds of the issued and outstanding shares of the
corporation entitled to vote thereon is required, unless (i) at least two-thirds
of the directors of FLAG approve a memorandum of understanding with the
interested shareholder regarding the business combination prior to the date on
which such shareholder became an interested shareholder, or (ii) the business
combination is unanimously approved by certain "continuing directors" of FLAG.
In addition, in order to amend certain provisions of FLAG's Articles of
Incorporation and Bylaws relating to the number, election, term and removal of
FLAG Directors, a two-thirds vote of the issued and outstanding shares of FLAG
is required, unless two-thirds of the directors then serving approve the
amendment.
EFFECT OF THE MERGER ON RIGHTS OF SHAREHOLDERS
As a result of the Merger, holders of Heart Common Stock will be
exchanging their shares of a Georgia corporation governed by the GBCC and
Heart's Articles of Incorporation (the "Heart Articles") and Bylaws, for shares
of Common Stock of FLAG, a Georgia corporation governed by the GBCC and FLAG's
Articles of Incorporation (the "FLAG Articles") and Bylaws. Certain significant
differences exist between the rights of Heart shareholders and those of FLAG
shareholders. The differences deemed material by Heart and FLAG are summarized
below. The following discussion is necessarily general; it is not intended to be
a complete statement of all the differences affecting the rights of shareholders
and their respective entities, and it is qualified in its entirety by reference
to the GBCC as well as to FLAG's Articles and Bylaws and Heart's Articles and
Bylaws.
Authorized Capital Stock
FLAG. The FLAG Articles authorize the issuance of an aggregate of
20,000,000 shares of Common Stock, $1.00 par value, of which 5,174,807 shares
were issued and outstanding as of the June 30, 1998. The FLAG Articles also
authorize the issuance, in one or more series, of not more than 10,000,000
shares of preferred stock ("FLAG Preferred Stock") with preferences, limitations
and relative rights, including par value, as the FLAG Board of Directors from
time to time may determine and set forth in an amendment to the FLAG Articles.
Shares of FLAG Common Stock have unlimited voting rights and are
entitled to receive the net assets of FLAG upon the dissolution of the
corporation. The FLAG Bylaws provide that each share of FLAG Common Stock is
entitled to one vote per share for all purposes.
FLAG's Board of Directors may authorize the issuance of authorized but
unissued shares of FLAG Common Stock without further action by FLAG's
shareholders, unless such action is required in a particular case by applicable
laws or regulations or by any stock exchange upon which FLAG's capital stock may
be listed. FLAG's shareholders do not have the preemptive right to purchase or
subscribe to any unissued authorized shares of FLAG Common Stock or FLAG
Preferred Stock or any option or warrant for the purchase thereof.
The authority to issue additional shares of FLAG Common Stock provides
FLAG with the flexibility necessary to meet its future needs without the delay
resulting from seeking shareholder approval. The authorized but unissued shares
of FLAG Common Stock will be issuable from time to time for any corporate
purpose, including, without limitation, stock splits, stock dividends, employee
benefit and compensation plans, acquisitions, and public or private sales for
cash as a means of raising capital. Such shares could be used to dilute the
stock ownership of persons seeking to obtain control of FLAG. In addition, the
sale of a substantial number of shares of FLAG Common Stock to persons who have
an understanding with FLAG concerning the voting of such shares, or the
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distribution or declaration of a dividend of shares of FLAG Common Stock (or the
right to receive FLAG Common Stock) to FLAG shareholders, may have the effect of
discouraging or increasing the cost of unsolicited attempts to acquire control
of FLAG.
Heart. Heart's authorized capital stock consists of 1,000,000 shares of
Heart Common Stock, $1.00 par value, of which 220,000 shares were issued and
outstanding as of the Heart Record Date. Each share of Heart Common Stock is
entitled to one vote per share for all purposes. Heart's shareholders do not
have the preemptive right to purchase or subscribe to any unissued authorized
shares of Heart Common Stock or any option or warrant for the purchase thereof.
In addition, the Board of Directors of Heart may authorize the issuance of
authorized but unissued shares of Heart Common Stock without further action by
Heart's shareholders, unless such action is required in a particular case by
applicable laws or regulations.
Amendment Of Articles Of Incorporation And Bylaws
FLAG. The FLAG Articles and Bylaws are generally silent with respect to
the issue of amending the FLAG Articles, and thus, the GBCC dictates the
requirements for making such an amendment. The GBCC generally provides that
other than in the case of certain routine amendments which may be made by a
corporation's board of directors without shareholder action (such as changing
the corporate name), and other amendments which the GBCC specifically allows
without shareholder action, the corporation's board of directors must recommend
any amendment of the FLAG Articles to the shareholders (unless the board elects
to make no such recommendation because of a conflict of interest or other
special circumstances, and the board communicates the reasons for its election
to the shareholders) and the affirmative vote of a majority of the votes
entitled to be cast on the amendment by each voting group entitled to vote on
the amendment (unless the GBCC, the articles of incorporation, or the board
require a greater vote or a vote by voting groups) is required to amend a
corporation's articles of incorporation. The FLAG Articles provide that the
provisions regarding the approval required for certain business combinations may
only be changed by the affirmative vote of at least two-thirds of the issued and
outstanding shares of the corporation entitled to vote thereon at any regular or
special meeting of the shareholders, and notice of the proposed change must be
contained in the notice of the meeting, unless two-thirds of certain "continuing
directors" approve the proposed amendment. The FLAG Articles also provide that
the provisions regarding the election, term and removal of FLAG Directors may
only be amended or rescinded by the affirmative vote of the holders of at least
two-thirds of the issued and outstanding shares of FLAG entitled to vote in an
election of directors or at any regular or special meeting of the shareholders,
and notice of any proposed change must be contained in the notice of the
meeting, unless two-thirds of the directors then serving approve the proposed
amendment.
The FLAG Bylaws generally provide that the Bylaws may be made, amended
or repealed by the FLAG Board of Directors unless the FLAG Articles or the GBCC
reserve the power to amend or repeal the Bylaws exclusively to the shareholders
in whole or in part, or the shareholders, in amending or repealing a particular
Bylaw, provide expressly that the FLAG Board of Directors may not amend or
repeal that Bylaw. Neither the FLAG Articles nor Bylaws expressly permit the
FLAG shareholders to make, alter or rescind any Bylaws. Any amendment of the
provisions in the FLAG Bylaws relating to the number of directors of FLAG
requires the affirmative vote of two-thirds of all directors then in office or
the affirmative vote of the holders of two-thirds of the issued and outstanding
shares of FLAG entitled to vote at any regular or special meeting of the
shareholders called for that purpose. Unless two-thirds of the directors then
serving approve, the provisions in the FLAG Bylaws relating to the removal of
FLAG directors by the FLAG shareholders may only be amended or rescinded by the
affirmative vote of the holders of at least two-thirds of the issued and
outstanding shares of FLAG entitled to vote in an election of directors or at
any regular or special meeting of the shareholders, and notice of any proposed
change must be contained in the notice of the meeting.
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Heart. The Heart Articles and Bylaws are generally silent with respect
to the issue of amending the Heart Articles, and thus, the GBCC dictates the
requirements for making such an amendment. The GBCC generally provides that
other than in the case of certain routine amendments which may be made by a
corporation's board of directors without shareholder action (such as changing
the corporate name), and other amendments which the GBCC specifically allows
without shareholder action, the corporation's board of directors must recommend
the amendment to the shareholders (unless the board elects to make no such
recommendation because of a conflict of interest or other special circumstances,
and the board communicates the reasons for its election to the shareholders) and
the affirmative vote of a majority of the votes entitled to be cast on the
amendment by each voting group entitled to vote on the amendment (unless the
GBCC, the articles of incorporation, or the board require a greater vote or a
vote by voting groups) is required to amend a corporation's articles of
incorporation.
In general, Heart's Bylaws may be altered, amended, or repealed by the
Heart Board of Directors. The Heart Bylaws provide that the Heart shareholders
have the power to alter, amend or repeal any bylaws adopted by the Board of
Directors of Heart, and new Bylaws may be adopted by the Heart shareholders. In
addition, the shareholders may prescribe that any bylaw or bylaws adopted by
them shall not be altered, amended, or repealed by the Heart Board of Directors.
Classified Board Of Directors And Absence Of Cumulative Voting
FLAG. FLAG's Bylaws generally provide that the number of directors
constituting the FLAG Board of Directors shall be twelve. The FLAG Board of
Directors is classified. The FLAG Articles and Bylaws provide that FLAG's Board
of Directors is divided into three classes, with each class to be as nearly
equal in number as possible. The directors in each class serve three-year terms
of office. The effect of FLAG having a classified Board of Directors is that
only approximately one-third of the members of the Board of Directors are
elected each year, which effectively requires two annual meetings for FLAG's
shareholders to change a majority of the members of the Board of Directors. The
FLAG Bylaws provide that in the event of a vacancy on the FLAG Board of
Directors, including any vacancy created by reason of an increase in the number
of directors, such vacancy may be filled by the shareholders of FLAG, the FLAG
Board of Directors, or, if the directors remaining in office constitute fewer
than a quorum of the Board of Directors, by affirmative vote of a majority of
the remaining directors. FLAG shareholders do not have cumulative voting rights
with respect to the election of directors. All elections for directors are
decided by a plurality of the votes cast by the shares entitled to vote in the
election at a meeting at which a quorum is present.
Heart. Unlike the FLAG Board of Directors, the Heart Board is not
classified. The number of directors is determined by the Board of Directors or
the Heart shareholders from time to time, but in no event will the Board of
Directors have less than two directors nor more than seven directors. The Heart
Bylaws provide that the directors will be elected by the affirmative vote of a
plurality of the shares represented at the annual meeting of Heart shareholders.
Removal Of Directors
FLAG. Under the FLAG Articles and Bylaws, any one or more directors of
FLAG may be removed from office, but only for cause (defined as final conviction
of a felony, request or demand for removal by any bank regulatory authority
having jurisdiction over FLAG, or breach of fiduciary duty involving personal
profit). Such removal must be effected by the affirmative vote of the holders of
a majority of the outstanding shares of FLAG.
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Heart. Under the Heart Articles and Bylaws, any one or more directors
of Heart may be removed from office, but only for cause. Such removal must be
effected by the affirmative vote of the holders of a majority of the outstanding
shares of Heart.
Indemnification
FLAG. The FLAG Articles and Bylaws generally provide that any director
who is deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding which is initiated against such person by reason of his
serving as a director, to the fullest extent authorized by the GBCC; provided,
however, that FLAG will not indemnify any director for any liability or expenses
incurred by such director (i) for any appropriation, in violation of his duties,
of any business opportunity of FLAG; (ii) for any acts or omissions which
involve intentional misconduct or a knowing violation of law; (iii) for the
types of liability set forth in Section 14-2-832 of the GBCC or successor
provisions; or (iv) for any transaction from which the director derives an
improper personal benefit. FLAG's Articles and Bylaws provide for the
advancement of expenses to its directors at the outset of a proceeding, upon the
receipt from such director of the written affirmation and repayment promise
required by Section 14-2-856 of the GBCC, the purchase of insurance by FLAG
against any liability of the director arising from his duties and actions as a
director, the survival of such indemnification to the director's heirs,
executors and administrators, and the limitation of a director's liability to
the corporation itself. The indemnification provisions state that they are
non-exclusive and shall not impair any other rights to which those seeking
indemnification or advancement of expenses may be entitled. The FLAG Bylaws also
provide for similar indemnification of the officers of FLAG. The FLAG Bylaws
provide that shareholders are entitled to notification of any indemnification
granted to the directors.
Heart. Under Heart's Bylaws, Heart must indemnify persons who are
parties to any civil, criminal, administrative or investigative action, suit or
proceeding by reason of the fact that such person was or is a director of Heart.
Except as noted below, directors are indemnified against expenses (including but
not limited to attorney's fees and court costs), and against any judgments,
fines and amounts paid in settlement actually and reasonably incurred by them.
Directors also are entitled to have Heart advance any such expenses prior to
final disposition of the proceeding, upon an undertaking to repay Heart if it is
ultimately determined that they are not entitled to indemnification. Directors
will not be indemnified against expenses, judgments, fines and amounts paid in
settlement attributable to circumstances as to which, under applicable
provisions of the GBCC as in effect from time to time, such indemnification may
not be authorized by action of the Board of Directors, the shareholders, or
otherwise. The GBCC currently provides that a director may not be indemnified
for liability resulting from (i) any appropriation, in violation of his duties,
of any business opportunity of Heart, (ii) acts or omissions involving
intentional misconduct or a knowing violation of law, (iii) the types of
liability set forth in Section 14-2-832 of the GBCC, or (iv) any transaction
from which the director receives an improper personal benefit. The
indemnification provisions state that they are non-exclusive and shall not
impair any other rights to which those seeking indemnification or advancement of
expense may be entitled.
Special Meetings Of Shareholders
FLAG. FLAG's Bylaws provide that such meetings may be called at any
time by a majority of the entire Board of Directors of FLAG, the Chairman of the
Board, the President, or, upon delivery to FLAG's Secretary of a signed and
dated written request setting out the purpose or purposes for the meeting, the
holders of a majority of the votes entitled to be cast on any issue proposed to
be considered at the proposed special meeting.
Heart. The Heart Bylaws provide that special meetings may be called at
any time by the President, the Chairman of the Board, or the Board of Directors
of Heart. Heart is required to call a special meeting when requested in writing
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by the holders of not less than twenty-five percent of all the shares entitled
to vote in an election of directors.
Actions by Shareholders Without a Meeting
FLAG. In accordance with FLAG's Articles and Section 14-2-704 of the
GBCC, action required or permitted by the GBCC to be taken at an annual or
special meeting may be taken without a meeting only if the action is taken by
all the shareholders entitled to vote on the action.
The provisions of the GBCC do not affect the special voting
requirements contained in the FLAG Articles of Incorporation or Bylaws for the
approval of a business combination or the amendment of such provision. The
approval of a business combination or of an amendment to the provision which
sets forth the voting requirements of such combinations requires the affirmative
vote of the holders of two-thirds of all shares of FLAG Common Stock outstanding
and entitled to vote, unless (i) two-thirds of the directors of FLAG approve a
memorandum of understanding with the interested shareholder prior to the date
when such interested shareholder first became an interested shareholder, or (ii)
the business combination is unanimously approved by the continuing directors of
FLAG.
Heart. In accordance with Heart's Articles and Section 14-2-704 of the
GBCC, action required or permitted by the GBCC to be taken at an annual or
special meeting may be taken without a meeting only if the action is taken by
all the shareholders entitled to vote on the action.
Mergers, Consolidations, And Sales Of Assets
FLAG. The FLAG Articles generally require the affirmative vote of the
holders of at least two-thirds of all the issued and outstanding shares (other
than shares held by an "interested shareholder") of FLAG Common Stock entitled
to vote to approve a "business combination" with an interested shareholder
(basically, a 10% or more shareholder of FLAG), unless (i) two-thirds of the
directors of FLAG approve a memorandum of understanding with the interested
shareholder regarding the business combination prior to the date such
shareholder became an interested shareholder, or (ii) the business combination
is unanimously approved by certain "continuing directors" of FLAG. In addition,
FLAG's Bylaws expressly provide that the terms and requirements of Sections
14-2-1110 through 14-2-1113 of the GBCC will be applicable to FLAG and to any
business combination approved or recommended by the Board of Directors of FLAG.
As a result, Section 14-2-1111 requires that the business combination be (i)
unanimously approved by the continuing directors, provided that the continuing
directors constitute at least three members of the board of directors at the
time of such approval, or (ii) recommended by at least two-thirds of the
continuing directors and approved by a majority of the votes entitled to be cast
by the holders voting shares of the corporation (other than the voting shares
beneficially owned by the interested shareholder who is a party to the business
combination). These voting requirements are required in addition to any vote
otherwise required by law or the Articles of Incorporation of FLAG. Further,
Section 14-2-1112 states that the voting requirements in Section 14-2-1111 do
not apply as long as all of the shareholders of FLAG receive a fair price in
return for their stock as a result of the business combination. However, the
voting requirements contained within the FLAG Articles of Incorporation would
continue to apply to any such business combinations.
The provisions of the FLAG Articles of Incorporation and Bylaws
relating to business combinations and Sections 14-2-1110 through 14-2-1113 of
the GBCC are designed as anti-takeover measures, and for the protection of the
minority shareholders of FLAG against some of the inequities which arise in
certain hostile takeover attempts. Heart's Articles and Bylaws do not contain
such provisions.
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Heart. The GBCC generally provides that a merger, consolidation, or a
sale of substantially all assets requires the approval of the corporation's
board of directors and by a majority of the corporation's outstanding shares.
Neither Heart's Articles of Incorporation nor its Bylaws include provisions that
alter the vote required to approve the Merger.
Shareholders' Rights To Examine Books And Records
FLAG. The FLAG Bylaws state that the Board of Directors of FLAG has the
power to determine which accounts and books of FLAG, if any, will be open to the
inspection of shareholders, except such books and records which are required by
law to be held open for inspection. The GBCC provides that a shareholder is
entitled to inspect and copy certain books and records (such as the
corporation's articles of incorporation or bylaws) upon written demand at least
five days before the date on which he wishes to inspect such records. A
shareholder is entitled to inspect certain other documents (such as minutes of
the meetings of the board of directors, accounting records and the record of
shareholders of the corporation) provided that such inspection must occur during
regular business hours at a reasonable location determined by FLAG, and any such
demand for inspection will only be permitted if the following conditions are
met: (i) the demand for inspection is made in good faith, or made for a proper
purpose (a purpose reasonably relevant to such person's legitimate interest as a
shareholder); (ii) the shareholder describes with particularity his or her
purpose for the inspection and the documents which he wishes to inspect; (iii)
the records requested for inspection by the shareholder are directly connected
with his or her stated purpose; and (iv) the records are to be used solely for
the shareholder's stated purpose. The FLAG Bylaws also state that the Board has
the power to prescribe reasonable rules and regulations not in conflict with
applicable law for the inspection of corporate books or accounts.
Heart. The Heart Bylaws contain substantially similar terms as the FLAG
Bylaws with respect to the rights of shareholders of Heart to inspect corporate
records or accounts. Basically, the Heart Board of Directors has the power to
designate which documents will be open for inspection and the manner in which
shareholders may inspect such documents, subject to the requirements of the
GBCC.
Dividends
FLAG. The FLAG Bylaws provide that dividends upon the capital stock of
FLAG may be declared by the FLAG Board of Directors, as long as the Board of
Directors complies with the requirements of the GBCC and the applicable rules
and regulations of any relevant regulatory authorities. Such dividends may be
paid in cash, property, or shares of FLAG's capital stock. Section 14-2-640 of
the GBCC provides, generally, that no distribution, including dividends, may be
made by a corporation if, after giving the distribution effect: (i) the
corporation would not be able to pay its debts as they become due in the usual
course of business; or (ii) the corporation's total assets would be less than
the sum of its total liabilities plus any amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of shareholders whose preferential rights
are superior to those receiving the distribution.
Heart. The Heart Bylaws provide that the Board of Directors, from time
to time in its discretion, may authorize or declare distributions or share
dividends in accordance with the GBCC.
COMPARATIVE MARKET PRICES AND DIVIDENDS
FLAG Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "FLAG." The following
table sets forth the high and low sale prices per share of FLAG Common Stock on
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the Nasdaq National Market and the dividends paid per share of FLAG Common Stock
for the indicated periods. Effective June 3, 1998, FLAG declared a 3-for-2 stock
split. The amounts below have been adjusted to reflect the stock split.
Sale Price Per
Share of FLAG
Common Stock Dividends Declared
-------------------- Per Share of FLAG
High Low Common Stock
------- ------- -------------
1996
First Quarter........................ $ 9.67 $ 8.33 $0.042
Second Quarter....................... 9.00 8.00 0.034
Third Quarter........................ 8.50 6.33 0.034
Fourth Quarter....................... 7.83 7.17 0.034
1997
First Quarter........................ $ 8.67 $ 6.83 $0.046
Second Quarter....................... 9.75 7.50 0.034
Third Quarter........................ 11.00 9.33 0.034
Fourth Quarter....................... 14.33 11.00 0.034
1998
First Quarter........................ $ 14.33 $ 11.92 $0.046
Second Quarter....................... 19.38 12.67 0.060
Third Quarter (through ____, 1998)... _____ _____
On May 27, 1998, the last day prior to the public announcement of the
proposed merger between FLAG and Heart, the last reported sale price per share
of FLAG Common Stock on the Nasdaq National Market was $15.167, as adjusted for
the 3-for-2 stock split effective June 3, 1998, and the resulting equivalent pro
forma price per share of Heart Common Stock (based on the 2.025 Exchange Ratio)
was $30.71. On September __, 1998, the latest practicable date prior to the
mailing of this Proxy Statement/Prospectus, the last reported sale price per
share of FLAG Common Stock on the Nasdaq National Market was $_______, and the
resulting equivalent pro forma price per share of Heart Common Stock was
$________. The equivalent per share price of a share of Heart Common Stock at
each specified date represents the last reported sale price of a share of FLAG
Common Stock on such date multiplied by the Exchange Ratio.
There is no established public trading market for the Heart Common
Stock, and no reliable information is available as to trades of such shares or
the prices at which such shares have traded. Heart has never paid dividends on
its common stock.
To the knowledge of Heart, the most recent trade of Heart Common Stock
prior to May 27, 1998, the last day prior to the public announcement of the
proposed merger between FLAG and Heart, was in December 1995 at $12.00 per
share. To the knowledge of Heart, there have been no trades of Heart Common
Stock since the announcement of the Merger.
The foregoing information regarding Heart Common Stock is provided for
informational purposes only and, due to the absence of an active market for
Heart's shares, should not be viewed as indicative of the actual or market value
of Heart Common Stock.
The holders of FLAG Common Stock are entitled to receive dividends when
and if declared by the Board of Directors out of funds legally available
therefor. FLAG has paid regular quarterly cash dividends on its Common Stock
since 1987. Although FLAG currently intends to continue to pay quarterly cash
dividends on FLAG Common Stock, there can be no assurance that FLAG's dividend
policy will remain unchanged after consummation of the Merger. The declaration
and payment of dividends thereafter will depend upon business conditions,
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operating results, capital and reserve requirements, and the Board of Directors'
consideration of other relevant factors. For information with respect to the
provisions of the Merger Agreement relating to FLAG's and Heart's abilities to
pay dividends on their respective common stock during the pendency of the
Merger, see "DESCRIPTION OF MERGER -- Conduct of the Business Pending the
Merger."
FLAG is a legal entity separate and distinct from its subsidiaries and
its revenues depend in significant part on the payment of dividends from its
subsidiary depository institutions. FLAG's bank subsidiaries and subsidiary
thrift institution are subject to certain legal restrictions on the amount of
dividends they are permitted to pay to FLAG.
BUSINESS OF HEART
General
Heart is a bank holding company headquartered in Mount Vernon, Georgia.
Heart's wholly-owned subsidiary, Mount Vernon Bank, operates one banking office
in Mount Vernon, Georgia. As of June 30, 1998, Heart had total consolidated
assets of approximately $33.5 million, total consolidated deposits of
approximately $29.3 million, and total consolidated shareholders' equity of
approximately $3.2 million. Through its banking subsidiary, Heart offers a broad
range of banking and banking-related services.
Management Stock Ownership
The following table presents information about each of the directors
and executive officers of Heart and all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and investment
powers over the indicated shares. Information relating to beneficial ownership
of the Heart Common Stock is based upon "beneficial ownership" concepts set
forth in rules promulgated under the Exchange Act. Under such rules, a person is
deemed to be a "beneficial owner" of a security if that person has or shares
"voting power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
Number of Shares of
Beneficially Owned at Percent of
Name the Heart Record Date Class (%)
---- --------------------- ---------
(a) Directors and Executive Officers
Donald M. Thigpen 56,100 25.50
Robert E. Thigpen, Jr. 60,267 27.39
R. E. Towns 37,797 17.18
(b) Directors and Executive Officers 154,164 70.07
as a Group
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Voting Securities And Principal Shareholders of Heart
The following lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
220,000 outstanding shares of Heart Common Stock as of the Heart Record Date.
Unless otherwise indicated, each person has sole voting and investment powers
over the indicated shares. Information relating to beneficial ownership of the
Heart Common Stock is based upon "beneficial ownership" concepts set forth in
rules promulgated under the Exchange Act. Under such rules, a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
Number of Shares Beneficially Percent of
Name and Address Owned at the Heart Record Date Class (%)
---------------- ------------------------------ ---------
Donald M. Thigpen 56,100 25.50
P. O. Box 153
Mount Vernon, Georgia 30445
Robert E. Thigpen, Jr. 60,267 27.39
P. O. Box 400
Dublin, Georgia 31404
R. E. Towns 37,797 17.18
Route #2, Box 129
Alamo, Georgia 30411
Betty Youmans 12,500 5.68
P. O. Box 400
Dublin, Georgia 31404
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
Corporate Profile
- -----------------
Heart, a one bank holding company for Mount Vernon Bank (collectively,
referred to in this section as "Heart"), is located in Mt. Vernon, Georgia,
Montgomery County. Mount Vernon, Georgia is located approximately 175 miles
south of downtown Atlanta.
Heart is community oriented, with an emphasis on retail banking, and
offers such customary banking services as consumer and commercial checking
accounts, NOW accounts, savings accounts, certificates of deposit, lines of
credit, Mastercard and VISA accounts, and money transfers. In addition, Heart
finances agriculture, commercial and consumer transactions, makes secured and
unsecured loans, including residential mortgage loans, and provides a variety of
other banking services.
Heart's primary service area is in Montgomery and Toombs Counties,
Georgia and surrounding counties. The service area has experienced minimal
growth for the past several years. The area's economic base is dependent upon
cyclical factors, such as agriculture and real estate activities.
41
<PAGE>
The following discussion focuses on significant changes in the
financial condition and results of operations of Heart during the past two years
since it became the holding company of Mount Vernon Bank in October 1995.
Operations of Heart consisted of only two months in 1995; therefore, comparison
of 1995 to 1996 would not be useful. The discussion and analysis is intended to
supplement and highlight information contained in the accompanying consolidated
financial statements and the selected financial data presented elsewhere in this
Proxy Statement/Prospectus.
Financial Highlights
- --------------------
Net earnings decreased 10% during 1997 as compared to 1996, totaling
just over $273,000. Net earnings per common share decreased 9% in 1997. Pretax
earnings for 1997 decreased by approximately $17,000, or 4%, primarily due to
the fact that gains from sale of securities decreased from $159,000 in 1996 to
$40,000 in 1997.
The returns on average assets and on average shareholders' equity were
.89% and 9.7%, respectively, in 1997 compared to 1.07% and 12.1%, respectively,
in 1996. The return on average assets decreased in light of the 8.6% growth in
average assets during 1997 and the 10% decrease in net earnings.
Total assets at December 31, 1997 were $32.6 million compared to $29.8
million at the end of 1996, an increase of approximately 9%. Total loans were
approximately $19.7 million at December 31, 1997, an increase of over 19% from
1996. Total deposits at December 31, 1997, were $28.6 million as compared to
$26.1 million in 1996, an increase of 10% from 1996. Heart continues to fund the
majority of its assets with deposits acquired in its local marketplace. Core
deposits, which exclude certificates of deposit of $100,000 or more, increased
by 14% during 1997.
Net Interest Income
- -------------------
Net interest income (the difference between interest earned on assets
and interest paid on deposits and liabilities) is the largest component and most
important source of Heart's earnings. Heart actively manages this income source
to provide the largest possible amount of income while balancing interest rate,
credit and liquidity risks. Net interest income for 1997 increased by 11.6% from
1996. The increased volume of earning assets was the primary reason for the
increase in 1997.
Interest income increased 9.3% in 1997. The increase in 1997 was
primarily a result of an increase in interest and fees on loans of approximately
$252,000 or 16.2% compared to 1996.
Average earning assets in 1997 increased 10.3% when compared to 1996
due to increases in average loans of over $2.7 million and decreases in average
investment securities of $260,000. The average earning asset mix remained
consistent during 1997 with loans at 64.3%, investment securities at 31.0% and
other earning assets at 4.6% of the total. In 1996, loans accounted for 60.0%,
investment securities 35.3% and other earning assets 4.7%. The mix of earning
assets is monitored on a continuing basis in order to react to favorable
interest rate movements and to maximize the return on earning assets.
42
<PAGE>
Table 1 presents net interest income, yields and rates on a
taxable-equivalent basis and average balances for 1997, 1996 and 1995.
Table 1 -CONSOLIDATED AVERAGE BALANCES, INTEREST AND RATES
Taxable Equivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS ------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest earning deposits
and fed funds sold $ 1,300 70 5.38% $ 1,200 67 5.58% $ 1,600 16 6.00%
Taxable investment securities 8,723 571 6.55% 8,983 618 6.88% 9,656 124 7.71%
Loans (including loan fees) 18,080 1,814 10.03% 15,294 1,562 10.21% 11,580 201 10.41%
------ ----- ------ ----- ------ -----
Total interest earning
assets 28,103 2,455 8.74% 25,477 2,247 8.82% 22,836 341 8.96%
Allowance for loan losses (216) (183) (156)
Cash and due from banks 999 978 1,031
Premises and equipment 1,031 1,042 997
Other assets 818 996 1,186
------- ------ ------
Total assets $ 30,735 $ 28,310 $ 25,894
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Demand $ 3,939 121 3.07% $ 3,946 137 3.47% $ 3,950 25 3.80%
Savings 896 27 3.01% 873 27 3.09% 884 5 3.39%
Time 19,765 1,156 5.85% 17,398 1,036 5.95% 14,350 140 5.85%
Other borrowings 521 44 8.45% 644 54 8.39% 660 9 8.18%
-------- ------ ------ ------ ------ ------ ------- ------- --------
Total interest bearing
liabilities 25,121 1,348 5.37% 22,861 1,254 5.49% 19,844 179 5.41%
Non-interest bearing demand
deposits 2,554 2,370 2,987
Other liabilities 244 573 569
Shareholders' equity 2,816 2,506 2,494
------- ------- -------
Total liabilities and
shareholders' equity $ 30,735 $ 28,310 $ 25,894
====== ====== ======
Net interest income 1,107 993 162
======= ===== =====
Net interest spread 3.37% 3.33% 3.55%
====== ====== ======
Net interest yield on interest
earning assets 3.94% 3.90% 4.26%
====== ====== =======
</TABLE>
43
<PAGE>
Consolidated Average Balances, Interest and Rates
- -------------------------------------------------
The net cost of funds, defined as interest expense divided by average
earning assets, decreased 10 basis points in 1997, while the yield on total
earning assets decreased 8 basis points and earning assets to total assets
increased from 90% in 1996 to 91% in 1997. The rate paid on interest bearing
liabilities decreased 12 basis points from 1996 levels.
The banking industry uses two key ratios to measure relative
profitability of net interest income. The net interest rate spread measures the
difference between the average yield on earning assets and the average rate paid
on interest bearing sources of funds. The interest rate spread eliminates the
impact of noninterest bearing deposits and gives a direct perspective on the
effect of market interest rate movements. The net interest margin is defined as
net interest income as a percentage of average total earning assets and takes
into account the positive impact of investing noninterest bearing funding
sources.
The net interest spread increased 4 basis points to 3.37% from the 1996
spread of 3.33% as the yield on interest earning assets decreased 8 basis points
while the rates paid on interest bearing liabilities decreased 12 basis points.
The net interest margin also showed an increase as reflected by the 3.94% earned
in 1997, a 4 basis point increase from 1996. Table 2 shows the change in net
interest income for the past two years due to changes in volumes and rates.
Table 2 - Analysis of the Changes in Net Interest Income
Taxable Equivalent Basis
(dollars in thousands)
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (decrease) due to changes in Increase (decrease) due to changes in
------------------------------------- -------------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
------ ---- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Interest earning deposits and
fed funds sold $ 6 (3) (3) 56 (5) 51
Taxable investment securities (18) (29) (47) 568 (74) 494
Loans (including loan fees) 285 (33) 252 1,392 (31) 1,361
--- --- --- ----- --- -----
Total interest income 272 (64) 208 2,016 (110) 1,906
--- --- --- ----- ---- -----
Interest paid on:
Deposits:
Demand - (16) (16) 125 (13) 112
Savings 1 (1) - 25 (3) 22
Time 141 (21) 120 878 18 896
Other borrowings (10) (21) (10) 44 1 45
--- --- --- ----- ---- -------
Total interest expense 131 (37) 94 1,072 3 1,075
--- --- --- ----- ---- -----
Net interest income $ 141 (27) 114 944 (113) 831
=== === === ====== ==== ======
</TABLE>
44
<PAGE>
Loans
- -----
Average loans increased approximately 18.2% in 1997 with much of the
increase concentrated in the commercial loan and real estate mortgage
categories. These categories account for 51.8% and 31.2%, respectively, of the
total loan portfolio. Total gross loans outstanding at year end 1997 increased
19.0% over the previous year end levels. The growth in the portfolio resulted
from Heart's ongoing efforts to increase the loan portfolio through the
origination of quality loans. Consumer installment loans also increased 13% from
year end 1996.
Table 3 breaks down the composition of the loan portfolio for each of
the past three years while Table 4 shows the amount of loans outstanding for
selected categories as of December 31, 1997, with maturities based on the
remaining scheduled repayments of principal.
45
<PAGE>
Table 3 - Loan Portfolio Composition
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------------- ------------------- -----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 10,327 52% 8,706 52% 6,923 56%
Real estate - construction 261 1% 36 1% 87 1%
Real estate- mortgage 6,253 31% 5,204 31% 3,270 27%
Installment loans to individuals 3,097~ 16% 2,742 16% 2,002~ 16%
------ -- ------- -- ------- --
Total loans 19,938 100% 16,688 100% 12,282 100%
Less: Allowance for loan losses (228) (197) (156)
------- ------- -------
Total net loans $ 19,710 16,491 12,126
====== ====== ======
</TABLE>
Table 4 - Loan Portfolio Maturity
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1997
Maturity Rate Structure > 1 Year
-----------------------------------------------------------------------------
Over One
One Year Due Predetermined Floating or
Year or Throug After Interest Adjustable
Less Five Years Five Years Total Rate Rate
---- ---------- ---------- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Commercial 7,412 2,732 183 10,327 2,718 197
Real estate - construction 261 - - 261 - -
------ -------- ----- -------- ------- --
7,673 2,732 183 10,588 2,718 197
===== ===== === ====== ===== ===
</TABLE>
46
<PAGE>
Investment Securities
- ---------------------
The composition of Heart's investment securities portfolio reflects its
investment strategy of maximizing portfolio yields commensurate with risk and
liquidity considerations. The primary objectives of Heart's investment strategy
are to maintain an appropriate level of liquidity and provide a tool to assist
in controlling Heart's interest rate position while at the same time producing
adequate levels of interest income. Management of the maturity of the portfolio
is necessary to provide liquidity and to control interest rate risk. During 1997
and 1996, gross investment securities sales were $1.9 million and $3.5 million,
respectively. Maturities and paydowns were $.4 million and $.1 million during
1997 and 1996, representing 26% and 40% of the average total portfolio for each
year, respectively. Net realized gains associated with the sales, accounted for
42.3% and 12.8% of noninterest income during 1997 and 1996, respectively. Gross
unrealized gains in the total portfolio amounted to approximately $87,000 at
year end 1997 and gross unrealized losses amounted to approximately $13,000 at
year end 1997.
Total average investment securities decreased 2.9% during 1997. Total
investment securities increased $545,000, or approximately 6.1%, during 1997.
Table 5 reflects the carrying amount of the investment securities
portfolio for the past three years.
Table 5 - Carrying Value of Securities
(dollars in thousands)
1997 1996 1995
---- ---- ----
Held to Maturity
U.S. Treasuries $ 168 - -
U.S. Government agencies 4,206 - -
Mortgage-backed securities 438 - -
------ --------- ----
$ 4,812 - -
===== ========= ====
Available for Sale
U.S. Treasuries 500 499 -
U.S. Government agencies 1,589 3,722 454
State, county and municipal - 15 15
Mortgage-backed securities 2,399 4,525 7,632
Equity securities 150 144 60
------ --------- -------
4,638 8,905 8,161
----- ----- -----
Total $ 9,450 8,905 8,161
===== ===== =====
Table 6 presents the expected maturity of the total investment securities
portfolio (using amortized cost) by maturity date and average yields (for all
obligations on a fully taxable basis assuming a 34% tax rate) at December 31,
1997. It should be noted that the composition and maturity/repricing
distribution of investment securities available for sale is subject to change
depending on rate sensitivity, capital needs, and liquidity needs.
47
<PAGE>
Table 6 - Expected Maturity of Investment Securities
(dollars in thousands)
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Totals
Amount Yield Amount Yield Amount Yield Amount Yield Amount
------ ----- ------ ----- ------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale
U.S. Treasuries $ 250 5.6% $ 251 5.6%$ - - $ - - $ 501
U.S Government agencies - - 1,589 6.1% - - - - 1,589
Mortgage backed securities - - - - - - 2,398 6.9% 2,398
Equity securities 150 5.8% - - - - - - 150
----- --- ------ ------ ------- ------ ------- --------- -----
400 5.7% 1,840 6.1% - - 2,398 6.9% 4,638
----- --- ----- ---- ------- ------ ----- ---- -----
Securities Held to Maturity
U.S. Treasuries - - 168 6.6% - - - - 168
U.S Government agencies 850 6.2% 2,657 6.4% 100 6.3% - - 4,207
Mortgage backed securities - - 33 8.4% 315 7.9% 89 8.5% 437
------ ------ ------ ---- ------ ------ ---- --- -----
850 6.2% 2,858 6.5% 1,015 6.8% 89 8.5% 4,812
------ --- ----- ---- ----- ---- ----- ---- -----
Total $ 1,250 6.0% $ 4,698 6.3% $ 1,015 6.8% $ 2,487 7.0% $ 9,450
===== === ===== ==== ===== ==== ===== ==== =====
</TABLE>
Deposits
- --------
As reflected in Table 1, total average interest bearing liabilities
increased 9.9% during 1997. The largest dollar increase in average interest
bearing deposits was in the time deposit category, rising over $2.3 million or
13.6% from 1996. Average interest bearing demand deposits decreased by $7,000 or
2%. Average noninterest bearing demand deposits increased over $184,000 or
approximately 7.8% during 1997 after decreasing 20.7% during 1996. Savings
deposits, interest bearing demand deposits and noninterest bearing demand
deposits accounted for 27.2% and 29.2% of total average deposits during 1997 and
1996, respectively. The maturities of time deposits of $100,000 or more issued
by Heart at December 31, 1997 are summarized in Table 7. Management is of the
opinion that its time deposits of $100,000 or more are customer-relationship
oriented and represent a reasonably stable source of funds.
Table 7 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
Within 3 months $ 313
After 3 through 6 months 1,045
After 6 through 12 months 3,459
After 12 months 796
------
$ 5,613
Liquidity Management
- --------------------
The objective of liquidity management is to ensure that sufficient funding
is available, at reasonable cost, to meet the ongoing operational cash needs of
Heart and to take advantage of income producing opportunities as they arise.
While the desired level of liquidity will vary depending upon a variety of
factors, it is the primary goal of Heart to maintain a high level of liquidity
in all economic environments. Liquidity is defined as the ability of a company
48
<PAGE>
to convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Liquidity management involves
maintaining Heart's ability to meet the day to day cash flow requirements of its
customers, whether they are depositors wishing to withdraw funds or borrowers
requiring funds to meet their credit needs. Without proper liquidity management,
Heart would not be able to perform the primary function of a financial
intermediary and would, therefore, not be able to meet the needs of the
communities it serves. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both requirements.
In a banking environment, both assets and liabilities are considered sources of
liquidity funding and both are monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments, maturities of securities and, to a lesser
extent, sales of securities available for sale. Commercial and real
estate-construction loans that mature in one year or less amounted to $6.3
million or 31.8% of the total loan portfolio at December 31, 1997. Securities
available for sale maturing in the same time frame totaled over $.4 million or
4.2% of the total investment securities portfolio at year end 1997 (including
estimated maturities of mortgage backed securities). Other short-term
investments such as federal funds sold and maturing interest bearing deposits
with other banks are additional sources of liquidity funding.
The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and noninterest bearing deposit accounts.
Federal funds purchased are additional sources of liquidity and represent
Heart's incremental borrowing capacity. This source of liquidity is short-term
in nature and is used as necessary to fund asset growth and meet short-term
liquidity needs.
As disclosed in Heart's Consolidated Statement of Cash Flows included
elsewhere herein, net cash provided by operating activities decreased by
approximately $30,000 primarily due to the decreases in net earnings and accrued
expenses. Net cash used in investing activities of $3.6 million consisted
primarily of net loans originated of $3.2 million and securities purchased of
$2.6 million. This resulted from management's continued efforts to invest new
funds from deposits into loans and investment securities. The $2.4 million of
net cash provided by financing activities consisted primarily of the $2.4
million increase in demand, savings and time deposits.
Management considers Heart's liquidity position at the end of 1997 to be
sufficient to meet its foreseeable cash flow requirements. Reference is made to
the Consolidated Statements of Cash Flows appearing in the Consolidated
Financial Statements for a three year analysis of the changes in cash and cash
equivalents resulting from operating, investing and financing activities.
49
<PAGE>
Interest Rate Sensitivity Management
- ------------------------------------
The absolute level and volatility of interest rates can have a significant
impact on Heart's profitability. The objective of interest rate risk management
is to identify and manage the sensitivity of net interest income to changing
interest rates, in order to achieve Heart's overall financial goals. Based on
economic conditions, asset quality and various other considerations, management
establishes tolerance ranges for interest rate sensitivity and manages within
these ranges.
Heart uses income simulation modeling as a primary tool in measuring
interest rate risk and managing interest rate sensitivity. Simulation modeling
considers not only the impact of changing market rates of interest on future net
interest income, but also such other potential causes of variability as earning
asset volume, mix, and general market conditions.
