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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
October 12, 1998
AVONDALE FINANCIAL CORP.
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(Exact name of Registrant as specified in its Charter)
DELAWARE 0-24566 36-3895923
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(State or other (Commission File No.) (IRS Employer
jurisdiction of Identification
incorporation) Number)
20 NORTH CLARK STREET, CHICAGO, ILLINOIS 60602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 782-6200
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N/A
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(Former name or former address, if changed since last report)
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Item 5. Other Events
On October 12, 1998 Avondale Financial Corp. ("Avondale") and Coal City
Corporation ("Coal City") entered into an Agreement and Plan of Merger
(including related stock option agreements) which, together with all exhibits
thereto, is included as Exhibit 2 hereto and incorporated by reference herein.
A copy of the joint press release announcing execution of the Agreement and
Plan of Merger is attached hereto as Exhibit 99.1 and incorporated by reference
herein.
A copy of Avondale's press release announcing a loss in the third quarter
of 1998 is attached hereto as Exhibit 99.2 and incorporated by reference herein.
Additional information on Coal City in the form of an offering memorandum
with respect to certain floating rate capital securities is attached hereto as
Exhibit 99.3 and incorporated by reference herein.
Item 7. Financial Statements and Exhibits
(c) Exhibits
2 Agreement and Plan of Merger, dated as of October 12,
1998, by and between Avondale Financial Corp. and Coal
City Corporation.
99.1 Joint Press Release of Avondale and Coal City, dated
October 13, 1998.
99.2 Press Release of Avondale dated October 13, 1998.
99.3 Offering Memorandum with respect to Coal City Capital
Trust I Floating Rate Capital Securities.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AVONDALE FINANCIAL CORP.
Date: October 12, 1998 By: /s/ ROBERT S. ENGELMAN, JR.
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Robert S. Engelman, Jr.
President and Chief
Executive Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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2 Agreement and Plan of Merger, dated as of October 12,
1998, by and between Avondale Financial Corp.
and Coal City Corporation.
99.1 Joint Press Release of Avondale and Coal City,
dated October 13, 1998.
99.2 Press Release of Avondale dated October 13, 1998.
99.3 Offering Memorandum with respect to Coal City
Capital Trust I Floating Rate Capital Securities.
EXHIBIT 2
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AGREEMENT AND PLAN OF MERGER
By and Between
Avondale Financial Corp.
And
Coal City Corporation
Dated as of October 12, 1998
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TABLE OF CONTENTS
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ARTICLE I
THE MERGER AND RELATED MATTERS............................................................................3
1.1 Merger..............................................................................................3
1.2 Effective Times.....................................................................................3
1.3 Conversion of Shares................................................................................4
1.4 Surviving Corporation in the Company Merger.........................................................5
1.5 Authorization for Issuance of Avondale Common Stock;
Exchange of Certificates............................................................................6
1.6 No Fractional Shares................................................................................8
1.7 Stockholders' Meetings..............................................................................8
1.8 Coal City Stock Options.............................................................................9
1.9 Registration Statement; Prospectus/Joint Proxy
Statement...........................................................................................9
1.10 Cooperation; Regulatory Approvals..................................................................11
1.11 Closing............................................................................................11
ARTICLE II
REPRESENTATIONS AND WARRANTIES...........................................................................12
2.1 Organization, Good Standing, Authority, Insurance, Etc.
..................................................................................................12
2.2 Capitalization.....................................................................................12
2.3 Ownership of Subsidiaries..........................................................................13
2.4 Financial Statements and Reports...................................................................13
2.5 Absence of Changes.................................................................................15
2.6 Prospectus/Joint Proxy Statement...................................................................15
2.7 No Broker's or Finder's Fees.......................................................................15
2.8 Litigation and Other Proceedings...................................................................16
2.9 Compliance with Law................................................................................16
2.10 Corporate Actions..................................................................................16
2.11 Authority..........................................................................................17
2.12 Employment Arrangements............................................................................18
2.13 Employee Benefits..................................................................................18
2.14 Information Furnished..............................................................................19
2.15 Property and Assets................................................................................20
2.16 Agreements and Instruments.........................................................................20
2.17 Material Contract Defaults.........................................................................21
2.18 Tax Matters........................................................................................21
2.19 Environmental Matters..............................................................................21
2.20 Loan Portfolio; Portfolio Management...............................................................22
2.21 Real Estate Loans and Investments..................................................................23
2.22 Derivatives Contracts..............................................................................23
2.23 Exceptions to Representations and Warranties.......................................................23
ARTICLE III
COVENANTS................................................................................................24
3.1 Investigations; Access and Copies..................................................................24
3.2 Conduct of Business................................................................................25
3.3 No Solicitation....................................................................................27
3.4 Stockholder Approvals..............................................................................28
3.5 Resale Letter Agreements; Accounting and Tax Treatment
..................................................................................................28
3.6 Publicity..........................................................................................28
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3.7 Cooperation Generally...............................................................................28
3.8 Additional Financial Statements and Reports.........................................................29
3.9 Stock Exchange Listing..............................................................................29
3.10 Employee Benefits and Agreements....................................................................29
3.11 Minority Interest in Manufacturers National.........................................................31
3.12 Preferred Stock.....................................................................................31
ARTICLE IV
CONDITIONS OF THE COMPANY MERGER;
TERMINATION OF AGREEMENT.................................................................................31
4.1 General Conditions..................................................................................31
4.2 Conditions to Obligations of .......................................................................33
4.3 Conditions to Obligations of .......................................................................34
4.4 Termination of Agreement and Abandonment of Merger..................................................36
ARTICLE V
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES..........................................................37
5.1 Termination; Lack of Survival of Representations and
Warranties..........................................................................................37
5.2 Payment of Expenses.................................................................................38
ARTICLE VI
CERTAIN POST-MERGER AGREEMENTS...........................................................................38
6.1 Indemnification.....................................................................................38
6.2 Directors and Officers of the Surviving Corporation and
Coal City Bank......................................................................................39
ARTICLE VII
GENERAL..................................................................................................42
7.1 Amendments..........................................................................................42
7.2 Confidentiality.....................................................................................42
7.3 Governing Law.......................................................................................42
7.4 Notices.............................................................................................42
7.5 No Assignment.......................................................................................43
7.6 Headings............................................................................................43
7.7 Counterparts........................................................................................43
7.8 Construction and Interpretation.....................................................................43
7.9 Entire Agreement....................................................................................44
7.10 Severability........................................................................................44
7.11 No Third Party Beneficiaries........................................................................44
7.12 No Employment Solicitation..........................................................................44
Schedules:
Schedule I Disclosure Schedule for Avondale...................................................................
Schedule II Disclosure Schedule for Coal City..................................................................
Exhibits:
Exhibit A Avondale Stock Option Agreement
Exhibit B Coal City Stock Option Agreement
Exhibit C Form of Avondale Voting Agreement
Exhibit D Form of Coal City Voting Agreement
Exhibit 1.4(c)(A) Amendment to Avondale Certificate
of Incorporation
Exhibit 1.4(c)(B) Amendment to Avondale Bylaws
Exhibit 3.5 Form of Affiliate Agreement
Exhibit 3.10(d) Form of Avondale Employment Agreement
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AGREEMENT AND PLAN OF MERGER
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THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is dated as of October 12,
1998, by and between Avondale Financial Corp., a Delaware corporation
("Avondale") and Coal City Corporation, an Illinois corporation ("Coal City").
Each of Avondale and Coal City is sometimes individually referred to herein as a
"party," and Avondale and Coal City are sometimes collectively referred to
herein as the "parties."
RECITALS
WHEREAS, Avondale, a unitary savings and loan holding company, with
principal offices in Chicago, Illinois, owns all of the issued and outstanding
capital stock of Avondale Federal Savings Bank, a federally chartered savings
bank ("Avondale Bank"), with principal offices in Chicago, Illinois. As of the
date hereof, Avondale has 10,000,000 authorized shares of common stock, par
value $0.01 per share ("Avondale Common Stock"), of which 2,902,566 shares are
outstanding, and 1,000,000 authorized shares of preferred stock, par value $.01
per share, none of which is outstanding.
WHEREAS, Coal City, a bank holding company, with principal offices in
Chicago, Illinois, owns 96.48% of the issued and outstanding common stock and
all of the issued and outstanding Class A Preferred Stock of Manufacturers
National Corporation, an Illinois corporation ("Manufacturers National"), with
principal offices in Chicago, Illinois, and Manufacturers National owns all of
the issued and outstanding capital stock of Manufacturers Bank, an Illinois
banking corporation ("Coal City Bank"), with principal offices in Chicago,
Illinois. As of the date hereof, Coal City has 200,000 authorized shares of
common stock, par value $10.00 per share ("Coal City Common Stock"), of which
48,957 shares are outstanding, 100 authorized shares of Class A preferred stock,
par value $100,000 per share ("Coal City Class A Preferred Stock"), of which no
shares are outstanding and 100 authorized shares of Class B preferred stock, par
value $150,000 per share ("Coal City Class B Preferred Stock, and together with
the Coal City Class A Preferred Stock, the "Coal City Preferred Stock"), of
which 68 shares are outstanding.
WHEREAS, Avondale and Coal City desire to combine their respective holding
companies through a tax-free, stock-for-stock merger so that the respective
stockholders of Avondale and Coal City will have an equity ownership in the
combined holding company.
WHEREAS, neither the Board of Directors of Avondale nor the Board of
Directors of Coal City seeks to sell its respective holding company at this time
but both Boards desire to merge their respective holding companies in a
transaction structured as a merger of equals.
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WHEREAS, it is intended that to accomplish this result, Coal City will be
merged with and into Avondale, with Avondale as the surviving corporation. Such
merger is referred to herein as the "Company Merger." Avondale after the Company
Merger is sometimes referred to herein as the "Surviving Corporation."
WHEREAS, following consummation of the Company Merger, all of the issued and
outstanding capital stock of Avondale Bank may be contributed to Manufacturers
National. Such transaction is referred to herein as the "Contribution."