Interest rate sensitivity is a function of the repricing characteristics
of Heart's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on the maturity structure of assets and liabilities and their repricing
characteristics during periods of changes in market interest rates. Effective
interest rate sensitivity management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in Heart's current portfolio that are subject
to repricing at various time horizons: immediate through three months, four to
twelve months, one to five years and on a cumulative basis. The differences are
known as interest sensitivity gaps. Table 8 shows interest sensitivity gaps for
these different intervals as of December 31, 1997.
Table 8 - Interest Rate Sensitivity Analysis
(dollars in thousands)
<TABLE>
<CAPTION>
Over
Over Over Five
Immediate Three One Years
Through Months Throug and
Three through Five Non-Rate
Months One Year Years Sensitive Total
------ -------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest bearing deposits and
federal funds sold $ 10 - - - 10
Taxable investment securities 1,864 1,126 5,104 1,301 9,395
Loans 5,804 4,658 8,386 1,090 19,938
----- ------- ------- ----- ------
Total interest earning assets 7,678 5,784 13,490 2,391 29,343
----- ----- ------ ----- ------
Interest bearing liabilities:
Deposits:
Interest bearing demand 500 1,487 2,224 - 4,211
Savings 110 327 488 - 925
Time 3,186 13,281 4,032 - 20,499
----- ------ ------- ------ ------
Total interest bearing
liabilities 3,796 15,095 6,744 - 25,635
----- ------ ----- ------ ------
Noninterest bearing funding
sources, net 1,541 487 998 - 3,026
Interest sensitivity gap 2,341 (9,798) 5,748 2,391 682
-------- -------- ----- ----- =======
Cumulative interest sensitivity gap $ 2,341 (7,457) (1,709) 682
======== ======== ====== ======
</TABLE>
50
<PAGE>
As seen in Table 8, 73% of earning asset funding sources will reprice
within one year compared to 46% of all interest earning assets. Changes in the
mix of earning assets or supporting liabilities can either increase or decrease
the net interest margin without affecting interest rate sensitivity. In
addition, the interest rate spread between an asset and its supporting liability
can vary significantly while the timing of repricing for both the asset and the
liability remains the same, thus impacting net interest income. This
characteristic is referred to as basis risk and generally relates to the
possibility that the repricing characteristics of short-term assets tied to
Heart's prime lending rate are different from those of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create changes in prepayment levels
of assets and liabilities which are not reflected in the interest rate
sensitivity analysis report. These prepayments may have significant effects on
Heart's net interest margin. Because of these factors an interest sensitivity
gap report may not provide a complete assessment of Heart's exposure to changes
in interest rates.
Table 8 indicates Heart is in a liability sensitive or negative gap
position after twelve months. This liability sensitive position would generally
indicate that Heart's net interest income would decrease should interest rates
rise and would increase should interest rates fall. Due to the factors cited
previously, current simulation results indicate only minimal sensitivity to
parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.
Fair Value of Financial Instruments
- -----------------------------------
As indicated in Note O to Heart's Consolidated Financial Statements, the
fair value of Heart's financial instruments is exceeded by the net book value of
such assets and liabilities by approximately $152,000 at December 31, 1997.
These disclosures should not be considered a surrogate of the liquidation value
of Heart or the Bank, but rather represent a good faith estimate of the increase
or decrease in value of financial instruments held by Heart since purchase,
origination, or issuance.
Capital Resources
- -----------------
Shareholders' equity at December 31, 1997 increased 13.8% from December
31, 1996. Net earnings for 1997 and the change in the tax affected unrealized
gain/(loss) on the securities available for sale portfolio, net of tax,
accounted for the majority of the increase in shareholders' equity.
No dividends were declared on Heart's common stock in 1997 and 1996. Heart
has strived to retain earnings in order to keep pace with the rate of asset
growth.
Average shareholders' equity as a percentage of total average assets is
one measure used to determine capital strength. The ratio of average
shareholders' equity to average assets for 1997 was 9.2% compared to 8.9% in
1996. The increase in the ratio is the result of retaining earnings to support
anticipated future asset growth. Table 9 summarizes these and other key ratios
of Heart for each of the last three years.
51
<PAGE>
Table 9 - Key Ratios
1997 1996 1995
---- ---- ----
Return on average assets .89% 1.07% .24%
Return on average equity 9.7% 12.1% 2.45%
Dividend payout ratio - - -
Average equity to average assets 9.2% 8.9% 9.63%
The Board of Governors of the Federal Reserve System has issued guidelines
for the implementation of risk-based capital requirements by U.S. banks and bank
holding companies. These risk-based capital guidelines take into consideration
risk factors, as defined by regulators, associated with various categories of
assets, both on and off balance sheet. Under the guidelines, capital strength is
measured in two tiers which are used in conjunction with risk adjusted assets to
determine the risk based capital ratios. The guidelines require an 8% total
risk-based capital ratio, of which 4% must be Tier I capital.
Heart's Tier I capital, which consists of shareholders' equity net of
unrealized gains and losses on securities available for sale and intangible
assets, amounted to $2,836,000 at December 31, 1997. Tier II capital includes
supplemental capital components such as qualifying allowance for loan losses.
Tier I capital plus Tier II capital components is referred to as Total
Risk-based Capital and was $3,064,000 at December 31, 1997. The percentage
ratios, as calculated under the guidelines, were 13.54% and 14.62% for Tier I
and Total Risk-based Capital, respectively, at December 31, 1997.
A minimum leverage ratio is required in addition to the risk-based capital
standards and is defined as Tier 1 capital divided by average assets adjusted
for the unrealized gain/loss on the investment securities investment portfolio
and intangible assets. Although a minimum leverage ratio of 3% has been
established, the Federal Reserve Board will require bank holding companies to
maintain a leverage ratio greater than 3% if it is experiencing or anticipating
significant growth or is operating with less than well-diversified risks in the
opinion of the Federal Reserve Board. The Federal Reserve Board uses the
leverage ratio in tandem with the risk-based capital ratios to assess capital
adequacy of banks and bank holding companies. Heart's leverage ratios at
December 31, 1997 and 1996 were 9.0% and 8.86%, respectively. Risk-based and
leverage capital positions as of December 31, 1997 and 1996 are presented in
Table 10.
Table 10 - Analysis of Capital Adequacy
(dollars in thousands)
1997 1996
---- ----
Risk-based capital ratios:
Tier I capital to risk-adjusted assets 13.54% 13.71%
Tier II capital to risk-adjusted assets 1.08% 1.06%
------ -----
Total capital to risk-adjusted assets 14.62% 14.77%
===== =====
Leverage ratio 9.00% 8.86%
==== =====
Tier I Capital $ 2,836 2,538
Tier II Capital 228 197
------- ------
Total Capital $ 3,064 2,735
======= ======
Total risk-adjusted assets $ 20,944 18,511
====== ======
52
<PAGE>
All three of the capital ratios of Heart's bank subsidiary currently
exceed the minimum ratios required in 1997 as defined by federal regulators and
are deemed to be well capitalized. Heart monitors these ratios to ensure that
the Bank remains within regulatory guidelines. Increased regulatory activity in
the financial industry as a whole will continue to impact the structure of the
industry, however, management does not anticipate any negative impact on the
capital resources or operations of Heart.
Provision and Allowance for Loan Losses
- ---------------------------------------
Heart manages asset quality and controls risk through diversification of
the loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. Heart's loan administration function
is charged with monitoring asset quality, establishing credit policies and
procedures, and enforcing the consistent application of these policies and
procedures.
The provision for loan losses is the annual cost of providing an adequate
allowance for anticipated potential future losses on loans. The amount each year
is dependent upon many factors including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral and economic factors and
trends.
During recent years, Heart has strengthened its review process of the
larger loans in its portfolio and has imposed stricter underwriting standards in
order to minimize the impact an economic downturn might have on credit quality.
Loan review procedures, including such techniques as loan grading and on-site
reviews, are continually utilized in order to ensure that potential problem
loans are identified early in order to lessen any potentially negative impact
such problem loans may have on Heart's earnings. Management's involvement
continues throughout the process and includes participation in the workout
process and recovery activity. These formalized procedures are monitored
internally by the loan review committee. Such review procedures are quantified
in quarterly reports to senior management and are used in determining whether
such loans represent potential loss to Heart. Management monitors the entire
loan portfolio in an attempt to identify problem loans so that risks in the
portfolio can be identified on a timely basis and an appropriate allowance
maintained.
The provision for loan losses decreased 5% in 1997. Heart has maintained a
net recovery in 1997, 1996, and 1995 and believes the allowance to be adequate
for potential losses. The allowance for loan losses as a percentage of gross
loans outstanding at year end totaled 1.15% and 1.19% for 1997 and 1996,
respectively.
Heart does not allocate the allowance for loan losses to the various loan
categories. The entire allowance is available to absorb losses from any and all
loans. Table 11 sets forth information with respect to Heart's allowance for
loan losses for each of the last five years.
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Table 11 - Analysis of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Allowance for loan losses at beginning of year $ 197 156 150
Charge-offs:
Commercial - - -
Real estate 2 - -
Installment loans to individuals 5 5 -
----- ---- ----
Total charge-offs 7 5 -
----- ---- ----
Recoveries:
Commercial - - -
Real estate - - -
Installment loans to individuals 14 21 6
----- ---- ----
Total recoveries 14 21 6
----- ---- ----
Net charge-offs (recoveries) (7) (16) (6)
Provisions charged to earnings 24 25 -
----- ---- ----
Balance at end of year $ 228 197 156
=== === ===
Ratio of net charge-offs to average loans
outstanding during the period (.04%) (.11%) (.05%)
Asset Quality
- -------------
Nonperforming assets, comprised of nonaccrual loans, loans 90 days or more
past due and other real estate owned totaled $124,000 at December 31, 1997. At
December 31, 1996, nonperforming assets amounted to $137,000. There were no
related party loans which were considered nonperforming at December 31, 1997 or
1996. Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. When a loan is placed on nonaccrual status, previously accrued and
uncollected interest is charged to interest income on loans. Loans made by Heart
to facilitate the sale of other real estate are made on terms comparable to
loans of similar risk. An adequate investment by the buyer is required prior to
the removal of other real estate from nonperforming assets.
There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1997. There were no other foreclosed or repossessed assets at
December 31, 1997. Table 12 summarizes Heart's risk elements for each of the
last three years.
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Table 12 - Risk Elements
(dollars in thousands)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Loans 90 days past due $ 79 5 3
Loans on nonaccrual 45 132 65
Other real estate - - -
---- ----- ---
Total nonperforming assets $ 124 137 68
=== === ==
Total nonperforming assets as a
percentage of net loans 0.63% 0.83% 0.56%
==== ====== ====
There may be additional loans within Heart's portfolio that become classified as
conditions dictate; however, management was not aware of any such loans that are
material in amount at December 31, 1997. At December 31, 1997, management was
unaware of any known trends, events or uncertainties that will have or that are
reasonably likely to have a material effect on Heart's liquidity, capital
resources or operations.
Noninterest Income
- ------------------
Noninterest income consists primarily of revenues generated from service charges
and fees on deposit accounts. Noninterest income decreased 16.6% during 1997 as
compared to 1996 primarily due to decrease in gain on sale of investments from
$158,575 in 1996 to $39,995 in 1997.
Noninterest Expense
- -------------------
Noninterest expense for 1997 increased 7.7%. Total salaries and employee
benefits increased 13.2% during 1997 due largely to employee additions required
to support Heart's asset growth.
Net occupancy expense increased 21.8% in 1997. The 1997 increase in occupancy
expense was due to expenses related to renovations incurred in 1996.
Other noninterest expenses increased by approximately $53,971 or 13.2%. The
largest components of other noninterest expenses which include data processing
and stationery and supplies, increased 6.5% in 1997. Management continues to
evaluate other noninterest expense details in efforts to further decrease the
cost of providing expanded banking services to a growing customer base.
Income Taxes
- ------------
Income tax expense increased 11.7% during 1997. The effective tax rate as a
percentage of pretax income was 30.9% in 1997 and 26.5% in 1996. These tax rates
differ from the statutory Federal tax rate of 34% primarily due to alternative
minimum tax credits available from previous years. In 1997, alternative minimum
tax credits as a percentage of pretax earnings increased to 5.8% from 1% in
1996. See Note I to Heart's Consolidated Financial Statements for an analysis of
income taxes.
55
<PAGE>
Impact of Inflation and Changing Prices
- ---------------------------------------
A bank's asset and liability structure is substantially different from that of
an industrial company in that primarily all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends on Heart's ability to react to changes in interest rates and, by
such reaction, reduce the inflationary impact on performance. Interest rates do
not necessarily move in the same direction, or at the same magnitude, as the
prices of other goods and services. As discussed previously, management seeks to
manage the relationship between interest-sensitive assets and liabilities in
order to protect against wide interest rate fluctuations, including those
resulting from inflation.
Management's Discussion and Analysis of Financial Condition and Results of
Operations For Each of the Six Months Ended June 30, 1998 and 1997
Financial Condition
- -------------------
Total assets at June 30, 1998 were approximately $33,497,108, representing a
2.6% increase from December 31, 1997. Deposits increased approximately $629,285,
or 2.2% from December 31, 1997, while net loans increased approximately
$1,499,487, or 7.6%. The allowance for loan losses at June 30, 1998 totaled
$237,559, representing 1.1% of total loans compared to the December 31, 1997
total of $228,339, representing 1.2% of total loans. Total securities decreased
approximately $1,204,449, or 12.7% from December 31, 1997 due to calls and
maturities. These funds were not reinvested because of management's wish to fund
loan growth. The increases in loans and deposits are primarily due to Heart's
efforts to increase the loan portfolio through the origination of quality loans
and a commitment to customer service.
The total of nonperforming assets, which includes nonaccrual loans, repossessed
collateral and loans for which payments are more than 90 days past due,
decreased from $124,000 at December 31, 1997 to $88,000 at June 30, 1998. There
were no related party loans which were considered nonperforming at June 30,
1998.
Heart was most recently examined by its primary regulatory authority in March
1997. There were no recommendations by the regulatory authority that in
management's opinion will have material effects on the Heart's liquidity,
capital resources or operations.
Results of Operations
- ---------------------
Net interest income increased $102,835, or 19.7%, in the first six months of
1998 compared to the same period for 1997. Interest income for the first six
months of 1998 was $1,323,810, representing an increase of $152,247, or 13.0%,
over the same period in 1997. Interest expense for the first six months of 1998
increased approximately $49,412, or 7.6%, compared to the same period in 1997.
This increase in interest income and interest expense during the first six
months of 1998 compared to the same period in 1997 is primarily attributable to
the increase in the volume of both loans and deposits.
The provision for loan losses for the first six months of 1998 remained the same
compared to the same period for 1997. It is management's belief that the
allowance for loan losses is adequate to absorb probable losses in the loan
portfolio.
Noninterest income decreased 0.04% to approximately $148,626 for the six month
period ended June 30, 1998, as compared to the same period in 1997. This
decrease is primarily attributable to the fact that Heart realized approximately
$21,000 in gains from sales of investments for the six month period ended June
30, 1997 and realized no such gains in 1998.
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<PAGE>
Noninterest expenses for the first six months of 1998 increased approximately
$43,379, or 9.0%, compared to the first six months of 1997. The net increase is
primarily attributable to employee additions required to maintain growth.
Capital Resources
- -----------------
Heart is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory- and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines, Heart must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Heart's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Heart to maintain minimum amounts and ratios of total and Tier 1 capital
(as defined) to risk-weighted assets and of Tier 1 capital (as defined) to
average assets. As of June 30, 1998, Heart met all capital adequacy requirements
to which it is subject.
The following tables present Heart's consolidated regulatory capital position at
June 30, 1998:
Risk-Based Capital Ratios
-------------------------
Tier 1 Capital 11.61%
Tier 1 Capital minimum requirement 4.00%
Excess 7.61%
Total Capital 12.68%
Total Capital minimum requirement 8.00%
Excess 4.68%
Leverage Ratio
--------------
Tier 1 Capital to adjusted total assets 7.90%
Minimum leverage requirement 4.00%
Excess 3.90%
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<PAGE>
Certain Transactions And Business Relationships
- -----------------------------------------------
Several of Heart's directors, executive officers and their affiliates,
including corporations and firms of which they are directors or officers or in
which they and/or their families have an ownership interest, are customers of
Heart and its subsidiary, Heart Bank. These persons, corporations and firms have
had transactions in the ordinary course of business with Heart and Heart Bank,
including borrowings, all of which, in the opinion of Heart management, were on
substantially the same terms including interest rates and collateral as those
prevailing at the time for comparable transactions with unaffiliated persons and
did not involve more than the normal risk of collectibility or present other
unfavorable features. Heart and Heart Bank expect to have such transactions on
similar terms with its directors, executive officers, and their affiliates in
the future. The aggregate amount of loans outstanding by Heart Bank to
directors, executive officers, and related parties of Heart or Heart Bank as of
June 30, 1998, was approximately $1.5 million, which represented approximately
50% of consolidated shareholders' equity on that date.
Year 2000 Issues
- ----------------
Like many financial institutions, Heart relies upon computers for the
daily conduct of its business and for information systems processing. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. Heart
generally relies on software and hardware developed by independent third parties
to provide the information systems its uses. Heart is seeking assurances about
the Year 2000 compliance with respect to the third party hardware or software
system it uses, and Heart believes that its internal systems and software and
the network connections it maintains will be adequately programmed to address
the Year 2000 issue. Based on information currently available, management does
not believe that Heart will incur significant costs in connection with the Year
2000 issue. Nevertheless, there can be no assurances that all hardware and
software that Heart uses will be Year 2000 compliant, and Heart cannot predict
with any certainty the costs it will incur to respond to any Year 2000 issues.
Further, the business of some of Heart's customers may be negatively affected by
the Year 2000 issue, and any financial difficulties incurred by Heart's
customers in solving Year 2000 issues could negatively affect such customer's
ability to repay any loans which Heart may have extended. Therefore, even if
Heart does not incur significant direct costs in connection with responding to
the Year 2000 issue, there can be no assurance that the failure or delay of
Heart's customers or other third parties in addressing the Year 2000 issue or
the costs involved in such process will not have a material adverse effect on
Heart's business, financial condition and results of operation.
BUSINESS OF FLAG
General
FLAG is a bank holding company headquartered in LaGrange, Georgia. FLAG
is the sole shareholder of the following depository institutions: Citizens,
Milan and First Federal. Citizens and Milan are state banks organized under the
laws of the State of Georgia, with ten banking offices located in the cities of
Unadilla, Vienna, Byromville, Montezuma, Oglethorpe, Cordele, Pinehurst, Milan
and McRae. First Federal is a federal savings bank, with five offices in
LaGrange, Georgia, which serve markets located in western Georgia. As of June
30, 1998, FLAG had total consolidated assets of approximately $442,878,940,
total consolidated deposits of approximately $339,245,243, and total
consolidated shareholders' equity of approximately $38,582,093. FLAG offers a
full array of deposit accounts and retail and commercial banking services,
engages in small business lending, residential and commercial real estate
lending, mortgage banking services, brokerage services and performs real estate
58
<PAGE>
appraisal services through its subsidiaries, First Federal, Citizens and Milan,
as well as First Federal's wholly-owned subsidiary, Piedmont. In addition, CB
Financial, a wholly-owned subsidiary of Citizens, provides pawn, title pawn and
check cashing services. CB Financial is currently winding up its business
operations.
As a routine part of its business, FLAG evaluates opportunities to
acquire bank holding companies, banks and other financial institutions. Thus, at
any particular point in time, including the date of this Proxy
Statement/Prospectus, discussions and, in some cases, negotiations and due
diligence activities looking toward or culminating in the execution of
preliminary or definitive documents respecting potential acquisitions may occur
or be in progress. These transactions may involve FLAG acquiring such financial
institutions in exchange for cash or capital stock, and depending upon the terms
of these transactions, they may have a dilutive effect upon the FLAG Common
Stock to be issued to holders of Empire Common Stock in the Merger.
Directors and Executive Officers
The directors of FLAG as the surviving corporation of the Merger will be:
Dr. A. Glenn Bailey Kelly R. Linch
Leonard H. Bateman J. Preston Martin
H. Speer Burdette, III J. Daniel Speight, Jr.
Patti S. Davis John W. Stewart, Jr.
Fred A. Durand, III Donald M. Thigpen
John S Holle Robert E. Thigpen, Jr.
James W. Johnson Robert W. Walters
The executive officers of FLAG as the surviving corporation of the Merger
will be:
John S. Holle Chairman of the Board
J. Daniel Speight, Jr. President and Chief Executive Officer
Patti S. Davis Chief Financial Officer, Senior Vice President
and Assistant Secretary
Ellison C. Rudd Senior Vice President, Treasurer and Secretary
J. Preston Martin Senior Vice President
Charles O. Hinely Chief Operating Officer and Senior Vice President
Additional persons may be elected as directors or executive officers following
the Merger. Upon completion of the merger of Empire with and into FLAG, Leonard
H. Bateman, President and Chief Executive Officer of Empire, will be elected as
a member of FLAG's Board of Directors. FLAG expects the merger of Empire with
FLAG to be complete by October 1, 1998. Upon completion of the merger of Brown
with and into Citizens, Dennis D. Allen, President and Chief Executive Officer
of Brown, will be elected as a member of FLAG's Board of Directors. Upon the
completion of the merger of Heart with and into FLAG, Donald M. Thigpen,
President and Chief Executive Officer of Heart, and Robert E. Thigpen, a
director of Heart, will be elected as members of FLAG's Board of Directors. See
"SUMMARY - Recent Development."
The following section sets forth certain information regarding each of
the persons who, after the consummation of the Merger, will be a director or
executive officer of FLAG, as the surviving corporation. Except as otherwise
indicated, each of the named persons has been engaged in his or her present
principal occupation for more than five years.
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<PAGE>
Dr. A. Glenn Bailey. Dr. Bailey is a physician and surgeon in LaGrange and
is a director, and from 1980 to 1989 was President, of Clark-Holder Clinic, a
LaGrange medical clinic. He has been a director of First Federal since 1982 and
a director of FLAG since 1994. Following the Merger, Dr. Bailey will continue to
serve as a member of the Boards of Directors of both FLAG and First Federal. Dr.
Bailey is 63 years old.
Leonard H. Bateman. Mr. Bateman has served as President and Chief
Executive Officer of Empire and Empire Bank since 1986. Following consummation
of the merger of Empire with FLAG, Mr. Bateman will serve as a member of the
Board of Directors of FLAG and as President and a director of Empire Bank. Mr.
Bateman is 50 years old.
H. Speer Burdette, III. Mr. Burdette is an owner, director and Vice
President/Treasurer of J.K. Boatwright & Co., P.C., an accounting firm located
in LaGrange. He has been a director of First Federal since 1993 and a director
of FLAG since 1994. Following the Merger, Mr. Burdette will continue to serve as
a member of the Boards of Directors of both FLAG and First Federal.
Mr. Burdette is 45 years old.
Patti S. Davis. Ms. Davis served as Executive Vice President and Chief
Financial Officer of Middle Georgia since 1994 until Middle Georgia merged with
FLAG in March 1998. Ms. Davis has been Senior Vice President and Chief Financial
Officer of Citizens since 1990. Following the consummation of the merger of
Middle Georgia and FLAG, Ms. Davis has served as a Senior Vice President and as
a member of the Board of Directors of FLAG and, since July 1998, has served as
Chief Financial Officer of FLAG. In addition, Ms. Davis continues to act as
Senior Vice President and Chief Financial Officer and a director of Citizens.
Following the Merger, Ms. Davis will continue to act in these capacities. Ms.
Davis and J. Daniel Speight, Jr. are cousins. Ms. Davis is 41 years old.
Fred A. Durand, III. Mr. Durand is President, Chief Executive Officer
and a director of Durand-Wayland, Inc., a manufacturer of produce sorting and
spray equipment. He has been a director of First Federal since 1990 and director
of FLAG since 1994. Following the Merger, Mr. Durand will continue to serve as a
member of the Boards of Directors of both FLAG and First Federal. Mr. Durand is
56 years old.
Charles O. Hinely. Mr. Hinely has served as Senior Vice President and
Chief Operating Officer of FLAG since December 1997. Mr. Hinely has 30 years of
banking and financial industry related experience. He has worked for Citizens
and Southern National Bank and was a principle of Bank Management Resources,
Inc. (BMR Financial Group) and LSI Partners, Inc. Following the Merger, Mr.
Hinely will continue to serve as Senior Vice President and Chief Operating
Officer of FLAG. Mr. Hinely is 51 years old.
John S. Holle. Mr. Holle served as Chairman of the Board, President,
Chief Executive Officer and as a director of FLAG since 1993, and he has been
President, Chief Executive Officer and a director of First Federal since 1985
and Chairman of the Board of First Federal since 1990. Following the merger of
FLAG and Middle Georgia, Mr. Holle has served as Chairman of the Board of FLAG
and President, Chief Executive Officer and a member of the Board of Directors of
First Federal and as a director of Citizens. Mr. Holle also has been Chairman of
the Board and President of First Federal's wholly-owned subsidiary, Piedmont,
since 1986. Following the Merger, Mr. Holle will continue to be the Chairman of
the Board of FLAG and will continue to serve as a member of the Board of
Directors of FLAG. In addition, Mr. Holle will continue to act as President,
Chief Executive Officer and a member of the Board of Directors of First Federal
and as a director of Citizens following the Merger. Mr. Holle is 47 years old.
James W. Johnson. Mr. Johnson is the president of McCannie Motor and
Tractor Company, Inc., a retail seller of tractors and implement equipment, and
served as a director of Middle Georgia and Citizens since 1982 until the merger
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<PAGE>
of FLAG and Middle Georgia. Following the merger of FLAG and Middle Georgia, Mr.
Johnson has served as a member of the Board of Directors of FLAG and continues
to serve as a director of Citizens. Following the Merger, Mr. Johnson will
continue in these capacities.
Mr. Johnson is 56 years old.
Kelly R. Linch. Mr. Linch is owner of Linch's, Inc., a retail appliance
and electronics store in LaGrange. He has been a director of First Federal since
1986 and a director of FLAG since 1994. Following the Merger, Mr. Linch will
continue to serve as a member of the Boards of Directors of both FLAG and First
Federal. Mr. Linch also is a director of Key Distributors of Georgia, Inc. Mr.
Linch is 55 years old.
J. Preston Martin. Mr. Martin served as the President and Chief
Executive Officer of Three Rivers and as President of Milan from 1986 until May
1998 when Three Rivers merged with and into FLAG. Mr. Martin currently serves as
Senior Vice President, on the Boards of Directors of FLAG, Citizens and Milan
and as President of Milan. Following the Merger, Mr. Martin will continue to act
in these capacities. Mr. Martin is 44 years old.
Ellison C. Rudd. Mr. Rudd served as Executive Vice President, Chief
Financial Officer and Treasurer of FLAG since 1994. Mr. Rudd has also been
Executive Vice President of First Federal since 1993 and Chief Financial Officer
and Treasurer of First Federal since 1989 when he joined First Federal as a Vice
President. Following the merger of FLAG and Middle Georgia and until July 1998,
Mr. Rudd served as Senior Vice President and Chief Financial Officer of FLAG.
Mr. Rudd currently serves as Senior Vice President, Secretary and Treasurer of
FLAG. Following the Merger, Mr. Rudd will continue to act in these capacities.
In addition, Mr. Rudd will continue to act as Chief Financial Officer, Treasurer
and Executive Vice President of First Federal. Mr. Rudd is 53 years old.
J. Daniel Speight, Jr. Mr. Speight served as Chief Executive Officer
and as a director of Middle Georgia since 1989 and has been President and Chief
Executive Officer of Citizens since 1984. Following the merger of FLAG and
Middle Georgia, Mr. Speight has served as the President and Chief Executive
Officer of FLAG, and as a member of the Board of Directors of FLAG. In addition,
Mr. Speight serves as President and Chief Executive Officer and a director of
Citizens and as a director of First Federal. Following the Merger, Mr. Speight
will continue to act in these capacities and will serve as a director of Empire
Bank. Mr. Speight is 41 years old.
John W. Stewart, Jr. Mr. Stewart is an owner, Chairman of the Board and
President of Stewart Wholesale Hardware Company, a wholesale grocery and
hardware business in LaGrange. He has been a director of First Federal since
1982 and a director of FLAG since 1994. Following the Merger, Mr. Stewart will
continue to serve as a member of the Boards of Directors of both FLAG and First
Federal. Mr. Stewart is 63 years old.
Donald M. Thigpen. Mr. Thigpen is Chief Executive Officer and a
director of Heart. He also serves as President and a director of Mount Vernon
Bank. Following the Merger, Mr. Thigpen will continue to serve as President and
a director of Mount Vernon Bank and will serve as a director of FLAG. Mr.
Thigpen is 56 years old.
Robert E. Thigpen. Mr. Thigpen is a partner with the accounting firm
Thigpen, Jones & Seaton & Co., P.C. located in Dublin, Georgia. Mr. Thigpen
serves as Secretary and a director of Heart and Chief Financial Officer and a
director of Mount Vernon Bank. Following the Merger, Mr. Thigpen will continue
to serve as Chief Financial Officer and a director of Mount Vernon Bank and as a
director of FLAG. Mr. Thigpen is 55 years old.
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Robert W. Walters. Mr. Walters retired in March 1996 as owner and
\ director of The Mill Store, Inc., a retail and contract floor covering
business in LaGrange. He has been a director of First Federal since 1982 and a
director of FLAG since 1994. Following the Merger, Mr. Walters will continue to
serve as a member of the Boards of Directors of both FLAG and First Federal. Mr.
Walters is 65 years old.
Management Stock Ownership
The following table presents information about each of the directors
and executive officers of FLAG and all executive officers and directors as a
group. Unless otherwise indicated, each person has sole voting and investment
powers over the indicated shares. Information relating to beneficial ownership
of the FLAG Common Stock is based upon "beneficial owner" concepts set forth in
rules promulgated under the Exchange Act. Under such rules, a person is deemed
to be a "beneficial owner" of a security if that person has or shares "voting
power," which includes the power to vote or to direct the voting of such
security, or "investment power," which includes the power to dispose or to
direct the disposition of such security. Under the rules, more than one person
may be deemed to be a beneficial owner of the same securities.
Amount and
Nature of Beneficial Percent
Name Ownership of Class (%)
---- --------- ------------
(a) Directors
Dr. A. Glenn Bailey 92,577 (1) 1.78
H. Speer Burdette, III 24,576 (2) .47
Patti S. Davis 145,868 (3) 2.81
Fred A. Durand, III 27,657 (4) .53
John S. Holle 87,941.1821 (5) 1.68
James W. Johnson 145,103 (6) 2.80
Kelly R. Linch 58,677 (7) 1.13
Preston Martin 288,000 (8) 5.57
J. Daniel Speight, Jr. 261,588 (9) 4.99
John W. Stewart, Jr. 29,838.391 (10) .58
Robert W. Walters 140,115.669 (11) 2.70
(b) Executive Officers
Charles O. Hinely 0 0
Ellison C. Rudd 34,522.1356 (12) .67
(c) All Directors and Executive
Officers as a group
(13 persons) 1,336,463.377 24.6
- -------------------
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(1) Consists of (i) 36,555 shares held by Dr. Bailey, (ii) 35,055 shares
held by Dr. Bailey's spouse as to which beneficial ownership is shared,
(iii) 975 shares held by Chattahoochee Land Investment as to which
beneficial ownership is shared, (iv) 1,125 shares held by a broker for
the benefit or Chattahoochee Land Investment as to which beneficial
ownership is shared, and (v) 18,867 shares of immediately exercisable
options.
(2) Consists of (i) 1,402 shares held by Mr. Burdette, (ii) 674 shares held
by a broker for the benefit of Mr. Burdette, (iii) 3,633 shares held in
Individual Retirement Accounts for the benefit of Mr. Burdette, and
(iv) 18,867 shares of immediately exercisable options.
(3) Consists of (i) 108,439 shares held by Ms. Davis, (ii) 4,063 shares
held in an Individual Retirement Account for the benefit of Ms. Davis,
(iii) 7,866 shares held by Speight Futures, Inc. as to which beneficial
ownership is shared and (iv) 25,500 shares of immediately exercisable
options. Ms. Davis is also an executive officer of FLAG.
(4) Consists of (i) 8,625 shares held by a broker for the benefit of Mr.
Durand, (ii) 165 shares held by a broker for the benefit of Mr.
Durand's spouse as to which beneficial ownership is shared, and (iii)
18,867 shares of immediately exercisable options.
(5) Consists of (i) 15,000 shares held by Mr. Holle, (ii) 238.392 shares
issued to Mr. Holle pursuant to FLAG's dividend reinvestment plan,
(iii) 27,702.7901 shares issued pursuant to First Federal's profit
sharing plan, and (iv) 45,000 shares of immediately exercisable
options. Mr. Holle is also an executive officer of FLAG.
(6) Consists of (i) 58,377 shares held by Mr. Johnson, (ii) 2,716 shares
held by Mr. Johnson's spouse as to which beneficial ownership is
shared, and (iii) 84,010 held by McCrannie Motor and Tractor Company,
Inc. Profit Sharing Plan for the benefit of Mr. Johnson.
(7) Consists of (i) 33,750 shares held by Mr. Linch, (ii) 6,060 shares held
by a broker for the benefit of Mr. Linch, and (iii) 18,867 shares of
immediately exercisable options.
(8) Consists of (i) 192,000 shares held by Mr. Martin, and (ii) 96,000
shares held by a broker for the benefit of Mr. Martin. Mr. Martin is
also an executive officer of FLAG.
(9) Consists of (i) 99,997 shares held by Mr. Speight, (ii) 49,998 shares
held by a broker for the benefit of Mr. Speight, (iii) 2,362 shares
held by Mr. Speight as trustee for Patricia Ruth Davis, (iv) 589 shares
held by Mr. Speight as trustee for Anna Davis, (v) 1,677 shares held by
a broker for the benefit of Mr. Speight as custodian for Alex Speight,
(vi) 1,677 shares held by a broker for the benefit of Mr. Speight as
custodian for J. Daniel Speight, III, (vii) 7,371 shares held in an
Individual Retirement Account for the benefit of Mr. Speight, (viii)
34,917 shares held by Sp8Co., Inc. as to which beneficial ownership is
shared, and (ix) 63,000 shares of immediately exercisable options. Mr.
Speight is also an executive officer of FLAG.
(10) Consists of (i) 9,486 shares held by Mr. Stewart, (ii) 15 shares held
by Mr. Stewart as custodian for Tristran Daugherty, (iii) 1,469.901
shares issued to Mr. Stewart pursuant to FLAG's dividend reinvestment
plan, (iv) .490 shares issued to Mr. Stewart as custodian for Tristran
Daugherty pursuant to FLAG'S dividend reinvestment plan, and (v) 18,867
shares of immediately exercisable options.
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(11) Consists of (i) 37,125 shares held by Mr. Walters, (ii) 41,700 shares
held jointly by Mr. Walters and his spouse, (iii) 42,000 shares held by
Mr. Walters' spouse as to which beneficial ownership is shared, (iv)
375 shares held by Mr. Walters as custodian for Myles D. Oliver, (v)
48.669 shares issued to Mr. Walter's as custodian for Myles D. Oliver
pursuant to FLAG's dividend reinvestment plan, and (vi) 18,867 shares
of immediately exercisable options.
(12) Consists of (i) 10,000 shares held by Mr. Rudd, (ii) 4,000 shares held
by a broker for the benefit of Mr. Rudd, (iii) 14,897.1356 shares
issued pursuant to First Federal's profit sharing plan, and (iv) 5,625
shares of immediately exercisable options.
Additional information about FLAG and its subsidiaries is included in
documents incorporated by reference in this Proxy Statement/Prospectus. See
"AVAILABLE INFORMATION" and "DOCUMENTS INCORPORATED BY REFERENCE."
Voting Securities and Principal Shareholders of FLAG
The following lists each shareholder of record that directly or
indirectly owned, controlled, or held with power to vote 5% or more of the
5,174,807 outstanding shares of FLAG Common Stock as of June 30, 1998. Unless
otherwise indicated, each person has sole voting and investment powers over the
indicated shares. Information relating to beneficial ownership of the FLAG
Common Stock is based upon "beneficial owner" concepts set forth in rules
promulgated under the Exchange Act. Under such rules, a person is deemed to be a
"beneficial owner" of a security if that person has or shares "voting power,"
which includes the power to vote or to direct the voting of such security, or
"investment power," which includes the power to dispose or to direct the
disposition of such security. Under the rules, more than one person may be
deemed to be a beneficial owner of the same securities.
Amount and
Nature of Beneficial Percent of
Name and Address Ownership Class (%)
---------------- --------- ---------
Donovan B. Bell, Jr. 289,440 5.59
2316 Peacock Drive
Dublin, Georgia 31021
Wendell S. Dunaway 259,732(1) 5.01
P.O. Box 1007
Hawkinsville, Georgia 31036
J. Preston Martin 288,000(2) 5.57
P.O. Box 38
Mt. Zion Street
Milan, Georgia 31091
- --------------------
(1) Consists of (i) 258,835 shares owned by Mr. Dunaway, and (ii) 897
shares owned by Dunaway Brothers, as to which beneficial ownership is
shared.
(2) Consists of (i) 192,000 shares held by Mr. Martin, and (ii) 96,000
shares held by a broker for the benefit of Mr. Martin.
64
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Pro Forma Consolidated Financial Information
The following unaudited pro forma condensed consolidated balance sheet
as of June 30, 1998 (the "Pro Forma Balance Sheet"), and the unaudited pro forma
consolidated statements of earnings for the six months ended June 30, 1998, and
for each of the three years in the period ended December 31, 1997 (collectively,
the "Pro Forma Earnings Statements"), combine the historical financial
statements of FLAG with Heart after giving effect to the Merger using the
pooling of interests method of accounting. Pro forma adjustments to the Pro
Forma Balance Sheet are computed as if the Merger occurred at June 30, 1998,
while the pro forma adjustments to the Pro Forma Earnings Statements are
computed as if the Merger were consummated on January 1, 1995, the earliest
period presented. The following financial statements do not reflect any
anticipated cost savings which may be realized by FLAG after consummation of the
Merger.
The pro forma information does not purport to represent what FLAG's and
Heart's combined results of operations actually would have been if the Merger
had occurred on January 1, 1995.
65
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
June 30, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Pro Other
Heart of Pro Forma Forma Pending Pro Forma Pro Forma
FLAG Georgia Adjustments Combined Acquisitions Adjustments Combined
---- ------- ----------- -------- ------------ ----------- --------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 11,724 1,024 $ 12,748 $ 3,591 $ 16,339
Federal funds sold 10,070 880 10,950 3,310 14,260
Interest-bearing deposits 3,508 - 3,508 - 3,508
Securities available for sale, at fair value 66,712 4,577 71,289 11,792 83,081
Securities held to maturity 2,720 3,670 6,390 2,814 9,204
Other investments 5,755 - 5,755 - 5,755
Loans held for sale 6,306 - 6,306 - 6,306
Loans, net 306,527 21,209 327,736 70,610 398,347
Premises and equipment, net 12,512 1,006 13,518 2,833 16,350
Other assets 17,044 1,131 18,175 3,530 21,705
-------- ------- -------- ------ --------
Total assets $ 442,878 33,497 $ 476,375 $ 98,480 $ 574,855
======= ====== ======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 26,509 $ 2,187 $ 28,696 $ 14,702 $ 43,398
Interest bearing 312,736 27,086 339,822 70,050 409,872
------- ------ ------------------- -------
Total deposits 339,245 29,273 368,518 84,752 453,270
Other borrowings 55,830 520 56,350 3,905 60,255
Accrued expenses and other liabilities 9,221 507 9,728 823 10,551
--------- -------- --------- ------ --------
Total liabilities $ 404,296 $ 30,300 $ 434,596 $ 89,480 $ 524,076
Shareholders' Equity
Common stock 5,175 220 226 5,621 445 942 7,008
Additional paid-in capital 8,817 2,135 (226) 10,726 2,800 (1,126) 12,400
Retained earnings 24,381 774 25,155 5,936 31,091
Unrealized gains on
securities available for sale, net of tax 209 68 277 3 280
-------- -------- -------- -------- --------
38,582 3,197 41,779 9,184 50,779
Less treasury stock - - - (184) 184 -
Total shareholders' equity 38,582 3,197 41,779 9,000 50,779
-------- ------- -------- ------- --------
Total shareholders'
equity and liabilities $ 442,878 33,497 $ 476,375 $ 98,480 $ 574,855
======= ====== ======= ====== =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
66
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Six Months Ended June 30, 1998
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Heart of Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Georgia Adjustments Combined Acquisitions Adjustments Combined
---- ------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 17,674 $ 1,324 $ 18,998 $ 4,278 $ 23,276
Interest expense 8,678 700 9,378 2,130 11,508
-------- ------- ------ ----- ------
Net interest income 8,996 624 9,620 2,148 11,768
Provision for loan losses 444 12 456 65 521
-------- ------- ------- ------- --------
Net interest income after
provision for loan losses 8,552 612 9,164 2,083 11,247
Noninterest income:
Fees and service charges 1,826 129 1,955 322 2,277
Net realized gains on
the sale of assets 1,023 - 1,023 14 1,037
Other operating income 869 19 888 77 965
-------- ------ ------- ------ -------
Total noninterest income 3,718 148 3,866 413 4,279
Noninterest expense:
Salaries and employee benefits 4,355 257 4,612 894 5,506
Net occupancy and equipment expenses 1,548 107 1,655 314 1,969
Other operating expenses 3,323 160 3,483 546 4,029
------- ----- ------- ------ ------
Total noninterest expense 9,226 524 9,750 1,754 11,504
Income before income taxes 3,044 236 3,280 742 4,022
Income tax expense 929 69 998 178 1,176
-------- ------ -------- ------ -------
Net income $ 2,115 $ 167 $ 2,282 $ 564 $ 2,846
======= ====== ======= ====== =======
Net income per common
share outstanding .41 .76 .41 .41
========= ======= ========= ==========
Weighted average outstanding shares $ 5,172 $ 220 $ 5,620 $ 6,997
======= ======= ======= ========
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
67
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Heart of Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Georgia Adjustments Combined Acquisitions Adjustments Combined
---- ------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 30,643 $ 2,455 $ 33,098 $ 8,087 $ 41,185
Interest expense 14,646 1,348 15,994 3,978 19,972
------ ----- ------ ------- ------
Net interest income 15,997 1,107 17,104 4,109 21,213
Provision for loan losses 765 24 789 831 1,620
-------- ------ ------- ------ -------
Net interest income after
provision for loan losses 15,232 1,083 16,315 3,278 19,593
Noninterest income:
Fees and service charges 3,568 253 3,821 664 4,485
Net realized gains on
the sale of assets 910 - 910 - 910
Other operating income 854 59 913 148 1,061
------- ------- -------- ------ -----
Total noninterest income 5,332 312 5,644 812 6,456
Noninterest expense:
Salaries and employee benefits 7,256 486 7,742 1,656 9,398
Net occupancy and equipment expenses 2,779 198 2,977 572 3,549
Other operating expenses 4,985 316 5,301 1,274 6,575
-------- ------- ------- -------- -------
Total noninterest expense 15,020 1,000 16,020 3,503 19,523
Income before income taxes 5,544 395 5,939 587 6,525
Income tax expense 1,795 122 1,917 26 1,943
------- -------- ------- ------- ------
Net income $ 3,749 $ 273 $ 4,022 $ 561 $ 4,583
======= ======== ======= ======= ======
Net income per common
share outstanding $ .73 $ 1.24 $ .72 $ .66
======= ======== ======= ======
Weighted average outstanding shares 5,167 220 5,612 6,972
======= ======== ======= ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
68
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Heart of Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Georgia Adjustments Combined Acquisitions Adjustments Combined
---- ------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 27,951 $ 2,247 $ 30,198 $ 6,657 $ 36,855
Interest expense 13,194 1,255 14,449 3,179 17,628
------ ------ ------- ------- ------
Net interest income 14,757 992 15,749 3,478 19,227
Provision for loan losses 3,744 25 3,769 731 4,500
------- ------- ------- ------ -------
Net interest income after
provision for loan losses 11,013 967 11,980 2,747 14,727
Noninterest income:
Fees and service charges 3,301 206 3,507 501 4,008
Net realized gains on
the sale of assets 748 - 748 4 752
Other operating income 588 169 757 74 831
------- ------- -------- ------ -------
Total noninterest income 4,637 375 5,012 579 5,591
Noninterest expense:
Salaries and employee benefits 6,172 455 6,627 1,381 8,008
Net occupancy and equipment expenses 2,228 177 2,405 432 2,837
Other operating expenses 5,618 297 5,915 995 6,910
------- ------ ------- ------- -------
Total noninterest expense 14,018 929 14,947 2,808 17,755
Income before income taxes 1,632 413 2,045 518 2,563
Income tax expense 347 109 456 105 561
------- ------- ------- ------ -------
Net income $ 1,285 $ 304 $ 1,589 $ 413 $ 2,002
======= ======= ======= ====== ======
Net income per common
share outstanding $ .25 $ 1.38 $ .29 $ .29
======= ======= ======== ======
Weighted average outstanding shares 5,124 220 5,570 6,927
======= ======= ======== ======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
69
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Pro Forma Consolidated Statement of Earnings
For the Year Ended December 31, 1995
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Other
Heart of Pro Forma Pro Forma Pending Pro Forma Pro Forma
FLAG Georgia Adjustments Combined Acquisitions Adjustments Combined
---- ------- ----------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 27,311 $ 340 $ 27,651 $ 5,328 $ 32,979
Interest expense 13,378 179 13,557 2,384 15,941
------ ------- ------ -------- ------
Net interest income 13,933 161 14,094 2,944 17,038
Provision for loan losses 775 - 775 716 1,491
--------- ------- ------- ------- -------
Net interest income after
provision for loan losses 13,158 161 13,319 2,228 15,547
Noninterest income:
Fees and service charges 2,971 26 2,998 399 3,397
Net realized gains (losses) on
the sale of assets 350 - 350 (12) 338
Other operating income 385 6 391 55 446
-------- ------ -------- -------- -------
Total noninterest income 3,706 33 3,739 441 4,180
Noninterest expense:
Salaries and employee benefits 5,749 61 5,810 1,076 6,886
Net occupancy and equipment expenses 1,825 26 1,851 302 2,153
Other operating expenses 4,112 63 4,175 802 4,977
------- ------ ------- ------- -------
Total noninterest expense 11,686 150 11,836 2,180 14,016
Income before income taxes 5,178 44 5,222 489 5,711
Income tax expense (benefit) 1,707 13 1,720 (45) 1,675
------- ------ ------- ------- -------
Net income $ 3,471 $ 31 $ 3,502 $ 534 $ 4,036
======= ====== ======= ======= =======
Net income per common
share outstanding $ .68 $ .14 $ .63 $ .59
======= ====== ======= =======
Weighted average outstanding shares 5,088 220 5,541 6,809
======= ======= ======= =======
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
70
<PAGE>
FLAG FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Pro Forma Financial Statements
(1) The unaudited pro forma consolidated balance sheet as of June 30, 1998 and
consolidated statements of earnings for the six months ended June 30, 1998
and for the years ended December 31, 1997, 1996 and 1995 have been prepared
based on the historical consolidated balance sheets and statements of
earnings, which give effect to the Merger of Heart with and into FLAG
accounted for as a pooling of interests, based on the exchange of 2.025
shares of FLAG Common Stock for each outstanding share of Heart Common
Stock.
(2) In the opinion of management of the respective companies included above,
all adjustments considered necessary for a fair presentation of the
financial position and results for the period presented have been included.
Adjustments, if any, are normal and recurring nature.
71
<PAGE>
SHAREHOLDER PROPOSALS
Proposals of shareholders of FLAG intended to be presented at the 1999
annual meeting of shareholders must be received by FLAG at its principal
executive offices on or before the date that is 120 calendar days in advance of
the date of FLAG's 1998 proxy statement released to security holders in order to
be included in FLAG's proxy statement and proxy relating to the 1999 annual
meeting of shareholders. As of the date of the mailing of this Proxy
Statement/Prospectus, FLAG's 1998 proxy statement has not been completed. The
specific date by which proposals of shareholders of FLAG intended to be
represented at the 1999 annual meeting of shareholders must be received by FLAG
in order to be included in FLAG's 1999 proxy statement will be set forth in
FLAG's 1998 proxy statement.
EXPERTS
The restated consolidated financial statements of FLAG and subsidiaries
as of December 31, 1997 and 1996, and for each of the years in the three year
period ended December 31, 1997, incorporated by reference herein and in the
Registration Statement, have been audited by Porter Keadle Moore, LLP,
independent certified public accountants, which are included in the FLAG Annual
Report to Shareholders which is incorporated by reference in FLAG's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1997. The financial
statements audited by Porter Keadle Moore, LLP have been incorporated herein by
reference in reliance upon the authority of said firm as experts in accounting
and auditing in giving said reports.
The consolidated financial statements of FLAG and subsidiary as of
December 31, 1996 and each of the years in the two-year period ended December
31, 1996, included in the restated consolidated financial statements of FLAG,
incorporated herein and in the Registration Statement by reference, have been
audited by Robinson, Grimes and Company, P.C. independent certified public
accountants. The financial statements audited by Robinson, Grimes and Company
P.C., have been incorporated herein by reference in reliance upon the authority
of said firm as experts in accounting and auditing in giving said reports.
The consolidated financial statements of Middle Georgia Bankshares,
Inc. as of December 31, 1997 and 1996 and for each of the years in the three
year period ended December 31, 1997, included in the restated consolidated
financial statements of FLAG, incorporated herein and in the Registration
Statement by reference, have been audited by Porter Keadle Moore, LLP,
independent certified public accountants. The financial statements audited by
Porter Keadle Moore, LLP have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Three Rivers Bancshares, Inc.
as of December 31, 1997 and 1996 and for each of the years in the three year
period ended December 31, 1997, included in the restated consolidated financial
statements of FLAG, incorporated herein and in the Registration Statement by
reference, have been audited by Thigpen, Jones, Seaton & Co., P.C., independent
certified public accountants. The financial statements audited by Thigpen,
Jones, Seaton & Co., P.C. have been incorporated herein by reference in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said reports.
The consolidated financial statements of Heart as of December 31, 1997
and 1996, and for each of the years in the three year period ended December 31,
1997, are contained herein and in the Registration Statement in reliance upon
the report of McLain, Calhoun & Co., P.C., independent certified public
72
<PAGE>
accountants, upon the authority of said firm as experts in accounting and
auditing in giving said reports.
LEGAL MATTERS
The legality of the shares of FLAG Common Stock to be issued in the
Merger and certain tax consequences of the Merger will be passed upon by Powell,
Goldstein, Frazer & Murphy LLP, Atlanta, Georgia.
OTHER MATTERS
Management of Heart does not know of any matters to be brought before
the Special Meeting other than those described above. If any other matters
properly come before the Special Meeting, the persons designated as Proxies will
vote on such matters in accordance with their best judgment.
73
<PAGE>
HEART FINANCIAL DATA
Page
----
Consolidated Balance Sheets as of June 30, 1998 and 1997 (Unaudited).........F-2
Consolidated Statements of Earnings for the Six Months
Ended June 30, 1998 and 1997 (Unaudited)................................F-3
Consolidated Statements of Comprehensive Income for the Six Months Ended
June 30, 1998 and 1997..................................................F-4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997 (Unaudited)......................................F-5
Notes to Consolidated Financial Statements (Unaudited).......................F-6
Report of Independent Certified Public Accountants...........................F-7
Consolidated Balance Sheets as of December 31, 1997
and 1996................................................................F-8
Consolidated Statements of Earnings for the Years Ended
December 31, 1997, 1996 and 1995........................................F-9
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...................F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................................F-11
Notes to Consolidated Financial Statements..................................F-12
F-1
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
June 30, 1998 and 1997
(Unaudited)
Assets
1998 1997
---- ----
Cash and cash equivalents:
Cash and due from banks $ 1,024,210 1,326,435
Federal funds sold 880,000 1,990,000
---------- ---------
Total cash and cash equivalents 1,904,210 3,316,435
Investment securities available for sale 4,576,439 5,432,186
Investment securities held to maturity 3,669,885 3,133,763
Loans, net 21,209,452 16,878,050
Bank premises and equipment, net 1,005,799 1,029,382
Accrued interest receivable 492,128 426,943
Other assets 639,195 724,921
---------- ----------
Total assets $33,497,108 30,941,680
========== ==========
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Non interest bearing demand $ 2,354,901 2,928,974
Interest bearing demand 4,729,311 3,523,315
Savings 1,101,339 912,925
Time - over $100,000 6,244,294 5,620,061
Other 14,843,670 14,254,208
---------- ----------
Total deposits 29,273,515 27,239,483
Accrued interest payable 351,313 332,121
Accrued expenses and other liabilities 155,615 48,628
Other borrowed funds 520,000 520,000
---------- ----------
Total liabilities 30,300,443 28,140,232
Shareholders' equity:
Common stock, par value $1, authorized 1,000,000
shares; issued 220,000 shares 220,000 220,000
Additional paid-in capital 2,135,000 2,135,000
Retained earnings 774,311 457,265
Unrealized gain (loss) on securities available
for sale, net of tax 67,354 (10,817)
---------- ----------
Total shareholders' equity 3,196,665 2,801,448
---------- ----------
Total liabilities and shareholders'equity $33,497,108 30,941,680
========== ==========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
Six Months Ended
June 30,
--------
1998 1997
---- ----
Interest income:
Interest and fees on loans $1,044,388 848,671
Interest on federal funds sold 23,361 35,914
Interest on investment securities:
U.S. government agencies 256,061 281,720
State, county and municipals - 5,237
Other - 21
--------- ---------
Total interest income 1,323,810 1,171,563
--------- ---------
Interest expense:
Demand deposits 64,578 54,217
Savings 14,409 13,375
Certificates of deposit of $100,000 or more 175,312 166,333
Other time deposits 424,243 391,997
Other 21,042 24,250
--------- ---------
Total interest expense 699,584 650,172
--------- --------
Net interest income 624,226 521,391
Provision for loan losses 12,000 12,000
--------- --------
Net interest income after provision
for loan losses 612,226 509,391
--------- --------
Other operating income:
Service charges on deposit accounts 94,638 79,350
Other service charges, commissions and fees 34,591 35,265
Gain on sales of securities - 21,321
Other income 19,397 12,746
--------- --------
Total other operating income 148,626 148,682
--------- --------
Other operating expenses:
Salaries 207,552 190,330
Employee benefits 49,889 39,596
Net occupancy expense 26,298 25,280
Equipment rental and depreciation of furniture
and equipment 72,283 70,358
Other expenses 168,636 155,715
--------- --------
Total other operating expenses 524,658 481,279
--------- --------
Income before income taxes 236,194 176,794
Provision for income taxes 68,776 53,105
-------- --------
Net income $ 167,418 123,689
========= ========
Net income per share $ 0.76 0.56
====== ======
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
Six Months Ended
June 30,
--------
1998 1997
---- ----
Net earnings: $ 167,418 $123,689
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Holding gains (losses) arising during period,
net of tax of $15,633 and $29,680 30,347 57,615
Realized gains and losses, net of tax of $0 and $7,249 - (14,072)
Comprehensive income $ 197,765 $167,232
======= =======
F-4
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 167,418 123,689
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Provision for loan losses 12,000 12,000
Depreciation and amortization 40,373 37,353
Gain on sale of investments - (21,321)
Increase in accrued income and other assets 9,218 (38,022)
Interest in accrued interest and other expenses 15,804 25,436
---------- ---------
Net cash provided by operating activities 244,813 139,135
---------- ---------
Cash flows from investing activities:
Net change in loans (1,511,487) (399,925)
Proceeds from maturities of investment securities held to maturity 2,753,430 1,353,879
Purchase of investment securities held to maturity (1,503,000) (927,034)
Property and equipment expenditures (49,350) (3,552)
Proceeds from sale of property and equipment 21,200 -
---------- ---------
Net cash (used in) provided by investing activities (289,207) 23,368
---------- ---------
Cash flows from financing activities:
Net increase in demand and savings deposits 39,992 232,551
Net change in time deposits 589,291 761,610
Principal payments on other borrowed funds - (74,000)
---------- ---------
Net cash provided by financing activities 629,283 920,161
---------- ---------
Net change in cash and cash equivalents 584,889 1,082,664
Cash and cash equivalents at beginning of period 1,319,321 2,233,771
--------- ---------
Cash and cash equivalents at end of period $ 1,904,210 3,316,435
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The consolidated financial statements include the accounts of Heart of
Georgia Bancshares, Inc. (the "Company") and its wholly-owned subsidiary,
Mount Vernon Bank. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The consolidated financial information furnished herein reflects all
adjustments which are, in the opinion of management, necessary to present
a fair statement of the results of operations and financial position for
the periods covered herein. All such adjustments are of a normal recurring
nature.
(2) Recent Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). SFAS 128 simplifies current standards by eliminating
the presentation of primary earnings per share (EPS) and requiring the
presentation of basic EPS, which includes no potential common shares and
thus no dilution. The Statement also requires entities with complex
capital structures to present basic and diluted EPS on the face of the
income statement and also eliminates the modified treasury stock method of
computing potential common shares. The Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Early application is not permitted. Upon
adoption, restatement of all prior-period EPS data presented is required.
Based upon the current capital structure of the Company, this Statement
will have no effect on the EPS calculation.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. SFAS
131 specifies the presentation and disclosure of operating segment
information reported in the annual report and interim reports issued to
stockholders. The provisions of both statements will be effective for
fiscal years beginning after December 15, 1997. The management of the
Company believes that the adoption of these statements will not have a
material impact on the Company's financial position, results of
operations, or liquidity.
F-6
<PAGE>
HEART OF GEORGIA BANCSHARES,
INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
F-7
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM JUNE 27, 1995 TO
DECEMBER 31, 1995
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT........................................... F-9
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets.......................................... F-10
Consolidated Statements of Changes in Shareholders' Equity........... F-11
Consolidated Statements of Income.................................... F-12
Consolidated Statements of Cash Flows................................ F-13
Notes to Consolidated Financial Statements........................... F-14
F-8
<PAGE>
McLain, Calhoun & Co., P.C.
Certified Public Accountants
Business Consultants
INDEPENDENT AUDITORS' REPORT
Board of Directors
Heart of Georgia Bancshares, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Heart of
Georgia Bancshares, Inc. and Subsidiary, as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the two years ended December 31, 1997 and 1996 and the period
from inception of June 27, 1995 to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heart of
Georgia Bancshares, Inc. and Subsidiary at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the two years
ended December 31, 1997 and 1996 and the period from inception of June 27, 1995
to December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ McLain, Calhoun & Co., P.C.
January 7, 1998
Vidalia, Georgia
F-9
<PAGE>
<TABLE>
<CAPTION>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------
As of December 31,
------------------
1997 1996
- -----------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 1,309,321 $ 768,771
Federal funds sold 10,000 1,465,000
- -----------------------------------------------------------------------------------
Total cash and cash equivalents 1,319,321 2,233,771
- -----------------------------------------------------------------------------------
Securities available for sale, at fair value 4,638,785 8,905,347
Securities held to maturity, at cost 4,811,988 -
Loans, net of unearned income 19,938,304 16,688,100
Less: allowance for loan losses (228,339) (197,975)
- -----------------------------------------------------------------------------------
Loans, net 19,709,965 16,490,125
- -----------------------------------------------------------------------------------
Bank premises and equipment 1,009,335 1,054,496
Accrued interest receivable 469,340 364,091
Other assets and accrued income 688,493 774,308
- -----------------------------------------------------------------------------------
Total Assets $32,647,227 $ 29,822,138
- -----------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand $ 3,008,996 $ 2,151,488
Interest-bearing demand 4,240,500 3,977,030
Savings 896,061 838,661
Time deposits over $100,000 5,613,404 5,856,297
Other time deposits 14,885,269 13,256,362
- -----------------------------------------------------------------------------------
Total deposits 28,644,230 26,079,838
Accrued interest payable 353,435 296,240
Accrued expenses and other liabilities 130,662 217,944
Other borrowed funds 520,000 594,000
- -----------------------------------------------------------------------------------
Total liabilities 29,648,327 27,188,022
- -----------------------------------------------------------------------------------
Shareholders' Equity:
Common stock, $1 par value, authorized 1,000,000 shares,
outstanding 220,000 shares 220,000 220,000
Paid-in capital surplus 2,135,000 2,135,000
Retained earnings 606,893 333,576
Unrealized holding gains (losses) on available for sale
securities, net of tax 37,007 (54,460)
- -----------------------------------------------------------------------------------
Total shareholders' equity 2,998,900 2,634,116
- -----------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 32,647,227 $ 29,822,138
- -----------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Unrealized
Paid-in Holding
Common Capital Retained Gains (Losses)
Stock Surplus Earnings on Securities Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 27, 1995 $ -- $ -- $ -- $ -- $ --
Formation of Heart of Georgia Bancshares, Inc. 220,000 2,135,000 -- 2,355,000
Net Income -- -- 30,508 -- 30,508
Valuation allowance adjustment on
securities available for sale -- -- -- (6,073) (6,073)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 220,000 2,135,000 30,508 (6,073) 2,379,435
Net Income -- -- 303,068 -- 303,068
Valuation allowance adjustment on
securities available for sale -- -- -- (48,387) (48,387)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 220,000 2,135,000 333,576 (54,460) 2,634,116
Net Income -- -- 273,317 -- 273,317
Valuation allowance adjustment on
securities available for sale -- -- -- 91,467 91,467
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ 220,000 $ 2,135,000 $ 606,893 $ 37,007 $ 2,998,900
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
June 27, 1995
Year Ended to December 31,
- -------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
Interest Income:
<S> <C> <C> <C>
Interest and fees on loans 1,814,445 $ 1,562,135 $ 200,886
Income on federal funds sold 70,257 66,948 15,525
Interest on investment securities
Taxable income 558,182 606,674 110,352
Non-taxable income 10,615 1,242 3,778
Other interest income 1,937 10,327 9,917
- ---------------------------------------------------------------------------------------
Total interest income 2,455,436 2,247,326 340,458
- ---------------------------------------------------------------------------------------
Interest Expense:
Demand deposits 121,131 137,083 24,769
Savings deposits 26,673 27,003 4,579
Time deposits 1,156,039 1,036,478 140,381
Other interest expense 44,038 54,466 9,226
- ---------------------------------------------------------------------------------------
Total interest expense 1,347,881 1,255,030 178,955
- ---------------------------------------------------------------------------------------
Net interest income before loan losses 1,107,555 992,296 161,503
Less - provision for loan losses 24,000 25,200 -
- ---------------------------------------------------------------------------------------
Net interest income after provision for loan losses 1,083,555 967,096 161,503
- ---------------------------------------------------------------------------------------
Other Operating Income:
Service charges on deposit accounts 183,507 128,875 16,513
Other service charges, commissions and fees 69,935 76,997 10,821
Gain on sales of investments 39,995 158,575 4,757
Other income 18,985 10,218 880
- ---------------------------------------------------------------------------------------
Total other operating income 312,422 374,665 32,971
- ---------------------------------------------------------------------------------------
Other Operating Expenses:
Salaries 397,117 372,364 53,497
Employee benefits 88,709 82,276 7,443
Net occupancy expenses 50,406 64,444 8,735
Equipment rental and depreciation of equipment 147,604 113,001 17,827
Other expenses 316,470 297,102 62,859
- ---------------------------------------------------------------------------------------
Total other operating expenses 1,000,306 929,187 150,361
- ---------------------------------------------------------------------------------------
Income Before Income Taxes 395,671 412,574 44,113
Less - provision for income taxes 122,354 109,506 13,605
- ---------------------------------------------------------------------------------------
Net Income $ 273,317 $ 303,068 $ 30,508
- ---------------------------------------------------------------------------------------
Earnings Per Share* $ 1.24 $ 1.37 $ 0.14
- ---------------------------------------------------------------------------------------
* Net Income / weighted average outstanding shares of 220,000
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 27, 1995
Year Ended December 31, to December 31,
- -----------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Income $ 273,317 $ 303,068 $ 30,508
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 24,000 25,200 -
Depreciation and amortization 76,495 109,617 8,174
Gain on sales of investments (39,995) (158,575) (4,757)
Changes in accrued income and other assets 858 (18,336) (99,079)
Changes in accrued expenses and other liabilities (20,758) 83,380 (34,121)
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 313,917 344,354 (99,275)
- -----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Net change in loans made to customers (3,243,840) (4,384,851) (1,711,152)
Purchases of held to matuity securities (2,632,359) (4,254,640) (60,304)
Proceeds from maturities of available for sale securities 2,265,514 3,595,732 1,558,413
Acquisition of bank subsidiary - - (2,775,000)
Property and equipment purchases (13,961) (106,541) -
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,624,646) (5,150,300) (2,988,043)
- -----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand and savings accounts 1,084,265 (487,734) (343,933)
Net change in other time deposits 1,386,014 5,104,818 505,418
Proceeds from borrowings - - 660,000
Proceeds from issuance of common stock - - 2,355,000
Principal payments on long term debt (74,000) (66,000) -
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,396,279 4,551,084 3,176,485
- -----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (914,450) (254,862) 89,167
Cash and Cash Equivalents, Beginning of Year 2,233,771 2,488,633 2,399,466
- -----------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1,319,321 $ 2,233,771 $ 2,488,633
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-13
<PAGE>
HEART OF GEORGIA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND PERIOD FROM JUNE 27, 1995
TO DECEMBER 31, 1995
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
The accounting and reporting policies of the Heart of Georgia Bancshares, Inc.
conform with generally accepted accounting principles and practices within the
banking industry. The policies that materially affect financial position and the
results of operations are summarized as follows:
1. Reporting Entity - Heart of Georgia Bancshares, Inc. (the "Company")
was formed on June 27, 1995 and operates as a bank holding company
with one bank subsidiary. On October 31, 1995, the Company acquired
100% of the outstanding stock of Mount Vernon Bank in Mount Vernon,
Georgia. Goodwill of $676,940, representing the excess of the cost of
Mount Vernon Bank over the fair value of the net assets at the date
of acquisition, is being amortized on the straight-line method over
fifteen years. Amortization expense charged to operations for 1997,
1996 and 1995 was $45,129, $45,129 and $7,522, respectively.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its bank subsidiary. All
material intercompany accounts and transactions have been eliminated
as a result of consolidation.
3. Securities - - The classification of securities is determined at the
date of purchase. Gains or losses on the sale of securities are
recognized on a specific identification basis.
Securities available for sale, primarily debt securities, are
recorded at fair value with unrealized gains or losses (net of tax
effect) excluded from earnings and reported as a component of
shareholders' equity. Securities available for sale will be used as a
part of the Corporation's interest rate risk management strategy and
may be sold in response to changes in interest rates, changes in
prepayment risk, and other factors.
Held to maturity securities, primarily debt securities, are stated at
cost, net of the amortization of premium and the accretion of
discount. The Company intends and has the ability to hold such
securities on a long-term basis or until maturity.
Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers
of the securities. Mortgage-backed securities are carried at unpaid
principal balances, adjusted for unamortized premiums and unearned
discounts.
The market value of securities is generally based on quoted market
prices. If a quoted market price is not available, market value is
estimated using quoted market prices for similar securities.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
4. Loans and Interest Income - Loans are stated at the amount of unpaid
principal, reduced by net deferred loan fees, unearned discounts, and
a valuation allowance for possible loan losses. Interest on simple
F-14
<PAGE>
interest installment loans and other loans is calculated by using the
simple interest method on daily balances of the principal amount
outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued,
all unpaid interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
5. Allowance for Loan Losses - The allowance for loan losses is
available to absorb losses inherent in the credit extension process.
The entire allowance is available to absorb losses related to the
loan and lease portfolio and other extensions of credit, including
off-balance sheet credit exposures. Credit exposures deemed to be
uncollectible are charged against the allowance for loan losses.
Recoveries of previously charged-off amounts are credited to the
allowance for loan losses. Additions to the allowance for credit
losses are made by charges to the provision for credit losses.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent
in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends
in historical loss experience, specific impaired loans, economic
conditions, and other risks inherent in the portfolio. Allowances for
impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of
uncertainties associated with local economic conditions, collateral
values, and future cash flows on impaired loans, it is reasonably
possible that a material change could occur in the allowance for loan
losses in the near term. However, the amount of the change that is
reasonably possible cannot be estimated.
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" (SFAS 114), which was amended in 1994 by
Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosure" (SFAS 118). These standards address the accounting for
certain loans when it is probable that all amounts due pursuant to
the contractual terms of the loan will not be collected. Individually
identified impaired loans are measured based on the present value of
payments expected to be received, using the historical effective loan
rate as the discount rate. Loans that are to be foreclosed or that
are solely dependent on the collateral for repayment may
alternatively be measured based on the fair value of the collateral
for such loans. Measurement may also be based on observable market
prices. If the recorded investment in the loan exceeds the measure of
fair value, a valuation allowance is established as a component of
the allowance for credit losses. The Company adopted SFAS 114 and
SFAS 118 effective January 1, 1995. Adoption of the standards did not
have a material impact on the Company's financial position or results
of operations.
6. Premises and Equipment - Premises and equipment are stated at cost,
less accumulated depreciation. Depreciation is charged to operating
expenses over the estimated useful lives of the assets and is
computed on the straight-line method. Costs of major additions and
improvements are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred. Gains or losses from
F-15
<PAGE>
disposition of property are reflected in operations and the asset
account is reduced.
7. Other Real Estate Owned - Other real estate owned, acquired
principally through foreclosure, is stated at the lower of cost or
net realizable value. Loan losses incurred in the acquisition of
these properties are charged against the allowance for possible loan
losses at the time of foreclosure. Subsequent write-downs of other
real estate owned are charged against the current period's expense.
8. Income Taxes - The Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," which requires
recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
The Company and its subsidiary file a consolidated income tax return.
The subsidiary computes its income tax expense as if it filed a
separate corporate return except without the benefit of the surtax
allocation. Any benefits or disadvantages of the consolidation are
absorbed by the parent company. The subsidiary pays its allocation of
federal income taxes to the parent company or receives payment from
the parent company to the extent that tax benefits are realized.
9. Cash and Cash Equivalents - For purposes of reporting cash flows,
cash and cash equivalents include cash on hand, amounts due from
banks, interest bearing deposits in other banks with original
maturities of less than three months, highly liquid debt instruments
purchased with an original maturity of three months or less, and
federal funds sold. Generally, federal funds are purchased and sold
for one-day periods.
10. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant
changes in the economic environment and market conditions. In
connection with the determination of the estimated losses on loans,
management obtains independent appraisals for significant collateral.
While management uses available information to recognize losses on
loans, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination
process, periodically review the estimated losses on loans. Such
agencies may require the Bank to recognize additional losses based on
their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably
possible that the estimated losses on loans may change materially in
the near term. However, the amount of the change that is reasonably
possible cannot be estimated.
F-16
<PAGE>
11. Advertising Costs - It is the policy of the Company to expense
advertising costs as they are incurred. The Company does not engage
in any direct-response advertising and accordingly has no advertising
costs reported as assets on its balance sheet. Amounts charged to
advertising expense for the years ended December 31, 1997 and 1996
and for the period from inception of June 27, 1995 to December 31,
1995 were $11,603, $10,658 and $0.
B. INVESTMENT SECURITIES
- ------------------------
Debt and equity securities have been classified in the balance sheet
according to management's intent. The following table reflects the
amortized cost and estimated market values of investments in debt and
equity securities held at December 31, 1997 and 1996. In addition, gross
unrealized gains and gross unrealized losses are disclosed as of December
31, 1997 and 1996, in accordance with Statement of Position 90-11 of the
American Institute of Certified Public Accountants, which is effective for
financial statements covering fiscal years ending after December 15, 1990.
F-17
<PAGE>
The book and market values of securities available for sale were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- -------------------------------------------------------------------------------------------------
December 31, 1997:
Non-mortgage backed debt securities of :
<S> <C> <C> <C> <C>
U.S. Treasury $ 502,930 $ - $ 2,695 $ 500,235
U.S. Agencies 1,599,404 - 10,106 1,589,298
State and Political subdivisions - - - -
- -------------------------------------------------------------------------------------------------
Total non-mortgage backed debt securities 2,102,334 - 12,801 2,089,533
Mortgage backed securities 2,330,776 68,872 - 2,399,648
- -------------------------------------------------------------------------------------------------
Total debt securities 4,433,110 68,872 12,801 4,489,181
Equity Securities 149,604 - - 149,604
- -------------------------------------------------------------------------------------------------
Total $ 4,582,714 $ 68,872 $ 12,801 $ 4,638,785
- -------------------------------------------------------------------------------------------------
December 31, 1996:
Non-mortgage backed debt securities of :
U.S. Treasury $ 505,707 $ - $ 7,113 $ 498,594
U.S. Agencies 3,746,965 - 24,840 3,722,125
State and Political subdivisions 15,000 33 - 15,033
- -------------------------------------------------------------------------------------------------
Total non-mortgage backed debt securities 4,267,672 33 31,953 4,235,752
Mortgage backed securities 4,575,986 - 50,595 4,525,391
- -------------------------------------------------------------------------------------------------
Total debt securities 8,843,658 33 82,548 8,761,143
Equity securities 144,204 - - 144,204
- -------------------------------------------------------------------------------------------------
Total $ 8,987,862 $ 33 $ 82,548 $ 8,905,347
- -------------------------------------------------------------------------------------------------
</TABLE>
Purchases of securities available for sale totaled $-0-, $4,254,640 and
$60,304, respectively, in 1997, 1996 and 1995. Sales and maturities of
securities available for sale totaled $2,265,514, $3,595,732 and
$1,558,413, respectively, in 1997, 1996 and 1995.
There were no securities classified as held to maturity at December 31,
1996 and 1995. Purchases of securities held to maturity totaled $2,632,359
in 1997. Transfers of securities from available for sale to held to
maturity totaled $2,179,629. The difference in book and market values at
the date securities were transferred was $2,509. The book and market values
of securities held to maturity were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
- --------------------------------------------------------------------------------------------
December 31, 1997:
Non-mortgage backed debt securities of :
<S> <C> <C> <C> <C>
U.S. Treasury $ 168,304 $ 3,555 $ - $ 171,859
U.S. Agencies 4,206,286 10,197 - 4,216,483
State and Political subdivisions - - - -
- --------------------------------------------------------------------------------------------
Total non-mortgage backed debt securities 4,374,590 13,752 - 4,388,342
Mortgage backed securities 437,398 4,196 - 441,594
- --------------------------------------------------------------------------------------------
Total debt securities 4,811,988 17,948 - 4,829,936
Equity Securities - - - -
- --------------------------------------------------------------------------------------------
Total $ 4,811,988 $ 17,948 $ - $ 4,829,936
- --------------------------------------------------------------------------------------------
</TABLE>
The book and market values of pledged securities were $300,000 and $299,063
at December 31, 1997, respectively. The book and market values of pledged
securities were $1,979,479 and $1,977,989 at December 31, 1996,
respectively.
F-18
<PAGE>
The amortized cost and estimated market value of debt securities held to
maturity and of available for sale at December 31, 1997 and 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
repay obligations with or without call or prepayment penalties.
Available for Sale
- --------------------------------------------------------------------------------
Estimated
December 31, 1997: Amortized Cost Market Value
- --------------------------------------------------------------------------------
Non-mortgage backed securities:
Due in one year or less $ 400,060 $ 399,135
Due after one year through five years 1,702,274 1,690,398
Due after five years through ten years - -
Due after ten years - -
- --------------------------------------------------------------------------------
Total non-mortgage backed securities 2,102,334 2,089,533
Mortgage backed securities 2,330,776 2,399,648
- --------------------------------------------------------------------------------
Total $ 4,433,110 $ 4,489,181
- --------------------------------------------------------------------------------
Estimated
December 31, 1996 Amortized Cost Market Value
- --------------------------------------------------------------------------------
Non-mortgage backed securities:
Due in one year or less $ 415,000 $ 414,945
Due after one year through five years 3,852,672 3,820,807
Due after five years through ten years - -
Due after ten years - -
- --------------------------------------------------------------------------------
Total non-mortgage backed securities 4,267,672 4,235,752
Mortgage backed securities 4,575,986 4,525,391
- --------------------------------------------------------------------------------
Total $ 8,843,658 $ 8,761,143
- --------------------------------------------------------------------------------
Held to Maturity
- --------------------------------------------------------------------------------
Estimated
December 31, 1997: Amortized Cost Market Value
- --------------------------------------------------------------------------------
Non-mortgage backed securities:
Due in one year or less $ 850,000 $ 849,437
Due after one year through five years 2,824,392 2,833,655
Due after five years through ten years 699,658 705,250
Due after ten years
- --------------------------------------------------------------------------------
Total non-mortgage backed securities 4,374,050 4,388,342
Mortgage backed securities 437,938 441,594
- --------------------------------------------------------------------------------
Total $4,811,988 $4,829,936
- --------------------------------------------------------------------------------
The market value is established by an independent pricing service as of the
approximate dates indicated. The differences between the book value and
market value reflect current interest rates and represent the potential loss
(or gain) had the portfolio been liquidated on that date. Security losses (or
gains) are realized only in the event of dispositions prior to maturity.
At December 31, 1997 and 1996, the Company did not hold investment
securities of any single issuer, other than obligations of the U. S.
Treasury and other U. S. Government agencies, whose aggregate book value
exceeded ten percent of shareholders' equity.
C. LOANS
- ---------
The following is a summary of the loan portfolio by principal categories at
December 31, 1997 and 1996:
F-19
<PAGE>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
Commercial loans $ 10,327,304 $ 8,706,492
Real estate - construction 261,000 36,000
Real estate- mortgage 6,253,000 5,204,000
Installment loans to individuals 3,097,000 2,742,000
- --------------------------------------------------------------------------------
Subtotal 19,938,304 16,688,492
Less: Unearned income -- (392)
- --------------------------------------------------------------------------------
Total $ 19,938,304 $ 16,688,100
- --------------------------------------------------------------------------------
D. ALLOWANCE FOR LOAN LOSSES
- ----------------------------
A summary of changes in allowance for loan losses of the Company for the year
ended December 31, 1997, 1996 and 1995 is as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Beginning Balance $ 197,975 $ 156,373 $ 150,000
Add: Provision for possible loan losses 24,000 25,200 --
- --------------------------------------------------------------------------------
Subtotal 221,975 181,573 150,000
Less:
Loans charged off 6,987 4,893 --
Recoveries on loans previously charged off (13,351) (21,295) (6,373)
- --------------------------------------------------------------------------------
Net loans charged off (6,364) (16,402) (6,373)
- --------------------------------------------------------------------------------
Balance, end of year $ 228,339 $ 197,975 $ 156,373
- --------------------------------------------------------------------------------
Loans on which the accrual of interest has been discontinued or reduced amounted
to $45,000, $135,844 and $64,579 at December 31, 1997, 1996 and 1995,
respectively. If interest on these loans had been accrued, such income would
have approximated $4,950, $17,043 and $10,429 for 1997, 1996 and 1995,
respectively.
E. BANK PREMISES AND EQUIPMENT
- ------------------------------
The following is a summary of asset classifications and depreciable lives for
the Bank:
- --------------------------------------------------------------------------------
Useful Lives (Years) 1997 1996
- --------------------------------------------------------------------------------
Land $ 42,900 $ 42,900
Banking house and improvements 8-40 847,200 847,200
Equipment, furniture, and fixtures 5-10 201,196 187,235
Vehicles 5 29,561 29,561
- --------------------------------------------------------------------------------
Total 1,120,857 1,106,896
Less - accumulated depreciation (111,522) (52,400)
- --------------------------------------------------------------------------------
Bank premises and equipment, net $ 1,009,335 $ 1,054,496
- --------------------------------------------------------------------------------
Depreciation included in operating expenses amounted to $59,122, 47,116 and
$5,284 in 1997, 1996 and 1995, respectively.
F. DEPOSITS
- -----------
The Company's bank had deposit liabilities in NOW accounts of $2,186,422
and $1,809,559 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
F-20
<PAGE>
- --------------------------------------------------------------------------------
1998 $ 16,432,913
1999 1,828,706
2000 1,033,359
2001 795,891
2002 and thereafter 407,804
- --------------------------------------------------------------------------------
Total time deposits $ 20,498,673
- --------------------------------------------------------------------------------
G. SHORT-TERM BORROWINGS
- ------------------------
The Company's subsidiary had a line of credit for federal funds purchased of
$2,000,000 with two correspondent institutions as of December 31, 1997. At
various times during the year the subsidiary was advanced funds against this
line, however, at December 31, 1997, there was no outstanding balance.
The Company's subsidiary had no advances from the Federal Home Loan Bank
(FHLB) at December 31, 1997 and 1996. Stock in FHLB, with a carrying value of
89,300 at December 31, 1997 was pledged to FHLB as collateral in the event
the subsidiary requests future advances. The subsidiary is required to
maintain a minimum investment in FHLB stock of the greater of 1% total
mortgage assets or .3% of total assets while the advance agreement is in
effect.
H. BORROWED FUNDS
- -----------------
The following is a summary of borrowed funds at December 31, 1997 and 1996:
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
The Bankers Bank $ 520,000 $ 594,000
- --------------------------------------------------------------------------------
The note bears a floating interest rate equal to the prime rate less
.5% and is secured by stock of the subsidiary bank. At December 31, 1997, the
prime rate was 8.50%. Interest is due and payable quarterly. Following are
maturities of long-term debt for each of the next five years and thereafter:
1998 $ 66,000
1999 66,000
2000 66,000
2001 66,000
2002 66,000
Thereafter 190,000
- ------------------------------------------------------------------------------
Total $ 520,000
- ------------------------------------------------------------------------------
I. PROVISION FOR INCOME TAXES
- -- --------------------------
The provision for income taxes was computed as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Current tax expense $ 75,659 $ 11,036 $ -
Deferred tax expense 46,695 98,470 13,605
- --------------------------------------------------------------------------------
Net income taxes expense $ 122,354 $ 109,506 $ 13,605
- --------------------------------------------------------------------------------
F-21
<PAGE>
Deferred income taxes are reflected for certain timing differences between
book and taxable income and will be reduced in future years as these timing
differences reverse. The reasons for the difference between the actual tax
expense and expense computed at the federal income tax rate are as follows:
June 27, 1995
Year Ended December 31, to December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Tax on pretax income at statutory rate $ 134,529 $ 140,274 $ -
Benefit of net operating loss carryovers - (7,779) -
Alternative minimum tax credit (22,960) (3,856) -
Non-deductible business meals and
entertainment 831 421 -
Non-deductible interest expense to carry
tax-exempt income 550 796 -
Tax-exempt income (3,609) (5,124) -
Dividends received deduction (568) (483) -
Non-deductible goodwill amortization 15,344 15,344 -
Effect of deferred tax adjustment (1,763) (30,087) 13,605
- -------------------------------------------------------------------------------
Total $122,354 $ 109,506 $13,605
- --------------------------------------------------------------------------------
Net effective tax rate 30.9% 26.5% N/A
- --------------------------------------------------------------------------------
The sources and tax effects of temporary differences that give rise to
significant portions of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
June 27, 1995
Year Ended December 31, to December 31,
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
Deferred Income Tax Assets:
<S> <C> <C> <C>
Unrealized losses on securities available for sale $ - $ 28,055 $ 3,129
Investment securities 95,783 138,389 240,904
Net operating loss - - 7,473
Alternative minimum tax credit - 12,861 -
Provision for loan losses, net 69,895 60,191 50,614
- ------------------------------------------------------------------------------------------
Total deferred tax asset 165,678 239,496 302,120
- ------------------------------------------------------------------------------------------
Deferred Income Tax Liability:
Depreciation (221,663) (220,731) (217,012)
Unrealized gains on securities available for sale (19,065) - -
- ------------------------------------------------------------------------------------------
Total deferred tax liability (240,728) (220,731) (217,012)
- ------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (75,050) $ 18,765 $ 85,108
- ------------------------------------------------------------------------------------------
</TABLE>
The valuation allowance for the deferred tax asset was $-0- and $5,092 at
December 31, 1997 and 1996, respectively.