Following consummation of the Contribution, either (i) Avondale Bank will be
merged with and into Coal City Bank, with Coal City Bank as the surviving
institution (such transaction referred to herein as the "Bank Merger"), or (ii)
Coal City Bank will purchase and assume all of the assets and liabilities of
Avondale Bank, other than a deposit taking office, deposits located thereat, and
certain assets and liabilities relating to the mortgage banking business of
Avondale Bank to be determined by the parties (such transaction referred to
herein as the "Bank Purchase and Assumption"). The Bank Merger and the Bank
Purchase and Assumption are sometimes collectively referred to herein as the
"Avondale Bank Acquisition." The Company Merger, the Contribution and the
Avondale Bank Acquisition are sometimes collectively referred to herein as the
"Merger."
WHEREAS, it is intended that for federal income tax purposes the Company
Merger shall qualify as a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and
this Agreement shall constitute a plan of reorganization pursuant to Section 368
of the Internal Revenue Code.
WHEREAS, as an inducement to and condition of Avondale's willingness to
enter into this Agreement and the Avondale Stock Option Agreement, Coal City
will grant to Avondale concurrently with the execution and delivery of this
Agreement an option pursuant to the Coal City Stock Option Agreement, and as an
inducement to and condition of Coal City's willingness to enter into this
Agreement and the Coal City Stock Option Agreement, Avondale will grant to Coal
City concurrently with the execution and delivery of this Agreement an option
pursuant to the Avondale Stock Option Agreement. The Avondale Stock Option
Agreement and the Coal City Stock Option Agreement are attached hereto as
Exhibits A and B, respectively. References herein to the "Stock Option
Agreement" shall refer in the case of Avondale to the Avondale Stock Option
Agreement and in the case of Coal City to the Coal City Stock Option Agreement,
and collectively such agreements shall be referred to as the "Stock Option
Agreements."
WHEREAS, concurrently with the execution and delivery of this Agreement, and
as an inducement to and condition of the parties' willingness to enter into this
Agreement, Coal City and each of the directors of Avondale and Avondale and each
of the directors of Coal City and certain of their affiliates, have entered into
voting
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agreements in the forms attached hereto as Exhibits C and D, respectively.
WHEREAS, the Boards of Directors of Avondale and Coal City (at meetings duly
called and held) have determined that this Agreement and the transactions
contemplated hereby are in the best interests of Avondale and Coal City,
respectively, and their respective stockholders and have approved this Agreement
and the Stock Option Agreements.
NOW THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements hereinafter set forth, the parties hereby
agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger. Subject to the terms and conditions of this Agreement and
pursuant to applicable law, at the Company Merger Effective Time (as hereinafter
defined), (i) Coal City shall be merged with and into Avondale pursuant to the
terms and conditions set forth herein, (ii) the separate corporate existence of
Coal City shall cease, and (iii) Avondale as the Surviving Corporation shall
continue to be governed by the laws of the State of Delaware. After the Company
Merger, subject to the terms and conditions of this Agreement and pursuant to
applicable law, at the Contribution Time (as hereinafter defined) all of the
issued and outstanding capital stock of Avondale Bank shall be contributed to
Manufacturers National pursuant to the terms and conditions set forth herein and
in a contribution agreement (the "Contribution Agreement"). After the
Contribution, subject to the terms and conditions of this Agreement and pursuant
to applicable law, either (i) at the Bank Merger Effective Time (as hereinafter
defined) (A) Avondale Bank shall be merged with and into Coal City Bank pursuant
to the terms and conditions set forth herein and in a bank merger agreement (the
"Bank Merger Agreement"), (B) the separate existence of Avondale Bank shall
cease, and (C) Coal City Bank shall continue as the surviving institution of the
Bank Merger, or (ii) at the Purchase and Assumption Time (as hereinafter
defined) (A) Coal City Bank shall purchase and assume all of the assets and
liabilities of Avondale Bank, other than a deposit taking office, deposits
located thereat, and certain assets and liabilities relating to the mortgage
banking business of Avondale Bank to be identified by the parties, pursuant to
the terms and conditions set forth herein and in a purchase and assumption
agreement (the "Purchase and Assumption Agreement") and (B) the separate
existence of Avondale Bank shall continue.
1.2 Effective Times. As soon as practicable after each of the
conditions set forth in Article IV hereof has been satisfied or waived, Avondale
and Coal City will file, or cause to be filed, a certificate of merger and
articles of merger with the appropriate authorities of Delaware and Illinois,
respectively, for the Company
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Merger, which certificate of merger and articles of merger shall in each case be
in the form required by and executed in accordance with the applicable
provisions of law. The Company Merger shall become effective at the time and
date which is the later of the time at which (i) the Delaware certificate of
merger is filed with the appropriate authorities of Delaware and (ii) the
Illinois articles of merger is filed with the appropriate authorities of
Illinois ("Company Merger Effective Time"), which shall be immediately following
the Closing (as defined in Section 1.11 hereof) and on the same day as the
Closing if practicable, or at such other date and time as may be agreed to by
the parties and specified in the certificate of merger and articles of merger in
accordance with applicable law. The Contribution shall become effective at such
time as shall be provided in the Contribution Agreement (the "Contribution
Time"). The Bank Merger, as and if applicable, shall become effective at the
time as shall be provided in the Bank Merger Agreement (the "Bank Merger
Effective Time"). The Bank Purchase and Assumption, as and if applicable, shall
become effective at such time as shall be provided in the Purchase and
Assumption Agreement (the "Purchase and Assumption Time"). The parties shall
cause the Company Merger to become effective before the Contribution. The
parties shall cause the Contribution to become effective before the Avondale
Bank Acquisition.
1.3 Conversion of Shares.
(a) At the Company Merger Effective Time, by virtue of the
Company Merger and without any action on the part of Avondale or Coal City or
the holders of shares of Avondale or Coal City Common Stock:
(i) Each outstanding share of Coal City Common Stock
issued and outstanding at the Company Merger Effective Time (except for
Dissenting Shares, if applicable, as defined in clause (a)(ii) of this Section),
subject to clause (a)(iii) of this Section and Section 1.6 hereof, shall cease
to be outstanding, shall cease to exist and shall be converted into and
represent solely 83.5 shares of Avondale Common Stock and shall no longer be a
share of Coal City Common Stock.
(ii) Any shares of Coal City Common Stock held by a holder
who dissents from the Company Merger in accordance with Section 5/11.65 of the
Illinois Business Corporation Act (the "IBCA") shall be referred to herein as
"Dissenting Shares." Notwithstanding any other provision of this Agreement, any
Dissenting Shares shall not, after the Company Merger Effective Time, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall be entitled only to such rights as are afforded in respect of
Dissenting Shares pursuant to the IBCA.
(iii) Any shares of Coal City Common Stock which are owned
or held by either party hereto or any of their respective Subsidiaries (as
defined in Section 2.1 hereof) (other than in a
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fiduciary capacity) at the Company Merger Effective Time shall cease to exist,
the certificates for such shares shall as promptly as practicable be cancelled,
such shares shall not be converted into or represent any shares of Avondale
Common Stock, and no shares of capital stock of Avondale shall be issued or
exchanged therefor.
(iv) Each share of Avondale Common Stock issued and
outstanding immediately before the Company Merger Effective Time shall remain an
outstanding share of Common Stock of Avondale as the Surviving Corporation.
(v) The holders of certificates representing shares of
Coal City Common Stock shall cease to have any rights as stockholders of Coal
City, except such rights, if any, as they may have pursuant to the IBCA.
1.4 Surviving Corporation in the Company Merger.
(a) The name of the Surviving Corporation in the Company
Merger shall be "MB Financial, Inc." The headquarters of the Surviving
Corporation shall be located in Chicago, Illinois.
(b) At the Company Merger Effective Time, the Certificate of
Incorporation of Avondale as then in effect shall be amended (subject to the
requisite approval of Avondale stockholders) as set forth in Exhibit 1.4(c)(A),
and such Certificate of Incorporation as so amended (or the Certificate of
Incorporation of Avondale immediately prior to the Company Merger Effective Time
if such amendment is not approved by the Avondale stockholders) shall be the
Certificate of Incorporation of Avondale as the Surviving Corporation until
amended as provided therein or as otherwise permitted by the Delaware General
Corporation Law (the "DGCL").
(c) At the Company Merger Effective Time, the Bylaws of
Avondale as then in effect shall be amended as set forth in Exhibit 1.4(c)(B),
and such Bylaws as so amended shall be the Bylaws of Avondale as the Surviving
Corporation until amended as provided therein or as otherwise permitted by the
DGCL.
(d) The directors and certain executive officers of Avondale
as the Surviving Corporation following the Company Merger shall be as provided
in Section 6.2 herein until such directors or officers are replaced or
additional directors or officers are elected or appointed in accordance with the
provisions of this Agreement and the Certificate of Incorporation and Bylaws of
the Surviving Corporation.
(e) From and after the Company Merger Effective Time:
(i) Avondale as the Surviving Corporation shall possess
all assets and property of every description, and every interest in the assets
and property, wherever located, and the rights, privileges, immunities, powers,
franchises, and authority,
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of a public as well as of a private nature, of each of Avondale and Coal City,
and all obligations belonging or due to each of Avondale and Coal City, all of
which shall vest in Avondale as the Surviving Corporation without further act or
deed. Title to any real estate or any interest in the real estate vested in
Avondale or Coal City shall not revert or in any way be impaired by reason of
the Company Merger.
(ii) Avondale as the Surviving Corporation will be liable for
all the obligations of each of Avondale and Coal City. Any claim existing, or
action or proceeding pending, by or against Avondale or Coal City, may be
prosecuted to judgement, with right of appeal, as if the Company Merger had not
taken place, or Avondale as the Surviving Corporation may be substituted in its
place.