J. YEAR 2000 COMPLIANCE ISSUES
- -- ---------------------------
The Company and its subsidiary are in the process of evaluating the
potential effects of the Year 2000 problem on its operating and
environmental systems. This potential problem exists due to many older
computers having been programmed to recognize only the last two digits of a
year i.e., "98" is for the year 1998. Accordingly, with the new millenium
approaching, these computers will potentially recognize the year 2000 -
"00" as the year 1900, or just not be able to comprehend the date, thus,
potentially affecting the accuracy of, or ability to, process any date
sensitive functions.
F-22
<PAGE>
The Company and its subsidiary have adopted a plan for bringing their
systems into compliance so that these potential problems should not occur.
The costs of achieving Year 2000 compliance for the Company and its
subsidiary are anticipated to be approximately $20,000. Compliance is
expected to be achieved by December 31, 1998.
K. LIMITATION ON DIVIDENDS
- -- -----------------------
The Board of Directors of any state-chartered bank in Georgia may declare
and pay cash dividends on its outstanding capital stock without any request
for approval of the Banks regulatory agency if the following conditions are
met:
1) Total classified assets at the most recent examination of the bank do
not exceed eighty (80) percent of equity capital.
2) The aggregate amount of dividends declared in the calendar year does
not exceed fifty (50) percent of the prior years net income.
3) The ratio of equity capital to adjusted total assets shall not be less
than six (6) percent.
As of January 1, 1998, the amount available for dividends without
regulatory consent was $157,272.
L. FINANCIAL INSTRUMENTS
- ------------------------
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the
amount recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of involvement the Bank has in those
particular financial instruments.
The Company's exposure to loan loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Bank does require collateral or other security to support financial
instruments with credit risk.
<TABLE>
<CAPTION>
Contract or Notional Amount
-----------------------------
1997 1996
- --------------------------------------------------------------------------------------------------
Financial instruments whose contract amount represent credit risk:
<S> <C> <C>
Commitments to extend credit $ 1,219,000 $ 1,014,000
Standby letters of credit 40,000 121,000
- --------------------------------------------------------------------------------------------------
Total $ 1,259,000 $ 1,135,000
- --------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case-by-case basis. The
F-23
<PAGE>
amount of collateral obtained if deemed necessary by the Company upon
extension of credit is based on management's credit evaluation. Collateral
held varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. All letters of credit are due within one year of the original
commitment date. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
M. RELATED PARTY TRANSACTIONS
- -----------------------------
In the ordinary course of business, the Company, through its subsidiary
bank, has direct and indirect loans outstanding to or for the benefit of
certain executive officers and directors. These loans were made on
substantially the same terms as those prevailing, at the time made, for
comparable loans to other persons and did not involve more than the normal
risk of collectibility or present other unfavorable features.
The following is a summary of activity during 1997 with respect to such
loans to these individuals:
Balances at December 31, 1996 $ 831,000
New loans 1,750,598
Repayments (1,413,608)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Balances at December 31, 1997 $ 1,167,990
- --------------------------------------------------------------------------------
The Bank subsidiary also had deposits from these related parties of
approximately $2,797,336 at December 31, 1997.
N. DISCLOSURES RELATING TO STATEMENT OF CASH FLOWS
- --------------------------------------------------
Interest and Income Taxes - Cash paid during the period for interest and
income taxes was as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Interest on deposits and borrowings $ 1,253,904 $ 1,125,688 $ 152,019
- --------------------------------------------------------------------------------
Income taxes, net $ 81,036 $ 13,400 $ -
- --------------------------------------------------------------------------------
Other Noncash Transactions - Noncash transactions relating to investing and
financing activities were as follows:
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Changes in unrealized gain/loss on investments $ (91,467) $ 48,387 $ 6,073
- --------------------------------------------------------------------------------
O. FAIR VALUES OF FINANCIAL INSTRUMENTS
- ---------------------------------------
SFAS No. 107, Disclosures about Fair Value of Financial Instruments
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheets, for which it
is practicable to estimate that value. The assumptions used in the
estimation of the fair value of Bank's financial instruments are detailed
below. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. The
F-24
<PAGE>
use of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered as representative
of the liquidation value of the Bank, but rather a good-faith estimate of
the increase or decrease in value of financial instruments held by the Bank
since purchase, origination, or issuance.
Cash and Short-Term Investments - For cash, due from banks, federal funds
sold and interest-bearing deposits with other banks, the carrying amount is
a reasonable estimate of fair value.
Investment Securities Held to Maturity and Securities Available for Sale
- Fair values for investment securities are based on quoted market prices.
Loans - The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
Deposit Liabilities - The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
Federal Funds Purchased - The carrying value of federal funds purchased
approximates their fair value.
FHLB Advances - The fair value of the Bank's fixed rate borrowings are
estimated using discounted cash flows, based on Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
Long-Term Debt and Convertible Subordinated Debentures - Rates currently
available to the Bank for debt with similar terms and remaining maturities
are used to estimate fair value of existing debt.
Commitments to Extend Credit, Standby Letters of Credit and Financial
Guarantees Written - Because commitments to extend credit and standby
letters of credit are made using variable rates, the contract value is a
reasonable estimate of fair value.
Limitations - Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire holdings
of a particular financial instrument. Because no market exists for a
significant portion of the Bank's financial instruments, fair value
estimates are based on many judgements. These estimates are subjective in
nature and involve uncertainties and matters of significant judgement and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include the
mortgage banking operation, brokerage network, deferred income taxes,
premises and equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
the estimates.
F-25
<PAGE>
The carrying amount and estimated fair values of the Bank subsidiaries'
financial instruments at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- ---------------------------------------------------------------------------------------
Assets:
<S> <C> <C> <C> <C>
Cash and short-term investments $ 1,319,321 $ 1,319,321 $ 2,233,771 $ 2,233,771
Securities available for sale 4,638,785 4,638,785 8,905,347 8,905,347
Securities held to maturity 4,811,988 4,829,963 - -
Loans 19,938,304 19,972,975 16,688,100 16,712,887
- ---------------------------------------------------------------------------------------
Liabilities:
Deposits 28,644,230 28,848,964 26,079,838 26,026,013
Borrowings 520,000 520,000 594,000 594,000
- ---------------------------------------------------------------------------------------
Unrecognized financial instruments:
Commitments to extend credit 1,219,000 1,219,000 1,014,000 1,014,000
Standby letters of credit 40,000 40,000 121,000 121,000
- ---------------------------------------------------------------------------------------
</TABLE>
P. CREDIT RISK CONCENTRATION
- ----------------------------
The Bank grants agribusiness, commercial, and residential loans to its
customers. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent on the area's economic stability. The primary trade area for the
Bank is generally that area within 25 miles in each direction of its
banking facility.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Commercial and standby letters of credit
were granted primarily to commercial borrowers. The Bank, as a matter of
policy, does not extend credit in excess of the legal lending limit to any
single borrower or group of related borrowers.
Q. REGULATORY MATTERS
- ---------------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997,
the Bank meets all capital adequacy requirements to which it is subject. As
of December 31, 1997, the most recent notification from the State
Department of Banking and Finance categorized the Bank as well-capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well-capitalized the Bank must maintain minimum total
F-26
<PAGE>
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
The Bank's actual capital amounts and ratios as well as those of Heart of
Georgia Bancshares, Inc. on a consolidated basis are presented in the
following table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
As of December 31, 1997
<S> <C> <C> <C> <C>
Total Capital To Consolidated 2,611,000 12.47% 1,675,000 >/= 8.0% N/A N/A
(Risk-Weighted Assets) Bank 3,064,000 14.62% 1,675,000 >/= 8.0% 2,094,000 >/= 10.0%
Tier I Capital To Consolidated 2,383,000 11.38% 837,000 >/= 4.0% N/A N/A
(Risk-Weighted Assets) Bank 2,836,000 13.54% 837,000 >/= 4.0% 1,256,000 >/= 6.0%
Tier I Capital To Consolidated 2,383,000 7.56% 1,260,000 >/= 4.0% N/A N/A
(Average Assets) Bank 2,836,000 9.00% 1,260,000 >/= 4.0% 1,576,000 >/= 5.0%
Tangible Capital To Consolidated 2,383,000 7.56% 472,000 >/= 1.5% N/A N/A
(Tangible Assets) Bank 2,836,000 9.00% 472,000 >/= 1.5% 472,000 >/= 1.5%
As of December 31, 1996
Total Capital To Consolidated 2,261,000 12.22% 1,481,000 >/= 8.0% N/A N/A
(Risk-Weighted Assets) Bank 2,735,000 14.77% 1,481,000 >/= 8.0% 1,851,000 >/= 10.0%
Tier I Capital To Consolidated 2,064,000 11.15% 740,000 >/= 4.0% N/A N/A
(Risk-Weighted Assets) Bank 2,538,000 13.71% 740,000 >/= 4.0% 1,111,000 >/= 6.0%
Tier I Capital To Consolidated 2,064,000 7.21% 1,145,000 >/= 4.0% N/A N/A
(Average Assets) Bank 2,538,000 8.86% 1,145,000 >/= 4.0% 1,432,000 >/= 5.0%
Tangible Capital To Consolidated 2,064,000 7.21% 429,000 >/= 1.5% N/A N/A
(Tangible Assets) Bank 2,538,000 8.86% 429,000 >/= 1.5% 429,000 >/= 1.5%
- ------------------------------------------------------------------------------------------------
</TABLE>
R. MISCELLANEOUS OPERATING EXPENSES
- -- --------------------------------
Components of other operating expense in excess of 1% of interest and other
income for the years ended December 31, 1997 and 1996 and the period ended
December 31, 1995 are as follows:
- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Computer services $ 49,402 $ 62,280 $ 11,459
Professional services $ 38,154 $ 36,250 $ 8,600
Printing & office supplies $ 33,538 $ 35,132 $ 4,669
- -----------------------------------------------------------------------------
F-27
<PAGE>
S. CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
- -------------------------------------------------------
Condensed parent company financial information on Heart of Georgia
Bancshares, Inc., is as follows:
BALANCE SHEETS
- --------------------------------------------------------------------------------
As of December 31,
------------------
1997 1996
- -------------------------------------------------------------------------------
Assets:
Cash in subsidiary $ 17,071 $ 63,074
Cash not in subsidiary - -
Federal funds sold - -
Investment in subsidiary, at equity in underlying
net assets 3,452,773 3,106,762
Accrued income and other assets 56,969 68,965
- -------------------------------------------------------------------------------
Total Assets $ 3,526,813 $ 3,238,801
- -------------------------------------------------------------------------------
Liabilities:
Accrued interest payable $ 7,045 $ 8,052
Other liabilities 868 2,633
Notes payable 520,000 594,000
- -------------------------------------------------------------------------------
Total liabilities 527,913 604,685
- -------------------------------------------------------------------------------
Shareholders' Equity:
Common stock, $1 par value; authorized 1,000,000 shares,
issued and outstanding 220,000 shares 220,000 220,000
Additional paid-in capital surplus 2,135,000 2,135,000
Retained earnings 606,893 333,576
Unrealized holding losses on securities 37,007 (54,460)
- -------------------------------------------------------------------------------
Total shareholders' equity 2,998,900 2,634,116
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 3,526,813 $ 3,238,801
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF INCOME AND RETAINED EARNINGS
- -------------------------------------------------------------------------------------------------
June 27, 1995
Years Ended December 31, to December 31,
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C>
Interest Income $ 1,722 $ 4,877 $ 13,108
Dividend Income 60,000 - -
- -------------------------------------------------------------------------------------------------
Operating Income 61,722 4,877 13,108
Operating Expenses 62,427 70,846 12,116
- -------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Equity Income of Subsidiary (705) (65,969) 992
Income tax benefit 19,477 12,331 -
- -------------------------------------------------------------------------------------------------
Loss Before Equity Income of Subsidiary 18,772 (53,638) 992
Equity in undistributed income of subsidiary 254,545 356,706 29,516
- -------------------------------------------------------------------------------------------------
Net Income 273,317 303,068 30,508
Retained Earnings, Beginning 333,576 30,508 -
- -------------------------------------------------------------------------------------------------
Retained Earnings, Ending $ 606,893 $ 333,576 $ 30,508
- -------------------------------------------------------------------------------------------------
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
June 27 1995
Years Ended December 31, to December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 273,317 $ 303,068 $ 30,508
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 17,373 17,372 2,890
Equity in undistributed income of subsidiary (254,544) (356,706) (29,516)
Net change in operating assets and liabilities:
Accrued income and other assets - (567) (86,864)
Accrued expenses and other liabilities (8,149) (1,173) 10,062
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 27,997 (38,006) (72,920)
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of bank subsidiary - - (2,775,000)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities - - (2,775,000)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - - 2,355,000
Payments on borrowings (74,000) (66,000) -
Proceeds from borrowings - - 660,000
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (74,000) (66,000) 3,015,000
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (46,003) (104,006) 167,080
Cash and cash equivalents at beginning of year 63,074 167,080 -
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 17,071 $ 63,074 $ 167,080
- --------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN FLAG FINANCIAL CORPORATION
AND HEART OF GEORGIA BANCSHARES, INC.
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
FLAG FINANCIAL CORPORATION
AND
HEART OF GEORGIA BANCSHARES, INC.
Dated as of August 19, 1998
<PAGE>
TABLE OF CONTENTS
LIST OF EXHIBITS..............................................................V
AGREEMENT AND PLAN OF MERGER..................................................1
ARTICLE 1. TRANSACTIONS AND TERMS OF THE MERGER...............................2
1.1 MERGER..........................................................2
1.2 TIME AND PLACE OF CLOSING.......................................2
1.3 EFFECTIVE TIME..................................................2
ARTICLE 2. TERMS OF MERGER....................................................2
2.1 ARTICLES OF INCORPORATION.......................................2
2.2 BYLAWS..........................................................2
2.3 DIRECTORS AND OFFICERS..........................................3
ARTICLE 3. MANNER OF CONVERTING SHARES........................................3
3.1 CONVERSION OF SHARES............................................3
3.2 ANTI-DILUTION PROVISIONS........................................3
3.3 SHARES HELD BY HEART OF GEORGIA OR FLAG.........................4
3.4 DISSENTING SHAREHOLDERS.........................................4
3.5 FRACTIONAL SHARES...............................................4
ARTICLE 4. EXCHANGE OF SHARES.................................................4
4.1 EXCHANGE PROCEDURES.............................................4
4.2 RIGHTS OF FORMER SHAREHOLDERS OF HEART OF GEORGIA...............5
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF HEART OF GEORGIA.................6
5.1 ORGANIZATION, STANDING, AND POWER...............................6
5.2 AUTHORITY OF HEART OF GEORGIA; NO BREACH BY AGREEMENT...........6
5.3 CAPITAL STOCK...................................................7
5.4 HEART OF GEORGIA SUBSIDIARIES...................................8
i
5.5 FINANCIAL STATEMENTS............................................9
5.6 ABSENCE OF UNDISCLOSED LIABILITIES..............................9
5.7 ABSENCE OF CERTAIN CHANGES OR EVENTS............................9
5.8 TAX MATTERS.....................................................9
5.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES.............................11
5.10 ASSETS.........................................................11
5.11 INTELLECTUAL PROPERTY..........................................12
5.12 ENVIRONMENTAL MATTERS..........................................12
5.13 COMPLIANCE WITH LAWS...........................................13
5.14 LABOR RELATIONS................................................14
5.15 EMPLOYEE BENEFIT PLANS.........................................14
5.16 MATERIAL CONTRACTS.............................................16
5.17 LEGAL PROCEEDINGS..............................................17
5.18 REPORTS........................................................17
5.19 STATEMENTS TRUE AND CORRECT....................................18
5.20 ACCOUNTING, TAX AND REGULATORY MATTERS.........................18
5.21 CHARTER PROVISIONS.............................................18
5.22 BOARD RECOMMENDATION...........................................18
5.23 Y-2K...........................................................18
ARTICLE 6. REPRESENTATIONS AND WARRANTIES OF FLAG............................19
6.1 ORGANIZATION, STANDING, AND POWER..............................19
6.2 AUTHORITY OF FLAG; NO BREACH BY AGREEMENT......................19
6.3 CAPITAL STOCK..................................................20
6.4 FLAG SUBSIDIARIES..............................................20
6.5 SEC FILINGS, FINANCIAL STATEMENTS..............................21
6.6 ABSENCE OF UNDISCLOSED LIABILITIES.............................22
6.7 ABSENCE OF CERTAIN CHANGES OR EVENTS...........................22
6.8 TAX MATTERS....................................................22
6.9 ALLOWANCE FOR POSSIBLE LOAN LOSSES.............................23
6.10 ASSETS.........................................................24
6.11 INTELLECTUAL PROPERTY..........................................24
6.12 ENVIRONMENTAL MATTERS..........................................25
6.13 COMPLIANCE WITH LAWS...........................................25
6.14 LABOR RELATIONS................................................26
6.15 EMPLOYEE BENEFIT PLANS.........................................26
6.16 MATERIAL CONTRACTS.............................................28
6.17 LEGAL PROCEEDINGS..............................................29
6.18 REPORTS........................................................29
6.19 STATEMENTS TRUE AND CORRECT....................................29
6.20 ACCOUNTING, TAX AND REGULATORY MATTERS.........................30
6.21 CHARTER PROVISIONS.............................................30
6.22 BOARD RECOMMENDATION...........................................30
6.23 Y2K............................................................30
ii
ARTICLE 7. CONDUCT OF BUSINESS PENDING CONSUMMATION..........................31
7.1 AFFIRMATIVE COVENANTS OF HEART OF GEORGIA......................31
7.2 NEGATIVE COVENANTS OF HEART OF GEORGIA.........................31
7.3 AFFIRMATIVE COVENANTS OF FLAG..................................33
7.4 NEGATIVE COVENANTS OF FLAG.....................................33
7.5 ADVERSE CHANGES IN CONDITION...................................33
7.6 REPORTS........................................................34
ARTICLE 8. ADDITIONAL AGREEMENTS.............................................34
8.1 REGISTRATION STATEMENT.........................................34
8.2 NASDAQ LISTING.................................................34
8.3 SHAREHOLDER APPROVAL...........................................34
8.4 APPLICATIONS...................................................35
8.5 FILINGS WITH STATE OFFICES.....................................35
8.6 AGREEMENT AS TO EFFORTS TO CONSUMMATE..........................35
8.7 INVESTIGATION AND CONFIDENTIALITY..............................35
8.8 PRESS RELEASES.................................................36
8.9 CERTAIN ACTIONS................................................36
8.10 ACCOUNTING AND TAX TREATMENT...................................37
8.11 CHARTER PROVISIONS.............................................37
8.12 AGREEMENTS OF AFFILIATES.......................................37
8.13 EMPLOYEE BENEFITS AND CONTRACTS................................37
8.14 INDEMNIFICATION................................................38
ARTICLE 9. CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE.................39
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY........................39
9.2 CONDITIONS TO OBLIGATIONS OF FLAG..............................40
9.3 CONDITIONS TO OBLIGATIONS OF HEART OF GEORGIA..................42
ARTICLE 10. TERMINATION......................................................43
10.1 TERMINATION....................................................43
10.2 EFFECT OF TERMINATION..........................................44
10.3 NON-SURVIVAL OF REPRESENTATIONS AND COVENANTS..................44
ARTICLE 11. MISCELLANEOUS....................................................44
11.1 DEFINITIONS....................................................44
11.2 EXPENSES.......................................................52
11.3 BROKERS AND FINDERS............................................53
11.4 ENTIRE AGREEMENT...............................................53
iii
11.5 AMENDMENTS.....................................................53
11.6 WAIVERS........................................................53
11.7 ASSIGNMENT.....................................................54
11.8 NOTICES........................................................54
11.9 GOVERNING LAW..................................................55
11.10 COUNTERPARTS...................................................55
11.11 CAPTIONS, ARTICLES AND SECTIONS................................55
11.12 INTERPRETATIONS................................................55
11.13 ENFORCEMENT OF AGREEMENT.......................................55
11.14 SEVERABILITY...................................................55
SIGNATURES TO AGREEMENT AND PLAN OF MERGER
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LIST OF EXHIBITS
Exhibit
Number Description
- ------ -----------
1. Form of Agreement of Affiliates of Heart of Georgia Bancshares, Inc. (ss.
8.12, ss. 9.2(f)).
2. Matters as to which Nelson Mullins Riley & Scarborough, L.L.P. will
opine.(ss. 9.2(d)).
3. Form of Claims Letter (ss. 9.2(g)).
4. Matters as to which Powell, Goldstein, Frazer & Murphy LLP will opine. (ss.
9.3(d)).
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AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of August 19, 1998, by and between FLAG FINANCIAL CORPORATION ("FLAG"),
a Georgia corporation located in LaGrange, Georgia, and HEART OF GEORGIA
BANCSHARES, INC. ("HEART OF GEORGIA"), a Georgia corporation located in Mount
Vernon, Georgia.
Preamble
--------
The respective Boards of Directors of HEART OF GEORGIA and FLAG are of
the opinion that the transactions described herein are in the best interests of
the Parties to this Agreement and their respective shareholders. This Agreement
provides for the acquisition of HEART OF GEORGIA by FLAG, pursuant to the merger
of HEART OF GEORGIA with and into FLAG. At the effective time of such merger,
the outstanding shares of the capital stock of HEART OF GEORGIA shall be
converted into the right to receive shares of the common stock of FLAG (except
as provided herein). As a result, shareholders of HEART OF GEORGIA shall become
shareholders of FLAG, and FLAG shall conduct the business and operations of
HEART OF GEORGIA. The transactions described in this Agreement are subject to
(a) approval of the shareholders of HEART OF GEORGIA, (b) approval of the
Georgia Department of Banking and Finance, (c) approval of the Board of
Governors of the Federal Reserve, and (d) satisfaction of certain other
conditions described in this Agreement. It is the intention of the Parties to
this Agreement that the merger, for federal income tax purposes, shall qualify
as a "reorganization" within the meaning of Section 368(a) of the Internal
Revenue Code, and, for accounting purposes, shall qualify for treatment as a
pooling of interests.
Certain terms used in this Agreement are defined in Section 11.1
hereof.
NOW, THEREFORE, in consideration of the above and the mutual
warranties, representations, covenants, and agreements set forth herein, the
Parties agree as follows:
1
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ARTICLE 1.
TRANSACTIONS AND TERMS OF THE MERGER
------------------------------------
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, HEART OF GEORGIA will merge with and into FLAG in accordance
with the provisions of Section 14-2-1101 of the GBCC and with the effect
provided in Section 14-2-1106 of the GBCC (the "Merger"). FLAG shall be the
Surviving Corporation resulting from the Merger and shall continue to be
governed by the Laws of the State of Georgia. The Merger shall be consummated
pursuant to the terms of this Agreement, which has been approved and adopted by
the respective Boards of Directors of HEART OF GEORGIA and FLAG, as set forth
herein.
1.2 Time anbd Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at 9:00 A.M. on the date
that the Effective Time occurs (or the immediately preceding day if the
Effective Time is earlier than 9:00 A.M.), or at such other time as the Parties,
acting through their authorized officers, may mutually agree. The Closing shall
be held at such location as may be mutually agreed upon by the Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the date and at the time the Certificate of
Merger reflecting the Merger shall become effective with the Secretary of State
of the State of Georgia (the "Effective Time"). Subject to the terms and
conditions hereof, unless otherwise mutually agreed upon in writing by the
authorized officers of each Party, the Parties shall use their reasonable
efforts to cause the Effective Time to occur on the fifth business day following
the last to occur of (i) the effective date (including expiration of any
applicable waiting period) of the last required Consent of any Regulatory
Authority having authority over and approving or exempting the Merger, and (ii)
the earliest date on which the shareholders of HEART OF GEORGIA have approved
this Agreement to the extent such approval is required by applicable Law;
provided, however, that the date of the Effective Time shall not extend past the
termination date set forth in ss. 10.1(e) hereof.
ARTICLE 2.
TERMS OF MERGER
---------------
2.1 Articles of Incorporation. The Articles of Incorporation of FLAG in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until duly amended or repealed.
2.2 Bylaws. The Bylaws of FLAG in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation until duly amended or
repealed.
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2.3 Directors and Officers.
(a) The directors of the Surviving Corporation shall be (i) the directors
of FLAG immediately prior to the Effective Time and (ii) Donald M. Thigpen and
Robert E. Thigpen Jr., together with such additional persons as may thereafter
be elected. Such persons shall serve as the directors of the Surviving
Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation.
(b) The executive officers of the Surviving Corporation shall be (i) the
executive officers of the Surviving Corporation immediately prior to the
Effective Time and (ii) such additional persons as may thereafter be elected.
Such persons shall serve as the executive officers of the Surviving Corporation
from and after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
ARTICLE 3.
MANNER OF CONVERTING SHARES
---------------------------
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of HEART OF GEORGIA, or the shareholders of the foregoing, the shares of HEART
OF GEORGIA shall be converted as follows:
(a) Each share of capital stock of FLAG issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and after
the Effective Time.
(b) Each share of HEART OF GEORGIA Common Stock (excluding shares held by
any HEART OF GEORGIA Entity or any FLAG Entity, in each case other than in a
fiduciary capacity or as a result of debts previously contracted, and excluding
shares held by shareholders who perfect their statutory dissenters' rights as
provided in Section 3.4) issued and outstanding immediately prior to the
Effective Time shall cease to be outstanding and shall be converted into and
exchanged for the right to receive 2.025 shares of FLAG Common Stock (the
"Exchange Ratio").
3.2 Anti-Dilution Provisions. In the event FLAG changes the number of
shares of FLAG Common Stock issued and outstanding prior to the Effective Time
as a result of a stock split, stock dividend, or similar recapitalization with
respect to such stock and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or similar
recapitalization for which a record date is not established) and prior to the
Effective Time, the Exchange Ratio shall be proportionately adjusted.
<PAGE>
3.3 Shares Held by HEART OF GEORGIA or FLAG. Each of the shares of HEART OF
GEORGIA Common Stock held by any HEART OF GEORGIA Entity or by any FLAG Entity,
in each case other than in a fiduciary capacity or as a result of debts
previously contracted, shall be canceled and retired at the Effective Time and
no consideration shall be issued in exchange therefor.
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<PAGE>
3.4 Dissenting Shareholders. Any holder of shares of HEART OF GEORGIA
Common Stock who perfects his dissenters' rights in accordance with and as
contemplated by Article 13, Part 2 of Title 14 of the GBCC, shall be entitled to
receive the value of such shares in cash as determined pursuant to such
provision of law; provided, that no such payment shall be made to any dissenting
shareholder unless and until such dissenting shareholder has complied with the
applicable provisions of the GBCC and surrendered to FLAG the certificates or
certificates representing the shares for which payment is being made. In the
event that after the Effective Time, a dissenting shareholder of HEART OF
GEORGIA fails to perfect, or effectively withdraws or loses, his right to
appraisal of and payment for his shares, FLAG shall issue and deliver the
consideration to which such holder of shares of HEART OF GEORGIA Common Stock is
entitled under this Article 3 (without interest) upon surrender by such holder
of the certificate or certificates representing shares of HEART OF GEORGIA
Common Stock held by him. If and to the extent required by applicable Law, HEART
OF GEORGIA will establish (or cause to be established) an escrow account with an
amount sufficient to satisfy the maximum aggregate payment that may be required
to be paid to dissenting shareholders. Upon satisfaction of all claims of
dissenting shareholders, the remaining escrowed amount, reduced by payment of
the fees and expenses of the escrow agent, will be returned to FLAG.
3.5 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of HEART OF GEORGIA Common Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fraction of a share of FLAG Common Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of FLAG
Common Stock multiplied by the market value of one share of FLAG Common Stock at
the Effective Time. The market value of one share of FLAG Common Stock at the
Effective Time shall be the last sale price of such common stock on the Nasdaq
National Market (as reported by The Wall Street Journal or, if not reported
thereby, any other authoritative source selected by FLAG) on the last trading
day preceding the Effective Time. No such holder will be entitled to dividends,
voting rights, or any other rights as a shareholder in respect of any fractional
shares.
ARTICLE 4.
EXCHANGE OF SHARES
------------------
4.1 Exchange Procedures. Promptly after the Effective Time, FLAG shall
cause the exchange agent selected by FLAG (the "Exchange Agent") to mail to each
holder of record of a certificate or certificates which represented shares of
HEART OF GEORGIA Common Stock immediately prior to the Effective Time (the
"Certificates") appropriate transmittal materials and instructions (which shall
specify that delivery shall be effected, and risk of loss and title to such
4
<PAGE>
Certificates shall pass, only upon proper delivery of such Certificates to the
Exchange Agent). The Certificate or Certificates of HEART OF GEORGIA Common
Stock so delivered shall be duly endorsed as the Exchange Agent may require. In
the event of a transfer of ownership of shares of HEART OF GEORGIA Common Stock
represented by Certificates that are not registered in the transfer records of
HEART OF GEORGIA, the consideration provided in Section 3.1 may be issued to a
transferee if the Certificates representing such shares are delivered to the
Exchange Agent, accompanied by all documents required to evidence such transfer
and by evidence satisfactory to the Exchange Agent that any applicable stock
transfer taxes have been paid. If any Certificate shall have been lost, stolen,
mislaid or destroyed, upon receipt of (i) an affidavit of that fact from the
holder claiming such Certificate to be lost, mislaid, stolen or destroyed, (ii)
such bond, security or indemnity as FLAG and the Exchange Agent may reasonably
require, and (iii) any other documents necessary to evidence and effect the bona
fide exchange thereof, the Exchange Agent shall issue to such holder the
consideration into which the shares represented by such lost, stolen, mislaid or
destroyed Certificate shall have been converted. The Exchange Agent may
establish such other reasonable and customary rules and procedures in connection
with its duties as it may deem appropriate. After the Effective Time, each
holder of shares of HEART OF GEORGIA Common Stock (other than shares to be
canceled pursuant to Section 3.3 or as to which statutory dissenters' rights
have been perfected as provided in Section 3.4) issued and outstanding at the
Effective Time shall surrender the Certificate or Certificates representing such
shares to the Exchange Agent and shall promptly upon surrender thereof receive
in exchange therefor the consideration provided in Section 3.1, together with
all undelivered dividends or distributions in respect of such shares (without
interest thereon) pursuant to Section 4.2. FLAG shall not be obligated to
deliver the consideration to which any former holder of HEART OF GEORGIA Common
Stock is entitled as a result of the Merger until such holder surrenders such
holder's Certificate or Certificates for exchange as provided in this Section
4.1. Any other provision of this Agreement notwithstanding, neither FLAG nor the
Exchange Agent shall be liable to a holder of HEART OF GEORGIA Common Stock for
any amounts paid or property delivered in good faith to a public official
pursuant to any applicable abandoned property, escheat or similar Law. Approval
of this Agreement by the shareholders of HEART OF GEORGIA shall constitute
ratification of the appointment of the Exchange Agent.
4.2 Rights of Former Shareholders of HEART OF GEORGIA. At the Effective
Time, the stock transfer books of HEART OF GEORGIA shall be closed as to holders
of HEART OF GEORGIA Common Stock immediately prior to the Effective Time and no
transfer of HEART OF GEORGIA Common Stock by any such holder shall thereafter be
made or recognized. Until surrendered for exchange in accordance with the
provisions of Section 4.1, each Certificate theretofore representing shares of
HEART OF GEORGIA Common Stock (other than shares to be canceled pursuant to
Sections 3.3 and 3.4) shall from and after the Effective Time represent for all
purposes only the right to receive the consideration provided in Section 3.1 in
exchange therefor, subject, however, to FLAG's obligation to pay any dividends
or make any other distributions with a record date prior to the Effective Time
which have been declared or made by HEART OF GEORGIA in respect of such shares
of HEART OF GEORGIA Common Stock in accordance with the terms of this Agreement
and which remain unpaid at the Effective Time. To the extent permitted by Law,
former shareholders of record of HEART OF GEORGIA shall be entitled to vote
after the Effective Time at any meeting of FLAG shareholders the number of whole
5
<PAGE>
shares of FLAG Common Stock into which their respective shares of HEART OF
GEORGIA Common Stock are converted, regardless of whether such holders have
exchanged their Certificates for certificates representing FLAG Common Stock in
accordance with the provisions of this Agreement. Whenever a dividend or other
distribution is declared by FLAG on the FLAG Common Stock, the record date for
which is at or after the Effective Time, the declaration shall include dividends
or other distributions on all shares of FLAG Common Stock issuable pursuant to
this Agreement, but no dividend or other distribution payable to the holders of
record of FLAG Common Stock as of any time subsequent to the Effective Time
shall be delivered to the holder of any Certificate until such holder surrenders
such Certificate for exchange as provided in Section 4.1. However, upon
surrender of such Certificate, both the FLAG Common Stock certificate (together
with all such undelivered dividends or other distributions without interest) and
any undelivered dividends and cash payments payable hereunder (without interest)
shall be delivered and paid with respect to each share represented by such
Certificate. No interest shall be payable with respect to any cash to be paid
under Section 3.1 of this Agreement except to the extent required in connection
with the exercise of dissenters' rights.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF HEART OF GEORGIA
--------------------------------------------------
HEART OF GEORGIA hereby represents and warrants to FLAG as follows:
5.1 Organization, Standing, and Power. HEART OF GEORGIA is a corporation
duly organized, validly existing, and in good standing under the Laws of the
State of Georgia, and has the corporate power and authority to carry on its
business as now conducted and to own, lease and operate its material Assets.
HEART OF GEORGIA is duly qualified or licensed to transact business as a foreign
corporation in good standing in the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect. The minute book and other organizational documents for HEART OF GEORGIA
have been made available to FLAG for its review and, except as disclosed in
Section 5.1 of the HEART OF GEORGIA Disclosure Memorandum, are true and complete
in all material respects as in effect as of the date of this Agreement and
accurately reflect in all material respects all amendments thereto and all
proceedings of the Board of Directors and shareholders thereof.
5.2 Authority of HEART OF GEORGIA; No Breach By Agreement.
(a) HEART OF GEORGIA has the corporate power and authority necessary to
execute, deliver, and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery, and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly authorized
by all necessary corporate action in respect thereof on the part of HEART OF
GEORGIA, subject to the approval of this Agreement by the holders of a majority
6
<PAGE>
of the outstanding voting stock of HEART OF GEORGIA, which is the only
shareholder vote required for approval of this Agreement, and consummation of
the Merger by HEART OF GEORGIA. Subject to such requisite shareholder approval,
this Agreement represents a legal, valid, and binding obligation of HEART OF
GEORGIA, enforceable against HEART OF GEORGIA in accordance with its terms
(except in all cases as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, receivership, conservatorship,
moratorium, or similar Laws affecting the enforcement of creditors' rights
generally and except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by HEART OF
GEORGIA, nor the consummation by HEART OF GEORGIA of the transactions
contemplated hereby, nor compliance by HEART OF GEORGIA with any of the
provisions hereof, will (i) conflict with or result in a breach of any provision
of HEART OF GEORGIA's Articles of Incorporation or Bylaws, or the Charter,
Articles of Incorporation, or Bylaws of any HEART OF GEORGIA Subsidiary or any
resolution adopted by the board of directors or the shareholders of any HEART OF
GEORGIA Entity, or (ii) except as disclosed in Section 5.2 of the HEART OF
GEORGIA Disclosure Memorandum, constitute or result in a Default under, or
require any Consent pursuant to, or result in the creation of any Lien on any
Asset of any HEART OF GEORGIA Entity under, any Contract or Permit of any HEART
OF GEORGIA Entity, where such Default or Lien, or any failure to obtain such
Consent, is reasonably likely to have, individually or in the aggregate, a HEART
OF GEORGIA Material Adverse Effect, or (iii) subject to receipt of the requisite
Consents referred to in Section 9.1(b), constitute or result in a Default under
or require any Consent pursuant to any Law or Order applicable to any HEART OF
GEORGIA Entity or any of their respective material Assets (including any FLAG
Entity or any HEART OF GEORGIA Entity becoming subject to or liable for the
payment of any Tax or any of the Assets owned by any FLAG Entity or any HEART OF
GEORGIA Entity being reassessed or revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of
applicable federal banking laws, and other than Consents required from
Regulatory Authorities, and other than notices to or filings with the Internal
Revenue Service or the Pension Benefit Guaranty Corporation with respect to any
employee benefit plans, or under the HSR Act, and other than Consents, filings,
or notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect, no notice to, filing with, or Consent of, any public body or authority
is necessary for the consummation by HEART OF GEORGIA of the Merger and the
other transactions contemplated in this Agreement.
5.3 Capital Stock.
(a) As of the date of this Agreement, the authorized capital stock of HEART
OF GEORGIA consists of 1,000,000 shares of HEART OF GEORGIA Common Stock, of
which 220,000 shares are issued and outstanding. All of the issued and
outstanding shares of capital stock of HEART OF GEORGIA are duly and validly
issued and outstanding and are fully paid and nonassessable under the GBCC. None
of the outstanding shares of capital stock of HEART OF GEORGIA has been issued
7
<PAGE>
in violation of any preemptive rights of the current or past shareholders of
HEART OF GEORGIA.
(b) Except as set forth in Section 5.3(a), or as disclosed in Section
5.3(b) of the HEART OF GEORGIA Disclosure Memorandum, there are no shares of
capital stock or other equity securities of HEART OF GEORGIA outstanding and no
outstanding Equity Rights relating to the capital stock of HEART OF GEORGIA.
5.4 HEART OF GEORGIA Subsidiaries. HEART OF GEORGIA has disclosed in
Section 5.4 of the HEART OF GEORGIA Disclosure Memorandum all of the HEART OF
GEORGIA Subsidiaries that are corporations (identifying its jurisdiction of
incorporation, each jurisdiction in which the character of its Assets or the
nature or conduct of its business requires it to be qualified and/or licensed to
transact business, and the number of shares owned and percentage ownership
interest represented by such share ownership) and all of the HEART OF GEORGIA
Subsidiaries that are general or limited partnerships, limited liability
companies, or other non-corporate entities (identifying the Law under which such
entity is organized, each jurisdiction in which the character of its Assets or
the nature or conduct of its business requires it to be qualified and/or
licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 5.4 of the HEART OF GEORGIA
Disclosure Memorandum, HEART OF GEORGIA or one of its wholly-owned Subsidiaries
owns all of the issued and outstanding shares of capital stock (or other equity
interests) of each HEART OF GEORGIA Subsidiary. No capital stock (or other
equity interest) of any HEART OF GEORGIA Subsidiary is or may become required to
be issued (other than to another HEART OF GEORGIA Entity) by reason of any
Equity Rights, and there are no Contracts by which any HEART OF GEORGIA
Subsidiary is bound to issue (other than to another HEART OF GEORGIA Entity)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any HEART OF GEORGIA Entity is or may be bound to transfer
any shares of the capital stock (or other equity interests) of any HEART OF
GEORGIA Subsidiary (other than to another HEART OF GEORGIA Entity). There are no
Contracts relating to the rights of any HEART OF GEORGIA Entity to vote or to
dispose of any shares of the capital stock (or other equity interests) of any
HEART OF GEORGIA Subsidiary. All of the shares of capital stock (or other equity
interests) of each HEART OF GEORGIA Subsidiary held by a HEART OF GEORGIA Entity
are fully paid and (except pursuant to 12 U.S.C. Section 55 in the case of
national banks and comparable, applicable State Law, if any, in the case of
State depository institutions) nonassessable and are owned by the HEART OF
GEORGIA Entity free and clear of any Lien. Except as disclosed in Section 5.4 of
the HEART OF GEORGIA Disclosure Memorandum, each HEART OF GEORGIA Subsidiary is
either a bank, savings association or a corporation, and is duly organized,
validly existing, and in good standing under the Laws of the jurisdiction in
which it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease, and operate its Assets and to carry on its
business as now conducted. Each HEART OF GEORGIA Subsidiary is duly qualified or
licensed to transact business as a foreign corporation in good standing in the
States of the United States and foreign jurisdictions where the character of its
Assets or the nature or conduct of its business requires it to be so qualified
or licensed, except for such jurisdictions in which the failure to be so
qualified or licensed is not reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect. Each HEART OF GEORGIA
Subsidiary that is a depository institution is an "insured institution" as
8
<PAGE>
defined in the Federal Deposit Insurance Act and applicable regulations
thereunder. The minute book and other organizational documents for each HEART OF
GEORGIA Subsidiary have been made available to FLAG for its review, and, except
as disclosed in Section 5.4 of the HEART OF GEORGIA Disclosure Memorandum, are
true and complete in all material respects as in effect as of the date of this
Agreement and accurately reflect in all material respects all amendments thereto
and all proceedings of the Board of Directors and shareholders thereof.
5.5 Financial Statements. Each of the HEART OF GEORGIA Financial Statements
(including, in each case, any related notes) was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements), and fairly
presented in all material respects the consolidated financial position of HEART
OF GEORGIA and its Subsidiaries as at the respective dates and the consolidated
results of operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be material
in amount or effect.
5.6 Absence of Undisclosed Liabilities. No HEART OF GEORGIA Entity has any
Liabilities that are reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect, except Liabilities which
are accrued or reserved against in the consolidated balance sheets of HEART OF
GEORGIA as of December 31, 1997 or March 31, 1998, included in the HEART OF
GEORGIA Financial Statements or reflected in the notes thereto. No HEART OF
GEORGIA Entity has incurred or paid any Liability since March 31, 1998, except
for such Liabilities incurred or paid (i) in the ordinary course of business
consistent with past business practice and which are not reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect or (ii) in connection with the transactions contemplated by this
Agreement.
5.7 Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in the HEART OF GEORGIA Financial Statements delivered prior to the
date of this Agreement or as disclosed in Section 5.7 of the HEART OF GEORGIA
Disclosure Memorandum, (i) there have been no events, changes, or occurrences
which have had, or are reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect, and (ii) HEART OF GEORGIA
Entities have not taken any action, or failed to take any action, prior to the
date of this Agreement, which action or failure, if taken after the date of this
Agreement, would represent or result in a material breach or violation of any of
the covenants and agreements of HEART OF GEORGIA provided in Article 7.
5.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any HEART OF
GEORGIA Entities have been timely filed or requests for extensions have been
timely filed, granted, and, to the Knowledge of HEART OF GEORGIA, have not
expired for such periods, except to the extent that all such failures to file,
taken together, are not reasonably likely to have a HEART OF GEORGIA Material
Adverse Effect, and all Tax Returns filed are complete and accurate in all
material respects. All Taxes shown on filed Tax Returns have been paid. There is
9
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no audit examination, deficiency, or refund Litigation with respect to any Taxes
that is reasonably likely to result in a determination that would have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect,
except as reserved against in the HEART OF GEORGIA Financial Statements
delivered prior to the date of this Agreement or as disclosed in Section 5.8 of
the HEART OF GEORGIA Disclosure Memorandum. All Taxes and other Liabilities due
with respect to completed and settled examinations or concluded Litigation have
been paid. There are no Liens with respect to Taxes upon any of the Assets of
HEART OF GEORGIA Entities, except for any such Liens which are not reasonably
likely to have a HEART OF GEORGIA Material Adverse Effect or with respect to
which the Taxes are not yet due and payable.
(b) None of the HEART OF GEORGIA Entities has executed an extension or
waiver of any statute of limitations on the assessment or collection of any Tax
due (excluding such statutes that relate to years currently under examination by
the Internal Revenue Service or other applicable taxing authorities) that is
currently in effect.
(c) The provision for any Taxes due or to become due for any of the HEART
OF GEORGIA Entities for the period or periods through and including the date of
the respective HEART OF GEORGIA Financial Statements that has been made and is
reflected on such HEART OF GEORGIA Financial Statements is sufficient to cover
all such Taxes.
(d) Deferred Taxes of HEART OF GEORGIA Entities have been provided for in
accordance with GAAP.
(e) Except as disclosed in Section 5.8 of the HEART OF GEORGIA Disclosure
Memorandum, none of the HEART OF GEORGIA Entities is a party to any Tax
allocation or sharing agreement and none of HEART OF GEORGIA Entities has been a
member of an affiliated group filing a consolidated federal income Tax Return
(other than a group the common parent of which was HEART OF GEORGIA) or has any
Liability for Taxes of any Person (other than HEART OF GEORGIA and its
Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign Law) as a transferee or successor or by
Contract or otherwise.
(f) Each of the HEART OF GEORGIA Entities is in compliance with, and its
records contain all information and documents (including properly completed IRS
Forms W-9) necessary to comply with, all applicable information reporting and
Tax withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect.
(g) Except as disclosed in Section 5.8 of the HEART OF GEORGIA Disclosure
Memorandum, none of the HEART OF GEORGIA Entities has made any payments, is
obligated to make any payments, or is a party to any Contract that could
obligate it to make any payments that would be disallowed as a deduction under
Sections 28OG or 162(m) of the Internal Revenue Code.
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(h) Exclusive of the Merger, there has not been an ownership change, as
defined in Internal Revenue Code Section 382(g), of HEART OF GEORGIA Entities
that occurred during or after any Taxable Period in which HEART OF GEORGIA
Entities incurred a net operating loss that carries over to any Taxable Period
ending after December 31, 1997.
(i) No HEART OF GEORGIA Entity has or has had in any foreign country a
permanent establishment, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
(j) All material elections with respect to Taxes affecting HEART OF GEORGIA
Entities have been or will be timely made.
5.9 Allowance for Possible Loan Losses. The allowance for possible loan or
credit losses (the "Allowance") shown on the consolidated balance sheets of
HEART OF GEORGIA included in the most recent HEART OF GEORGIA Financial
Statements dated prior to the date of this Agreement was, and the Allowance
shown on the consolidated balance sheets of HEART OF GEORGIA included in the
HEART OF GEORGIA Financial Statements as of dates subsequent to the execution of
this Agreement will be, as of the dates thereof, adequate (within the meaning of
GAAP and applicable regulatory requirements or guidelines) to provide for all
known or reasonably anticipated losses relating to or inherent in the loan and
lease portfolios (including accrued interest receivables) of HEART OF GEORGIA
Entities and other extensions of credit (including letters of credit and
commitments to make loans or extend credit) by HEART OF GEORGIA Entities as of
the dates thereof, except where the failure of such Allowance to be so adequate
is not reasonably likely to have a HEART OF GEORGIA Material Adverse Effect.
5.10 Assets.
(a) Except as disclosed in Section 5.10 of the HEART OF GEORGIA Disclosure
Memorandum or as disclosed or reserved against in the HEART OF GEORGIA Financial
Statements delivered prior to the date of this Agreement, HEART OF GEORGIA
Entities have good and marketable title, free and clear of all Liens, to all of
their respective Assets, except for any such Liens or other defects of title
which are not reasonably likely to have a HEART OF GEORGIA Material Adverse
Effect. All tangible properties used in the businesses of the HEART OF GEORGIA
Entities are usable in the ordinary course of business consistent with HEART OF
GEORGIA's past practices.
(b) All Assets which are material to HEART OF GEORGIA's business on a
consolidated basis, held under leases or subleases by any of the HEART OF
GEORGIA Entities, are held under valid Contracts enforceable against HEART OF
GEORGIA in accordance with their respective terms (except as enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other Laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceedings may be brought), and, assuming the enforceability of such Contract
against the third party thereto, each such Contract is in full force and effect.
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(c) HEART OF GEORGIA Entities currently maintain the insurance policies
described in Section 5.10(c) of the HEART OF GEORGIA Disclosure Memorandum. None
of the HEART OF GEORGIA Entities has received written notice from any insurance
carrier that (i) any policy of insurance will be canceled or that coverage
thereunder will be reduced or eliminated, or (ii) premium costs with respect to
such policies of insurance will be substantially increased. There are presently
no claims for amounts exceeding in any individual case $25,000 pending under
such policies of insurance and no written notices of claims in excess of such
amounts have been given by any HEART OF GEORGIA Entity under such policies.
(d) The Assets of the HEART OF GEORGIA Entities include all material Assets
required to operate the business of the HEART OF GEORGIA Entities as presently
conducted.
5.11 Intellectual Property. Each HEART OF GEORGIA Entity owns or has a
license to use all of the Intellectual Property used by such HEART OF GEORGIA
Entity in the ordinary course of its business. Each HEART OF GEORGIA Entity is
the owner of or has a license to any Intellectual Property sold or licensed to a
third party by such HEART OF GEORGIA Entity in connection with such HEART OF
GEORGIA Entity's business operations, and such HEART OF GEORGIA Entity has the
right to convey by sale or license any Intellectual Property so conveyed. No
HEART OF GEORGIA Entity is in material Default under any of its Intellectual
Property licenses. No proceedings have been instituted, or are pending or, to
the Knowledge of HEART OF GEORGIA, threatened, which challenge the rights of any
HEART OF GEORGIA Entity with respect to Intellectual Property used, sold or
licensed by such HEART OF GEORGIA Entity in the course of its business, nor has
any person claimed or alleged any rights to such Intellectual Property. To the
Knowledge of HEART OF GEORGIA, the conduct of the business of the HEART OF
GEORGIA Entities does not infringe any Intellectual Property of any other
person. Except as disclosed in Section 5.11 of the HEART OF GEORGIA Disclosure
Memorandum, no HEART OF GEORGIA Entity is obligated to pay any recurring
royalties to any Person with respect to any such Intellectual Property.
5.12 Environmental Matters.
(a) Except as disclosed in Section 5.12 of the HEART OF GEORGIA Disclosure
Memorandum, to the Knowledge of HEART OF GEORGIA, each HEART OF GEORGIA Entity,
its Participation Facilities, and its Operating Properties are, and have been,
in compliance with all Environmental Laws, except for violations which are not
reasonably likely to have, individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of HEART OF
GEORGIA, threatened, before any court, governmental agency, or authority or
other forum in which any HEART OF GEORGIA Entity or any of its Operating
Properties or Participation Facilities (or HEART OF GEORGIA in respect of such
Operating Property or Participation Facility) has been or, with respect to
threatened Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law or (ii) relating to
the emission, migration, release, discharge, spillage, or disposal into the
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environment of any Hazardous Material, whether or not occurring at, on, under,
adjacent to, or affecting (or potentially affecting) a site owned, leased, or
operated by any HEART OF GEORGIA Entity or any of its Operating Properties or
Participation Facilities or any neighboring property, except for such Litigation
pending or threatened that is not reasonably likely to have, individually or in
the aggregate, a HEART OF GEORGIA Material Adverse Effect, nor, to the Knowledge
of HEART OF GEORGIA, is there any reasonable basis for any Litigation of a type
described in this sentence, except such as is not reasonably likely to have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect.
(c) Except as disclosed in Section 5.12 of the HEART OF GEORGIA Disclosure
Memorandum, during the period of (i) any HEART OF GEORGIA Entity's ownership or
operation of any of their respective current Assets, or (ii) any HEART OF
GEORGIA Entity's participation in the management of any Participation Facility
or any Operating Property, to the Knowledge of HEART OF GEORGIA, there have been
no emissions, migrations, releases, discharges, spillages, or disposals of
Hazardous Material in, on, at, under, adjacent to, or affecting (or potentially
affecting) such properties or any neighboring properties, except such as are not
reasonably likely to have, individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect. Except as disclosed in Section 5.12 of the HEART OF
GEORGIA Disclosure Memorandum, prior to the period of (i) any HEART OF GEORGIA
Entity's ownership or operation of any of their respective current properties,
(ii) any HEART OF GEORGIA Entity's participation in the management of any
Participation Facility or any Operating Property, to the Knowledge of HEART OF
GEORGIA, there were no releases, discharges, spillages, or disposals of
Hazardous Material in, on, under, or affecting any such property, Participation
Facility or Operating Property, except such as are not reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect.
5.13 Compliance with Laws. Each HEART OF GEORGIA Entity has in effect all
Permits necessary for it to own, lease, or operate its material Assets and to
carry on its business as now conducted, except for those Permits the absence of
which are not reasonably likely to have, individually or in the aggregate, a
HEART OF GEORGIA Material Adverse Effect, and, to the Knowledge of HEART OF
GEORGIA, there has occurred no Default under any such Permit, other than
Defaults which are not reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect. Except as disclosed in
Section 5.13 of the HEART OF GEORGIA Disclosure Memorandum, none of the HEART OF
GEORGIA Entities:
(a) is in Default under any of the provisions of its Articles of
Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to have, individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect; or
(c) since January 1, 1995, or as of the date of organization, if later, has
received any written notification or written communication from any agency or
department of federal, state, or local government or any Regulatory Authority or
the staff thereof (i) asserting that any HEART OF GEORGIA Entity is not in
compliance with any of the Laws or Orders which such governmental authority or
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Regulatory Authority enforces, where such noncompliance is reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect, (ii) threatening to revoke any Permits, the revocation of which is
reasonably likely to have, individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect, or (iii) requiring any HEART OF GEORGIA Entity to enter
into or consent to the issuance of a cease and desist order, formal agreement,
directive, commitment, or memorandum of understanding, or to adopt any Board
resolution or similar undertaking, which restricts materially the conduct of its
business or in any material manner relates to its capital adequacy, its credit
or reserve policies, its management, or the payment of dividends. Copies of all
material reports, correspondence, notices and other documents relating to any
inspection, audit, monitoring or other form of review or enforcement action by a
Regulatory Authority have been made available to FLAG.
5.14 Labor Relations. No HEART OF GEORGIA Entity is the subject of any
Litigation asserting that it or any other HEART OF GEORGIA Entity has committed
an unfair labor practice (within the meaning of the National Labor Relations Act
or comparable state law) or seeking to compel it or any other HEART OF GEORGIA
Entity to bargain with any labor organization as to wages or conditions of
employment, nor is any HEART OF GEORGIA Entity party to any collective
bargaining agreement, nor is there any strike or other labor dispute involving
any HEART OF GEORGIA Entity, pending or threatened, or to the Knowledge of HEART
OF GEORGIA, is there any activity involving any HEART OF GEORGIA Entity's
employees seeking to certify a collective bargaining unit or engaging in any
other organization activity.
5.15 Employee Benefit Plans.
(a) HEART OF GEORGIA has disclosed in Section 5.15 of the HEART OF GEORGIA
Disclosure Memorandum, and has delivered or made available to FLAG prior to the
execution of this Agreement copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any HEART OF GEORGIA Entity or
ERISA Affiliate (as defined in subparagraph (c) below) thereof for the benefit
of employees, retirees, dependents, spouses, directors, independent contractors,
or other beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, "HEART OF GEORGIA Benefit Plans"). Each HEART OF
GEORGIA Benefit Plan which is an "employee pension benefit plan," as that term
is defined in Section 3(2) of ERISA, is referred to herein as an "HEART OF
GEORGIA ERISA Plan." Each HEART OF GEORGIA ERISA Plan which is also a "defined
benefit plan" (as defined in Section 4140 of the Internal Revenue Code) is
referred to herein as an "HEART OF GEORGIA Pension Plan." No HEART OF GEORGIA
Pension Plan is or has been a multiemployer plan within the meaning of Section
3(37) of ERISA.
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(b) All HEART OF GEORGIA Benefit Plans are in compliance with the
applicable terms of ERISA, the Internal Revenue Code, and any other applicable
Laws the breach or violation of which are reasonably likely to have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect.
Each HEART OF GEORGIA ERISA Plan which is intended to be qualified under Section
401(a) of the Internal Revenue Code has received a favorable determination
letter from the Internal Revenue Service, and HEART OF GEORGIA has no Knowledge
of any circumstances likely to result in revocation of any such favorable
determination letter. To the Knowledge of HEART OF GEORGIA, no HEART OF GEORGIA
Entity has engaged in a transaction with respect to any HEART OF GEORGIA Benefit
Plan that, assuming the taxable period of such transaction expired as of the
date hereof, would subject any HEART OF GEORGIA Entity to a Tax imposed by
either Section 4975 of the Internal Revenue Code or Section 502(i) of ERISA in
amounts which are reasonably likely to have, individually or in the aggregate, a
HEART OF GEORGIA Material Adverse Effect.
(c) No HEART OF GEORGIA Pension Plan has any "unfunded current liability,"
as that term is defined in Section 302(d)(8)(A) of ERISA, based on actuarial
assumptions set forth for such plan's most recent actuarial valuation. Since the
date of the most recent actuarial valuation, there has been (i) no material
change in the financial position of any HEART OF GEORGIA Pension Plan, (ii) no
change in the actuarial assumptions with respect to any HEART OF GEORGIA Pension
Plan, and (iii) no increase in benefits under any HEART OF GEORGIA Pension Plan
as a result of plan amendments or changes in applicable Law which is reasonably
likely to have, individually or in the aggregate, a HEART OF GEORGIA Material
Adverse Effect or materially adversely affect the funding status of any such
plan. Neither any HEART OF GEORGIA Pension Plan nor any "single employer plan,"
within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any HEART OF GEORGIA Entity, or the single-employer plan of any
entity which is considered one employer with HEART OF GEORGIA under Section 4001
of ERISA or Section 414 of the Internal Revenue Code or Section 302 of ERISA
(whether or not waived) (an "ERISA Affiliate") has an "accumulated funding
deficiency" within the meaning of Section 412 of the Internal Revenue Code or
Section 302 of ERISA, which is reasonably likely to have a HEART OF GEORGIA
Material Adverse Effect. No HEART OF GEORGIA Entity has provided, or is required
to provide, security to a HEART OF GEORGIA Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any HEART OF GEORGIA Entity with respect to any ongoing, frozen, or
terminated single-employer plan or the single-employer plan of any ERISA
Affiliate, which Liability is reasonably likely to have a HEART OF GEORGIA
Material Adverse Effect. No HEART OF GEORGIA Entity has incurred any withdrawal
Liability with respect to a multiemployer plan under Subtitle B of Title IV of
ERISA (regardless of whether based on contributions of an ERISA Affiliate),
which Liability is reasonably likely to have a HEART OF GEORGIA Material Adverse
Effect. No notice of a "reportable event," within the meaning of Section 4043 of
ERISA for which the 30-day reporting requirement has not been waived, has been
required to be filed for any HEART OF GEORGIA Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.
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(e) Except as disclosed in Section 5.15 of the HEART OF GEORGIA Disclosure
Memorandum, no HEART OF GEORGIA Entity has any Liability for retiree health and
life benefits under any of the HEART OF GEORGIA Benefit Plans and there are no
restrictions on the rights of such HEART OF GEORGIA Entity to amend or terminate
any such retiree health or benefit Plan without incurring any Liability
thereunder, which Liability is reasonably likely to have a HEART OF GEORGIA
Material Adverse Effect.
(f) Except as disclosed in Section 5.15 of the HEART OF GEORGIA Disclosure
Memorandum, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any HEART OF GEORGIA
Entity from any HEART OF GEORGIA Entity under any HEART OF GEORGIA Benefit Plan
or otherwise, (ii) increase any benefits otherwise payable under any HEART OF
GEORGIA Benefit Plan, or (iii) result in any acceleration of the time of payment
or vesting of any such benefit, where such payment, increase, or acceleration is
reasonably likely to have, individually or in the aggregate, a HEART OF GEORGIA
Material Adverse Effect.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any HEART OF GEORGIA Entity and their respective beneficiaries,
other than entitlements accrued pursuant to funded retirement plans subject to
the provisions of Section 412 of the Internal Revenue Code or Section 302 of
ERISA, have been fully reflected on the HEART OF GEORGIA Financial Statements to
the extent required by and in accordance with GAAP.
5.16 Material Contracts. Except as disclosed in Section 5.16 of the HEART
OF GEORGIA Disclosure Memorandum or otherwise reflected in the HEART OF GEORGIA
Financial Statements, none of the HEART OF GEORGIA Entities, nor any of their
respective Assets, businesses, or operations, is a party to, or is bound or
affected by, or receives benefits under, (i) any employment, severance,
termination, consulting, or retirement Contract providing for aggregate payments
to any Person in any calendar year in excess of $50,000, (ii) any Contract
relating to the borrowing of money by any HEART OF GEORGIA Entity or the
guarantee by any HEART OF GEORGIA Entity of any such obligation (other than
Contracts evidencing deposit liabilities, purchases of federal funds,
fully-secured repurchase agreements, Federal Home Loan Bank advances and trade
payables and Contracts relating to borrowings or guarantees made in the ordinary
course of business), (iii) any Contract which prohibits or restricts any HEART
OF GEORGIA Entity from engaging in any business activities in any geographic
area, line of business or otherwise in competition with any other Person, (iv)
any Contract between or among the HEART OF GEORGIA Entities, (v) any Contract
relating to the provision of data processing, network communication, or other
technical services to or by any HEART OF GEORGIA Entity, (vi) any exchange
traded or over-the-counter swap, forward, future, option, cap, floor, or collar
financial Contract, or any other interest rate or foreign currency protection
Contract not included on its balance sheet which is a financial derivative
Contract, and (vii) any other Contract or amendment thereto that would be
required to be filed as an exhibit to a Form 10-K filed by HEART OF GEORGIA with
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the SEC (assuming HEART OF GEORGIA were subject to the reporting requirements of
the 1934 Act) as of the date of this Agreement (together with all Contracts
referred to in Sections 5.10 and 5.15(a), the "HEART OF GEORGIA Contracts").
With respect to each HEART OF GEORGIA Contract and except as disclosed in
Section 5.16 of the HEART OF GEORGIA Disclosure Memorandum: (i) assuming the
enforceability of such Contract against the third party thereto, each such
Contract is in full force and effect; (ii) no HEART OF GEORGIA Entity is in
Default thereunder, other than Defaults which are not reasonably likely to have,
individually or in the aggregate, a HEART OF GEORGIA Material Adverse Effect;
(iii) no HEART OF GEORGIA Entity has repudiated or waived any material provision
of any such Contract; and (iv) no other party to any such Contract is, to the
Knowledge of HEART OF GEORGIA, in Default in any respect, other than Defaults
which are not reasonably likely to have, individually or in the aggregate, a
HEART OF GEORGIA Material Adverse Effect, or has repudiated or waived any
material provision thereunder. Except as disclosed in Section 5.16 of the HEART
OF GEORGIA Disclosure Memorandum, no officer, director or employee of any HEART
OF GEORGIA Entity is party to any Contract which restricts or prohibits such
officer, director or employee from engaging in activities competitive with any
Person, including any HEART OF GEORGIA Entity. All of the indebtedness of any
HEART OF GEORGIA Entity for money borrowed is prepayable at any time by such
HEART OF GEORGIA Entity without penalty or premium.
5.17 Legal Proceedings. There is no Litigation instituted or pending or, to
the Knowledge of HEART OF GEORGIA, threatened (or unasserted but considered
probable of assertion and which if asserted would have at least a reasonable
probability of an unfavorable outcome) against any HEART OF GEORGIA Entity, or
against any director, employee or employee benefit plan (acting in such
capacity) of any HEART OF GEORGIA Entity, or against any Asset, interest, or
right of any of them, that is reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect, nor are there any Orders
of any Regulatory Authorities, other governmental authorities, or arbitrators
outstanding against any HEART OF GEORGIA Entity, that are reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
Effect. Section 5.17 of the HEART OF GEORGIA Disclosure Memorandum contains a
summary of all Litigation as of the date of this Agreement to which any HEART OF
GEORGIA Entity is a party and which names a HEART OF GEORGIA Entity as a
defendant or cross-defendant or for which, to the Knowledge of HEART OF GEORGIA,
any HEART OF GEORGIA Entity has any potential Liability.
5.18 Reports. Since January 1, 1995, or the date of organization if later,
each HEART OF GEORGIA Entity has timely filed all reports and statements,
together with any amendments required to be made with respect thereto, that it
was required to file with Regulatory Authorities, except for such filings which
the failure to so file is not reasonably likely to have, individually or in the
aggregate, a HEART OF GEORGIA Material Adverse Effect. As of their respective
dates, each of such reports and documents, including the financial statements,
exhibits, and schedules thereto, complied in all material respects with all
applicable Laws. As of its respective date, each such report and document did
not, in all material respects, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
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5.19 Statements True and Correct. No statement, certificate, instrument, or
other writing furnished or to be furnished by any HEART OF GEORGIA Entity to
FLAG pursuant to this Agreement or any other document, agreement, or instrument
referred to herein contains or will contain any untrue statement of material
fact or will omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. None of the information supplied or to be supplied by any HEART OF
GEORGIA Entity for inclusion in the registration statement to be filed by FLAG
with the SEC in accordance with Section 8.1 will, when such registration
statement becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary to make the statements
therein not misleading. All documents that any HEART OF GEORGIA Entity is
responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable Law. No documents to be filed by a HEART OF
GEORGIA Entity with any Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
5.20 Accounting, Tax and Regulatory Matters. No HEART OF GEORGIA Entity has
taken or agreed to take any action or has any Knowledge of any fact or
circumstance that is reasonably likely to (i) prevent the Merger from qualifying
for pooling of interest accounting treatment and as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code, or (ii) materially
impede or delay receipt of any Consents of Regulatory Authorities referred to in
Section 9.1(b) or result in the imposition of a condition or restriction of the
type referred to in the last sentence of such Section.
5.21 Charter Provisions. Each HEART OF GEORGIA Entity has taken all action
so that the entering into of this Agreement and the consummation of the Merger
and the other transactions contemplated by this Agreement do not and will not
result in the grant of any rights to any Person under the Charter, Articles of
Incorporation, Bylaws or other governing instruments of any HEART OF GEORGIA
Entity or restrict or impair the ability of FLAG or any of its Subsidiaries to
vote, or otherwise to exercise the rights of a shareholder with respect to,
shares of any HEART OF GEORGIA Entity that may be directly or indirectly
acquired or controlled by them.
5.22 Board Recommendation. The Board of Directors of HEART OF GEORGIA, at a
meeting duly called and held, has by unanimous vote of those directors present
(who constituted all of the directors then in office) (i) determined that this
Agreement and the transactions contemplated hereby are fair to and in the best
interests of the shareholders and (ii) resolved to recommend that the holders of
the shares of HEART OF GEORGIA Common Stock approve this Agreement.
5.23 Y-2K. HEART OF GEORGIA has formed a committee to review policies and
directives issued by Regulatory Authorities with respect to preparedness for
year 2000 data processing and other operations, and intends to implement such
committee's recommendations for ensuring compliance with such policies and
directives.
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ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF FLAG
--------------------------------------
FLAG hereby represents and warrants to HEART OF GEORGIA as follows:
6.1 Organization, Standing, and Power. FLAG is a corporation duly
organized, validly existing, and in good standing under the Laws of the State of
Georgia, and has the corporate power and authority to carry on its business as
now conducted and to own, lease and operate its material Assets. FLAG is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have, individually or
in the aggregate, a FLAG Material Adverse Effect. The minute book and other
organizational documents for FLAG have been made available to HEART OF GEORGIA
for its review and, except as disclosed in Section 6.1 of the FLAG Disclosure
Memorandum, are true and complete in all material respects as in effect as of
the date of this Agreement and accurately reflect in all material respects all
amendments thereto and all proceedings of the Board of Directors and
shareholders thereof.
6.2 Authority of FLAG; No Breach By Agreement.
(a) FLAG has the corporate power and authority necessary to execute,
deliver and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein,
including the Merger, have been duly and validly authorized by all necessary
corporate action in respect thereof on the part of FLAG. This Agreement
represents a legal, valid, and binding obligation of FLAG, enforceable against
FLAG in accordance with its terms (except in all cases as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
receivership, conservatorship, moratorium, or similar Laws affecting the
enforcement of creditors' rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by FLAG, nor the
consummation by FLAG of the transactions contemplated hereby, nor compliance by
FLAG with any of the provisions hereof, will (i) conflict with or result in a
breach of any provision of FLAG's Articles of Incorporation or Bylaws, or the
Charter, or Articles of Incorporation or Bylaws of any FLAG Entity, or any
resolution adopted by the Board of Directors or the shareholders of any FLAG
Entity, or (ii) constitute or result in a Default under, or require any Consent
pursuant to, or result in the creation of any Lien on any Asset of any FLAG
Entity under, any Contract or Permit of any FLAG Entity, where such Default or
Lien, or any failure to obtain such Consent, is reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, or (iii)
subject to receipt of the requisite Consents referred to in Section 9. 1 (b),
constitute or result in a Default under, or require any Consent pursuant to, any
Law or Order applicable to any FLAG Entity or any of their respective material
Assets (including any FLAG Entity becoming subject to or liable for the payment
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of any Tax or any of the Assets owned by any FLAG Entity being reassessed or
revalued by any Taxing authority).
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules of
the NASD, and other than Consents required from Regulatory Authorities, and
other than notices to or filings with the Internal Revenue Service or the
Pension Benefit Guaranty Corporation with respect to any employee benefit plans,
or under the HSR Act, and other than Consents, filings, or notifications which,
if not obtained or made, are not reasonably likely to have, individually or in
the aggregate, a FLAG Material Adverse Effect, no notice to, filing with, or
Consent of, any public body or authority is necessary for the consummation by
FLAG of the Merger and the other transactions contemplated in this Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of FLAG consists of (i) 20,000,000 shares
of FLAG Common Stock, of which 5,174,807 shares are issued and outstanding as of
the date of this Agreement, and (ii) 10,000,000 shares of FLAG Preferred Stock,
of which no shares are issued and outstanding. All of the issued and outstanding
shares of FLAG Capital Stock are, and all of the shares of FLAG Common Stock to
be issued in exchange for shares of HEART OF GEORGIA Common Stock upon
consummation of the Merger, when issued in accordance with the terms of this
Agreement, will be, duly and validly issued and outstanding and fully paid and
nonassessable under the GBCC. None of the outstanding shares of FLAG Capital
Stock has been, and none of the shares of FLAG Common Stock to be issued in
exchange for shares of HEART OF GEORGIA Common Stock upon consummation of the
Merger will be, issued in violation of any preemptive rights of the current or
past shareholders of FLAG.
(b) Except as set forth in Section 6.3(a), or as disclosed in Section 6.3
of the FLAG Disclosure Memorandum, there are no shares of capital stock or other
equity securities of FLAG outstanding and no outstanding Equity Rights relating
to the capital stock of FLAG.
6.4 FLAG Subsidiaries. FLAG has disclosed in Section 6.4 of the FLAG
Disclosure Memorandum all of the FLAG Subsidiaries that are corporations
(identifying its jurisdiction of incorporation, each jurisdiction in which the
character of its Assets or the nature or conduct of its business requires it to
be qualified and/or licensed to transact business, and the number of shares
owned and percentage ownership interest represented by such share ownership) and
all of the FLAG Subsidiaries that are general or limited partnerships, limited
liability companies, or other non-corporate entities (identifying the Law under
which such entity is organized, each jurisdiction in which the character of its
Assets or the nature or conduct of its business requires it to be qualified
and/or licensed to transact business, and the amount and nature of the ownership
interest therein). Except as disclosed in Section 6.4 of the FLAG Disclosure
Memorandum, FLAG or one of its wholly-owned Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each FLAG
Subsidiary. No capital stock (or other equity interest) of any FLAG Subsidiary
are or may become required to be issued (other than to another FLAG Entity) by
reason of any Equity Rights, and there are no Contracts by which any FLAG
Subsidiary is bound to issue (other than to another FLAG Entity) additional
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shares of its capital stock (or other equity interests) or Equity Rights or by
which any FLAG Entity is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any FLAG Subsidiary (other than to another
FLAG Entity). There are no Contracts relating to the rights of any FLAG Entity
to vote or to dispose of any shares of the capital stock (or other equity
interests) of any FLAG Subsidiary. All of the shares of capital stock (or other
equity interests) of each FLAG Subsidiary held by a FLAG Entity are fully paid
and nonassessable under the applicable corporation Law of the jurisdiction in
which such Subsidiary is incorporated or organized and are owned by the FLAG
Entity free and clear of any Lien. Each FLAG Subsidiary is either a bank,
savings association or a corporation, and is duly organized, validly existing,
and (as to corporations) in good standing under the Laws of the jurisdiction in
which it is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease and operate its Assets and to carry on its
business as now conducted. Each FLAG Subsidiary is duly qualified or licensed to
transact business as a foreign corporation in good standing in the States of the
United States and foreign jurisdictions where the character of its Assets or the
nature or conduct of its business requires it to be so qualified or licensed,
except for such jurisdictions in which the failure to be so qualified or
licensed is not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Each FLAG Subsidiary that is a depository
institution is an "insured institution" as defined in the Federal Deposit
Insurance Act and applicable regulations thereunder. The minute book and other
organizational documents for each FLAG Subsidiary have been made available to
HEART OF GEORGIA for its review, and, except as disclosed in Section 6.4 of the
FLAG Disclosure Memorandum, are true and complete in all material respects as in
effect as of the date of this Agreement and accurately reflect in all material
respects all amendments thereto and all proceedings of the Board of Directors
and shareholders thereof.
6.5 SEC Filings, Financial Statements.
(a) FLAG has timely filed and made available to HEART OF GEORGIA all SEC
Documents required to be filed by FLAG since December 31, 1993 (the "FLAG SEC
Reports"). The FLAG SEC Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Laws and other
applicable Laws and (ii) did not, at the time they were filed (or, if amended or
superseded by a filing prior to the date of this Agreement, then on the date of
such filing) contain any untrue statement of a material fact or omit to state a
material fact required to be stated in such FLAG SEC Reports or necessary in
order to make the statements in such FLAG SEC Reports, in light of the
circumstances under which they were made, not misleading. No FLAG Subsidiary is
required to file any SEC Documents.
(b) Each of the FLAG Financial Statements (including, in each case, any
related notes) contained in the FLAG SEC Reports, including any FLAG SEC Reports
filed after the date of this Agreement until the Effective Time, complied as to
form in all material respects with the applicable published rules and
regulations of the SEC with respect thereto, was prepared in accordance with
GAAP applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes to such financial statements or, in the case of
unaudited interim statements, as permitted by Form 10-Q of the SEC), and fairly
presented in all material respects the consolidated financial position of FLAG
and its Subsidiaries as at the respective dates and the consolidated results of
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operations and cash flows for the periods indicated, except that the unaudited
interim financial statements were or are subject to normal and recurring
year-end adjustments which were not or are not expected to be material in amount
or effect.
6.6 Absence of Undisclosed Liabilities. No FLAG Entity has any Liabilities
that are reasonably likely to have, individually or in the aggregate, a FLAG
Material Adverse Effect, except Liabilities which are accrued or reserved
against in the consolidated balance sheets of FLAG as of December 31, 1997 and
March 31, 1998, included in the FLAG Financial Statements delivered prior to the
date of this Agreement or reflected in the notes thereto. No FLAG Entity has
incurred or paid any Liability since March 31, 1998, except for such Liabilities
incurred or paid (i) in the ordinary course of business consistent with past
business practice and which are not reasonably likely to have, individually or
in the aggregate, a FLAG Material Adverse Effect or (ii) in connection with the
transactions contemplated by this Agreement.
6.7 Absence of Certain Changes or Events. Since December 31, 1997, except
as disclosed in the FLAG Financial Statements delivered prior to the date of
this Agreement or as disclosed in Section 6.7 of the FLAG Disclosure Memorandum,
(i) there have been no events, changes or occurrences which have had, or are
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, and (ii) the FLAG Entities have not taken any action, or failed
to take any action, prior to the date of this Agreement, which action or
failure, if taken after the date of this Agreement, would represent or result in
a material breach or violation of any of the covenants and agreements of FLAG
provided in Article 7.
6.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the FLAG
Entities have been timely filed or requests for extensions have been timely
filed, granted, and have not expired for periods ended on or before December 31,
1997, and on or before the date of the most recent fiscal year end immediately
preceding the Effective Time, except to the extent that all such failures to
file, taken together, are not reasonably likely to have a FLAG Material Adverse
Effect, and all Tax Returns filed are complete and accurate in all material
respects. All Taxes shown on filed Tax Returns have been paid. There is no audit
examination, deficiency, or refund Litigation with respect to any Taxes that is
reasonably likely to result in a determination that would have, individually or
in the aggregate, a FLAG Material Adverse Effect, except as reserved against in
the FLAG Financial Statements delivered prior to the date of this Agreement or
as disclosed in Section 6.8 of the FLAG Disclosure Memorandum. All Taxes and
other Liabilities due with respect to completed and settled examinations or
concluded Litigation have been paid. There are no Liens with respect to Taxes
upon any of the Assets of the FLAG Entities, except for any such Liens which are
not reasonably likely to have a FLAG Material Adverse Effect or with respect to
which the Taxes are not vet due and payable.
(b) None of the FLAG Entities has executed an extension or waiver of any
statute of limitations on the assessment or collection of any Tax due (excluding
such statutes that relate to veers currently under examination by the Internal
Revenue Service or other applicable taxing authorities) that is currently in
effect.
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(c) The provision for any Taxes due or to become due for any of the FLAG
Entities for the period or periods through and including the date of the
respective FLAG Financial Statements that has been made and is reflected on such
FLAG Financial Statements is sufficient to cover all such Taxes.
(d) Deferred Taxes of the FLAG Entities have been provided for in
accordance with GAAP.
(e) None of the FLAG Entities is a party to any Tax allocation or sharing
agreement and none of the FLAG Entities has been a member of an affiliated group
filing a consolidated federal income Tax Return (other than a group the common
parent of which was FLAG) or has any Liability for Taxes of any Person (other
than FLAG and its Subsidiaries) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign, Law) as a transferee or
successor or by Contract or otherwise.
(f) Each of the FLAG Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS Forms
W-9) necessary to comply with, all applicable information reporting and Tax
withholding requirements under federal, state, and local Tax Laws, and such
records identify with specificity all accounts subject to backup withholding
under Section 3406 of the Internal Revenue Code, except for such instances of
noncompliance and such omissions as are not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect.
(g) Except as disclosed in Section 6.8 of the FLAG Disclosure Memorandum,
none of the FLAG Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Sections 28OG or 162(m)
of the Internal Revenue Code.
(h) There has not been an ownership change, as defined in Internal Revenue
Code Section 382(g), of the FLAG Entities that occurred during or after any
Taxable Period in which the FLAG Entities incurred a net operating loss that
carries over to any Taxable Period ending after December 31, 1997.
(i) No FLAG Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention between the
United States and such foreign country.
(j) All material elections with respect to Taxes affecting the FLAG
Entities have been or will be timely made.
6.9 Allowance for Possible Loan Losses. The Allowance shown on the
consolidated balance sheets of FLAG included in the most recent FLAG Financial
Statements dated prior to the date of this Agreement was, and the Allowance
shown on the consolidated balance sheets of FLAG included in the FLAG Financial
Statements as of dates subsequent to the execution of this Agreement will be, as
of the dates thereof, adequate (within the meaning of GAAP and applicable
regulatory requirements or guidelines) to provide for all known or reasonably
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anticipated losses relating to or inherent in the loan and lease portfolios
(including accrued interest receivables) of the FLAG Entities and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by the FLAG Entities as of the dates thereof, except where the
failure of such Allowance to be so adequate is not reasonably likely to have a
FLAG Material Adverse Effect.
6.10 Assets.
(a) Except as disclosed in Section 6.10 of the FLAG Disclosure Memorandum
or as disclosed or reserved against in the FLAG Financial Statements delivered
prior to the date of this Agreement, the FLAG Entities have good and marketable
title, free and clear of all Liens, to all of their respective Assets, except
for any such Liens or other defects of title which are not reasonably likely to
have a FLAG Material Adverse Effect. All tangible properties used in the
businesses of the FLAG Entities are in good condition, reasonable wear and tear
excepted, and are usable in the ordinary course of business consistent with
FLAG's past practices.
(b) All Assets which are material to FLAG's business on a consolidated
basis, held under leases or subleases by any of the FLAG Entities, are held
under valid Contracts enforceable in accordance with their respective terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought), and each such
Contract is in full force and effect.
(c) The FLAG Entities currently maintain insurance similar in amounts,
scope and coverage to that maintained by other peer banking organizations. None
of the FLAG Entities has received notice from any insurance carrier that (i) any
policy of insurance will be cancelled or that coverage thereunder will be
reduced or eliminated, or (ii) premium costs with respect to such policies of
insurance will be substantially increased. There are presently no claims for
amounts exceeding in any individual case $25,000 pending under such policies of
insurance and no notices of claims in excess of such amounts have been given by
any FLAG Entity under such policies.
(d) The Assets of the FLAG Entities include all Assets required to operate
the business of the FLAG Entities as presently conducted.
6.11 Intellectual Property. Each FLAG Entity owns or has a license to use
all of the Intellectual Property used by such FLAG Entity in the course of its
business. Each FLAG Entity is the owner of or has a license to any Intellectual
Property sold or licensed to a third party by such FLAG Entity in connection
with such FLAG Entity's business operations, and such FLAG Entity has the right
to convey by sale or license any Intellectual Property so conveyed. No FLAG
Entity is in Default under any of its Intellectual Property licenses. No
proceedings have been instituted, or are pending or to the Knowledge of FLAG
threatened, which challenge the rights of any FLAG Entity with respect to
Intellectual Property used, sold or licensed by such FLAG Entity in the course
of its business, nor has any person claimed or alleged any rights to such
Intellectual Property. The conduct of the business of the FLAG Entities does not
infringe any Intellectual Property of any other person. Except as disclosed in
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Section 6.11 of the FLAG Disclosure Memorandum, no FLAG Entity is obligated to
pay any recurring royalties to any Person with respect to any such Intellectual
Property. Except as disclosed in Section 6.11 of the FLAG Disclosure Memorandum,
no officer, director or employee of any FLAG Entity is party to any Contract
which restricts or prohibits such officer, director or employee from engaging in
activities competitive with any Person, including any FLAG Entity.
6.12 Environmental Matters.
(a) To the Knowledge of FLAG, each FLAG Entity, its Participation
Facilities, and its Operating Properties are, and have been, in compliance with
all Environmental Laws, except for violations which are not reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of FLAG, threatened
before any court, governmental agency, or authority or other forum in which any
FLAG Entity or any of its Operating Properties or Participation Facilities (or
FLAG in respect of such Operating Property or Participation Facility) has been
or, with respect to threatened Litigation, may be named as a defendant (i) for
alleged noncompliance (including by any predecessor) with any Environmental Law
or (ii) relating to the emission, migration, release, discharge, spillage, or
disposal into the environment of any Hazardous Material, whether or not
occurring at, on, under, adjacent to, or affecting (or potentially affecting) a
site owned, leased, or operated by any FLAG Entity or any of its Operating
Properties or Participation Facilities or any neighboring property, except for
such Litigation pending or threatened that is not reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, nor is there
any reasonable basis for any Litigation of a type described in this sentence,
except such as is not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect.