(iii) All the rights of creditors of each of Avondale and Coal
City will be preserved unimpaired, and all liens upon the property of Avondale
and Coal City will be preserved unimpaired only on the property affected by such
liens immediately before the Company Merger Effective Time.
1.5 Authorization for Issuance of Avondale Common Stock;
Exchange of Certificates.
(a) Avondale shall reserve for issuance a sufficient
number of shares of its common stock for the purpose of issuing its shares to
Coal City's stockholders in accordance with this Article I.
(b) After the Company Merger Effective Time, holders
of certificates theretofore representing outstanding shares of Coal City Common
Stock (other than as provided in Sections 1.3(a)(ii) and (iii) hereof), upon
surrender of such certificates to an exchange agent appointed jointly by
Avondale and Coal City on behalf of Avondale as the Surviving Corporation (the
"Exchange Agent"), shall be entitled to receive certificates for the number of
whole shares of Avondale Common Stock into which shares of Coal City Common
Stock theretofore evidenced by the certificates so surrendered shall have been
converted, as provided in Section 1.3 hereof, and cash payments in lieu of
fractional shares, if any, as provided in Section 1.6 hereof. As soon as
practicable after the Company Merger Effective Time, the Exchange Agent will
send a notice and transmittal form to each Coal City stockholder of record at
the Company Merger Effective Time whose Coal City Common Stock shall have been
converted into Avondale Common Stock advising such stockholder of the
effectiveness of the Company Merger and the procedure for surrendering to the
Exchange Agent outstanding certificates formerly representing Coal City Common
Stock in exchange for new certificates for Avondale Common Stock. Upon
surrender, each certificate representing Coal City Common Stock shall be
cancelled.
(c) Until surrendered as provided in this Section 1.5
hereof, all outstanding certificates of a holder which, before
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the Company Merger Effective Time, represented Coal City Common Stock (other
than those representing Dissenting Shares and shares cancelled at the Company
Merger Effective Time pursuant to Section 1.3(a)(iii) hereof) will be deemed for
all corporate purposes to represent the number of whole shares of Avondale
Common Stock into which the shares of Coal City Common Stock formerly
represented thereby were converted and the right to receive cash in lieu of a
fractional share interest. However, until such outstanding certificates formerly
representing Coal City Common Stock are so surrendered, no dividend or
distribution payable to holders of record of Avondale Common Stock shall be paid
to any holder of such outstanding certificates, but upon surrender of such
outstanding certificates by such holder there shall be paid to such holder the
amount of any dividends or distribution, without interest, theretofore paid with
respect to such whole shares of Avondale Common Stock, but not paid to such
holder, and which dividends or distribution had a record date occurring on or
after the Company Merger Effective Time and the amount of any cash, without
interest, payable to such holder in lieu of a fractional share interest pursuant
to Section 1.6 hereof. After the Company Merger Effective Time, there shall be
no further registration of transfers on the records of Coal City of outstanding
certificates formerly representing shares of Coal City Common Stock and, if a
certificate formerly representing such shares is presented to Coal City or
Avondale, it shall be forwarded to the Exchange Agent for cancellation and
exchanged for a certificate representing shares of Avondale Common Stock and
cash for any fractional share interest (if any), as herein provided. Following
six months after the Company Merger Effective Time, the Exchange Agent shall
return to Avondale any certificates for Avondale Common Stock and cash remaining
in the possession of the Exchange Agent (together with any dividends in respect
thereof) and thereafter shareholders of Coal City shall look exclusively to
Avondale for shares of Avondale Common Stock and cash to which they are entitled
hereunder.
(d) All shares of Avondale Common Stock and cash in
lieu of any fractional share issued or paid upon the conversion of Coal City
Common Stock in accordance with the above terms and conditions shall be deemed
to have been issued or paid in full satisfaction of all rights pertaining to
such Coal City Common Stock.
(e) If any new certificate for Avondale Common Stock
is to be issued in a name other than that in which the certificate surrendered
in exchange thereof is registered, it shall be a condition of the issuance
therefor that the certificate surrendered in exchange shall be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
transfer pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of a new certificate representing shares of Avondale
Common Stock in any name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
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(f) In the event any certificate representing Coal
City Common Stock shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, such shares of
Avondale Common Stock and cash for any fractional share interest, as may be
required pursuant hereto; provided, however, that Avondale as the Surviving
Corporation or Exchange Agent may, in its discretion and as a condition
precedent to the issuance or payment thereof, require the owner of such lost,
stolen or destroyed certificate to deliver a bond in such sum as it may direct
as indemnity against any claim that may be made against Avondale as the
Surviving Corporation, Coal City, the Exchange Agent or any other person with
respect to the certificate alleged to have been lost, stolen or destroyed.
1.6 No Fractional Shares. Notwithstanding any term or provision hereof,
no fractional shares of Avondale Common Stock, and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued upon the
conversion of or in exchange for any shares of Coal City Common Stock; no
dividend or distribution with respect to Avondale Common Stock shall be payable
on or with respect to any fractional share interest; and no such fractional
share interest shall entitle the owner thereof to vote or to any other rights of
a stockholder of Avondale as the Surviving Corporation. In lieu of such
fractional share interest, any holder of Coal City Common Stock who would
otherwise be entitled to a fractional share of Avondale Common Stock will, upon
surrender of his certificate or certificates representing Coal City Common Stock
outstanding immediately before the Company Merger Effective Time, be paid the
applicable cash value of such fractional share interest, which shall be equal to
the product of the fraction of the share to which such holder would otherwise
have been entitled and the closing price of Avondale Common Stock on the trading
day immediately prior to the date of the Company Merger Effective Time. For the
purposes of determining any such fractional share interest, all shares of Coal
City Common Stock owned by a Coal City stockholder shall be combined so as to
calculate the maximum number of whole shares of Avondale Common Stock issuable
to such Coal City stockholder.
1.7 Stockholders' Meetings.
(a) Avondale shall, at the earliest practicable date,
hold a meeting of its stockholders (the "Avondale Stockholders' Meeting") to
submit this Agreement for adoption by its stockholders. The affirmative vote of
a majority of the issued and outstanding shares of Avondale Common Stock
entitled to vote shall be required for such adoption.
(b) Coal City shall, at the earliest practicable
date, hold a meeting of its stockholders (the "Coal City Stockholders' Meeting")
to submit this Agreement for stockholder approval. The affirmative vote of
two-thirds of the issued and
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outstanding shares of Coal City Common Stock entitled to vote shall be required
for such approval.
1.8 Coal City Stock Options.
(a) At the Company Merger Effective Time, by virtue
of the Company Merger and without any action on the part of any holder of an
option, each outstanding option under the stock option plans of Coal City (the
"Coal City Option Plans"), whether vested or unvested, shall continue
outstanding as an option to purchase, in place of the purchase of each share of
Coal City Common Stock, the number of shares (rounded to the nearest whole
share) of Avondale Common Stock that would have been received by the optionee in
the Company Merger had the option been exercised in full (without regard to any
limitations contained therein on exercise) for shares of Coal City Common Stock
immediately before the Company Merger upon the same terms and conditions under
the relevant option as were applicable immediately before the Company Merger
Effective Time, except for appropriate pro rata adjustments as to the relevant
option price for shares of Avondale Common Stock substituted therefor so that
the aggregate option exercise price of shares subject to an option immediately
following the substitution shall be the same as the aggregate option exercise
price for such shares immediately before such substitution. It is intended that
the foregoing substitution shall be undertaken consistent with and in a manner
that will not constitute a "modification" under Section 424 of the Internal
Revenue Code as to any stock option which is an "incentive stock option."
(b) At all times after the Company Merger Effective
Time, Avondale as the Surviving Corporation shall reserve for issuance such
number of shares of Avondale Common Stock as necessary so as to permit the
exercise of options granted under the Coal City Option Plans in the manner
contemplated by this Agreement and the instruments pursuant to which such
options were granted. Avondale shall make all filings required under federal and
state securities laws promptly after the Company Merger Effective Time so as to
permit the exercise of such options and the sale of the shares received by the
optionee upon such exercise at and after the Company Merger Effective Time and
Avondale as the Surviving Corporation shall continue to make such filings
thereafter as may be necessary to permit the continued exercise of options and
sale of such shares.
1.9 Registration Statement; Prospectus/Joint Proxy Statement.
(a) For the purposes (i) of holding the Avondale
Stockholders' Meeting, (ii) of registering with the Securities and Exchange
Commission ("SEC") and with applicable state securities authorities the Avondale
Common Stock to be issued to holders of Coal City Common Stock in connection
with the Company Merger and (iii) of holding the Coal City Stockholders'
Meeting, the parties shall cooperate in the preparation of an appropriate
registration
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statement (such registration statement, together with all and any amendments and
supplements thereto, is referred to herein as the "Registration Statement"),
including the Prospectus/Joint Proxy Statement satisfying all applicable
requirements of applicable state laws, and of the Securities Act of 1933 (the
"Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act")
and the rules and regulations thereunder (such Prospectus/Joint Proxy Statement,
together with any and all amendments or supplements thereto, is referred to
herein as the "Prospectus/Joint Proxy Statement").
(b) Avondale shall furnish such information
concerning Avondale and its Subsidiaries as is necessary in order to cause the
Prospectus/Joint Proxy Statement, insofar as it relates to such entities, to
comply with Section 1.9(a) hereof. Avondale agrees promptly to advise Coal City
if at any time before the Coal City or Avondale Stockholders' Meeting any
information provided by Avondale in the Prospectus/Joint Proxy Statement becomes
incorrect or incomplete in any material respect and to provide the information
needed to correct such inaccuracy or omission. Avondale shall furnish Coal City
with such supplemental information as may be necessary in order to cause such
Prospectus/Joint Proxy Statement, insofar as it relates to Avondale and its
Subsidiaries, to comply with Section 1.9(a) hereof.
(c) Coal City shall furnish Avondale with such
information concerning Coal City and its Subsidiaries as is necessary in order
to cause the Prospectus/Joint Proxy Statement, insofar as it relates to such
entities, to comply with Section 1.9(a) hereof. Coal City agrees promptly to
advise Avondale if at any time before the Avondale or Coal City Stockholders'
Meeting any information provided by Coal City in the Prospectus/Joint Proxy
Statement becomes incorrect or incomplete in any material respect and to provide
Avondale with the information needed to correct such inaccuracy or omission.
Coal City shall furnish Avondale with such supplemental information as may be
necessary in order to cause the Prospectus/Joint Proxy Statement, insofar as it
relates to Coal City and its Subsidiaries, to comply with Section 1.9(a).
(d) Avondale shall promptly file the Registration
Statement with the SEC and applicable state securities agencies. Avondale and
Coal City shall use all reasonable efforts to cause the Registration Statement
to become effective under the Securities Act and applicable state securities
laws at the earliest practicable date. Coal City authorizes Avondale to utilize
in the Registration Statement the information concerning Coal City and its
Subsidiaries provided to Avondale for the purpose of inclusion in the
Prospectus/Joint Proxy Statement. Avondale shall advise Coal City promptly when
the Registration Statement has become effective and of any supplements or
amendments thereto, and Avondale shall furnish Coal City with copies of all such
documents. Before the Company Merger Effective Time or the termination of this
Agreement, each party shall consult with the other with respect to any material
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(other than the Prospectus/Joint Proxy Statement) that might constitute a
"prospectus" relating to the Company Merger within the meaning of the Securities
Act.
1.10 Cooperation; Regulatory Approvals. The parties shall cooperate,
and shall cause each of their respective affiliates and Subsidiaries to
cooperate, in the preparation and submission by them, as promptly as reasonably
practicable, of such applications, petitions, and other filings as any of them
may reasonably deem necessary or desirable to or with thrift and bank regulatory
authorities, Federal Trade Commission, Department of Justice, SEC, Secretary of
State of Delaware and Illinois, other regulatory or governmental authorities,
holders of the voting shares of common stock of Avondale and Coal City, and any
other persons for the purpose of obtaining any approvals or consents necessary
to consummate the transactions contemplated hereby. Each party will have the
right to review and comment on such applications, petitions and filings in
advance and shall furnish to the other copies thereof promptly after submission
thereof. Any such materials must be acceptable to both Avondale and Coal City
prior to submission with any regulatory or governmental authority or
transmission to stockholders or other third parties, except to the extent that
Avondale or Coal City is legally required to proceed prior to obtaining the
acceptance of the other party hereto. Each party agrees to consult with the
other with respect to obtaining all necessary consents and approvals, and each
will keep the other apprised of the status of matters relating to such approvals
and consents and the consummation of the transactions contemplated hereby. At
the date hereof, no party is aware of any reason that any regulatory approval
required to be obtained by it would not be obtained or would be obtained subject
to conditions that would have or result in a material adverse effect on Avondale
as the Surviving Corporation or, as and if applicable, Coal City Bank as the
surviving institution in the Bank Merger or, as and if applicable, Coal City
Bank as the acquiror in the Bank Purchase and Assumption.
1.11 Closing. If (i) this Agreement has been duly approved by the
stockholders of Avondale and Coal City, and (ii) all relevant conditions of this
Agreement have been satisfied or waived, a closing (the "Closing") shall take
place as promptly as practicable thereafter at the principal office of Schwartz,
Cooper, Greenberger & Krauss, Chicago, Illinois, or at such other place as the
parties agree, at which the parties will exchange certificates, opinions,
letters and other documents as required hereby and will make the filings
described in Section 1.2 hereof. Such Closing will take place within 30 days
after the satisfaction or waiver of all conditions and/or obligations precedent
to Closing contained in Article IV of this Agreement, or at such other time as
the parties agree. The parties shall use their respective best efforts to cause
the Closing to occur on or prior to March 31, 1999.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES
Avondale represents and warrants to Coal City, and Coal City represents
and warrants to Avondale, except as disclosed in the Disclosure Schedule
delivered by each party to the other pursuant to Section 2.23 herein, as
follows:
2.1 Organization, Good Standing, Authority, Insurance, Etc. It is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation. Section 2.1 of its Disclosure Schedule
lists each "subsidiary" (the term "subsidiary" when used with respect to any
party means any entity (including without limitation any corporation,
partnership, joint venture or other organization, whether incorporated or
unincorporated) which is consolidated with such party for financial reporting
purposes (individually a "Subsidiary" and collectively the "Subsidiaries"). Each
of its Subsidiaries is duly organized, validly existing and in good standing
under the laws of the jurisdiction under which it is organized, as set forth in
Section 2.1 of its Disclosure Schedule. It and each of its Subsidiaries have all
requisite power and authority and to the extent required by applicable law are
licensed to own, lease and operate their respective properties and conduct their
respective businesses as they are now being conducted. It has delivered or made
available to the other party a true, complete and correct copy of the articles
of incorporation, certificate of incorporation or other organizing document and
of the bylaws, as in effect on the date of this Agreement, of it and each of its
Subsidiaries. It and each of its Subsidiaries are qualified to do business as
foreign corporations or entities and are in good standing in each jurisdiction
in which qualification is necessary under applicable law, except to the extent
that any failures to so qualify would not, in the aggregate, have a material
adverse effect on it. All eligible accounts of each of its Subsidiaries that is
a depositary institution are insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum extent permitted under applicable law.
In the case of the representations and warranties of Avondale, Avondale is duly
registered as a savings and loan holding company under the Home Owners' Loan Act
of 1933, as amended, and the Avondale Common Stock is registered under the
Exchange Act. In the case of the representations and warranties of Coal City,
Coal City is duly registered as a bank holding company registered under the Bank
Holding Company Act of 1956, as amended.
Its minute books and those of each of its Subsidiaries contain complete
and accurate records of all meetings and other corporate actions taken by their
respective stockholders and Boards of Directors (including the committees of
such Boards).
2.2 Capitalization. (a) Its authorized capital stock and the
number of issued and outstanding shares of its capital stock as of
the date hereof are accurately set forth in the recitals in this
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Agreement. All outstanding shares of its common stock are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. Except
(i) as set forth in Section 2.2 of its Disclosure Schedule or (ii) with respect
to the Stock Option Agreement, as of the date of this Agreement, there are no
options, convertible securities, warrants or other rights (preemptive or
otherwise) to purchase or acquire any of its capital stock from it and no oral
or written agreement, contract, arrangement, understanding, plan or instrument
of any kind to which it or any of its Subsidiaries is subject with respect to
the issuance, voting or sale of issued or unissued shares of its capital stock.
A true and complete copy of each plan and agreement pursuant to which such
options, convertible securities, warrants or other rights have been granted or
issued, as in effect on the date of this Agreement, is included in Section 2.2
of its Disclosure Schedule. Only the holders of its common stock have the right
to vote at meetings of its stockholders on matters to be voted thereat
(including this Agreement).
(b) With respect to the shares of Avondale Common Stock to be
issued in the Company Merger, Avondale represents and warrants that such shares
when so issued in accordance with this Agreement will be duly authorized,
validly issued, fully paid and nonassessable and not subject to any preemptive
rights or other liens.
2.3 Ownership of Subsidiaries. All outstanding shares or ownership
interests of its Subsidiaries are validly issued, fully paid, nonassessable and
owned beneficially and of record by it or one of its Subsidiaries free and clear
of any lien, claim, charge, restriction, rights of third parties, or encumbrance
(collectively, "Encumbrance"), except as set forth in Section 2.3 of its
Disclosure Schedule. There are no options, convertible securities, warrants or
other rights (preemptive or otherwise) to purchase or acquire any capital stock
or ownership interests of any of its Subsidiaries and no contracts to which it
or any of its Subsidiaries is subject with respect to the issuance, voting or
sale of issued or unissued shares of the capital stock or ownership interests of
any of its Subsidiaries. Neither it nor any of its Subsidiaries owns more than
2% of the capital stock or other equity securities (including securities
convertible or exchangeable into such securities) of or more than 2% of the
aggregate profit participations in any entity other than a Subsidiary or as
otherwise set forth in Section 2.3 of its Disclosure Schedule.
2.4 Financial Statements and Reports. (a) No registration statement,
offering circular, proxy statement, schedule or report filed by it or any of its
Subsidiaries under various securities and financial institution laws and
regulations ("Regulatory Reports"), on the date of its effectiveness in the case
of such registration statements, or on the date of filing in the case of such
reports or schedules, or on the date of mailing in the case of such proxy
statements, contained any untrue statement of a material fact or
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omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. For the past five years, it and its Subsidiaries have
timely filed all Regulatory Reports required to be filed by them under various
securities and financial institution laws and regulations except to the extent
that all failures to so file, in the aggregate, would not have a material
adverse effect on it; and all such documents, as finally amended, complied in
all material respects with applicable requirements of law and, as of their
respective date or the date as amended, did not 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 therein, in light of the circumstances under
which they were made, not misleading. Except to the extent stated therein, all
financial statements and schedules included in the Regulatory Reports (or to be
included in Regulatory Reports to be filed after the date hereof) (i) are or
will be (with respect to financial statements in respect of periods ending after
June 30, 1998), in accordance with its books and records and those of its
consolidated Subsidiaries, and (ii) present (and in the case of financial
statements in respect of periods ending after June 30, 1998, will present)
fairly the consolidated financial position and the consolidated results of
operations or income, changes in stockholders' equity and cash flows of it and
its Subsidiaries as of the dates and for the period indicated in accordance with
generally accepted accounting principles applied on a basis consistent with
prior periods (except for the omission of notes to unaudited statements and in
the case of unaudited statements to normal recurring year-end adjustments normal
in nature and amounts). Its audited consolidated financial statements at
December 31, 1997 and for the year then ended and the consolidated financial
statements for all periods thereafter up to the Closing reflect or will reflect,
as the case may be, all liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due and regardless of when
asserted) as of such date of it and its Subsidiaries required to be reflected in
such financial statements in accordance with generally accepted accounting
principles and contain or will contain (as the case may be) adequate reserves
for losses on loans and properties acquired in settlement of loans, taxes and
all other material accrued liabilities and for all reasonably anticipated
material losses, if any, as of such date in accordance with generally accepted
accounting principles. There exists no set of circumstances that could
reasonably be expected to result in any liability or obligation material to it
or its Subsidiaries, taken as a whole, except as disclosed in such consolidated
financial statements at December 31, 1997 or for transactions effected or
actions occurring or omitted to be taken after December 31, 1997 (i) in the
ordinary course of business, (ii) as permitted by this Agreement or (iii) as
disclosed in its Regulatory Reports filed after December 31, 1997 and before the
date of this Agreement. A true and complete copy of such December 31, 1997
financial statements has been delivered by it to the other party.