(c) During the period of (i) any FLAG Entity's ownership or operation of
any of their respective current properties, (ii) any FLAG Entity's participation
in the management of any Participation Facility or any Operating Property, there
have been no emissions, migrations, releases, discharges, spillages, or
disposals of Hazardous Material in, on, at, under, adjacent to, or affecting (or
potentially affecting) such properties or any neighboring properties, except
such as are not reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect. Prior to the period of (i) any FLAG Entity's
ownership or operation of any of their respective current properties, (ii) any
FLAG Entity's participation in the management of any Participation Facility or
any Operating Property, to the Knowledge of FLAG, there were no releases,
discharges, spillages, or disposals of Hazardous Material in, on, under, or
affecting any such property, Participation Facility or Operating Property,
except such as are not reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect.
6.13 Compliance with Laws. Each FLAG Entity has in effect all Permits
necessary for it to own, lease or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which are
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, and there has occurred no Default under any such Permit, other
than Defaults which are not reasonably likely to have, individually or in the
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aggregate, a FLAG Material Adverse Effect. Except as disclosed in Section 6.11
of the FLAG Disclosure Memorandum, none of the FLAG Entities:
(a) is in Default under any of the provisions of its Articles of
Incorporation or Bylaws (or other governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults which are not
reasonably likely to, have, individually or in the aggregate, a FLAG Material
Adverse Effect; or
(c) since January 1, 1995, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any FLAG Entity is
not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, (ii) threatening to revoke any Permits, the revocation of which
is reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect, or (iii) requiring any FLAG Entity to enter into or consent to
the issuance of a cease and desist order, formal agreement, directive,
commitment or memorandum of understanding, or to adopt any Board resolution or
similar undertaking, which restricts materially the conduct of its business, or
in any manner relates to its capital adequacy, its credit or reserve policies,
its management, or the payment of dividends. Copies of all material reports,
correspondence, notices and other documents relating to any inspection, audit,
monitoring or other form of review or enforcement action by a Regulatory
Authority have been made available to HEART OF GEORGIA.
6.14 Labor Relations. No FLAG Entity is the subject of any Litigation
asserting that it or any other FLAG Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other FLAG Entity to bargain with any
labor organization as to wages or conditions of employment, nor is any FLAG
Entity party to any collective bargaining agreement, nor is there any strike or
other labor dispute involving any FLAG Entity, pending or threatened, or to the
Knowledge of FLAG, is there any activity involving any FLAG Entity's employees
seeking to certify a collective bargaining unit or engaging in any other
organization activity.
6.15 Employee Benefit Plans.
(a) FLAG has disclosed in Section 6.12 of the FLAG Disclosure Memorandum
and has delivered or made available to HEART OF GEORGIA prior to the execution
of this Agreement copies in each case of all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock ownership,
severance pay, vacation, bonus, or other incentive plan, all other written
employee programs, arrangements, or agreements, all medical, vision, dental, or
other health plans, all life insurance plans, and all other employee benefit
plans or fringe benefit plans, including "employee benefit plans" as that term
is defined in Section 3(3) of ERISA, currently adopted, maintained by, sponsored
in whole or in part by, or contributed to by any FLAG Entity or ERISA Affiliate
thereof for the benefit of employees, retirees, dependents, spouses, directors,
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independent contractors, or other beneficiaries and under which employees,
retirees, dependents, spouses, directors, independent contractors, or other
beneficiaries are eligible to participate (collectively, the "FLAG Benefit
Plans"). Each FLAG Benefit Plan which is an "employee pension benefit plan," as
that term is defined in Section 3(2) of ERISA, is referred to herein as a "FLAG
ERISA Plan." Each FLAG ERISA Plan which is also a "defined benefit plan" (as
defined in Section 4140) of the Internal Revenue Code) is referred to herein as
a "FLAG Pension Plan." No FLAG Pension Plan is or has been a multiemployer plan
within the meaning of Section 3(37) of ERISA.
(b) All FLAG Benefit Plans are in compliance with the applicable terms of
ERISA, the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect. Each FLAG ERISA Plan which is
intended to be qualified under Section 401(a) of the Internal Revenue Code has
received a favorable determination letter from the Internal Revenue Service, and
FLAG is not aware of any circumstances likely to result in revocation of any
such favorable determination letter. To the Knowledge of Flag, no FLAG Entity
has engaged in a transaction with respect to any FLAG Benefit Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
would subject any FLAG Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA in amounts which are reasonably
likely to have, individually or in the aggregate, a FLAG Material Adverse
Effect.
(c) No FLAG Pension Plan has any "unfunded current liability," as that term
is defined in Section 302(d)(8)(A) of ERISA, based on actuarial assumptions set
forth for such plan's most recent actuarial valuation. Since the date of the
most recent actuarial valuation, there has been (i) no material change in the
financial position of a FLAG Pension Plan, (ii) no change in the actuarial
assumptions with respect to any FLAG Pension Plan, and (iii) no increase in
benefits under any FLAG Pension Plan as a result of plan amendments or changes
in applicable Law which is reasonably likely to have, individually or in the
aggregate, a FLAG Material Adverse Effect or materially adversely affect the
funding status of any such plan. Neither any FLAG Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any FLAG Entity, or the single-employer plan
of any ERISA Affiliate has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
which is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has provided, or is required to provide, security to a FLAG Pension Plan
or to any single-employer plan of an ERISA Affiliate pursuant to Section 40 1
(a)(29) of the Internal Revenue Code.
(d) Within the six-year period preceding the Effective Time, no Liability
under Subtitle C or D of Title IV of ERISA has been or is expected to be
incurred by any FLAG Entity with respect to any ongoing, frozen or terminated
single-employer plan or the single-employer plan of any ERISA Affiliate, which
Liability is reasonably likely to have a FLAG Material Adverse Effect. No FLAG
Entity has incurred any withdrawal Liability with respect to a multiemployer
plan under Subtitle B of Title IV of ERISA (regardless of whether based on
contributions of an ERISA Affiliate), which Liability is reasonably likely to
have a FLAG Material Adverse Effect. No notice of a "reportable event," within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any FLAG Pension Plan or
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by any ERISA Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 6.15 of the FLAG Disclosure Memorandum,
no FLAG Entity has any Liability for retiree health and life benefits under any
of the FLAG Benefit Plans and there are no restrictions on the rights of such
FLAG Entity to amend or terminate any such retiree health or benefit Plan
without incurring any Liability thereunder, which Liability is reasonably likely
to have a FLAG Material Adverse Effect.
(f) Except as disclosed in Section 6.15 of the FLAG Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment (including
severance, unemployment compensation, golden parachute, or otherwise) becoming
due to any director or any employee of any FLAG Entity from any FLAG Entity
under any FLAG Benefit Plan or otherwise, (ii) increase any benefits otherwise
payable under any FLAG Benefit Plan, or (iii) result in any acceleration of the
time of payment or vesting of any such benefit, where such payment, increase, or
acceleration is reasonably likely to have, individually or in the aggregate, a
FLAG Material Adverse Effect.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any FLAG Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of ERISA,
have been fully reflected on the FLAG Financial Statements to the extent
required by and in accordance with GAAP.
6.16 Material Contracts. Except as disclosed in Section 6.16 of the FLAG
Disclosure Memorandum or otherwise reflected in the FLAG Financial Statements,
none of the FLAG Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000, (ii) any Contract relating to the borrowing of money by any
FLAG Entity or the guarantee by any FLAG Entity of any such obligation (other
than Contracts evidencing deposit liabilities, purchases of federal funds,
fully-secured repurchase agreements, and Federal Home Loan Bank advances of
depository institution Subsidiaries, trade payables and Contracts relating to
borrowings or guarantees made in the ordinary course of business), (iii) any
Contract which prohibits or restricts any FLAG Entity from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, (iv) any Contract between or among FLAG
Entities, (v) any Contract relating to the provision of data processing, network
communication, or other technical services to or by any FLAG Entity, (vi) any
exchange-traded or over-the-counter swap, forward, future, option, cap, floor,
or collar financial Contract, or any other interest rate or foreign currency
protection Contract not included on its balance sheet which is a financial
derivative Contract, or (vii) any other Contract or amendment thereto that would
be required to be filed as an exhibit to a Form 10-K filed by FLAG with the SEC
as of the date of this Agreement that has not been filed as an exhibit to FLAG's
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Form 10-K filed for the fiscal year ended December 31, 1997, or in an SEC
Document and identified to HEART OF GEORGIA (together with all Contracts
referred to in Sections 6.10 and 6.15(a), the "FLAG Contracts"). With respect to
each FLAG Contract and except as disclosed in Section 6.16 of the FLAG
Disclosure Memorandum: (i) the Contract is in full force and effect; (ii) no
FLAG Entity is in Default thereunder, other than Defaults which are not
reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect; (iii) no FLAG Entity has repudiated or waived any material
provision of any such Contract; and (iv) no other party to any such Contract is,
to the Knowledge of FLAG, in Default in any respect, other than Defaults which
are not reasonably likely to have, individually or in the aggregate, a FLAG
Material Adverse Effect, or has repudiated or waived any material provision
thereunder. All of the indebtedness of any FLAG Entity for money borrowed is
prepayable at any time by such FLAG Entity without penalty or premium.
6.17 Legal Proceedings. There is no Litigation instituted or pending or, to
the Knowledge of FLAG, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any FLAG Entity, or against any director,
employee or employee benefit plan of any FLAG Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have,
individually or in the aggregate, a FLAG Material Adverse Effect, nor are there
any Orders of any Regulatory Authorities, other governmental authorities, or
arbitrators outstanding against any FLAG Entity, that are reasonably likely to
have, individually or in the aggregate, a FLAG Material Adverse Effect. Section
6.17 of the FLAG Disclosure Memorandum contains a summary of all Litigation as
of the date of this Agreement to which any FLAG Entity is a party and which
names a FLAG Entity as a defendant or cross-defendant or for which any FLAG
Entity has any potential Liability.
6.18 Reports. Since January 1, 1993, each FLAG Entity has timely filed all
reports and statements, together with any amendments required to be made with
respect thereto, that it was required to file with Regulatory Authorities
(except, in the case of state securities authorities, failures to file which are
not reasonably likely to have, individually or in the aggregate, a FLAG Material
Adverse Effect). As of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its respective
date, each such report and document did not, in all material respects, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
6.19 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any FLAG Entity to HEART OF
GEORGIA pursuant to this Agreement or any other document, agreement or
instrument referred to herein contains or will contain any untrue statement of
material fact or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied or to be supplied by any FLAG
Entity for inclusion in the Registration Statement to be filed by FLAG with the
SEC, will, when such Registration Statement becomes effective, be false or
misleading with respect to any material fact, or omit to state any material fact
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necessary to make the statements therein not misleading. None of the documents
to be filed by any FLAG Entity with the SEC or any other Regulatory Authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. All documents that any FLAG Entity thereof is responsible for
filing with any Regulatory Authority in connection with the transactions
contemplated hereby will comply as to form in all material respects with the
provisions of applicable Law.
6.20 Accounting, Tax and Regulatory Matters. No FLAG Entity has taken or
agreed to take any action or has any knowledge of any fact or circumstance that
is reasonably likely to (i) prevent the Merger from qualifying for pooling of
interests accounting treatment and as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, or (ii) materially impede or delay
receipt of any Consents of Regulatory Authorities referred to in Section 9.l(b)
or result in the imposition of a condition or restriction of the type referred
to in the last sentence of such Section.
6.21 Charter Provisions. Each FLAG Entity has taken all action so that the
entering into of this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement do not and will not result in the
grant of any rights to any Person under the Charter, Articles of Incorporation,
Bylaws or other governing instruments of any FLAG Entity or restrict or impair
the ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise
the rights of a shareholder with respect to, shares of any FLAG Entity that may
be directly or indirectly acquired or controlled by them.
6.22 Board Recommendation. The Board of Directors of FLAG, at a meeting
duly called and held, has by unanimous vote of those directors present (who
constituted all of the directors then in office) determined that this Agreement
and the transactions contemplated hereby, including the Merger, taken together,
are fair to and in the best interests of the FLAG shareholders.
6.23 Y2K. Each FLAG Entity is in compliance with all policies and
directives issued by Regulatory Authorities with respect to preparedness for
year 2000 data processing and other operations. Section 6.23 of the FLAG
Disclosure Memorandum sets forth a summary of the steps taken by FLAG to ensure
such compliance. FLAG has entered into an agreement with Phoenix International
Ltd., Inc. ("Phoenix") to license the Phoenix Retail Banking System, and FLAG is
scheduled to convert each of the existing FLAG Entities, as well as the HEART OF
GEORGIA Subsidiaries, to the Phoenix Retail Banking System prior to March 31,
1999. Phoenix has represented to FLAG that the Phoenix Retail Banking System is
year 2000 compliant.
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ARTICLE 7.
CONDUCT OF BUSINESS PENDING CONSUMMATION
----------------------------------------
7.1 Affirmative Covenants of HEART OF GEORGIA. From the date of this
Agreement until the earlier of the Effective Time or the termination of this
Agreement, unless the prior written consent of FLAG shall have been obtained,
and except as otherwise expressly contemplated herein, HEART OF GEORGIA shall,
and shall cause each of its Subsidiaries to (a) operate its business only in the
usual, regular, and ordinary course, (b) preserve intact its business
organization and Assets and maintain its rights and franchises, and (c) take no
action which would (i) materially adversely affect the ability of any Party to
obtain any Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the last
sentences of Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the
ability of any Party to perform its covenants and agreements under this
Agreement.
7.2 Negative Covenants of HEART OF GEORGIA. From the date of this Agreement
until the earlier of the Effective Time or the termination of this Agreement,
unless the prior written consent of FLAG shall have been obtained, and except as
otherwise expressly contemplated herein, HEART OF GEORGIA covenants and agrees
that it will not do or agree or commit to do, or permit any of its Subsidiaries
to do or agree or commit to do, any of the following:
(a) amend the Articles of Incorporation, Bylaws or other governing
instruments of any HEART OF GEORGIA entity, or
(b) incur any additional debt obligation or other obligation for borrowed
money (other than indebtedness of a HEART OF GEORGIA Entity to another HEART OF
GEORGIA Entity) in excess of an aggregate of $100,000 (for HEART OF GEORGIA
Entities on a consolidated basis) except in the ordinary course of the business
of the HEART OF GEORGIA Subsidiaries consistent with past practices (which shall
include, for the HEART OF GEORGIA Subsidiaries that are depository institutions,
creation of deposit liabilities, purchases of federal funds, advances from the
Federal Reserve Bank or Federal Home Loan Bank, and entry into repurchase
agreements fully secured by U.S. government or agency securities), or impose, or
suffer the imposition, on any Asset of any HEART OF GEORGIA Entity of any Lien
or permit any such Lien to exist (other than in connection with deposits,
repurchase agreements, bankers acceptances, "treasury tax and loan" accounts
established in the ordinary course of business, the satisfaction of legal
requirements in the exercise of trust powers, and Liens in effect as of the date
hereof that are disclosed in Section 7.2(b) of the HEART OF GEORGIA Disclosure
Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than
exchanges in the ordinary course under employee benefit plans), directly or
indirectly, any shares, or any securities convertible into any shares, of the
capital stock of any HEART OF GEORGIA Entity, or declare or pay any dividend or
make any other distribution in respect of HEART OF GEORGIA's capital stock; or
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(d) except for this Agreement, or pursuant to the exercise of stock options
outstanding as of the date hereof and pursuant to the terms thereof in existence
on the date hereof, or as disclosed in Section 7.2(d) of the HEART OF GEORGIA
Disclosure Memorandum, issue, sell, pledge, encumber, authorize the issuance of,
enter into any Contract to issue, sell, pledge, encumber, or authorize the
issuance of, or otherwise permit to become outstanding, any additional shares of
HEART OF GEORGIA Common Stock or any other capital stock of any HEART OF GEORGIA
Entity, or any stock appreciation rights, or any option, warrant, or other
Equity Right; or
(e) adjust, split, combine or reclassify any capital stock of any HEART OF
GEORGIA Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of HEART OF GEORGIA Common Stock, or
sell, lease, mortgage or otherwise dispose of or otherwise encumber any Asset
having a book value in excess of $100,000 other than in the ordinary course of
business for reasonable and adequate consideration or any shares of capital
stock of any HEART OF GEORGIA Subsidiary (unless any such shares of stock are
sold or otherwise transferred to another HEART OF GEORGIA Entity); or
(f) except for loans made in the ordinary course of its business, make any
material investment, either by purchase of stock or securities, contributions to
capital, Asset transfers, or purchase of any Assets, in any Person other than a
wholly owned HEART OF GEORGIA Subsidiary, or otherwise acquire direct or
indirect control over any Person, other than in connection with (i) foreclosures
in the ordinary course of business, (ii) acquisitions of control by a depository
institution Subsidiary in its fiduciary capacity, or (iii) the creation of new
wholly owned Subsidiaries organized to conduct or continue activities otherwise
permitted by this Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any HEART OF GEORGIA Entity, except in accordance with past practice
specifically disclosed in Section 7.2(g) of the HEART OF GEORGIA Disclosure
Memorandum or as required by Law; pay any severance or termination pay or any
bonus other than pursuant to written policies or written Contracts in effect on
the date of this Agreement and disclosed in Section 7.2(g) of the HEART OF
GEORGIA Disclosure Memorandum; and enter into or amend any severance agreements
with officers of any HEART OF GEORGIA Entity; grant any material increase in
fees or other increases in compensation or other benefits to directors of any
HEART OF GEORGIA Entity except in accordance with past practice disclosed in
Section 7.2(g) of the HEART OF GEORGIA Disclosure Memorandum; or voluntarily
accelerate the vesting of any stock options or other stock-based compensation or
employee benefits or other Equity Rights; or
(h) enter into or amend any employment Contract between any HEART OF
GEORGIA Entity and any Person having a salary thereunder in excess of $50,000
per year (unless such amendment is required by Law) that the HEART OF GEORGIA
Entity does not have the unconditional right to terminate without Liability
(other than Liability for services already rendered), at any time on or after
the Effective Time; or
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(i) adopt any new employee benefit plan of any HEART OF GEORGIA Entity or
terminate or withdraw from, or make any material change in or to, any existing
employee benefit plans of any HEART OF GEORGIA Entity other than any such change
that is required by Law or that, in the opinion of counsel, is necessary or
advisable to maintain the tax qualified status of any such plan, or make any
distributions from such employee benefit plans, except as required by Law, the
terms of such plans or consistent with past practice; or
(j) make any significant change in any Tax or accounting methods or systems
of internal accounting controls, except as may be appropriate to conform to
changes in Tax Laws or regulatory accounting requirements or GAAP; or
(k) commence any Litigation other than in accordance with past practice or
except as set forth in Section 7.2(k) of the HEART OF GEORGIA Disclosure
Memorandum, settle any Litigation involving any Liability of any HEART OF
GEORGIA Entity for material money damages or restrictions upon the operations of
any HEART OF GEORGIA Entity; or
(l) except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any material
rights or claims.
7.3 Affirmative Covenants of FLAG. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, unless
the prior written consent of HEART OF GEORGIA shall have been obtained, and
except as otherwise expressly contemplated herein, FLAG shall and shall cause
each of its Subsidiaries to (a) operate its business only in the usual, regular,
and ordinary course, (b) preserve intact its business organization and Assets
and maintain its rights and franchises, and (c) take no action which would (i)
materially adversely affect the ability of any Party to obtain any Consents
required for the transactions contemplated hereby without imposition of a
condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of any
Party to perform its covenants and agreements under this Agreement.
7.4 Negative Covenants of FLAG. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of HEART OF GEORGIA shall have been obtained, and except
as otherwise expressly contemplated herein, FLAG covenants and agrees that it
will not amend the Articles of Incorporation or Bylaws of FLAG in any manner
adverse to the holders of HEART OF GEORGIA Common Stock, or take any action
which will materially adversely impact the ability of FLAG Entities to
consummate the transactions contemplated by this Agreement.
7.5 Adverse Changes in Condition. Each of FLAG and HEART OF GEORGIA agrees
to give written notice promptly to the other upon becoming aware of the
occurrence or impending occurrence of any event or circumstance relating to it
or any of its Subsidiaries which (i) is reasonably likely to have, individually
or in the aggregate, a HEART OF GEORGIA Material Adverse Effect or a FLAG
Material Adverse Effect, as applicable, or (ii) would cause or constitute a
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material breach of any of its representations, warranties, or covenants
contained herein, and to use its reasonable efforts to prevent or promptly to
remedy the same.
7.6 Reports. Each of FLAG and HEART OF GEORGIA and their Subsidiaries shall
file all reports required to be filed by it with Regulatory Authorities between
the date of this Agreement and the Effective Time and shall deliver to the other
copies of all such reports promptly after the same are filed. If financial
statements are contained in any such reports filed with the SEC, such financial
statements will fairly present the consolidated financial position of the entity
filing such statements as of the dates indicated and the consolidated results of
operations, changes in shareholders' equity, and cash flows for the periods then
ended in accordance with GAAP (subject in the case of interim financial
statements to normal recurring year-end adjustments that are not material). As
of their respective dates, such reports filed with the SEC will comply in all
material respects with the Securities Laws and will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.
ARTICLE 8.
ADDITIONAL AGREEMENTS
---------------------
8.1 Registration Statement. As soon as practicable after execution of this
Agreement, FLAG shall prepare and file the Registration Statement with the SEC,
and shall use its reasonable efforts to cause the Registration Statement to
become effective under the 1933 Act and take any action required to be taken
under the applicable state Blue Sky or Securities Laws in connection with the
issuance of the shares of FLAG Common Stock upon consummation of the Merger.
HEART OF GEORGIA shall cooperate in the preparation and filing of the
Registration Statement and shall furnish all information concerning it and the
holders of its capital stock as FLAG may reasonably request in connection with
such action. FLAG and HEART OF GEORGIA shall make all necessary filings with
respect to the Merger under the Securities Laws.
8.2 Nasdaq Listing. FLAG shall use its reasonable efforts to list, prior to
the Effective Time, on the Nasdaq National Market the shares of FLAG Common
Stock to be issued to the holders of HEART OF GEORGIA Common Stock pursuant to
the Merger, and FLAG shall give all notices and make all filings with the NASD
required in connection with the transactions contemplated herein.
8.3 Shareholder Approval. HEART OF GEORGIA shall call a Shareholders'
Meeting, to be held as soon as reasonably practicable after the Registration
Statement is declared effective by the SEC, for the purpose of voting upon
approval of this Agreement and such other related matters as it deems
appropriate. In connection with the Shareholders' Meeting, the Board of
Directors of HEART OF GEORGIA shall recommend to its shareholders, subject to
the conditions in such authorization and recommendation by the Board of
Directors, the approval of the matters submitted for approval (subject to the
Board of Directors of HEART OF GEORGIA, after having consulted with and
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considered the advice of outside counsel, reasonably determining in good faith
that the making of such recommendation, or the failure to withdraw or modify its
recommendation, would constitute a breach of fiduciary duties of the members of
such Board of Directors to HEART OF GEORGIA's shareholders, under applicable
law), and the Board of Directors and officers of HEART OF GEORGIA shall use
their reasonable efforts to obtain such shareholders' approval (subject to the
Board of Directors of HEART OF GEORGIA, after having consulted with and
considered the advice of outside counsel, reasonably determining in good faith
that the taking of such actions would constitute a breach of fiduciary duties of
the members of such Board of Directors to the HEART OF GEORGIA shareholders,
under applicable law).
8.4 Applications. FLAG shall promptly prepare and file, and HEART OF
GEORGIA shall cooperate in the preparation and, where appropriate, filing of,
applications with all Regulatory Authorities having jurisdiction over the
transactions contemplated by this Agreement, including without limitation, the
Board of Governors of the Federal Reserve System and the Georgia Department of
Banking and Finance, seeking the requisite Consents necessary to consummate the
transactions contemplated by this Agreement. The Parties shall deliver to each
other copies of all filings, correspondence and orders to and from all
Regulatory Authorities in connection with the transactions contemplated hereby.
8.5 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, FLAG shall cause to be filed the Certificate of
Merger with the Secretary of State of the State of Georgia.
8.6 Agreements as to Effects to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable efforts to lift
or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9; provided, that nothing herein shall preclude either
Party from exercising its rights under this Agreement. Each Party shall use, and
shall cause each of its Subsidiaries to use, its reasonable efforts to obtain
all Consents necessary or desirable for the consummation of the transactions
contemplated by this Agreement.
8.7 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all material developments relevant to its business and to
consummation of the Merger and shall permit the other Party to make or cause to
be made such investigation of the business and properties of it and its
Subsidiaries and of their respective financial and legal conditions as the Party
reasonably requests, provided that such investigation shall be reasonably
related to the transactions contemplated hereby, and shall not interfere
unnecessarily with normal operations. No investigation by a Party shall affect
the representations and warranties of any other Party.
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(b) Each Party shall, and shall cause its advisers and agents to, maintain
the confidentiality of all confidential information furnished to it by the other
Party concerning its and its Subsidiaries' businesses, operations, and financial
positions and shall not use such information for any purpose except in
furtherance of the transactions contemplated by this Agreement. If this
Agreement is terminated prior to the Effective Time, each Party shall promptly
return or certify the destruction of all documents and copies thereof, and all
work papers containing confidential information received from the other Party.
(c) Each Party shall use its reasonable efforts to exercise its rights
under confidentiality agreements entered into with Persons which were
considering an Acquisition Proposal with respect to such Party to preserve the
confidentiality of the information relating to such Party and its Subsidiaries
provided to such Persons and their Affiliates and Representatives.
(d) Each Party agrees to give the other Party notice as soon as practicable
after any determination by it of any fact or occurrence relating to the other
Party which it has discovered through the course of its investigation and which
represents, or is reasonably likely to represent, either a material breach of
any representation, warranty, covenant or agreement of the other Party or which
has had or is reasonably likely to have a HEART OF GEORGIA Material Adverse
Effect or a FLAG Material Adverse Effect, as applicable.
8.8 Press Releases. Prior to the Effective Time, HEART OF GEORGIA and FLAG
shall consult with each other as to the form and substance of any press release
or other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.8
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's disclosure
obligations imposed by Law.
8.9 Certain Actions. Except with respect to this Agreement and the
transactions contemplated hereby, no HEART OF GEORGIA Entity nor any
Representatives thereof retained by any HEART OF GEORGIA Entity shall directly
or indirectly solicit any Acquisition Proposal by any Person. Except to the
extent the Board of Directors of HEART OF GEORGIA, after having consulted with
and considered the advice of outside counsel, reasonably determines in good
faith that the failure to take such actions would constitute a breach of
fiduciary duties of the members of such Board of Directors to HEART OF GEORGIA's
shareholders, under applicable Law, no HEART OF GEORGIA Entity or Representative
thereof shall furnish any non-public information that it is not legally
obligated to furnish, negotiate with respect to, or enter into any Contract with
respect to, any Acquisition Proposal, but HEART OF GEORGIA may communicate
information about such an Acquisition Proposal to its shareholders if and to the
extent that it is required to do so in order to comply with its legal
obligations. HEART OF GEORGIA shall promptly advise FLAG following the receipt
of any Acquisition Proposal and the details thereof, and advise FLAG of any
developments with respect to such Acquisition Proposal promptly upon the
occurrence thereof. HEART OF GEORGIA shall (i) immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any Persons
conducted heretofore with respect to any of the foregoing, and (ii) direct and
use its reasonable efforts to cause its Representatives not to engage in any of
the foregoing.
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8.10 Accounting and Tax Treatment. Each of the Parties undertakes and
agrees to use its reasonable efforts to cause the Merger to, and to take no
action which would cause the Merger not to, qualify for pooling of interests
accounting treatment and as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code for federal income tax purposes.
8.11 Charter Provisions. Each Party shall take, and shall cause its
Subsidiaries to take, all necessary action to ensure that the entering into of
this Agreement and the consummation of the Merger and the other transactions
contemplated hereby do not and will not result in the grant of any rights to any
Person under the charter, articles of incorporation, bylaws or other governing
instruments of such Party or any of its Subsidiaries or restrict or impair the
ability of FLAG or any of its Subsidiaries to vote, or otherwise to exercise the
rights of a shareholder with respect to, shares of any HEART OF GEORGIA Entity
that may be directly or indirectly acquired by them.
8.12 Agreements of Affiliates. HEART OF GEORGIA has disclosed in Section
8.12 of the HEART OF GEORGIA Disclosure Memorandum each Person whom it
reasonably believes is an "affiliate" of HEART OF GEORGIA for purposes of Rule
145 under the 1933 Act. HEART OF GEORGIA shall use its reasonable efforts to
cause each such Person to deliver to FLAG not later than 30 days after the date
of this Agreement a written agreement, substantially in the form of Exhibit 1,
providing that such Person will not sell, pledge, transfer, or otherwise dispose
of the shares of the HEART OF GEORGIA Common Stock held by such Person except as
contemplated by such agreement or by this Agreement and will not sell, pledge,
transfer, or otherwise dispose of the shares of FLAG Common Stock to be received
by such Person upon consummation of the Merger except in compliance with
applicable provisions of the 1933 Act and the rules and regulations thereunder
and until such time as financial results covering at least 30 days of combined
operations of FLAG and HEART OF GEORGIA have been published within the meaning
of Section 201.01 of the SEC's Codification of Financial Reporting Policies,
except that transfers may be made in compliance with Staff Accounting Bulletin
No. 76 issued by the SEC. Except for transfers made in compliance with Staff
Accounting Bulletin No. 76, shares of FLAG Common Stock issued to such
affiliates of HEART OF GEORGIA shall not be transferable until such time as
financial results covering at least 30 days of combined operations of FLAG and
HEART OF GEORGIA have been published within the meaning of Section 201.01 of the
SEC's Codification of Financial Reporting Policies, regardless of whether each
such affiliate has provided the written agreement referred to in this Section
8.12. FLAG shall be entitled to place restrictive legends upon certificates for
shares of FLAG Common Stock issued to affiliates of HEART OF GEORGIA pursuant to
this Agreement to enforce the provisions of this Section 8.12. FLAG shall not be
required to maintain the effectiveness of the Registration Statement under the
1933 Act for the purposes of resale of FLAG Common Stock by such affiliates.
8.13 Employee Benefits and Contracts. Following the Effective Time, FLAG
shall either (i) continue to provide to officers and employees of the HEART OF
GEORGIA Entities employee benefits under HEART OF GEORGIA's existing employee
benefit and welfare plans or, (ii) if FLAG shall determine to provide to
officers and employees of the HEART OF GEORGIA Entities employee benefits under
other employee benefit plans and welfare plans, provide generally to officers
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and employees of the HEART OF GEORGIA Entities employee benefits under employee
benefit and welfare plans, on terms and conditions which when taken as a whole
are substantially similar to those currently provided by the FLAG Entities to
their similarly situated officers and employees. For purposes of participation
and vesting (but not accrual of benefits) under FLAG's employee benefit plans,
(i) service under any qualified defined benefit plan of HEART OF GEORGIA shall
be treated as service under FLAG's defined benefit plan, if any, (ii) service
under any qualified defined contribution plans of HEART OF GEORGIA shall be
treated as service under FLAG's qualified defined contribution plans, and (iii)
service under any other employee benefit plans of HEART OF GEORGIA shall be
treated as service under any similar employee benefit plans maintained by FLAG.
With respect to officers and employees of the HEART OF GEORGIA Entities who, at
or after the Effective Time, become employees of a FLAG Entity and who,
immediately prior to the Effective Time, are participants in one or more
employee welfare benefit plans maintained by the HEART OF GEORGIA Entities, FLAG
shall cause each comparable employee welfare benefit plan which is substituted
for a HEART OF GEORGIA welfare benefit plan to waive any evidence of
insurability or similar provision, to provide credit for such participation
prior to such substitution with regard to the application of any pre-existing
condition limitation, and to provide credit towards satisfaction of any
deductible or out-of-pocket provisions for expenses incurred by such
participants during the period prior to such substitution, if any, that overlaps
with the then current plan year for each such substituted employee welfare
benefit plans. FLAG also shall cause the Surviving Bank and its Subsidiaries to
honor in accordance with their terms all employment, severance, consulting and
other compensation Contracts disclosed in Section 8.13 of the HEART OF GEORGIA
Disclosure Memorandum to FLAG between any HEART OF GEORGIA Entity and any
current or former director, officer, or employee thereof, and all provisions for
vested benefits or other vested amounts earned or accrued through the Effective
Time under the HEART OF GEORGIA Benefit Plans.
8.14 Indemnification.
(a) Subject to the conditions set forth in paragraph (b) below, for a
period of six years after the Effective Time, FLAG shall indemnify, defend and
hold harmless each person entitled to indemnification from a HEART OF GEORGIA
Entity (each, an "Indemnified Party") against all Liabilities arising out of
actions or omissions occurring at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under Georgia Law and by HEART OF GEORGIA's Articles of Incorporation and Bylaws
as in effect on the date hereof, including provisions relating to advances of
expenses incurred in the defense of any Litigation. Without limiting the
foregoing, in any case in which approval by FLAG is required to effectuate any
indemnification, FLAG shall direct, at the election of the Indemnified Party,
that the determination of any such approval shall be made by independent counsel
mutually agreed upon between FLAG and the Indemnified Party.
(b) Any Indemnified Party wishing to claim indemnification under paragraph
(a) of this Section 8.14, upon learning of any such Liability or Litigation,
shall promptly notify FLAG thereof. In the event of any such Liability or
Litigation (whether arising before or after the Effective Time), (i) FLAG shall
have the right to assume the defense thereof (provided FLAG acknowledges
responsibility for such indemnification) and FLAG shall not be liable to such
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Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if FLAG elects not to assume such defense or
counsel for the Indemnified Parties advises that there are substantive issues
which raise conflicts of interest between FLAG and the Indemnified Parties, the
Indemnified Parties may retain counsel satisfactory to them, and FLAG shall pay
all reasonable fees and expenses of such counsel for the Indemnified Parties
promptly as statements therefor are received; provided, that FLAG shall be
obligated pursuant to this paragraph (b) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties will
cooperate in the defense of any such Litigation, and (iii) FLAG shall not be
liable for any settlement effected without its prior written consent; and
provided further that FLAG shall not have any obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall determine,
and such determination shall have become final, that the indemnification of such
Indemnified Party in the manner contemplated hereby is prohibited by applicable
Law.
ARTICLE 9.
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
-------------------------------------------------
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a) Shareholder Approval. The shareholders of HEART OF GEORGIA shall have
approved this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law or by the
provisions of any governing instruments. The shareholders of FLAG shall have
approved the issuance of shares of FLAG Common Stock pursuant to the Merger, as
and to the extent required by Law, by the provisions of any governing
instruments, or by the rules of the NASD.
(b) Regulatory Approvals. All Consents of, filings and registrations with,
and notifications to, all Regulatory Authorities required for consummation of
the Merger shall have been obtained or made and shall be in full force and
effect and all waiting periods required by Law shall have expired. No Consent
obtained from any Regulatory Authority which is necessary to consummate the
transactions contemplated hereby shall be conditioned or restricted in a manner
(including requirements relating to the raising of additional capital or the
disposition of Assets) which in the reasonable judgment of the Board of
Directors of any Party would so materially adversely impact the economic or
business benefits of the transactions contemplated by this Agreement that, had
such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(c) Consents and Approvals. Each Party shall have obtained any and all
Consents required for consummation of the Merger (other than those referred to
in Section 9.1 (b)) or for the preventing of any Default under any Contract or
Permit of such Party which, if not obtained or made, is reasonably likely to
have, individually or in the aggregate, a HEART OF GEORGIA Material Adverse
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Effect or a FLAG Material Adverse Effect, as applicable. No Consent so obtained
which is necessary to consummate the transactions contemplated hereby shall be
conditioned or restricted in a manner which in the reasonable judgment of the
Board of Directors of any Party would so materially adversely impact the
economic or business benefits of the transactions contemplated by this Agreement
that, had such condition or requirement been known, such Party would not, in its
reasonable judgment, have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory authority of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any Law or Order (whether temporary, preliminary or permanent) or taken
any other action which prohibits, restricts or makes illegal consummation of the
transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, and no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under state securities
laws or the 1933 Act or 1934 Act relating to the issuance or trading of the
shares of FLAG Common Stock issuable pursuant to the Merger shall have been
received.
(f) Nasdaq Listing. The shares of FLAG Common Stock issuable pursuant to
the Merger shall have been approved for listing on the Nasdaq National Market.
(g) Tax Matters. Each Party shall have received a written opinion of
counsel from Powell, Goldstein, Frazer & Murphy LLP, in form reasonably
satisfactory to such Parties (the "Tax Opinion"), to the effect that (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code, (ii) the exchange in the Merger of HEART OF GEORGIA
Common Stock for FLAG Common Stock will not give rise to gain or loss to the
shareholders of HEART OF GEORGIA with respect to such exchange (except to the
extent of any cash received), and (iii) neither HEART OF GEORGIA nor FLAG will
recognize gain or loss as a consequence of the Merger (except for amounts
resulting from any required change in accounting methods and any income and
deferred gain recognized pursuant to Treasury regulations issued under Section
1502 of the Internal Revenue Code). In rendering such Tax Opinion, such counsel
shall be entitled to rely upon representations of officers of HEART OF GEORGIA
and FLAG reasonably satisfactory in form and substance to such counsel.
(h) Donald M. Thigpen shall have negotiated a mutually satisfactory
employment relationship with FLAG, and any previously existing agreements
between Mr. Thigpen and HEART OF GEORGIA concerning employment, severance,
consulting and any other compensation, including post termination payments
subsequent to a change in ownership, shall have been terminated.
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9.2 Conditions to Obligations of FLAG. The obligations of FLAG to perform
this Agreement and consummate the Merger and the other transactions contemplated
hereby are subject to the satisfaction of the following conditions, unless
waived by FLAG pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of HEART OF GEORGIA set forth
in this Agreement shall be assessed as of the date of this Agreement and as of
the Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 5.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties set forth in Sections
5.20 and 5.21 shall be true and correct in all material respects. There shall
not exist inaccuracies in the representations and warranties of HEART OF GEORGIA
set forth in this Agreement (including the representations and warranties set
forth in Sections 5.3, 5.20 and 5.21) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a HEART OF GEORGIA Material
Adverse Effect; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to "material"
or "Material Adverse Effect" or to the "Knowledge" of any Person shall be deemed
not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of HEART OF GEORGIA to be performed and complied with pursuant to
this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all material
respects.
(c) Certificates. HEART OF GEORGIA shall have delivered to FLAG (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its secretary, to the effect that to the best of
their Knowledge the conditions set forth in Section 9.1 as relates to HEART OF
GEORGIA and in Section 9.2(a) and 9.2(b) have been satisfied; provided, however,
that the representations, warranties and covenants to which such certificate
relates shall not been deemed to have survived the Closing, and (ii) certified
copies of resolutions duly adopted by HEART OF GEORGIA's Board of Directors and
shareholders evidencing the taking of all corporate action necessary to
authorize the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, all in such reasonable
detail as FLAG and its counsel shall request.
(d) Opinion of Counsel. FLAG shall have received an opinion of Nelson
Mullins Riley & Scarborough, L.L.P., counsel to HEART OF GEORGIA, dated as of
the Closing Date, in form reasonably satisfactory to FLAG, as to the matters set
forth in Exhibit 2.
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(e) Pooling Letters. FLAG shall have received an opinion of Porter Keadle
Moore, LLP, dated as of the date of filing of the Registration Statement with
the SEC and as of the Closing Date, addressed to FLAG and in form and substance
reasonably acceptable to FLAG, to the effect that the Merger, for accounting
purposes, shall qualify for treatment as a pooling of interests.
(f) Affiliates Agreements. FLAG shall have received from each affiliate of
HEART OF GEORGIA the affiliates letter referred to in Section 8.12 and Exhibit
1.
(g) Claims Letters. Each of the directors and officers of HEART OF GEORGIA
shall have executed and delivered to FLAG letters in substantially the form of
Exhibit 3.
9.3 Conditions to Obligations of HEART OF GEORGIA. The obligations of HEART
OF GEORGIA to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by HEART OF GEORGIA pursuant to Section
11.6(b):
(a) Representations and Warranties. For purposes of this Section 9.3(a),
the accuracy of the representations and warranties of FLAG set forth in this
Agreement shall be assessed as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth in
Section 6.3 shall be true and correct (except for inaccuracies which are de
minimus in amount). The representations and warranties of FLAG set forth in
Section 6.16 and 6.17 shall be true and correct in all material respects. There
shall not exist inaccuracies in the representations and warranties of FLAG set
forth in this Agreement (including the representations and warranties set forth
in Sections 6.3, 6.16 and 6.17) such that the aggregate effect of such
inaccuracies has, or is reasonably likely to have, a FLAG Material Adverse
Effect; provided that, for purposes of this sentence only, those representations
and warranties which are qualified by references to "material" or "Material
Adverse Effect" or to the "Knowledge" of any Person shall be deemed not to
include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the agreements
and covenants of FLAG to be performed and complied with pursuant to this
Agreement and the other agreements contemplated hereby prior to the Effective
Time shall have been duly performed and complied with in all material respects.
(c) Certificates. FLAG shall have delivered to HEART OF GEORGIA (i) a
certificate, dated as of the Closing Date and signed on its behalf by its chief
executive officer and its chief financial officer, to the effect that to the
best of their knowledge the conditions set forth in Section 9.1 as relates to
FLAG and in Section 9.3(a) and 9.3(b) have been satisfied, provided, however,
that the representations, warranties and covenants to which such certificate
relates shall not been deemed to have survived the Closing, and (ii) certified
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copies of resolutions duty adopted by FLAG's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation of
the transactions contemplated hereby, all in such reasonable detail as HEART OF
GEORGIA and its counsel shall request.
(d) Opinion of Counsel. HEART OF GEORGIA shall have received an opinion of
Powell, Goldstein, Frazer & Murphy LLP, counsel to FLAG, dated as of the Closing
Date, in form reasonably acceptable to HEART OF GEORGIA, as to the matters set
forth in Exhibit 4.
ARTICLE 10.