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(b) To the extent permitted under applicable law, it has delivered or
made available to the other party each Regulatory Report filed, used or
circulated by it with respect to periods since January 1, 1992 through the date
of this Agreement and will promptly deliver to the other party each such
Regulatory Report filed, used or circulated after the date hereof, each in the
form (including exhibits and any amendments thereto) filed with the applicable
regulatory or governmental entity (or, if not so filed, in the form used or
circulated).
2.5 Absence of Changes.
(a) Since June 30, 1998, there has been no material adverse
change affecting it. There is no occurrence, event or development of any nature
existing or, to its best knowledge, threatened which may reasonably be expected
to have a material adverse effect upon it.
(b) Except as set forth in Section 2.5 of its Disclosure
Schedule or in its Regulatory Reports filed after December 31, 1997 and before
the date of this Agreement, since December 31, 1997, each of it and its
Subsidiaries has owned and operated its respective assets, properties and
businesses in the ordinary course and consistent with past practice.
2.6 Prospectus/Joint Proxy Statement. At the time the Prospectus/Joint
Proxy Statement is mailed to the stockholders of Avondale and Coal City for the
solicitation of proxies for the approvals referred to in Section 1.7 hereof and
at all times after such mailings up to and including the times of such
approvals, such Prospectus/Joint Proxy Statement (including any supplements
thereto), with respect to all information set forth therein relating to it
(including its Subsidiaries) and its stockholders, its common stock, this
Agreement, the Merger and the other transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions
of the Securities Act, the Exchange Act and the rules and regulations under such
Acts; and
(b) Not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements contained therein, in light of the circumstances
under which it is made, not misleading.
2.7 No Broker's or Finder's Fees. No agent, broker, investment banker,
person or firm acting on behalf or under authority of it or any of its
Subsidiaries is or will be entitled to any broker's or finder's fee or any other
commission or similar fee directly or indirectly in connection with the Merger
or any other transaction contemplated hereby, except as set forth in Section 2.7
of its Disclosure Schedule.
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2.8 Litigation and Other Proceedings. Except for matters which would
not have a material adverse effect on it, or except as set forth in Section 2.8
of its Disclosure Schedule, neither it nor any of its Subsidiaries is a
defendant in, nor is any of its property subject to, any pending or, to its best
knowledge, threatened claim, action, suit, investigation or proceeding or
subject to any judicial order, judgment or decree.
2.9 Compliance with Law. Except as set forth in Section 2.9 of its
Disclosure Schedule:
(a) It and each of its Subsidiaries are in compliance in all
material respects with all laws, regulations, ordinances, rules, judgments,
orders or decrees applicable to their respective operations or businesses,
including without limitation the Equal Credit Opportunity Act, the Fair Housing
Act, the Community Reinvestment Act, the Home Owners' Disclosure Act and all
other applicable fair lending laws or other laws relating to discrimination.
Neither it nor any of its Subsidiaries has received notice from any federal,
state or local government or governmental agency of any material violation of,
and does not know of any material violations of, any of the above.
(b) It and each of its Subsidiaries have all permits,
licenses, certificates of authority, orders and approvals of, and have made all
filings, applications and registrations with, all federal, state, local and
foreign governmental or regulatory bodies that are required in order to permit
them to carry on their respective businesses as they are presently being
conducted.
(c) It and each of its Subsidiaries have received since
January 1, 1995 no notification or communication from any governmental or
regulatory entity or the staff thereof (A) asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances that such governmental or regulatory entity administers or enforces;
(B) threatening to revoke any license, franchise, permit or authorization; or
(C) threatening or contemplating any enforcement action by or supervisory or
other written agreement with a state or federal banking regulator, or any
revocation or limitation of, or action which would have the effect of revoking
or limiting, the FDIC deposit insurance of any Subsidiary (nor, to the knowledge
of its executive officers, do any grounds for any of the foregoing exist); and
(d) It and each of its Subsidiaries are not required to give
prior notice to any regulatory agency of the proposed addition of an individual
to their respective board of directors or the employment of an individual as a
senior executive officer.
2.10 Corporate Actions.
(a) Its Board of Directors has (i) duly approved the
Company Merger, this Agreement and the Stock Option Agreements, and
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authorized its officers to execute and deliver this Agreement, the Stock Option
Agreements and to take all action necessary to consummate the Company Merger and
the other transactions contemplated hereby, and (ii) authorized and directed the
submission for stockholders' approval or adoption of this Agreement.
(b) Its Board of Directors has taken all necessary action to
exempt this Agreement, and the Stock Option Agreement and the transactions
contemplated hereby and thereby from, and this Agreement, the Stock Option
Agreement and the transactions contemplated hereby and thereby are exempt from,
(i) any applicable state takeover laws, (ii) any state laws limiting or
restricting the voting rights of stockholders, (iii) any state laws requiring a
stockholder approval vote in excess of the vote normally required in
transactions of similar type not involving a "related person," "interested
stockholder" or person or entity of similar type and (iv) any provision in its
or any of its Subsidiaries' articles of incorporation, certificate of
incorporation, charter or bylaws, (A) restricting or limiting stock ownership or
the voting rights of stockholders or (B) requiring a stockholder approval vote
in excess of the vote normally required in transactions of similar type not
involving a "related person," interested stockholder" or person or entity of
similar type.
2.11 Authority. Except as set forth in Section 2.11 of its Disclosure
Schedule, neither the execution and delivery of and performance of its
obligations under this Agreement, the Contribution Agreement, the Bank Merger
Agreement (as and if applicable), the Bank Purchase and Assumption Agreement (as
and if applicable) and the Stock Option Agreement by it or its applicable
Subsidiary nor the consummation of the Merger will violate any of the provisions
of, or constitute a breach or default under or give any person the right to
terminate or accelerate payment or performance under, (i) its articles of
incorporation, certificate of incorporation or bylaws, or the articles of
incorporation, certificate of incorporation, charter or bylaws of any of its
Subsidiaries, (ii) any regulatory restraint on the acquisition of it or control
thereof, (iii) any law, rule, ordinance or regulation or judgment, decree,
order, award or governmental or non-governmental permit or license to which it
or any of its Subsidiaries is subject or (iv) any agreement, lease, contract,
note, mortgage, indenture, arrangement or other obligation or instrument
("Contract") to which it or any of its Subsidiaries is a party or is subject or
by which any of its or their properties or assets is bound and which provides
for payments by, on behalf of, or to it and/or any of its Subsidiaries in excess
of either $25,000 per annum or $100,000 over the term of such Contract. The
parties acknowledge that the consummation of the Merger and the other
transactions contemplated hereby is subject to various regulatory approvals. It
or its applicable Subsidiary has all requisite corporate power and authority to
enter into this Agreement, the Stock Option Agreements, the Contribution
Agreement, the Bank Merger Agreement (as and if applicable) and the Bank
Purchase and
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Assumption Agreement (as and if applicable), and to perform its obligations
hereunder and thereunder, subject in the case of the Company Merger to the
approval or adoption of this Agreement by its stockholders under applicable law.
Other than the receipt of Governmental Approvals (as defined in Section 4.1(c)),
the approval or adoption of this Agreement by its stockholders and except as set
forth in Section 2.11 of its Disclosure Schedule with respect to any Contract,
no consents or approvals are required on its behalf or on behalf of any of its
Subsidiaries in connection with the consummation of the transactions
contemplated by this Agreement. This Agreement and the Stock Option Agreements
constitute the valid and binding obligations of it, enforceable in accordance
with their terms, except as enforceability may be limited by applicable laws
relating to bankruptcy, insolvency or creditors rights generally and general
principles of equity.
2.12 Employment Arrangements. Except as set forth in Section 2.12 of
its Disclosure Schedule, there are no agreements, plans or other arrangements
with respect to employment, severance or other benefits with any current or
former directors, officers or employees of it or any of its Subsidiaries which
may not be terminated without penalty or expense (including any augmentation or
acceleration of benefits) on 30 days' or less notice to any such person. Except
as set forth in Section 2.12 of its Disclosure Schedule, no payments and
benefits (including any augmentation or acceleration of benefits) to current or
former directors, officers or employees of it or any of its Subsidiaries
resulting from the transactions contemplated hereby or the termination of such
person's service or employment within two years after completion of the Company
Merger will cause the imposition of excise taxes under Section 4999 of the
Internal Revenue Code or the disallowance of a deduction to it, Avondale as the
Surviving Corporation, or any of their respective Subsidiaries pursuant to
Section 162, 280G, or any other section of the Internal Revenue Code.
2.13 Employee Benefits. (a) Neither it nor any of its Subsidiaries
maintains any funded deferred compensation plans (including profit sharing,
pension, retirement savings or stock bonus plans), unfunded deferred
compensation arrangements or employee benefit plans as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
other than any plans ("Employee Plans") set forth in Section 2.13 of its
Disclosure Schedule (true and correct copies of which it has delivered to the
other party). Neither it nor any of its Subsidiaries has incurred or reasonably
expects to incur any liability to the Pension Benefit Guaranty Corporation
except for required premium payments which, to the extent due and payable, have
been paid. The Employee Plans intended to be qualified under Section 401(a) of
the Internal Revenue Code are so qualified, and it is not aware of any fact
which would adversely affect the qualified status of such plans. Except as set
forth in Section 2.13 of its Disclosure Schedule, neither it nor any of its
Subsidiaries (a) provides health, medical, death or survivor benefits to any
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former employee or beneficiary thereof or (b) maintains any form of current
(exclusive of base salary and base wages) or deferred compensation, bonus, stock
option, stock appreciation right, benefit, severance pay, retirement, employee
stock ownership, incentive, group or individual health insurance, welfare or
similar plan or arrangement for the benefit of any single or class of directors,
officers or employees, whether active or retired (collectively "Benefit
Arrangements").
(b) Except as disclosed in Section 2.13 of its Disclosure
Schedule, all Employee Plans and Benefit Arrangements which are in effect were
in effect for substantially all of calendar year 1997 and there has been no
material amendment thereof (other than amendments required to comply with
applicable law) or increase in the cost thereof or benefits payable thereunder
on or after January 1, 1997.
(c) To its best knowledge, with respect to all Employee Plans
and Benefit Arrangements, it and each of its Subsidiaries are in substantial
compliance with the requirements prescribed by any and all statutes,
governmental or court orders or rules or regulations currently in effect,
including but not limited to ERISA and the Internal Revenue Code, applicable to
such Employee Plans or Benefit Arrangements. To its best knowledge, no condition
exists that could constitute grounds for the termination of any Employee Plan
under Section 4042 of ERISA; no "prohibited transaction," as defined in Section
406 of ERISA and Section 4975 of the Internal Revenue Code, has occurred with
respect to any Employee Plan, or any other employee benefit plan maintained by
it or any of its Subsidiaries which is covered by Title I of ERISA, which could
subject any person to liability under Title I of ERISA or to the imposition of
any tax under Section 4975 of the Internal Revenue Code; to its best knowledge,
no Employee Plan subject to Part III of Subtitle B of Title I of ERISA or
Section 412 of the Internal Revenue Code, or both, has incurred any "accumulated
funding deficiency," as defined in Section 412 of the Internal Revenue Code,
whether or not waived; neither it nor any of its Subsidiaries has failed to make
any contribution or pay any amount due and owing as required by the terms of any
Employee Plan or Benefit Arrangement. To its best knowledge, neither it nor any
of its Subsidiaries has incurred or expects to incur, directly or indirectly,
any liability under Title IV of ERISA arising in connection with the termination
of, or a complete or partial withdrawal from, any plan covered or previously
covered by Title IV of ERISA which could constitute a liability of Avondale as
the Surviving Corporation or any of its Subsidiaries at or after the Company
Merger Effective Time or consummation of the Avondale Bank Acquisition.
2.14 Information Furnished. No statement contained in any schedule,
certificate or other document furnished (whether before, on or after the date of
this Agreement) or to be furnished in writing by or on behalf of it to the other
party pursuant to this Agreement contains or will contain any untrue statement
of a
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material fact or any material omission. To its best knowledge, no information
which is material to the Merger and necessary to make the representations and
warranties herein not misleading has been withheld from the other party.
2.15 Property and Assets. It and its Subsidiaries have good and
marketable title to all of their real property reflected in the financial
statements at December 31, 1997, referred to in Section 2.4 hereof or acquired
subsequent thereto, free and clear of all Encumbrances, except for (a) such
items shown in such financial statements or in the notes thereto, (b) liens for
current real estate taxes not yet delinquent, (c) customary easements,
restrictions of record and title exceptions that are not material to the value
or use of such property, (d) property sold or transferred in the ordinary course
of business since the date of such financial statements,(e) as otherwise
specifically indicated in its Regulatory Reports filed after December 31, 1997
and before the date of this Agreement or in Section 2.15 of its Disclosure
Schedule. It and its Subsidiaries enjoy peaceful and undisturbed possession
under all material leases for the use of real property under which they are the
lessee; all of such leases are valid and binding and in full force and effect,
and neither it nor any of its Subsidiaries is in default in any material respect
under any such lease. No default will arise under any material real property,
material personal property lease or material intellectual property license by
reason of the consummation of the Merger without the lessor's or licensor's
consent except as set forth in Section 2.15 of its Disclosure Schedule. There
has been no material physical loss, damage or destruction, whether or not
covered by insurance, affecting any of the real properties or material personal
property of it and its Subsidiaries since December 31, 1997. All fixed assets
material to its or any of its Subsidiaries' respective business and currently
used by it or any of its Subsidiaries are, in all material respects, in good
operating condition and repair.
2.16 Agreements and Instruments. Except as set forth in its Regulatory
Reports filed after December 31, 1997 and before the date of this Agreement or
in Section 2.16 of its Disclosure Schedule, neither it nor any of its
Subsidiaries is a party to (a) any material agreement, arrangement or commitment
not made in the ordinary course of business, (b) any agreement, indenture or
other instrument relating to the borrowing of money by it or any of its
Subsidiaries or the guarantee by it or of its Subsidiaries of any such
obligation (other than Federal Home Loan Bank advances with a maturity of one
year or less from the date hereof), (c) any agreements to make loans or for the
provision, purchase or sale of goods, services or property between it or any of
its Subsidiaries and any director or officer of it or any of its Subsidiaries or
any affiliate or member of the immediate family of any of the foregoing, (d) any
agreements with or concerning any labor or employee organization to which it or
any of its Subsidiaries is a party, (e) any agreements between it or any of its
Subsidiaries and any 5% or more stockholder of it and (f) any agreements,
directives, orders
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or similar arrangements between or involving it or any of its Subsidiaries and
any state or regulatory authority.
2.17 Material Contract Defaults. Neither it or any of its Subsidiaries
nor the other party thereto is in default in any respect under any contract,
agreement, commitment, arrangement, lease, insurance policy or other instrument
to which it or any Subsidiary of it is a party or by which its respective
assets, business or operations may be bound or affected or under which it or its
respective assets, business or operations receives benefits, which default is
reasonably expected to have either individually or in the aggregate a material
adverse effect on it, and there has not occurred any event that, with the lapse
of time or the giving of notice or both, would constitute such a default.
2.18 Tax Matters. (a) It and each of its Subsidiaries have duly and
properly filed all federal, state, local and other tax returns and reports
required to be filed by them and have made timely payments of all taxes due and
payable, whether disputed or not; the current status of audits of such returns
or reports by the Internal Revenue Service and other applicable tax authorities
is as set forth in Section 2.18 of its Disclosure Schedule; and, except as set
forth in Section 2.18 of its Disclosure Schedule, there is no agreement by it or
any of its Subsidiaries for the extension of time for the assessment or payment
of any taxes payable. Except as set forth in Section 2.18 of its Disclosure
Schedule, neither the Internal Revenue Service nor any other taxing authority is
now asserting or, to its best knowledge, threatening to assert any deficiency or
claim for additional taxes (or interest thereon or penalties in connection
therewith), nor is it aware of any basis for any such assertion or claim. It and
each of its Subsidiaries have complied in all material respects with applicable
Internal Revenue Service backup withholding requirements. It and each of its
Subsidiaries have complied with all applicable state law tax collection and
reporting requirements.
(b) Adequate provision for any unpaid federal, state, local or
foreign taxes due or to become due from it or any of its Subsidiaries for all
periods through and including June 30, 1998 has been made and is reflected in
its June 30, 1998 financial statements referred to in Section 2.4 and has been
or will be made with respect to periods ending after June 30, 1998.
2.19 Environmental Matters. To its best knowledge, neither it nor any
of its Subsidiaries owns, leases, or otherwise controls any property affected by
toxic waste, radon gas or other hazardous conditions or constructed in part with
the use of asbestos which requires removal or encapsulation. Neither it nor any
of its Subsidiaries is aware of, nor has it or any of its Subsidiaries received
written notice from any governmental or regulatory body of, any past, present or
future conditions, activities, practices or incidents which may interfere with
or prevent compliance or continued compliance with hazardous substance or other
environmental
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laws or any regulation, order, decree, judgment or injunction, issued, entered,
promulgated or approved thereunder or which may give rise to any common law or
legal liability or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation based on or related to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial, toxic or
hazardous substance or waste. There is no civil, criminal or administrative
claim, action, suit, proceeding, hearing or investigation pending or, to its
knowledge, threatened against it or any of its Subsidiaries relating in any way
to such hazardous substance laws or any regulation, order, decree, judgment or
injunction issued, entered, promulgated or approved thereunder.
2.20 Loan Portfolio; Portfolio Management. (a) All evidences of
indebtedness reflected as assets in its financial statements at December 31,
1997 referred to in Section 2.4 hereof, or originated or acquired since such
date, are (except with respect to those assets which are no longer assets of it
or any of its Subsidiaries) binding obligations of the respective obligers named
therein except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and except
as to the availability of equitable remedies, including specific performance,
which are subject to the discretion of the court before which a proceeding is
brought, and the payment of no material amount thereof (either individually or
in the aggregate with other evidences of indebtedness) is subject to any
defenses or offsets which have been threatened or asserted against it or any
Subsidiary. All such indebtedness which is secured by an interest in real
property is secured by a valid and perfected mortgage lien having the priority
specified in the loan documents. All loans originated or purchased by it or any
of its Subsidiaries were at the time entered into and at all times owned by it
or its Subsidiaries in compliance in all material respects with all applicable
laws and regulations (including, without limitation, all consumer protection
laws and regulations). It and its Subsidiaries (as applicable) administer their
loan and investment portfolios (including, but not limited to, adjustments to
adjustable mortgage loans) in accordance with all applicable laws and
regulations and the terms of applicable instruments. The records of it and any
of its Subsidiaries (as applicable) regarding all loans outstanding on its books
are accurate in all material respects.