TERMINATION
-----------
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the shareholders of HEART
OF GEORGIA, this Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time:
(a) By mutual consent of FLAG and HEART OF GEORGIA; or
(b) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by the other
Party of any representation or warranty contained in this Agreement which cannot
be or has not been cured within 30 days after the giving of written notice to
the breaching Party of such breach and which breach is reasonably likely, in the
opinion of the non-breaching Party, to have, individually or in the aggregate, a
HEART OF GEORGIA Material Adverse Effect or a FLAG Material Adverse Effect, as
applicable, on the breaching Party; or
(c) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event of a material breach by the other
Party of any covenant or agreement contained in this Agreement which cannot be
or has not been cured within 30 days after the giving of written notice to the
breaching Party of such breach; or
(d) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other agreement
contained in this Agreement) in the event (i) any Consent of any Regulatory
Authority required for consummation of the Merger and the other transactions
contemplated hereby shall have been denied by final non-appealable action of
such authority or if any action taken by such authority is not appealed within
the time limit for appeal, or (ii) the shareholders of HEART OF GEORGIA fail to
vote their approval of the matters relating to this Agreement and the
transactions contemplated hereby at the Shareholders' Meeting where such matters
were presented to such shareholders for approval and voted upon; or
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(e) By either Party in the event that the Merger shall not have been
consummated by December 31, 1998, if the failure to consummate the transactions
contemplated hereby on or before such date is not caused by any breach of this
Agreement by the Party electing to terminate pursuant to this Section 10.1(e).
10.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 10.1, this Agreement shall become void and
have no effect, except that (i) the provisions of this Section 10.2 and Article
11 and Section 8.7(b) shall survive any such termination and abandonment, and
(ii) a termination pursuant to Sections 10.1(b), 10.1(c) or 10.1(e) shall not
relieve the breaching Party from Liability for an uncured willful breach of a
representation, warranty, covenant, or agreement giving rise to such
termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.3 and
Articles 1, 2, 3, 4 and 11 and Section 8.10.
ARTICLE 11.
MISCELLANEOUS
-------------
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Acquisition Proposal" with respect to a Party shall mean any tender offer
or exchange offer or any proposal for a merger, acquisition of all of the stock
or assets of, or other business combination involving the acquisition of such
Party or any of its Subsidiaries or the acquisition of a substantial equity
interest in, or a substantial portion of the assets of, such Party or any of its
Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such Person; or (iii) any other Person for which a Person
described in clause (ii) acts in any such capacity.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits, the FLAG Disclosure Memorandum and the HEART OF GEORGIA Disclosure
Memorandum delivered pursuant hereto and incorporated herein by reference.
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"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and records
of such Person, or any Affiliate of such Person and wherever located.
"Certificate of Merger" shall mean the Certificate of Merger to be executed
by FLAG and HEART OF GEORGIA and filed with the Secretary of State of the State
of Georgia relating to the Merger as contemplated by Section 1.1.
"Closing Date" shall mean the date on which the Closing occurs.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation by any Person pursuant to any
Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement (provided such oral
agreement is, in any one year period, in excess of $5,000 individually, or
$25,000 in the aggregate), arrangement, authorization, commitment, contract,
indenture, instrument, lease, obligation, plan, practice, restriction,
understanding, or undertaking of any kind or character, or other document to
which any Person is a party or that is binding on any Person or its capital
stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, after
failing to cure any such breach, violation, default, contravention or conflict
within any applicable grace or cure period (ii) any occurrence of any event that
with the passage of time or the giving of notice or both would constitute a
breach or violation of, default under, contravention of, or conflict with, any
Contract, Law, Order, or Permit, or (iii) any occurrence of any event that with
or without the passage of time or the giving of notice would give rise to a
right of any Person to exercise any remedy or obtain any relief under, terminate
or revoke, suspend, cancel, or modify or change the current terms of, or
renegotiate, or to accelerate the maturity or performance of, or to increase or
impose any Liability under, any Contract, Law, Order, or Permit.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency and other federal, state and local agencies with jurisdiction
over, and including common law in respect of, pollution or protection of the
environment, including the Comprehensive Environmental Response Compensation and
Liability Act, as amended, 42 U.S.C. 9601 et seq. ("CERCLA"), the Resource
Conservation and Recovery Act, as amended, 42 U.S.C. 6901 et seq. ("RCRA"), and
other Laws relating to emissions, migrations, discharges, releases, or
threatened releases of any Hazardous Material, or otherwise relating to the
manufacture, processing, distribution use, treatment, storage, disposal,
generation, recycling, transport, or handling of any Hazardous Material.
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"Equity Rights" shall mean all arrangements, calls, commitments, Contracts,
options, rights to subscribe to, scrip, understandings, warrants, or other
binding obligations of any character whatsoever relating to, or securities or
rights convertible into or exchangeable for, shares of the capital stock of a
Person or by which a Person is or may be bound to issue additional shares of its
capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exhibits 1 through 4," inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"FLAG Capital Stock" shall mean, collectively, the FLAG Common Stock, the
FLAG Preferred Stock and any other class or series of capital stock of FLAG.
"FLAG Common Stock" shall mean the $1.00 par value common stock of FLAG.
"FLAG Disclosure Memorandum" shall mean the written information entitled
"FLAG Financial Corporation Disclosure Memorandum" delivered prior to execution
of this Agreement to HEART OF GEORGIA describing in reasonable detail the
matters contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto, unless it is clear from the
disclosure of such information that it applies to other Sections.
"FLAG Entities" shall mean, collectively, FLAG and all FLAG Subsidiaries.
"FLAG Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of FLAG as of June 30, 1998 and
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareholders' equity, and cash flows (including related notes and schedules,
if any) for the six months ended June 30, 1998, and for each of the three fiscal
years ended December 31, 1997, 1996 and 1995, as filed by FLAG in SEC Documents,
and (ii) the consolidated balance sheets of FLAG (including related notes and
schedules, if any) and related statements of income, changes in shareholders'
equity, and cash flows (including related notes and schedules, if any) included
in SEC Documents filed with respect to periods ended subsequent to June 30,
1998.
"FLAG Material Adverse Effect" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results of
operations of FLAG and its Subsidiaries, taken as a whole, or (ii) the ability
of FLAG Entities to perform their obligations under this Agreement or to
consummate the Merger or the other transactions contemplated by this Agreement,
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provided that "Material Adverse Effect" shall not be deemed to include the
impact of (a) changes in banking and similar Laws of general applicability or
interpretations thereof by courts or governmental authorities, (b) changes in
generally accepted accounting principles or regulatory accounting principles
generally applicable to savings associations, banks, and their holding
companies, and (c) actions and omissions of FLAG (or any of its Subsidiaries)
taken with the prior informed written Consent of HEART OF GEORGIA in
contemplation of the transactions contemplated hereby.
"FLAG Preferred Stock" shall mean the shares of preferred stock of FLAG.
"FLAG Subsidiaries" shall mean the Subsidiaries of FLAG, which shall
include the FLAG Subsidiaries described in Section 6.4 and any corporation,
bank, savings association, or other organization acquired as a Subsidiary of
FLAG in the future and held as a Subsidiary by FLAG at the Effective Time.
"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"GBCC" shall mean the Georgia Business Corporation Code.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
constituent, hazardous waste, solid waste, special waste, regulated substance,
or toxic substance (as those terms are listed, defined or regulated by any
applicable Environmental Laws) and (ii) any chemicals, pollutants, contaminants,
petroleum, petroleum products, or oil (and specifically shall include asbestos
requiring abatement. removal, or encapsulation pursuant to the requirements of
governmental authorities and any polychlorinated biphenyls).
"HEART OF GEORGIA Common Stock" shall mean the $1.00 par value common stock
of HEART OF GEORGIA.
"HEART OF GEORGIA Disclosure Memorandum" shall mean the written information
entitled "HEART OF GEORGIA Disclosure Memorandum" delivered prior to execution
of this Agreement to FLAG describing in reasonable detail the matters contained
therein and, with respect to each disclosure made therein, specifically
referencing each Section of this Agreement under which such disclosure is being
made. Information disclosed with respect to one Section shall not be deemed to
be disclosed for purposes of any other Section not specifically referenced with
respect thereto, unless it is clear from the disclosure of such information that
it applies to other Sections.
"HEART OF GEORGIA Entities" shall mean, collectively, HEART OF GEORGIA and
all HEART OF GEORGIA Subsidiaries.
"HEART OF GEORGIA Financial Statements" shall mean (i) the consolidated
balance sheets (including related notes and schedules, if any) of HEART OF
GEORGIA as of June 30, 1998, and as of December 31, 1997 and the related
statements of income, changes in shareholders' equity, and cash flows (including
related notes and schedules, if any) for the six months ended June 30, 1998, and
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for the Fiscal year ended December 31, 1997, and (ii) the consolidated balance
sheets of HEART OF GEORGIA (including related notes and schedules, if any) and
related statements of income, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) with respect to periods ended
subsequent to June 30, 1998.
"HEART OF GEORGIA Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business, or results of operations of HEART OF GEORGIA and its Subsidiaries,
taken as a whole, or (ii) the ability of HEART OF GEORGIA to perform its
obligations under this Agreement or to consummate the Merger or the other
transactions contemplated by this Agreement, provided that an "HEART OF GEORGIA
Material Adverse Effect" shall not be deemed to include the impact of (a)
changes in banking and similar Laws of general applicability or interpretations
thereof by courts or governmental authorities, (b) changes in generally accepted
accounting principles or regulatory accounting principles generally applicable
to banks and their holding companies, and (c) actions and omissions of HEART OF
GEORGIA (or any of its Subsidiaries) taken with the prior informed written
Consent of FLAG in contemplation of the transactions contemplated hereby.
"HEART OF GEORGIA Subsidiaries" shall mean the Subsidiaries of HEART OF
GEORGIA, which shall include the HEART OF GEORGIA Subsidiaries described in
Section 5.4 and any corporation, bank, savings association, or other
organization acquired as a Subsidiary of HEART OF GEORGIA in the future and held
as a Subsidiary by HEART OF GEORGIA at the Effective Time.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, and licenses, computer
software (including any source or object codes therefor or documentation
relating thereto), trade secrets, franchises, inventions, and other intellectual
property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"Knowledge" as used with respect to a FLAG Entity (including references to
being aware of a particular matter) shall mean those facts that are known or
should reasonably have been known after due inquiry by the chairman, president,
chief financial officer, chief accounting officer, chief operating officer,
chief credit officer, general counsel, any assistant or deputy general counsel,
or any senior, executive or other vice president of such FLAG Entity.
"Knowledge" as used with respect to a HEART OF GEORGIA Entity (including
references to being aware of a particular matter) shall mean those facts that
are actually known (with no obligation of inquiry) by the president and chief
executive officer of such HEART OF GEORGIA Entity.
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"Law" shall mean any code, law (including common law), ordinance,
regulation, decision, judicial interpretation, reporting or licensing
requirement, rule, or statute applicable to a Person or its Assets, Liabilities,
or business, including those promulgated, interpreted or enforced by any
Regulatory Authority.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course of
business) of any type, whether accrued, absolute or contingent, liquidated or
unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) Liens for current property Taxes not yet due
and payable, (ii) for depository institution Subsidiaries of a Party, pledges to
secure deposits and other Liens incurred in the ordinary course of the banking
business, and (iii) Liens which do not materially impair the use of or title to
the Assets subject to such Lien.
"Litigation" shall mean any action, arbitration, cause of action. claim,
complaint investigation hearing, criminal prosecution, governmental or other
examination or other administrative or other proceeding relating to or affecting
a Party, its business. its Assets (including Contracts related to it), or the
transactions contemplated by this Agreement. but shall not include regular.
periodic examinations of depository institutions and their Affiliates by
Regulatory Authorities.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Nasdaq National Market" shall mean the National Market System of the
National Association of Securities Dealers Automated Quotations System.
"Operating Property" shall mean any property owned, leased, or operated by
the Party in question or by any of its Subsidiaries and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
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"Participation Facility" shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management and,
where required by the context, said term means the owner or operator of such
facility or property, but only with respect to such facility or property.
"Party" shall mean either HEART OF GEORGIA or FLAG, and "Parties" shall
mean HEART OF GEORGIA and FLAG.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets, or
business.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Registration Statement" shall mean the Registration Statement on Form S-4,
or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by FLAG under the 1933 Act
with respect to the shares of FLAG Common Stock to be issued to the shareholders
of HEART OF GEORGIA in connection with the transactions contemplated by this
Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NASD, the
Federal Trade Commission, the United States Department of Justice, the Board of
the Governors of the Federal Reserve System, the Office of Thrift Supervision
(including its predecessor, the Federal Home Loan Bank Board), the Federal
Deposit Insurance Corporation, the Georgia Department of Banking and Finance,
and all other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
50
<PAGE>
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Shareholders Meeting" shall mean the meeting of the shareholders of HEART
OF GEORGIA to be held pursuant to Section 8.3, including any adjournment or
adjournments thereof.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided, there
shall not be included any such entity the equity securities of which are owned
or controlled in a fiduciary capacity), (ii) in the case of partnerships, serves
as a general partner, (iii) in the case of a limited liability company, serves
as a managing member, or (iv) otherwise has the ability to elect a majority of
the directors, trustees or managing members thereof.
"Surviving Corporation" shall mean FLAG as the surviving corporation
resulting from the Merger.
"Tax Return" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection with
Taxes, including any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.
"Tax" or Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration, ad
valorem, value added, alternative or add-on minimum, estimated, or other tax or
governmental fee of any kind whatsoever, imposed or required to be withheld by
the United States or any state, county, local or foreign government or
subdivision or agency thereof, including any interest, penalties, and additions
imposed thereon or with respect thereto.
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(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
Allowance Section 5.9
Certificates Section 4.1
Closing Section 1.2
Effective Time Section 1.3
ERISA Affiliate Section 5.15(c)
Exchange Agent Section 4.1
Exchange Ratio Section 3.1(b)
FLAG Benefit Plans Section 6.15(a)
FLAG ERISA Plan Section 6.15(a)
FLAG Pension Plan Section 6.15(a)
FLAG SEC Reports Section 6.5(a)
HEART OF GEORGIA Benefit Plans Section 5.15(a)
HEART OF GEORGIA Contracts Section 5.16
HEART OF GEORGIA ERISA Plan Section 5.15(a)
HEART OF GEORGIA Pension Plan Section 5.15(a)
Indemnified Party Section 8.14(a)
Merger Section 1.1
Tax Opinion Section 9.1(g)
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each Party shall
bear and pay all direct costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated hereunder, including filing,
registration and application fees, printing fees, and fees and expenses of its
own financial or other consultants, investment bankers, accountants, and
counsel.
(b) If this Agreement is terminated by FLAG pursuant to Sections 10.1(b),
(c) or (d)(ii), HEART OF GEORGIA shall pay to FLAG an amount equal to the lesser
of $100,000 or FLAG's actual out of pocket expenses incurred in connection with
the transactions contemplated by this Agreement.
(c) If this Agreement is terminated by HEART OF GEORGIA pursuant to
Sections 10.1(b) or (c), FLAG shall pay to HEART OF GEORGIA an amount equal to
the lesser of $100,000 or HEART OF GEORGIA's actual out of pocket expenses
incurred in connection with the transactions contemplated by this Agreement. (d)
Nothing contained in this Section 11.2 shall constitute or shall be deemed to
constitute liquidated damages for the willful breach by a Party of the terms of
this Agreement or otherwise limit the rights of the nonbreaching Party.
52
<PAGE>
11.3 Brokers and Finders. Each of the Parties represents and warrants that
neither it nor any of its officers, directors, employees, or Affiliates has
employed any broker or finder or incurred any Liability for any financial
advisory fees, investment bankers' fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions contemplated
hereby. In the event of a claim by any broker or finder based upon his or its
representing or being retained by or allegedly representing or being retained by
HEART OF GEORGIA or by FLAG, each of HEART OF GEORGIA and FLAG, as the case may
be, agrees to indemnify and hold the other Party harmless of and from any
Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral. Nothing in this Agreement,
expressed or implied, is intended to confer upon any Person, other than the
Parties or their respective successors, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after shareholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of HEART OF GEORGIA Common Stock, there shall be made no amendment that,
pursuant to the GBCC, requires further approval by such shareholders without the
further approval of such shareholders; and further provided, that after any such
approval by the holders of FLAG Common Stock, the provisions of this Agreement
relating to the manner or basis in which shares of HEART OF GEORGIA Common Stock
will be exchanged for shares of FLAG Common Stock shall not be amended after the
Shareholders' Meeting in a manner adverse to the holders of FLAG Common Stock
without any requisite approval of the holders of the issued and outstanding
shares of FLAG Common Stock entitled to vote thereon.
11.6 Waivers.
(a) Prior to or at the Effective Time, FLAG, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
HEART OF GEORGIA, to waive or extend the time for the compliance or fulfillment
by HEART OF GEORGIA of any and all of its obligations under this Agreement, and
to waive any or all of the conditions precedent to the obligations of FLAG under
this Agreement, except any condition which, if not satisfied, would result in
the violation of any Law. No such waiver shall be effective unless in writing
signed by a duly authorized officer of FLAG.
53
<PAGE>
(b) Prior to or at the Effective Time, HEART OF GEORGIA, acting through its
Board of Directors, chief executive officer or other authorized officer, shall
have the right to waive any Default in the performance of any term of this
Agreement by FLAG, to waive or extend the time for the compliance or fulfillment
by FLAG, of any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of HEART OF GEORGIA
under this Agreement, except any condition which, if not satisfied, would result
in the violation of any Law. No such waiver shall be effective unless in writing
signed by a duly authorized officer of HEART OF GEORGIA.
(c) The failure of any Party at any time or times to require performance of
any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any condition or of the breach of any term contained in this Agreement
in one or more instances shall be deemed to be or construed as a further or
continuing waiver of such condition or breach or a waiver of any other condition
or of the breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party 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 assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or by
courier or overnight carrier, to the persons at the addresses set forth below
(or at such other address as may be provided hereunder), and shall be deemed to
have been delivered as of the date so delivered:
HEART OF GEORGIA: Heart of Georgia Bancshares, Inc.
101 Railroad Avenue
Mount Vernon, GA 30445
Telecopy Number: (912) 583-2894
Attention: Donald M. Thigpen
Copy to Counsel: Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, GA 30309
Telecopy Number: (404) 817-6225
Attention: Neil E. Grayson, Esq.
54
<PAGE>
FLAG: FLAG Financial Corporation
101 North Greenwood St.
LaGrange, GA 30240
Telecopy Number: (706) 845-5155
Attention: J. Daniel Speight, Jr.
Copy to Counsel: Powell Goldstein Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy Number: (404) 572-5958
Attention: Walter G. Moeling IV, Esq.
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Georgia, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
11.11 Captions, Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether under
any rule of construction or otherwise. No party to this Agreement shall be
considered the draftsman. The parties acknowledge and agree that this Agreement
has been reviewed, negotiated, and accepted by all parties and their attorneys
and shall be construed and interpreted according to the ordinary meaning of the
words used so as fairly to accomplish the purposes and intentions of all parties
hereto.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
It is accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
55
<PAGE>
11.14 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.
[SIGNATURES APPEAR ON NEXT PAGE]
56
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SIGNATURES TO AGREEMENT AND PLAN OF MERGER
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
FLAG FINANCIAL CORPORATION
By: /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President & Chief Executive Officer
HEART OF GEORGIA BANCSHARES, INC.
By: /s/ Donald M. Thigpen
---------------------
Donald M. Thigpen
President and Chief Executive Officer
<PAGE>
Exhibit 1
ARTICLE 12.
12.1 AFFILIATE AGREEMENT
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
Attention: J. Daniel Speight, Jr., President and Chief Executive Officer
Gentlemen:
The undersigned is a shareholder of Heart of Georgia Bancshares, Inc.
("HEART OF GEORGIA"), a Georgia Corporation, and will become a shareholder of
FLAG Financial Corporation ("FLAG"), a Georgia corporation, pursuant to the
transactions described in the Agreement and Plan of Merger, dated as of
________________ ___, 1998 (the "Agreement"), by and between FLAG, and HEART OF
GEORGIA. Under the terms of the Agreement, HEART OF GEORGIA will be merged with
and into FLAG (the "Merger"), and the shares of the $_.__ par value common stock
of HEART OF GEORGIA ("HEART OF GEORGIA Common Stock") will be converted into and
exchanged for shares of the $1.00 par value common stock of FLAG ("FLAG Common
Stock"). This Affiliate Agreement represents an agreement between the
undersigned and FLAG regarding certain rights and obligations of the undersigned
in connection with the shares of FLAG to be received by the undersigned as a
result of the Merger.
In consideration of the Merger and the mutual covenants contained
herein, the undersigned and FLAG hereby agree as follows:
1. Affiliate Status. The undersigned understands and agrees that as to
HEART OF GEORGIA he is an "affiliate" under Rule 145(c) as defined in Rule 405
of the Rules and Regulations of the Securities and Exchange Commission ("SEC")
under the Securities Act of 1933, as amended ("1933 Act"), and the undersigned
anticipates that he will be such an "affiliate" at the time of the Merger.
2. Initial Restrictions on Disposition. The undersigned agrees that he
will not sell, transfer or otherwise dispose of his interests in, or reduce his
risk relative to, any of the shares of FLAG Common Stock into which his shares
of HEART OF GEORGIA Common Stock are converted upon consummation of the Merger
until such time as FLAG notifies the undersigned that the requirements of SEC
Accounting Series Release Nos. 130 and 135 ("ASR 130 and 135") have been met,
except that transfers may be made in compliance with Staff Accounting Bulletin
No. 76 issued by the SEC. The undersigned understands that ASR 130 and 135
relate to publication of financial results of post-Merger combined operations of
FLAG and HEART OF GEORGIA. FLAG agrees that it will publish such results within
45 days after the end of the first fiscal quarter of FLAG containing the
required period of post-Merger combined operations and that it will notify the
undersigned promptly following such publication.
<PAGE>
3. Covenants and Warranties of Undersigned. The undersigned represents,
warrants and agrees that:
(a) At any meeting of shareholders of HEART OF GEORGIA called to vote
upon the Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstances upon which a vote, consent or other approval with respect to
the Merger and the Merger Agreement is sought (the "Shareholders' Meeting"), the
undersigned shall vote (or cause to be voted) the Shareholder's Shares in favor
of the Merger, the execution and delivery by HEART OF GEORGIA of the Merger
Agreement, and the approval of the terms thereof and each of the other
transactions contemplated by the Merger Agreement, provided that the terms of
the Merger Agreement shall not have been amended to reduce the consideration
payable in the Merger to a lesser amount of FLAG Common Stock or otherwise to
materially and adversely impair the Shareholder's rights or increase the
Shareholder's obligations thereunder. The undersigned hereby waives any rights
of appraisal, or rights to dissent from the Merger, that the undersigned may
have.
(b) The FLAG Common Stock received by the undersigned as a result of
the Merger will be taken for his own account and not for others, directly or
indirectly, in whole or in part.
(c) FLAG has informed the undersigned that any distribution by the
undersigned of FLAG Common Stock has not been registered under the 1933 Act and
that shares of FLAG Common Stock received pursuant to the Merger can only be
sold by the undersigned (1) following registration under the 1933 Act, or (2) in
conformity with the volume and other requirements of Rule 145(d) promulgated by
the SEC as the same now exist or may hereafter be amended, or (3) to the extent
some other exemption from registration under the 1933 Act might be available.
The undersigned understands that FLAG is under no obligation to file a
registration statement with the SEC covering the disposition of the
undersigned's shares of FLAG Common Stock or to take any other action necessary
to make compliance with an exemption from such registration available.
(d) The undersigned will, and will cause each of the other parties
whose shares are deemed to be beneficially owned by the undersigned pursuant to
Section 9 hereof, have all shares of HEART OF GEORGIA Common Stock beneficially
owned by the undersigned registered in the name of the undersigned or such
parties, as applicable, prior to the effective date of the Merger and not in the
name of any bank, broker-dealer, nominee or clearinghouse.
(e) During the thirty (30) days immediately preceding the Effective
Time of the Merger, the undersigned has not sold, transferred, or otherwise
disposed of his interests in, or reduced his risk relative to, any of the shares
of HEART OF GEORGIA Common Stock beneficially owned by the undersigned as of the
record date for determination of shareholders entitled to vote at the
Shareholders' Meeting of HEART OF GEORGIA held to approve the Merger.
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<PAGE>
(f) The undersigned is aware that FLAG intends to treat the Merger as a
tax-free reorganization under Section 368 of the Code for federal income tax
purposes. The undersigned agrees to treat the transaction in the same manner as
FLAG for federal income tax purposes.
4. Restrictions on Transfer. The undersigned understands and agrees
that stop-transfer instructions with respect to the shares of FLAG Common Stock
received by the undersigned pursuant to the Merger will be given to FLAG's
Transfer Agent and that there will be placed on the certificates for such
shares, or shares issued in substitution thereof, a legend stating in substance:
The shares represented by this certificate were issued
pursuant to a business combination which is accounted for as a "pooling
of interests" and may not be sold, nor may the owner thereof reduce his
risks relative thereto in any way, until such time as FLAG Financial
Corporation ("FLAG") has published the financial results covering at
least 30 days of combined operations after the effective date of the
merger through which the business combination was effected. In
addition, the shares represented by this certificate may not be sold,
transferred or otherwise disposed of except or unless (1) covered by an
effective registration statement under the Securities Act of 1933, as
amended, (2) in accordance with (i) Rule 145(d) (in the case of shares
issued to an individual who is an affiliate of FLAG) of the Rules and
Regulations of such Act, or (3) in accordance with a legal opinion
satisfactory to counsel for FLAG that such sale or transfer is
otherwise exempt from the registration requirements of such Act.
Such legend will also be placed on any certificate representing FLAG securities
issued subsequent to the original issuance of FLAG Common Stock pursuant to the
Merger as a result of any transfer of such shares or any stock dividend, stock
split, or other recapitalization as long as the FLAG Common Stock issued to the
undersigned pursuant to the Merger has not been transferred in such manner as to
justify the removal of the legend therefrom. Upon the request of the
undersigned, FLAG shall cause the certificates representing the shares of FLAG
Common Stock issued to the undersigned in connection with the Merger to be
reissued free of any legend relating to restrictions on transfer by virtue of
ASR 130 and 135 as soon as practicable after the requirements of ASR 130 and 135
have been met. In addition, if the provisions of Rules 144 and 145 are amended
to eliminate restrictions applicable to the FLAG Common Stock received by the
undersigned pursuant to the Merger, or at the expiration of the restrictive
period set forth in Rule 145(d), FLAG, upon the request of the undersigned, will
cause the certificates representing the shares of FLAG Common Stock issued to
the undersigned in connection with the Merger to be reissued free of any legend
relating to the restrictions set forth in Rules 144 and 145(d) upon receipt by
FLAG of an opinion of its counsel to the effect that such legend may be removed.
5. Understanding of Restrictions on Disposition. The undersigned has
carefully read the Agreement and this Affiliate Agreement and has discussed
their requirements and impact upon his ability to sell, transfer or otherwise
dispose of the shares of FLAG Common Stock received by the undersigned, to the
extent he believes necessary, with his counsel or counsel for HEART OF GEORGIA.
3
<PAGE>
6. Filing of Reports by FLAG. FLAG agrees, for a period of three years
after the effective date of the Merger, to file on a timely basis all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended, so that the public information provisions of Rule 145(d)
promulgated by the SEC as the same are presently in effect will be available to
the undersigned in the event the undersigned desires to transfer any shares of
FLAG Common Stock issued to the undersigned pursuant to the Merger.
7. Transfer Under Rule 145(d). If the undersigned desires to sell or
otherwise transfer the shares of FLAG Common Stock received by him in connection
with the Merger at any time during the restrictive period set forth in Rule
145(d), the undersigned will provide the necessary representation letter to the
transfer agent for FLAG Common Stock, together with such additional information
as the transfer agent may reasonably request. If FLAG's counsel concludes that
such proposed sale or transfer complies with the requirements of Rule 145(d),
FLAG shall cause such counsel to provide such opinions as may be necessary to
FLAG's transfer agent so that the undersigned may complete the proposed sale or
transfer.
8. Certain Actions. The undersigned covenants and agrees with FLAG
that, for a period of two (2) years after the effective time of the Merger, the
undersigned shall not, without the prior written consent of FLAG, directly or
indirectly serve as a consultant to, serve as a management official of, or be or
become a major shareholder of any financial institution having an office in
Montgomery County, Georgia. It is expressly understood that the covenants
contained in this paragraph 8 do not apply to (i) "management official"
positions which the undersigned holds with financial institutions (other than
FLAG, HEART OF GEORGIA, and their subsidiaries) as of the date of this
Agreement, (ii) securities holdings which cause the undersigned to be deemed a
major shareholder of a financial institution (other than FLAG, HEART OF GEORGIA,
and their subsidiaries) as of the date of this Agreement, or (iii) advisory
relationships with a financial institution which the undersigned has as of the
date of this Agreement or may have after the date hereof solely in the capacity
as legal counsel. For the purposes of the covenants contained in this paragraph
8, the following terms shall have the following respective meanings:
(a) The term "management official" shall refer to service of
any type which gives the undersigned the authority to participate,
directly or indirectly, in policy-making functions of the financial
institution. This includes, but is not limited to, service as an
organizer, officer, director, or advisory director of the financial
institution. It is expressly understood that the undersigned may be
deemed a management official of the financial institution whether or
not he holds any official, elected, or appointed position with such
financial institution.
(b) The term "financial institution" shall refer to any bank,
bank holding company, savings and loan association, savings and loan
holding company, banking-related company, or any other similar
financial institution which engages in the business of accepting
deposits or making loans or which owns or controls a company which
engages in the business of accepting deposits or making loans. It is
expressly understood that the term "financial institution" shall
include any financial institution as defined herein that, after the
4
<PAGE>
date of this Agreement, makes application for an appropriate federal or
state regulatory authority for approval to organize.
(c) The term "major shareholder" shall refer to the beneficial
ownership of five percent (5%) or more of any class of voting
securities or the ownership of five percent (5%) of the total equity
interest in such company, however denominated.
The provisions of this paragraph 8 shall be of no further force and
effect if the undersigned is not offered employment as a director of FLAG or any
of its subsidiaries (to include the subsidiaries of HEART OF GEORGIA acquired at
the Effective Time of the Merger) at the Effective Time of the Merger or, if the
undersigned is so employed, the undersigned's employment is terminated by FLAG
after the Effective Time of the Merger.
9. Acknowledgments. The undersigned recognizes and agrees that the
foregoing provisions also apply to all shares of the capital stock of HEART OF
GEORGIA and FLAG that are deemed to be beneficially owned by the undersigned
pursuant to applicable federal securities laws, which the undersigned agrees may
include, without limitation, shares owned or held in the name of (i) the
undersigned's spouse, (ii) any relative of the undersigned or of the
undersigned's spouse who has the same home as the undersigned, (iii) any trust
or estate in which the undersigned, the undersigned's spouse and any such
relative collectively own at least a ten percent (10%) beneficial interest or of
which any of the foregoing serves as trustee, executor, or in any similar
capacity, and (iv) any corporation or other organization in which the
undersigned, the undersigned's spouse and any such relative collectively own at
least ten percent (10%) of any class of equity securities or of the equity
interest. The undersigned further recognizes that, in the event that the
undersigned is a director or officer of FLAG or becomes a director or officer of
FLAG upon consummation of the Merger, among other things, any sale of FLAG
Common Stock by the undersigned within a period of less than six (6) months
following the Effective Time of the Merger may subject the undersigned to
liability pursuant to Section 16(b) of the Securities Exchange Act of 1934, as
amended.
10. Miscellaneous. This Affiliate Agreement is the complete agreement
between FLAG and the undersigned concerning the subject matter hereof. Any
notice required to be sent to any party hereunder shall be sent by registered or
certified mail, return receipt requested, using the addresses set forth herein
or such other address as shall be furnished in writing by the parties. This
Affiliate Agreement shall be governed by the laws of the State of Georgia.
SIGNATURES CONTAINED ON NEXT PAGE
5
<PAGE>
This Affiliate Agreement is executed as of the _________ day of
________________, 1998.
Very truly yours,
------------------------------------
Signature
------------------------------------
Print Name
Address:----------------------------
------------------------------------
------------------------------------
[add below the signatures of all registered
owners of shares deemed beneficially owned
by the affiliate]
------------------------------------
Name
------------------------------------
Name
-------------------------------------
Name
AGREED TO AND ACCEPTED as of
the _______ day of ________________, 1998.
FLAG FINANCIAL CORPORATION
By:---------------------------
6
<PAGE>
Exhibit 2
ARTICLE 13.
13.1
MATTERS AS TO WHICH NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. WILL OPINE
1. Heart of Georgia Bancshares, Inc. ("HEART OF GEORGIA") is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Georgia with full corporate power and authority to carry on the
business in which it is engaged, and to own and use its Assets.
2. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the
Articles of Incorporation or Bylaws of HEART OF GEORGIA or, to our
knowledge but without any independent investigation, result in any conflict
with, breach of, or default or acceleration under any Contract disclosed in
the Agreement, Law, Order or Permit (subject to the approval of Regulatory
Authorities) to which HEART OF GEORGIA is a party or by which HEART OF
GEORGIA is bound.
3. The Agreement has been duly and validly executed and delivered by HEART
OF GEORGIA and, assuming valid authorization, execution and delivery by
FLAG, constitutes a valid and binding agreement of HEART OF GEORGIA
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; provided, however, that we express no opinion
as to the availability of the equitable remedy of specific performance.
4. The authorized capital stock of HEART OF GEORGIA consists of 1,000,000
shares of the HEART OF GEORGIA Common Stock, of which 220,000 shares were
issued and outstanding as of _______________________, 1998. The shares of
the HEART OF GEORGIA Common Stock that are issued and outstanding were not
issued in violation of any statutory preemptive rights of shareholders,
were duly issued, and are fully paid and nonassessable under the GBCC. To
our knowledge, except as set forth above, or as disclosed in Section 5.3 of
the HEART OF GEORGIA Disclosure Memorandum, as of ______________, 1998,
there were no shares of capital stock or other equity securities of HEART
OF GEORGIA outstanding and no outstanding Equity Rights relating to the
capital stock of HEART OF GEORGIA.
<PAGE>
Exhibit 3
ARTICLE 14.
14.1
____________________, 1998
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, GA 30240
RE: Heart of Georgia Bancshares, Inc. ("HEART OF GEORGIA ")
Mount Vernon, Georgia
Ladies and Gentlemen:
This letter is delivered pursuant to Section 9.2(g) of the Agreement
and Plan of Merger, dated as of ____________ __, 1998, by and between FLAG
Financial Corporation and HEART OF GEORGIA.
In my capacity as an officer or a director of HEART OF GEORGIA, and as
of the date of this letter, I do not, to the best of my knowledge, have any
claims, and I am not aware of any facts or circumstances that I believe are
likely to give rise to any claim, for indemnification under HEART OF GEORGIA's
Articles of Incorporation or Bylaws as existing on the date hereof or as may be
afforded by the laws of the State of Georgia or the United States.
Very truly yours,
--------------------------------------
14.2 Signature of Officer or Director
--------------------------------------
14.3 Name of Officer or Director
--------------------------------------
14.4 Position at HEART OF GEORGIA
<PAGE>
Exhibit 4
ARTICLE 15.
MATTERS AS TO WHICH POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
WILL OPINE
1. FLAG Financial Corporation ("FLAG") is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Georgia with full corporate power and authority to carry on the business in
which it is engaged, and to own and use its Assets.
2. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the
Articles of Incorporation or Bylaws of FLAG or, to our knowledge but
without any independent investigation, result in any conflict with, breach
of, or default under any Contract disclosed in the Agreement, Law, Order or
Permit (subject to the approval of Regulatory Authorities) to which FLAG is
a party or by which FLAG is bound.
3. The Agreement has been duly and validly executed and delivered by FLAG,
and assuming valid authorization, execution and delivery by Heart of
Georgia Bancshares, Inc., constitutes a valid and binding agreement of FLAG
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, or similar laws
affecting creditors' rights generally, provided, however, that we express
no opinion as to the availability of the equitable remedy of specific
performance.
4. The authorized capital stock of FLAG consists of 20,000,000 shares of
FLAG Common Stock, of which 5,174,807 shares are issued and outstanding as
of ____________ 1998, and (ii) 10,000,000 shares of FLAG Preferred Stock,
of which no shares are issued and outstanding as of _____________________
1998. The shares of FLAG Common Stock that are issued and outstanding were
not issued in violation of any statutory preemptive rights of shareholders,
were duly issued and are fully paid and nonassessable under the Georgia
Business Corporation Code. To our knowledge, except as set forth above, or
as disclosed in Section 6.3 of the FLAG Disclosure Memorandum, as of
_________________________, 1998, there were no shares of capital stock or
other equity securities of FLAG outstanding and no outstanding Equity
Rights relating to the capital stock of FLAG. The shares of FLAG Common
Stock to be issued to the shareholders of Heart of Georgia Bancshares, Inc.
as contemplated by the Agreement have been registered under the Securities
Act of 1933, as amended, and when properly issued and delivered following
consummation of the Merger will be fully paid and non-assessable under the
Georgia Business Corporation Code.
<PAGE>
APPENDIX B
EXCERPTS FROM THE
GEORGIA BUSINESS CORPORATION CODE
RELATING TO DISSENTING SHAREHOLDERS
<PAGE>
GEORGIA BUSINESS CORPORATION CODE
ARTICLE 13
DISSENTERS' RIGHTS
14-2-1301. Definitions.
As used in this article, the term:
(1) "Beneficial shareholder" means the person who is a
beneficial owner of shares held in a voting trust or by a
nominee as the record shareholder.
(2) "Corporate action" means the transaction or other action
by the corporation that creates dissenters' rights under
Code Section 14-2-1302.
(3) "Corporation" means the issuer of shares held by a
dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that
issuer.
(4) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under Code Section 14-2-1302 and who
exercises that right when and in the manner required by Code
Sections 14-2-1320 through 14-2-1327.
(5) "Fair value," with respect to a dissenter's shares, means
the value of the shares immediately before the effectuation
of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation
of the corporate action.
(6) "Interest" means interest from the effective date of the
corporate action until the date of payment, at a rate that
is fair and equitable under all the circumstances.
(7) "Record shareholder" means the person in whose name shares
are registered in the records of a corporation or the
beneficial owner of shares to the extent of the rights
granted by a nominee certificate on file with a corporation.
(8) "Shareholder" means the record shareholder or the
beneficial shareholder.
14-2-1302. Right to dissent.
(a) A record shareholder of the corporation is entitled to dissent
from, and obtain payment of the fair value of his or her shares in the event of,
any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation
is a party:
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(A) If approval of the shareholders of the
corporation is required for the merger by Code Section
14-2-1103 or the articles of incorporation and the shareholder
is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged
with its parent under Code Section 14-2-1104;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all or substantially
all of the property of the corporation if a shareholder vote is
required on the sale or exchange pursuant to Code Section 14-2-1202,
but not including a sale pursuant to court order or a sale for cash
pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholder within one
year after the date of sale;
(4) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of a dissenter's
shares because it:
(A) Alters or abolishes a preferential right of the
shares;
(B) Creates, alters, or abolishes a right in respect
of redemption, including a provision respecting a sinking fund
for the redemption or repurchase, of the shares;
(C) Alters or abolishes a preemptive right of the
holder of the shares to acquire shares or other securities;
(D) Excludes or limits the rights of the shares to
vote on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other
securities with similar voting rights;
(E) Reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share
so created is to be acquired for cash under Code Section
14-2-604; or
(F) Cancels, redeems, or repurchases all or part of
the shares of the class; or
(5) Any corporate action taken pursuant to a shareholder vote
to the extent that Article 9 of this chapter, the articles of
incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent
and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this article may not challenge the corporate action creating his or
her entitlement unless the corporate action fails to comply with procedural
requirements of this chapter or the articles of incorporation or bylaws of the
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corporation or the vote required to obtain approval of the corporate action was
obtained by fraudulent and deceptive means, regardless of whether the
shareholder has exercised dissenter's rights.
(c) Notwithstanding any other provision of this article, there shall be
no right of dissent in favor of the holder of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at a meeting at which a plan of merger or share
exchange or a sale or exchange of property or an amendment of the articles of
incorporation is to be acted on, were either listed on a national securities
exchange or held of record by more than 2,000 shareholders, unless:
(1) In the case of a plan of merger or share exchange, the
holders of shares of the class or series are required under the plan of
merger or share exchange to accept for their shares anything except
shares of the surviving corporation or another publicly held
corporation which at the effective date of the merger or share exchange
are either listed on a national securities exchange or held of record
by more than 2,000 shareholders, except for scrip or cash payments in
lieu of fractional shares; or
(2) The articles of incorporation or a resolution of the board
of directors approving the transaction provides otherwise.
14-2-1303. Dissent by nominees and beneficial owners.
A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his or her name only if he dissents with respect to all
shares beneficially owned by any one beneficial shareholder and notifies the
corporation in writing of the name and address of each person on whose behalf
asserts dissenters' rights. The rights of a partial dissenter under this Code
section are determined as if the shares as to which dissents and his or her
other shares were registered in the names of different shareholders.
14-2-1320. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this article and be accompanied by a copy of this article.
(b) If corporate action creating dissenters' rights under Code Section
14-2-1302 is taken without a vote of shareholders, the corporation shall notify
in writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Code Section
14-2-1322.
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14-2-1321. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is submitted to a vote at a shareholders' meeting, a record
shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation before the vote is taken
written notice of his or her intent to demand payment for his or her
shares if the proposed action is effectuated; and
(2) Must not vote his or her shares in favor of the proposed
action.
(b) A record shareholder who does not satisfy the requirements of
subsection (a) of this Code section is not entitled to payment for his or her
shares under this article.
14-2-1322. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Code
Section 14-2-1302 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Code Section 14-2-1321.
(b) The dissenters' notice must be sent no later than ten days after
the corporate action was taken and must:
(1) State where the payment demand must be sent and where and
when certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
(3) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30 nor more than 60
days after the date the notice required in subsection (a) of this Code
section is delivered; and
(4) Be accompanied by a copy of this article.
14-2-1323. Duty to demand payment.
(a) A record shareholder sent a dissenters' notice described in Code
Section 14-2-1322 must demand payment and deposit his or her certificates in
accordance with the terms of the notice.
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(b) A record shareholder who demands payment and deposits his or her
shares under subsection (a) of this Code section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(c) A record shareholder who does not demand payment or deposit his or
her share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his or her shares under this article.
14-2-1324. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under Code Section
14-2-1326.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
14-2-1325. Offer of payment.
(a) Except as provided in Code Section 14-2-1327, within ten days of
the later of the date the proposed corporate action is taken or receipt of a
payment demand, the corporation shall offer to pay each dissenter who complied
with Code Section 14-2-1323 the amount the corporation estimates to be the fair
value of his or her shares, plus accrued interest.
(b) The offer of payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair
value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment
under Code Section 14-2-1327; and
(5) A copy of this article.
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(c) If the shareholder accepts the corporation's offer by written
notice to the corporation within 30 days after the corporation's offer, payment
for his or her shares shall be made within 60 days after the making of the offer
or the taking of the proposed corporate action, whichever is later.
14-2-1326. Failure to take action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Code Section 14-2-1422 and repeat the payment demand
procedure.
14-2-1327. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his or her own
estimate of the fair value of his or her shares and amount of interest due, and
demand payment of his or her estimate of the fair value of his or her shares and
interest due, if:
(1) The dissenter believes that the amount offered under Code
Section 14-2-1325 is less than the fair value of his or her shares or
that the interest due is incorrectly calculated; or
(2) The corporation, having failed to take the proposed
action, does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within 60 days
after the date set for demanding payment.
(b) A dissenter waives his or her right to demand payment under this
Code section unless he notifies the corporation of his or her demand in writing
under subsection (a) of this Code section within 30 days after the corporation
made or offered payment for his or her shares.
(c) If the corporation does not offer payment within the time set forth
in subsection (a) of Code Section 14-2-1325:
(1) The shareholder may demand the information required under
subsection (b) of Code Section 14-2-1325, and the corporation shall
provide the information to the shareholder within ten days after
receipt of a written demand for the information; and
(2) The shareholder may at any time, subject to the
limitations period of Code Section 14-2-1332, notify the corporation of
his or her own estimate of the fair value of his or her shares and the
amount of interest due and demand payment of his or her estimate of the
fair value of his or her shares and interest due.
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14-2-1330. Court action.
(a) If a demand for payment under Code Section 14-2-1327 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand and petition the court to determine the fair value
of the shares and accrued interest. If the corporation does not commence the
proceeding within the 60 day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding, which shall be a
nonjury equitable valuation proceeding, in the superior court of the county
where a corporation's registered office is located. If the surviving corporation
is a foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
(c) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unsettled parties to the proceeding, which
shall have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in the proceeding upon each
dissenting shareholder who is a resident of this state in the manner provided by
law for the service of a summons and complaint, and upon each nonresident
dissenting shareholder either by registered or certified mail and publication,
or in any other manner permitted by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) of this Code section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers described
in the order appointing them or in any amendment to it. Except as otherwise
provided in this chapter, Chapter 11 of the Title 9, known as the "Georgia Civil
Practice Act," applies to any proceeding with respect to dissenters' rights
under this chapter.
(e) Each dissenter made a party to the proceeding is entitled to
judgment for the amount which the court finds to be the fair value of his or her
shares, plus interest to the date of judgment.
14-2-1331. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Code Section
14-2-1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, but not
including fees and expenses of attorneys and experts for the respective parties.
The court shall assess the costs against the corporation, except that the court
may assess the costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment under Code Section
14-2-1327.
(b) The court may also assess the fees and expenses of attorneys and
experts for the respective parties, in amounts the court finds equitable:
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(1) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of Code Sections 14-2-1320 through
14-2-1327; or
(2) Against either the corporation or a dissenter, in favor of
any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this article.
(c) If the court finds that the services of attorneys for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
14-2-1332. Limitation of actions.
No action by any dissenter to enforce dissenters' rights shall be
brought more than three years after the corporate action was taken, regardless
of whether notice of the corporate action and of the right to dissent was given
by the corporation in compliance with the provisions of Code Section 14-2-1320
and Code Section 14-2-1322.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The FLAG Articles and Bylaws generally provide that any director who is
deemed eligible will be indemnified against liability and other expenses
incurred in a proceeding in which the director was made a party by reason of the
fact he is or was a director, to the fullest extent authorized by the GBCC;
provided, however, that FLAG will not indemnify any director for any liability
or expenses incurred by such director (i) for any appropriation, in violation of
his duties, of any business opportunity of FLAG; (ii) for any acts or omissions
which involve intentional misconduct or a knowing violation of law; (iii) for
the types of liability set forth in Section 14-2-832 of the GBCC or successor
provisions; or (iv) for any transaction from which the director derives an
improper personal benefit. FLAG's Articles and Bylaws provide for the
advancement of expenses to its directors at the outset of a proceeding, upon the
receipt from such director of the written affirmation and repayment promise
required by Section 14-2-856 of the GBCC, the purchase of insurance by FLAG
against any liability of the director arising from his duties and actions as a
director, the survival of such indemnification to the director's heirs,
executors and administrators, and the limitation of the directors' liability to
the corporation (except under the four situations described above). The
indemnification provisions are non-exclusive, and shall not impair any other
rights to which those seeking indemnification or advancement of expenses may be
entitled. The FLAG Bylaws also provide for a similar amount of indemnification
for the officers of FLAG. In the Bylaws of FLAG, shareholders are entitled to
notification of any indemnification paid to the directors. The GBCC's provisions
for indemnification are summarized below.
Section 14-2-851 of the GBCC empowers a corporation to indemnify any
person who was or is a party to any proceeding by reason of the fact that he is
or was a director of the corporation or is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, or agent of
another domestic or foreign corporation, partnership, joint venture, trust,
employee benefit plan, or other entity against liability incurred in connection
with such proceeding, if he: (i) conducted himself in good faith; and (ii)
reasonably believed (a) in the case of conduct in his official capacity, that
such conduct was in the best interests of the corporation, (b) in all other
cases, that such conduct was at least not opposed to the best interests of the
corporation (for example, this Section states that a director's conduct with
respect to an employee benefit plan for a purpose he believed in good faith to
be in the interests of the participants in and beneficiaries of the plan is
conduct that satisfies this requirement), and (c) in the case of any criminal
proceeding, that he had no reasonable cause to believe his conduct was unlawful.
This Section further provides that the termination of proceeding by judgment,
order, settlement, or conviction or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not meet the
standards of conduct described above. This Section also provides that a
corporation is not permitted to indemnify any director of the corporation under
this Section in connection with a proceeding by or in the right of the
corporation (except for reasonable expenses incurred in connection with the
proceeding if it is determined that the director has met the standards of
conduct as outlined in this Section), nor may a corporation indemnify a director
under this Section in connection with any proceeding with respect to conduct for
which he or she was adjudged liable on the basis that improper personal benefit
was received by him (whether or not the conduct involved action in his official
capacity).
Section 14-2-852 requires a corporation to indemnify a director against
reasonable expenses incurred by the director in connection with any proceeding
to which he was a party because he was a director of the corporation where the
director is wholly successful, on the merits or otherwise, in the defense of
such proceeding.
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Section 14-2-853 empowers a corporation to advance funds to a director,
before the final disposition of a proceeding to which he was a party because he
was a director of the corporation, in order to pay for or reimburse the
reasonable expenses incurred by the director if the director delivers to the
corporation a written affirmation to the corporation of his belief that he has
satisfied the relevant standard of conduct described in Section 14-2-851 (or
that the proceeding involves conduct for which a director's liability has been
eliminated under the corporation's articles of incorporation), and a written
undertaking by the director to repay any funds so advanced (which must be an
unlimited general obligation of the director, but which need not be secured, and
which may be accepted by the corporation without reference to the financial
ability of the director to repay the advancement) if it is ultimately determined
that the director is not entitled to indemnification under the provisions of the
GBCC. This Section further provides that any advancement of expenses to be made
pursuant to this Section must be authorized (i) by the Board of Directors: (a)
when there are two or more disinterested directors, by a majority vote of all
the disinterested directors (a majority of whom will constitute a quorum for
such purposes) or by a majority of the members of a committee consisting of two
or more disinterested directors who are appointed by such a vote; or (b) if
there are fewer than two disinterested directors, by majority vote of a quorum
of the Board of Directors, in which authorization the directors who do not
qualify as disinterested directors may take part; or (ii) by the shareholders of
the corporation, but no shares owned by a director who does not qualify as a
disinterested director may be voted on the authorization.
Section 14-2-854 provides that a director who is a party to a
proceeding by virtue of the fact that he is a director may apply to the court
conducting the proceeding or another court of competent jurisdiction for
indemnification or the advancement of expenses. Once a court receives such an
application, and after the court gives any notice which it deems necessary, the
court considering the application must order indemnification or advance for
expenses (i) if the court determines that the director is entitled to such
indemnification, or (ii) if the court determines that, taking into account all
of the relevant circumstances, it is fair and reasonable to indemnify the
director or to advance expenses to the director, even if the director failed to
satisfy the standards of conduct set forth in Section 14-2-851, failed to comply
with the requirements of Section 14-2-853, or was adjudged liable in any
proceeding by or in right of the corporation or any proceeding initiated on the
basis that improper personal benefit was received by the director (provided
that, if the director is adjudged so liable, the indemnification must be limited
to the reasonable expenses incurred by the director in connection with such
proceeding). In addition, Section 14-2-851 states that, if the court determines
that the director is entitled to indemnification or advance for expenses, the
court may also direct the corporation to pay the director's reasonable expenses
incurred in connection with obtaining such court-ordered indemnification or
advance for expenses.
Section 14-2-855 states that a corporation may not indemnify a director
under Section 14-2-851 unless such indemnification is authorized thereunder and
a determination is made that the indemnification of the director in a particular
proceeding is permissible due to the fact that the director has satisfied the
relevant standard of conduct set forth in Section 14-2-851. Such a determination
must be made: (i) if there are two or more disinterested directors, by the board
of directors by a majority vote of all such disinterested directors (a majority
of whom constitutes a quorum for such purposes) or by a majority of the members
of a committee of two or more disinterested directors appointed by such a vote;
(ii) by special legal counsel selected in the manner described in (i) above, or,
if there are fewer than two disinterested directors, selected by the board of
directors (including the directors who are not considered disinterested
directors); or (iii) by the shareholders of the corporation, but no shares owned
by a director who does not qualify as a disinterested director may be voted on
the determination. The authorization of indemnification and evaluation as to the
reasonableness of the expenses involved with such indemnification must be
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obtained in the same manner as the determination that indemnification is
permissible (as described above), except that, if there are fewer than two
disinterested directors, or the determination as to the permissibility of the
indemnification is made by special legal counsel, then the authorization of such
indemnification and the evaluation as to the reasonableness of the expenses
involved must be made by the board of directors (in which authorization and
evaluation directors who do not qualify as disinterested directors may
participate).
Section 14-2-856 states that, if authorized by the corporation's
articles of incorporation or a bylaw, contract, or resolution approved or
ratified by the shareholders by a majority of the votes entitled to be cast, a
corporation will be permitted to indemnify a director made a party to a
proceeding (including a proceeding brought by or in right of the corporation),
without regard to the other limitations on indemnification contained within
Title 14, Chapter 2, Article 8, Part 5 of the GBCC, but any director, who at the
time does not qualify as a disinterested director with respect to an existing or
threatened proceeding that would be covered by such authorization, will not be
permitted to vote the shares owned or voted under the control of such director
with respect to such authorization. However, Section 14-2-856 further states
that no corporation may indemnify a director under Section 14-2-856 for any
liability incurred in a proceeding in which the director is adjudged liable to
the corporation (or is subjected to injunctive relief in favor of the
corporation): (i) for any appropriation, in violation of his duties, of any
business opportunity of the corporation; (ii) for any acts or omissions
involving intentional misconduct or a knowing violation of law; (iii) for the
types of liability set forth in Section 14-2-832 of the GBCC (relating to
unlawful distributions); or (iv) for any transaction from which he received an
improper personal benefit. Where approved or authorized in the manner described
above, a corporation may advance or reimburse expenses incurred by the director
in advance of final disposition of the proceeding only if the director delivers
a written affirmation to the corporation which indicates his good faith belief
that his conduct does not fall within any of the four categories of conduct
listed above, and a written undertaking by the director (executed personally or
on his behalf) to repay any advances made to him by the corporation if it is
ultimately determined that the director is not entitled to indemnification under
this Section.
Section 14-2-857 provides that a corporation may indemnify and advance
expenses to an officer of the corporation who is made a party to a proceeding by
virtue of his status as an officer of the corporation. A corporation's officers
may be indemnified to the same extent as the corporation's directors (as
discussed above), and any officer who is not also a director (or who was made a
party to a proceeding solely due to an act or omission committed in his role as
an officer) may be indemnified to any further extent as provided in the articles
of incorporation, the bylaws, a resolution of the board of directors, or
contract except for liability arising out of conduct which constitutes: (i) an
appropriation, in violation of his duties as an officer, of any business
opportunity of the corporation; (ii) any acts or omissions which involve
intentional misconduct or a knowing violation of law; (iii) the types of
liability set forth in Section 14-2-832; or (iv) the receipt of an improper
personal benefit. In addition, this Section provides that a corporation may
indemnify and advance expenses to its employees or agents (who are not also
directors) to the extent provided in the corporation's articles of
incorporation, bylaws, general or specific action of its board of directors, or
contract (so long as such indemnification or advancement of expenses is
consistent with public policy).
Section 14-2-858 provides that the corporation is empowered to purchase
and maintain insurance on behalf of any person who is a director, officer,
employee, or agent of the corporation or who, while a director, officer,
employee or agent of the corporation serves at the request of the corporation as
a director, officer, partner, trustee, employee, or agent of another domestic or
foreign corporation, partnership, joint venture, trust, employee benefit plan,
or other entity against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him or advance expenses against
such liability under the provisions of Title 14, Chapter 2, Article 8, Part 5 of
the GBCC.
II-3
<PAGE>
The Registrant maintains an insurance policy insuring the Registrant
and directors and officers of the Registrant against certain liabilities,
including liabilities under the Securities Act of 1933.
Item 21. Exhibits And Financial Statement Schedules
(a) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of August 19, 1998,
by and between FLAG and Heart (included in Appendix A to the
Proxy Statement/Prospectus and incorporated by reference
herein)
2.2 - Agreement and Plan of Merger, dated as of June 30, 1998 by
and between FLAG and Empire Bank Corp. (incorporated by
reference herein from the registrant's Current Report on
Form 8-K filed August 10, 1998)
2.3 - Agreement and Plan of Merger, dated as of July 24, 1998, by
and among FLAG, Citizens Bank and The Brown Bank (included
herein by reference from the registrant's Current Report on
Form 8-K filed August 11, 1998)
4.1 - Articles of Incorporation of FLAG, as amended (incorporated
herein by reference from Exhibit 3.1(i) of the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
4.2 - Bylaws of FLAG, as amended (incorporated herein by reference
from Exhibit 3.1(ii) of the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP (including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr. and the
Company dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and the Company
dated as of April 1, 1998*+
10.3 - Employment Agreement between Ellison C. Rudd and the Company
dated as of April 1, 1998*+
II-4
<PAGE>
10.4 - Employment Agreement between Patti S. Davis and the Company
dated as of April 1, 1998*+
10.5 - Separation Agreement between Charles O. Hinely and the
Company dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and the
Company dated May 13, 1998*+
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.11 - Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Incorporated herein by reference from Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.12 - Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995*+
10.13 - Form of Director Agreement (pursuant to Director Indexed Fee
Construction Program for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.14 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Fee Continuation Program of First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.15 - Form of Indexed Executive Salary Continuation Plan Agreement
by and between First Federal Savings Bank of LaGrange and
individuals listed on exhibit coverage page*+
10.16 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.17 - Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William
F. Holle, Jr. dated February 3, 1995*+
II-5
<PAGE>
10.18 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)*
10.19 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993)*
11 - Statement regarding Computation of Per Share Earnings+
13 - Registrant's Annual Report for the fiscal year ended
December 31, 1997 (incorporated herein by reference from
Exhibit 13 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
21 - Subsidiaries of the registrant +
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation)
23.3 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of Middle Georgia Bankshares, Inc.)
23.4 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with
respect to financial statements of Three Rivers Bancshares,
Inc.)
23.5 - Consent of McLain, Calhoun & Co., P.C. (with respect to
financial statements of Heart of Georgia Bancshares, Inc.)
23.6 - Consents of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99 - Form of Proxy of Heart
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
Registrant's Amendment No. 1 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
II-6
<PAGE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10
(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes to deliver or cause to
be delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the Registrant's Articles of Incorporation
or Bylaws, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
II-7
<PAGE>
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of LaGrange, State of Georgia, on September 21, 1998.
FLAG FINANCIAL CORPORATION
By /s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints J. Daniel Speight, Jr. and John S. Holle,
and each of them, as true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to the Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith,
including any Registration Statement filed pursuant to Rule 462(b) of the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
which said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do, or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities indicated on September 21, 1998.
Signature Title
--------- -----
/s/ Dr. A. Glenn Bailey Director
- --------------------------
Dr. A. Glenn Bailey
/s/ H. Speer Burdette, III Director
- --------------------------
H. Speer Burdette, III
/s/ Patti S. Davis Director, Senior Vice President
- ------------------------- and Chief Financial Officer
Patti S. Davis (principal financial and accounting
officer)
/s/ Fred A. Durand, III Director
- ------------------------
Fred A. Durand, III
/s/ John S. Holle Chairman of the Board and Director
- ------------------
John S. Holle
- ---------------------- Director
James W. Johnson
- ---------------------- Director
Kelly R. Linch
/s/ J. Preston Martin Director
- ---------------------
J. Preston Martin
/s/ Ellison C. Rudd Senior Vice President, Secretary
- --------------------- and Treasurer
Ellison C. Rudd
/s/ J. Daniel Speight, Jr. President, Chief Executive Officer
- --------------------- and Director
J. Daniel Speight, Jr. (principal executive officer)
/s/ John W. Stewart, Jr. Director
- -----------------------
John W. Stewart, Jr.
- ------------------------- Director
Robert W. Walters
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------ -----------------------
2.1 - Agreement and Plan of Merger, dated as of July 19, 1998,
by and between FLAG and Heart (included in Appendix A to the
Proxy Statement/Prospectus and incorporated by reference
herein)
2.2 - Agreement and Plan of Merger, dated as of June 30, 1998 by
and between FLAG and Empire Bank Corp. (incorporated by
reference herein from the registrant's Current Report on
Form 8-K filed August 10, 1998)
2.3 - Agreement and Plan of Merger, dated as of July 24, 1998, by
and among FLAG, Citizens Bank and The Brown Bank (included
herein by reference from the registrant's Current Report on
Form 8-K filed August 11, 1998)
4.1 - Articles of Incorporation of FLAG, as amended (incorporated
herein by reference from Exhibit 3.1(i) of the registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1993)
4.2 - Bylaws of FLAG, as amended (incorporated herein by reference
from Exhibit 3.1(ii) of the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993)
5 - Opinion of Powell, Goldstein, Frazer & Murphy LLP (including
consent)
8 - Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
federal income tax matters (including consent)
10.1 - Employment Agreement between J. Daniel Speight, Jr. and the
Company dated as of April 1, 1998*+
10.2 - Employment Agreement between John S. Holle and the Company
dated as of April 1, 1998*+
10.3 - Employment Agreement between Ellison C. Rudd and the Company
dated as of April 1, 1998*+
10.4 - Employment Agreement between Patti S. Davis and the Company
dated as of April 1, 1998*+
10.5 - Separation Agreement between Charles O. Hinely and the
Company dated April 1, 1998*+
10.6 - Separation Agreement between J. Preston Martin and the
Company dated May 13, 1998*+
<PAGE>
10.7 - Split Dollar Insurance Agreement between J. Daniel Speight,
Jr. and Citizens Bank dated November 2, 1992*+
10.8 - Director Indexed Retirement Program for Citizens Bank dated
January 13, 1995*+
10.9 - Form of Executive Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.10 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Retirement Program for Citizens Bank) for individuals listed
on exhibit cover page*+
10.11 - Tax Sharing Agreement dated March 1, 1994, among the
Company, the Bank and Piedmont Mortgage Service, Inc.
(Incorporated herein by reference from Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)
10.12 - Director Indexed Fee Continuation Program for First Federal
Savings Bank of LaGrange effective February 3, 1995*+
10.13 - Form of Director Agreement (pursuant to Director Indexed
Fee Construction Program for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.14 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Director Indexed
Fee Continuation Program of First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.15 - Form of Indexed Executive Salary Continuation Plan
Agreement by and between First Federal Savings Bank of
LaGrange and individuals listed on exhibit coverage page*+
10.16 - Form of Flexible Premium Life Insurance Endorsement Method
Split Dollar Plan Agreement (pursuant to Executive Salary
Continuation Plan for First Federal Savings Bank of
LaGrange) for individuals listed on exhibit cover page*+
10.17 - Indexed Executive Salary Continuation Plan Agreement by and
between First Federal Savings Bank of LaGrange and William
F. Holle, Jr. dated February 3, 1995*+
10.18 - FLAG Financial Corporation 1994 Employees Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993)*
10.19 - FLAG Financial Corporation 1994 Directors Stock Incentive
Plan (Incorporated herein by reference from Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1993)*
<PAGE>
11 - Statement regarding Computation of Per Share Earnings+
13 - Registrant's Annual Report for the fiscal year ended
December 31, 1997 (incorporated herein by reference from
Exhibit 13 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997)
21 - Subsidiaries of the registrant +
23.1 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of FLAG Financial Corporation)
23.2 - Consent of Robinson, Grimes and Company, P.C. (with respect
to financial statements of FLAG Financial Corporation
23.3 - Consent of Porter Keadle Moore, LLP (with respect to
financial statements of Middle Georgia Bankshares, Inc.)
23.4 - Consent of Thigpen, Jones, Seaton & Co., P.C. (with
respect to financial statements of Three River Bancshares,
Inc.)
23.5 - Consent of McLain, Calhoun & Co., P.C. (with respect to
financial statements of Heart of Georgia Bancshares, Inc.)
23.6 - Consents of Powell, Goldstein, Frazer & Murphy LLP (included
in Exhibits 5 and 8)
24 - Powers of Attorney (appears on the signature page to this
Registration Statement)
99 - Form of Proxy of Empire
*The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Registration Statement on Form S-4.
+Incorporated by reference from exhibit of the same number from the
Registrant's Amendment No. 1 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
EXHIBIT 5
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY LLP]
September 21, 1998
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30204
Ladies and Gentlemen:
This opinion is given in connection with the filing of a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission, by FLAG Financial Corporation, a corporation organized and
existing under the laws of the State of Georgia ("FLAG"), with respect to the
registration under the Securities Act of 1933, as amended, of 445,500 shares of
the $1.00 par value common stock of FLAG (the "FLAG Common Stock") to be issued
in connection with the proposed merger of Heart of Georgia Bancshares, Inc.
("Heart") with FLAG (the "Merger").
The Merger is intended to be effected pursuant to an Agreement and Plan
of Merger dated as of August 19, 1998 between FLAG and Heart, pursuant to which
each outstanding share of $1.00 par value common stock of Heart (other than
shares held by FLAG, Heart or their subsidiaries or by shareholders who perfect
dissenters' rights) will be converted into and exchanged for the right to
receive 2.025 shares of FLAG Common Stock.
In rendering this opinion, we have examined such corporate records and
documents as we have deemed relevant and necessary as the basis for the opinion
set forth herein.
Based upon the foregoing, it is our opinion that the shares of FLAG
Common Stock when issued to holders of Heart Common Stock on the terms and upon
fulfillment of the conditions set forth in the Agreement, will be validly
issued, fully paid and nonassessable under the Georgia Business Corporation
Code.
We consent to the use of this opinion and to the reference made to the
firm in the Proxy Statement/Prospectus of FLAG and Heart constituting part of
the Registration Statement.
/S/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
EXHIBIT 8
September 21, 1998
Heart of Georgia Bancshares, Inc.
101 Railroad Avenue
Mount Vernon, Georgia 30445
FLAG Financial Corporation
101 North Greenwood Street
LaGrange, Georgia 30240
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income
tax consequences of the proposed merger of Heart of Georgia Bancshares, Inc., a
corporation organized and existing under the laws of the state of Georgia
("Heart of Georgia"), with and into FLAG Financial Corporation, a corporation
organized and existing under the laws of the state of Georgia ("FLAG"). For
purposes of rendering this opinion, we have reviewed and relied on the Agreement
and Plan of Merger between FLAG and Heart of Georgia, dated as of August 19,
1998 (the "Merger Agreement"), the certificates attached hereto, and such other
documents as we have considered appropriate. Unless otherwise indicated, terms
used in this opinion have the same meaning as in the Merger Agreement.
For purposes of this opinion, we have assumed that the Merger will be
consummated at the Effective Time pursuant to the terms and conditions set forth
in the Merger Agreement. We have assumed that the cash paid to Heart of Georgia
shareholders pursuant to the Merger (including pursuant to a shareholder's
statutory right to dissent) does not exceed more than fifty percent (50%) of the
value of all shares of Heart of Georgia Common Stock outstanding as of the
Effective Time.
In addition, we have assumed with your permission that the facts and
representations certified to us in writing by Heart of Georgia and FLAG which
are set forth in the certificates attached hereto, apply as of the Effective
Time. Copies of such certificates are attached hereto and incorporated herein by
reference. We have neither investigated nor verified the accuracy of any of the
facts that have been certified to us, upon which this opinion is based.
This opinion is based also on the Internal Revenue Code, Treasury
Regulations, Internal Revenue Service rulings, judicial decisions, and other
applicable authority, all as in effect on the date of this opinion. The legal
authorities on which this opinion is based may be changed at any time. Any such
changes may be retroactively applied and could modify the opinions expressed
herein. This opinion does not address any tax considerations under foreign,
state, or local laws, or the tax considerations to certain Heart of Georgia
shareholders in light of their particular circumstances, including, persons who
are not United States persons, dealers in securities, tax-exempt entities,
shareholders who do not hold Heart of Georgia Common Stock as "capital assets"
within the meaning of Section 1221 of the Internal Revenue Code, and
shareholders who acquired their shares of Heart of Georgia Common Stock pursuant
to the exercise of Heart of Georgia options or otherwise as compensation.
Based upon and subject to the foregoing, we are of the opinion that the
Merger will constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code, and that the following are certain
federal income tax consequences that will result:
<PAGE>
(a) No gain or loss will be recognized for federal income tax
purposes by Heart of Georgia shareholders upon the exchange of their
shares of Heart of Georgia Common Stock for FLAG Common Stock.
(b) The basis of the shares of FLAG Common Stock to be
received by Heart of Georgia shareholders will be the same as the basis
of Heart of Georgia Common Stock surrendered in exchange therefor.
(c) The holding period of the FLAG Common Stock to be received
by each Heart of Georgia shareholder will include the period during
which the shares of Heart of Georgia Common Stock surrendered in
exchange therefor had been held, provided such shares were held by such
shareholders as a capital asset at the Effective Time of the Merger.
(d) Heart of Georgia shareholders who receive solely cash
pursuant to their statutory right to dissent will be treated as having
received such payment in redemption, as provided in Section 302(a) of
the Internal Revenue Code, of their stock. Generally, any gain or loss
recognized by any such Heart of Georgia shareholder will be capital
gain or loss, provided (i) the Heart of Georgia Common Stock
constitutes a capital asset in the hands of such shareholder, and (ii)
the requirements of 302(b)(1), (2) or (3) of the Internal Revenue Code
are met. Each affected Heart of Georgia shareholder should consult such
shareholder's own tax advisor for the tax effect of such redemption
(i.e., exchange treatment or dividend).
(e) No gain or loss will be recognized for federal income tax
purposes by Heart of Georgia or FLAG as a consequence of the Merger,
except for deferred gain or loss recognized pursuant to Treasury
Regulations issued under Section 1502 of the Internal Revenue Code.
This opinion is being rendered solely to the parties to whom it is
addressed and may be relied upon by them and the shareholders of Heart of
Georgia. This opinion may not be relied upon by any other party without the
express written permission of our Firm.
Very truly yours,
/S/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE>
CERTIFICATE OF
FLAG FINANCIAL CORPORATION
--------------------------
In connection with the merger of Heart of Georgia Bancshares Inc.
("Heart of Georgia") with and into FLAG Financial Corporation, Inc. ("FLAG"),
with FLAG as the surviving entity, and in accordance with the Agreement and Plan
of Merger by and between Heart of Georgia and FLAG dated as of August 19, 1998
(the "Agreement"), J. Daniel Speight, Jr. and Patti S. Davis, the President and
Chief Executive Officer and the Chief Financial Officer and Senior Vice
President, respectively, of FLAG make the following certifications. Unless
otherwise indicated, terms used in this certificate have the same meaning as in
the Agreement.
1. The undersigned are the President and Chief Executive
Officer and the Chief Financial Officer and Senior Vice President, respectively,
of FLAG, a corporation organized and existing under the laws of the State of
Georgia, and in such capacities have access to the information contained herein.
2. The following facts and representations made on behalf of
the management of FLAG presented to Powell, Goldstein, Frazer & Murphy in
connection with rendering the tax opinion referred to in the Agreement, are on
the date hereof true, correct, and complete.
3. The merger is expected to permit FLAG to expand its
operations into the Montgomery.
4. County area currently served by Heart of Georgia to
strengthen the franchise and thereby make a long-term contribution to earnings
per share.
5. Following the Effective Time, FLAG intends that it will
either (i) continue the historic business of Heart of Georgia or (ii) use, in a
going concern, a significant portion of Heart of Georgia's business assets.
6. FLAG has paid or will pay expenses it incurred in
connection with the Merger. FLAG did not and will not pay the expenses of Heart
of Georgia or any shareholder of Heart of Georgia incurred in connection with
the Merger.
7. There is no indebtedness outstanding between FLAG and Heart
of Georgia that was issued, acquired, or will be settled at a discount.
8. Not more than twenty-five percent (25%) of the fair market
value of FLAG's total assets consist of stock and securities of any one issuer,
and not more than fifty percent (50%) of the fair market value of its total
assets consists of stock and securities of five or fewer issuers. For purposes
of the preceding sentence, (a) a corporation's total assets exclude cash, cash
items (including accounts receivable and cash equivalents), and United States
government securities, (b) a corporation's total assets exclude stock and
securities issued by any subsidiary at least fifty percent (50%) of the voting
power or fifty percent (50%) of the total fair market value of the stock of
which is owned by the corporation, but the corporation is treated as owning
directly a ratable share (based on the percentage of the fair market value of
the subsidiary's stock owned by the corporation) of the assets owned by any such
subsidiary, and (c) all corporations that are members of the same "controlled
group" within the meaning of section 1563(a) of the Code are treated as a single
issuer.
9. The fair market value of the assets of Heart of Georgia
transferred to FLAG equaled or exceeded the sum of the liabilities, if any,
assumed by FLAG plus the liabilities, if any, to which the transferred assets
are subject.
1
<PAGE>
10. To the best knowledge of the undersigned, the liabilities
of Heart of Georgia, if any, assumed by FLAG and the liabilities, if any, to
which the transferred assets of Heart of Georgia are subject were incurred by
Heart of Georgia in the ordinary course of its business.
11. The transfer of assets pursuant to the Merger Agreement
does not constitute a transfer in a "title 11 or similar case" as such term is
defined in Section 368(a)(3) of the Code.
12. The payment of cash in lieu of fractional shares of FLAG
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to FLAG of issuing fractional shares and is not separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
the Heart of Georgia shareholders in lieu of issuing fractional shares of FLAG
Common Stock will not exceed one percent (1%) of the total consideration that
will be issued in the Merger to the Heart of Georgia shareholders in exchange
for their shares of Heart of Georgia Common Stock. The fractional share
interests of each Heart of Georgia shareholder will be aggregated, and no Heart
of Georgia shareholder will receive cash in an amount equal to or greater than
the value of one full share of FLAG Common Stock.
13. None of the shares of FLAG Common Stock or cash, if any,
received by any shareholder-employees of Heart of Georgia is separate
consideration for, or allocable to, any employment agreement.
14. The fair market value of the FLAG Common Stock and other
consideration received by the shareholders of Heart of Georgia will be, in each
instance, approximately equal to the fair market value of the Heart of Georgia
Common Stock surrendered in exchange therefor.
15. FLAG has no present plan or intention to reacquire, either
directly or through a "Related Person" as hereafter defined, any of its Common
Stock issued in the Merger. A "Related Person" is defined as any corporation
that is a member of the affiliated group of corporations of which FLAG is the
common parent for federal income tax purposes.
16. FLAG has no plan or intention to sell or otherwise dispose
of the assets of Heart of Georgia acquired in the transaction except for
dispositions made in the ordinary course of business or transfers to a
corporation controlled by FLAG. For purposes of the foregoing, FLAG is
considered to control a corporation in which it holds at least eighty percent
(80%) of the total combined voting power of all classes of stock entitled to
vote and at least eighty percent (80%) of the total number of all other classes
of stock.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of this 18th day of September, 1998.
/s/ J. Daniel Speight, Jr.
--------------------------
J. Daniel Speight, Jr.
President and Chief Executive Officer
/s/ Patti S. Davis
------------------
Patti S. Davis
Chief Financial Officer and
Senior Vice President
2
<PAGE>
CERTIFICATE OF
HEART OF GEORGIA BANCSHARES INC.
--------------------------------
In connection with the merger of Heart of Georgia Bancshares Inc.
("Heart of Georgia") with and into FLAG Financial Corporation. ("FLAG"), with
FLAG as the surviving entity, and in accordance with the Agreement and Plan of
Merger by and between FLAG and Heart of Georgia dated as of August 19, 1998 (the
"Agreement'), Donald M. Thigpen and Robert E. Thigpen, Jr., the President and
Secretary, respectively, of Heart of Georgia make the following certifications.
Unless otherwise indicated, terms used in this certificate have the same
meanings as in the Agreement.
1. The undersigned are the President and Secretary, respectively, of
Heart of Georgia, a corporation organized and existing under the laws of the
State of Georgia, and in such capacities have access to the information
contained herein.
2. The following facts and representations, made on behalf of the
management of Heart of Georgia and presented to Powell, Goldstein, Frazer &
Murphy LLP in connection with rendering the tax opinion referred to in the
Agreement, are on the date hereof true, correct and complete.
3. The Merger is expected to permit Heart of Georgia to (a) avoid
business concerns of remaining an independent financial institution in light of
current economic conditions and the competition presented by larger financial
institutions, (b) develop a more liquid trading market for Heart of Georgia's
shareholders investment, and (c) strengthen the franchise and thereby make a
long-term contribution to earnings per share.
4. Heart of Georgia has paid or will pay expenses it incurred or incurs
in connection with the Merger. FLAG did not and will not pay the expenses of
Heart of Georgia or any shareholder of Heart of Georgia incurred in connection
with the Merger.
5. There is no indebtedness outstanding between FLAG and Heart of
Georgia that was issued, acquired, or will be settled at a discount.
6. Not more than twenty-five percent (25%) of the fair market value of
Heart of Georgia's total assets consist of stock and securities of any one
issuer, and not more than fifty percent (50%) of the fair market value of its
total assets consists of stock and securities of five or fewer issuers. For
purposes of the preceding sentence, (a) a corporation's total assets exclude
cash, cash items (including accounts receivable and cash equivalents), and
United States government securities, (b) a corporation's total assets exclude
stock and securities issued by any subsidiary at least fifty percent (50%) of
the voting power or fifty percent (50%) of the total fair market value of the
stock of which is owned by the corporation, but the corporation is treated as
owning directly a ratable share (based on the percentage of the fair market
value of the subsidiary's stock owned by the corporation) of the assets owned by
any such subsidiary, and (c) all corporations that are members of the same
"controlled group" within the meaning of section 1563(a) of the Code are treated
as a single issuer.
7. The fair market value of the assets of Heart of Georgia transferred
to FLAG equaled or exceeded the sum of the liabilities, if any, assumed by FLAG
plus the liabilities, if any, to which the transferred assets are subject.
8. The liabilities of Heart of Georgia, if any, assumed by FLAG and the
liabilities, if any, to which the transferred assets of Heart of Georgia are
subject were incurred by Heart of Georgia in the ordinary course of its
business.
9. The transfer of assets pursuant to the Agreement does not constitute
a transfer in a "title 11 or similar case" as such term is defined in Section
368(a)(3) of the Code.
1
<PAGE>
10. None of the shares of FLAG Common Stock received by any
shareholder-employees of Heart of Georgia is separate consideration for, or
allocable to, any employment agreement.
11. The fair market value of the FLAG Common Stock and other
consideration received by the shareholders of Heart of Georgia will be, in each
instance, approximately equal to the fair market value of the Heart of Georgia
Common Stock surrendered in exchange therefor.
12. To the best of the knowledge of the undersigned, FLAG has no
present plan or intention to redeem any of its Common Stock issued in the Merger
and there is no present plan or intention on the part of the Heart of Georgia's
shareholders to sell any of the FLAG Common Stock received in the Merger to a
person related (as defined in Treasury Regulation Section 1.368-1(e)(3)) to
FLAG.
13. To the best of the knowledge of the undersigned, FLAG has no plan
or intention to sell or otherwise dispose of the assets of Heart of Georgia
acquired in the Merger except for dispositions made in the ordinary course of
business or transfers to a corporation controlled by FLAG. For purposes of the
foregoing, FLAG is considered to control a corporation in which it holds at
least eighty percent (80%) of the total combined voting power of all classes of
stock entitled to vote and at least eighty percent (80%) of the total number of
all other classes of stock.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
this 18th day of September, 1998.
/s/ Donald M. Thigpen
---------------------
Donald M. Thigpen
President
/s/ Robert E. Thigpen
---------------------
Robert E. Thigpen
Secretary
2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1998, except for note 2 as
to which the date is May 8, 1998 and note 10 as to which the date is June 3,
1998, accompanying the consolidated financial statements of FLAG Financial
Corporation and subsidiaries incorporated by reference in the Form S-4
Registration Statement and Prospectus. We consent to the use of the
aforementioned report in this Form S-4 Registration Statement and Prospectus and
to the use of our name as it appears under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
September 21, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 31, 1997, accompanying the
consolidated financial statements of FLAG Financial Corporation and subsidiaries
incorporated by reference in the Form S-4 Registration Statement and Prospectus.
We consent to the use of the aforementioned report in this Form S-4 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
/s/ ROBINSON, GRIMES AND COMPANY, P.C.
Columbus, Georgia
September 21, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 23, 1998, accompanying the
consolidated financial statements of Middle Georgia Bankshares, Inc. and
subsidiary incorporated by reference in the Form S-4 Registration Statement and
Prospectus. We consent to the use of the aforementioned report in this Form S-4
Registration Statement and Prospectus and to the use of our name as it appears
under the caption "Experts."
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
September 21, 1998
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 28, 1998, except for note S as
to which the date is February 18, 1998, accompanying the consolidated financial
statements of Three Rivers Bancshares, Inc. and subsidiaries incorporated by
reference in the Form S-4 Registration Statement and Prospectus. We consent to
the use of the aforementioned report in this Form S-4 Registration Statement and
Prospectus and to the use of our name as it appears under the caption "Experts."
/s/ THIGPEN, JONES, SEATON & CO., P.C.
Dublin, Georgia
September 21, 1998
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 17, 1998, accompanying the
consolidated financial statements of Heart of Georgia Bancshares, Inc. and
subsidiary contained in the Form S-4 Registration Statement and Prospectus. We
consent to the use of the aforementioned report in this Form S-4 Registration
Statement and Prospectus and to the use of our name as it appears under the
caption "Experts."
/s/ MCLAIN, CALHOUN & CO., P.C.
Vidalia, Georgia
September 21, 1998
EXHIBIT 99
PROXY
HEART OF GEORGIA BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby constitutes and appoints Donald M. Thigpen and
Robert E. Thigpen, or either of them, as proxies, each with full power of
substitution, to vote the number of shares of common stock of Heart of Georgia
Bancshares, Inc., a Georgia corporation ("Heart"), which the undersigned would
be entitled to vote if personally present at the Special Meeting of Heart
Shareholders to be held at the main office of Mount Vernon Bank located at 101
Railroad Avenue, Mount Vernon, Georgia, on ____________, October __, 1998, at
____ a.m., local time, and at any adjournment or postponement thereof (the
"Special Meeting") upon the proposals described in the Proxy
Statement/Prospectus and the Notice of Special Meeting of Shareholders, dated
October __, 1998, the receipt of which is acknowledged in the manner specified
below.
1. Merger. To approve, ratify, confirm and adopt the Agreement and Plan of
Merger, dated as of August 19, 1998 (the "Merger Agreement"), by and
between FLAG Financial Corporation ("FLAG") and Heart pursuant to which
(i) Heart will merge (the "Merger") with and into FLAG, and (ii) each
share of the $1.00 par value common stock of Heart ("Heart Common
Stock") issued and outstanding at the effective time of the Merger will
be exchanged for 2.025 shares of $1.00 par value common stock of FLAG
("FLAG Common Stock").
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In the discretion of the proxies on such other matters as may properly
come before the Special Meeting or any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 ABOVE.
Please sign this proxy exactly as your name appears below. When shares
are held jointly, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
DATED:________________________ , 1998
______________________________________
Signature
______________________________________
Signature if held jointly
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF HEART OF GEORGIA
BANCSHARES, INC., AND MAY BE REVOKED PRIOR TO ITS EXERCISE.