(b) Section 2.20 of its Disclosure Schedule sets forth a list,
accurate and complete in all material respects, of the aggregate amounts of
loans, extensions of credit and other assets of it and its Subsidiaries that
have been adversely designated, criticized or classified by it as of August 31,
1998, separated by category of classification or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been adversely designated, classified or criticized as of the date
hereof by any representative of any
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governmental or regulatory authority as "Special Mention," "Substandard,"
"Doubtful," "Loss" or words of similar import are excluded from the amounts
disclosed in the Asset Classification, other than amounts of loans, extensions
of credit or other assets that were charged off by it or any of its Subsidiaries
before the date hereof.
2.21 Real Estate Loans and Investments. Except for properties acquired
in settlement of loans, there are no facts, circumstances or contingencies known
to it which exist and would require a material reduction under generally
accepted accounting principles in the present carrying value of any of the real
estate investments, joint ventures, construction loans, other investments or
other loans of it or any of its Subsidiaries (either individually or in the
aggregate with other loans and investments).
2.22 Derivatives Contracts. Neither it nor any of its Subsidiaries is a
party to or has agreed to enter into an exchange-traded or over-the-counter
swap, forward, future, option, cap, floor or collar financial contract or any
other contract not included in its financial statement as of June 30, 1998 which
is a derivatives contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that are identified in Thrift
Bulletin No. 65 or otherwise referred to as structured notes (each, a
"Structured Note"), except for those Derivatives Contracts and Structured Notes
set forth in Section 2.22 of its Disclosure Schedule, including a list, as
applicable, of any of its or any of its Subsidiaries' assets pledged as security
for a Derivatives Contract.
2.23 Exceptions to Representations and Warranties. (a) On or before the
date hereof, Avondale has delivered to Coal City and Coal City has delivered to
Avondale its respective Disclosure Schedule setting forth, among other things,
exceptions to any and all of its representations and warranties in Article II,
provided that each exception set forth in a Disclosure Schedule shall be deemed
disclosed for purposes of all representations and warranties if such exception
is contained in a section of the Disclosure Schedule corresponding to a Section
in Article II and provided further that (i) no such exception is required to be
set forth in a Disclosure Schedule if its absence would not result in the
related representation or warranty being deemed untrue or incorrect under the
standard established by Section 2.23(b) and (ii) the mere inclusion of an
exception in a Disclosure Schedule shall not be deemed an admission by a party
that such exception represents a material fact, event or circumstance or would
result in a material adverse effect or material adverse change.
(b) None of the representations or warranties of Avondale or
Coal City contained in Article II shall be deemed untrue or incorrect, and no
party shall be deemed to have breached its representations or warranties
contained herein, as a consequence of the existence of any fact, circumstance or
event if such fact,
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circumstance or event, individually or taken together with all other facts,
circumstances or events, would not, or in the case of Section 2.8 is not
reasonably likely to, have a material adverse effect or material adverse change
on such party.
As used in this Agreement, the term "material adverse effect" or
"material adverse change" means an effect or change which (i) is materially
adverse to the financial condition of a party and its respective Subsidiaries
taken as a whole, (ii) significantly and adversely affects the ability of
Avondale or Coal City to consummate the transactions contemplated hereby or to
perform its material obligations hereunder or (iii) enables any person to
prevent the consummation of the transactions contemplated hereby, provided
however that any effect or change resulting from (A) actions or omissions of
Avondale or Coal City contemplated by this Agreement or taken with the prior
consent of the other party in contemplation of the transactions provided for
herein (including, without limitation, conforming accounting adjustments), or
(B) circumstances affecting the financial institutions industry generally
(including changes in laws or regulations, accounting principles or general
levels of interest rates) which do not adversely affect a party and its
Subsidiaries, taken as a whole, in a manner significantly different than the
other party hereto or (C) any adjustments to the value of (x) interest-only
strips owned by Avondale or any of its Subsidiaries, or (y) any mortgage-banking
operations of Avondale or any of its Subsidiaries, shall be deemed not to be or
have a material adverse effect or result in a material adverse change.
ARTICLE III
COVENANTS
3.1 Investigations; Access and Copies. Between the date of this
Agreement and the Company Merger Effective Time, each party agrees to give to
the other party and its respective representatives and agents full access (to
the extent lawful) to all of the premises, books, records and employees of it
and its Subsidiaries at all reasonable times and to furnish and cause its
Subsidiaries to furnish to the other party and its respective agents or
representatives access to and true and complete copies of such financial and
operating data, all documents with respect to matters to which reference is made
in Article II of this Agreement or on any list, schedule or certificate
delivered or to be delivered in connection herewith and such other documents,
records, or information with respect to the businesses and properties of it and
its Subsidiaries as the other party or its respective agents or representative
shall from time to time reasonably request; provided however, that any such
inspection (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of the business of the entity inspected and (b)
shall not affect any of the representations and warranties hereunder. One
representative of each party shall be permitted to attend all meetings of the
board of directors of the other party (except for any portion of such meetings
which relates to the transactions contemplated by this
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Agreement or such other matters deemed confidential). Each party will also give
prompt written notice to the other party of any event or development which, (x)
had it existed or been known on the date of this Agreement, would have been
required to be disclosed under this Agreement, (y) would cause any of its
representations and warranties contained herein to be inaccurate or otherwise
materially misleading or (z) materially relates to the satisfaction of the
conditions set forth in Article IV of this Agreement. Notwithstanding anything
to the contrary herein, neither party hereto nor any of its Subsidiaries shall
be required to provide access to or to disclose information where such access or
disclosure would jeopardize the attorney-client privilege of the entity in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement or, in the event of any litigation or
threatened litigation between the parties over the terms of this Agreement,
where access to information may be adverse to the interests of such party. To
the extent reasonably practicable, the parties hereto will make appropriate
substitute disclosure arrangements under circumstances in which the restrictions
of the preceding sentence apply.
3.2 Conduct of Business. Between the date of this Agreement and the
Company Merger Effective Time or the termination of this Agreement, each party
agrees, on behalf of itself and each of its respective Subsidiaries, except
insofar as the President of Avondale or the President of Coal City shall
otherwise consent in writing (which consent shall not be unreasonably withheld):
(a) That it and its Subsidiaries shall (i) except as
contemplated in this Agreement conduct their business only in the ordinary
course consistent with past practices, (ii) maintain their books and records in
accordance with past practices and (iii) use all reasonable efforts to preserve
intact their business organizations and assets, to maintain their rights,
franchises and existing relations with customers, suppliers, employees and
business associates and to take no action that would (A) adversely affect the
ability of any of them to obtain the Governmental Approvals (as defined in
Section 4.1(c) herein) or which would reasonably be expected to hinder or delay
receipt of the Governmental Approvals or (B) adversely affect its ability to
perform its obligations under this Agreement, the Contribution Agreement, the
Bank Merger Agreement (as and if applicable), the Bank Purchase and Assumption
Agreement (as and if applicable) or the Stock Option Agreement;
(b) That except where the provisions herein are limited to a
specific party and/or its Subsidiaries, it and its Subsidiaries shall not: (i)
declare, set aside or pay any dividend or make any other distribution with
respect to its capital stock, except for dividends or distributions by a wholly
owned Subsidiary of such party to such party; (ii) reacquire or buy any of its
outstanding shares; (iii) issue or sell any shares of capital stock of it or any
of its Subsidiaries, except shares of its common stock issued
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pursuant to the Stock Option Agreement and shares issued pursuant to exercise of
stock options previously issued and identified in Section 2.2 of its Disclosure
Schedule or as set forth in Section 3.2 of the Avondale Disclosure Schedule;
(iv) effect any stock split, stock dividend, reverse stock split or other
reclassification or recapitalization of its common stock; or (v) except with
respect to the Stock Option Agreement or as set forth in Section 3.2 of the
Avondale Disclosure Schedule, grant any options or issue any warrants
exercisable for or securities convertible or exchangeable into capital stock of
it or any of its Subsidiaries or grant any stock appreciation or other rights
with respect to shares of capital stock of it or of any of its Subsidiaries.
(c) That except where the provisions herein are limited to a
specific party and/or its Subsidiaries, it and its Subsidiaries shall not: (i)
sell, dispose of or pledge any significant assets of it or of any of its
Subsidiaries other than in the ordinary course of business consistent with past
practices or to borrow funds consistent with the provisions hereinafter
contained except as contemplated in Schedule 3.2 of the Avondale Disclosure
Schedule; (ii) merge or consolidate it or any of its Subsidiaries into another
entity or acquire any other entity or except in accordance with its written
business plan in effect on the date hereof, acquire any significant assets;
(iii) sell or pledge or agree to sell or pledge or permit any lien to exist on
any stock of any of its Subsidiaries owned by it; (iv) change the articles of
incorporation or certificate of incorporation, charter, bylaws or other
governing instruments of it or any of its Subsidiaries, except, in the case of
Avondale, with respect to the authorization of additional shares of Avondale
Common Stock, or otherwise as contemplated by this Agreement; (v) engage in any
lending activities other than in the ordinary course of business consistent with
past practices; (vi) form any new subsidiary or cause or permit a material
change in the activities presently conducted by any Subsidiary or make
additional investments in subsidiaries in excess of $100,000 except as
contemplated in Schedule 3.2 of the Avondale Disclosure Schedule; (vii) except
to hedge interest rate risk on certificates of deposits, engage in any off
balance sheet interest rate swap arrangement, (viii) engage in any activity not
contemplated by its written business plan in effect on the date hereof (ix)
purchase any equity securities other than Federal Home Loan Bank stock or incur
or assume any indebtedness except in the ordinary and usual course of business;
(x) authorize capital expenditures other than in the ordinary and usual course
of business; or (xi) implement or adopt any change in its accounting principles,
practices or methods other than as may be required by generally accepted
accounting principles. The limitations contained in this Section 3.2(c) shall
also be deemed to constitute limitations as to the making of any commitment with
respect to any of the matters set forth in this Section 3.2(c).
(d) That except where the provisions herein are limited to a
specific party and/or its Subsidiaries it and its Subsidiaries shall not: (i)
grant any general increase in compensation or
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benefits to its employees or officers or pay any bonuses to its employees or
officers except in accordance with policies in effect on the date hereof; (ii)
enter into, extend, renew, modify, amend or otherwise change any employment or
severance agreements with any of its directors, officers or employees; (iii)
grant any increase in fees or other increases in compensation or other benefits
to any of its present or former directors in such capacity; or (iv) establish or
sponsor any new Employee Plan or Benefit Arrangement or effect any change in its
Employee Plans or Benefit Arrangements (except, in the case of Avondale, with
respect to the reservation of additional shares of Avondale Common Stock under
its stock option plans or the adoption of a new stock option plan and unless
such change is contemplated by this Agreement or is required by applicable law
or, in the opinion of its counsel, is necessary to maintain continued
qualification of any tax-qualified plan that provides for retirement benefits).
3.3 No Solicitation. Each party agrees, on behalf of itself and each of
its Subsidiaries, that it will not authorize or permit any officer, director,
employee, investment banker, financial consultant, attorney, accountant or other
representative of it or any of its Subsidiaries, directly or indirectly, to
initiate contact with any person or entity in an effort to solicit, initiate or
encourage any "Takeover Proposal" (as such term is defined below). Except as the
fiduciary duties of its Board of Directors may otherwise require (as determined
in good faith after consultation with legal counsel), each party agrees that it
will not authorize or permit any officer, director, employee, investment banker,
financial consultant, attorney, accountant or other representative of it or any
of its Subsidiaries, directly or indirectly, (A) to cooperate with, or furnish
or cause to be furnished any non-public information concerning its business,
properties or assets to, any person or entity in connection with any Takeover
Proposal; (B) to negotiate any Takeover Proposal with any person or entity; or
(C) to enter into any agreement, letter of intent or agreement in principle as
to any Takeover Proposal. Each party agrees that it shall promptly give written
notice to the other upon becoming aware of any Takeover Proposal, such notice to
contain, at a minimum, the identity of the persons submitting the Takeover
Proposal, a copy of any written inquiry or other communication, the terms of any
Takeover Proposal, any information requested or discussions sought to be
initiated and the status of any requests, negotiations or expressions of
interest. As used in this Agreement, "Takeover Proposal" shall mean any
proposal, other than as contemplated by this Agreement or Section 3.2 of the
Avondale Disclosure Schedule, for a merger or other business combination
involving either party or any of their respective financial institution
Subsidiaries or for the acquisition of a 10% or greater equity interest in
either party or any of their respective Subsidiaries, or for the acquisition of
a substantial portion of the assets of either party or any of their respective
Subsidiaries.
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3.4 Stockholder Approvals. The parties shall call the meetings of their
respective stockholders to be held for the purpose of voting upon this Agreement
and related matters, as referred to in Section 1.7 hereof, as soon as
practicable. In connection with the Avondale and Coal City Stockholders'
Meetings, the respective Boards of Directors shall recommend approval of this
Agreement, and any other matters requiring stockholder action relating to the
transactions contemplated herein (and such recommendation shall be contained in
the Prospectus/Joint Proxy Statement) unless as a result of an unsolicited
Takeover Proposal received by a party after the date hereof, the Board of
Directors of such party determines in good faith after consultation with its
legal counsel and investment banking firm that to do so would constitute a
breach of the fiduciary duties of such Board of Directors to the stockholders of
such party. Each of the parties shall use its best efforts to solicit from its
stockholders proxies in favor of approval and to take all other action necessary
or helpful to secure a vote of the holders of the outstanding shares of its
common stock in favor of this Agreement, except as the fiduciary duties of its
Board of Directors may otherwise require.
3.5 Resale Letter Agreements; Accounting and Tax Treatment. After
execution of this Agreement, (i) Coal City shall use its best efforts to cause
to be delivered to Avondale from each person who may be deemed to be an
"affiliate" of Coal City within the meaning of Rule 145 of the Securities Act, a
written letter agreement as of a date prior to the date of the Coal City
Stockholders' Meeting in the form as set forth in Exhibit 3.5, regarding
restrictions on resale of shares of Avondale Common Stock, to ensure compliance
with applicable restrictions imposed under the federal securities laws and prior
to the Company Merger Effective Time Coal City shall use its best efforts to
secure such written letter agreement from persons who become an affiliate of it
subsequent to the date hereof, and (ii) neither party shall take any action
which would prevent the Company Merger and the other transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section 368 of
the Internal Revenue Code, provided that nothing hereunder shall limit the
ability of either party to exercise its rights under the Stock Option Agreement.
3.6 Publicity. Between the date of this Agreement and the Company
Merger Effective Time, neither party nor any of its Subsidiaries shall, without
the prior approval of the other party, issue or make, or permit any of its
directors, employees, officers or agents to issue or make, any press release,
disclosure or statement to the press or any third party with respect to the
Merger or the other transactions contemplated hereby, except as required by law.
The parties shall cooperate when issuing or making any press release, disclosure
or statement with respect to the Merger or the other transactions contemplated
hereby.
3.7 Cooperation Generally. Between the date of this Agreement and the
Company Merger Effective Time, the parties and their
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respective Subsidiaries shall in conformance with the provisions of this
Agreement use their best efforts, and take all actions necessary or appropriate,
to consummate the Company Merger and the other transactions contemplated hereby
at the earliest practicable date.
3.8 Additional Financial Statements and Reports. As soon as reasonably
practicable after they become publicly available, each party shall furnish to
the other its statements of financial condition, statements of operations or
statements of income, statements of cash flows and statements of changes in
stockholders' equity at all dates and for all periods before the Closing. Such
financial statements will be prepared in conformity with generally accepted
accounting principles applied on a consistent basis and fairly present the
financial condition, results of operations and cash flows of the respective
parties (subject, in the case of unaudited financial statements, to (a) normal
year-end audit adjustments, (b) any other adjustments described therein and (c)
the absence of notes which, if presented, would not differ materially from those
included with its most recent audited consolidated financial statements), and
all of such financial statements will be prepared in conformity with the
requirements of Form 10-Q or Form 10-K, as and if applicable, under the Exchange
Act. As soon as reasonably practicable after they are filed, each party shall,
to the extent permitted under applicable law, furnish to the other its
Regulatory Reports.
3.9 Stock Exchange Listing. Avondale agrees to use all reasonable
efforts to cause to be listed on the Nasdaq National Market, subject to official
notice of issuance, the shares of Avondale Common Stock to be issued in the
Company Merger.
3.10 Employee Benefits and Agreements.
(a) Following the Company Merger Effective Time and the Bank Merger
Effective Time or the Purchase and Assumption Time, whichever is applicable,
Avondale as the Surviving Corporation, and Coal City Bank as the resulting
financial institution, shall honor in accordance with their terms all Benefit
Arrangements and all provisions for vested benefits or other vested amounts
earned or accrued through such time period under the Employee Plans.
(b) The Employee Plans shall not be terminated by reason of the Merger
but shall continue thereafter as plans of Avondale as the Surviving Corporation
or Coal City Bank as the resulting financial institution until such time as the
Employee Plans are integrated, subject to the terms and conditions specified in
such plans and to such changes therein as may be necessary to reflect the
consummation of the Merger. Avondale as the Surviving Corporation shall take
such steps as are necessary as soon as practicable following the Company Merger
Effective Time to integrate the Employee Plans, with (i) full credit for prior
service with Avondale or Coal City or any of the Avondale or Coal City
Subsidiaries for purposes of vesting and
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eligibility for participation (but not benefit accruals under any Employee
Plan), and co-payments and deductibles and (ii) waiver of all waiting periods
and pre-existing condition exclusions or penalties.
(c) The Avondale Employee Stock Ownership Plan (the "ESOP") shall be
terminated as of the Company Merger Effective Time or as soon thereafter as is
practicable. In connection with the termination of the ESOP, Avondale shall
promptly apply to the IRS for a favorable determination letter on the ESOP's
tax-qualified status upon termination under Code Section 401(a). The parties
acknowledge that the existing loan between Avondale and the ESOP (the "ESOP
Loan") shall be repaid in full by the ESOP upon such termination or as soon
thereafter as is practicable. The parties further acknowledge that the ESOP has
unallocated assets with a current fair market value exceeding the outstanding
balance (principal and interest) of the ESOP Loan. The parties agree that
participants in the ESOP will benefit from these assets as an allocation of
earnings to the fullest extent permissible under applicable law upon termination
of the ESOP. Avondale may take such actions as it deems necessary or appropriate
to effectuate this intent, including, but not limited to, (1) amending the ESOP
to provide that all participants' accounts shall be fully vested and
nonforfeitable as of the Company Merger Effective Time, (2) amending the ESOP to
provide that each participant's account in the ESOP will not be distributed
after termination of the participant's employment (regardless of the amount of
the account balance) and prior to the liquidation of the ESOP following
termination thereof unless the participant requests such distribution or such
distribution is otherwise required by applicable law, (3) amending the ESOP to
provide that any excess assets contained in the unallocated company stock
account after the repayment in full (principal and interest) of the ESOP Loan
shall be allocated to participants' accounts as earnings of the trust fund, and
(4) amending the ESOP to delete any requirement that a participant complete any
number of hours of service or be employed on any particular day during the plan
year to receive an allocation of earnings under the plan. In addition, Avondale
may take such other actions, including the making of other amendments to the
plan, that it deems necessary or appropriate to preserve the tax-qualified
status of the ESOP or the exempt status of the ESOP Loan. Upon the election of
any participant, his or her account balance in the ESOP upon plan termination
that constitutes an "eligible rollover distribution" (as defined in Section
402(c)(4) of the Code) may be rolled over to any qualified retirement plan of
Avondale or of Coal City Bank or to any eligible individual retirement account,
as elected by the participant.
(d) Employment Agreements and Related Matters. At the time of the
execution of this Agreement, Robert S. Engelman, Jr. shall enter into a new
Employment Agreement in the form of Exhibit 3.10(d), to become effective at the
Company Merger Effective Time (at which time his existing Employment Agreement
shall be cancelled). As soon as practicable after the time of the execution
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of this Agreement, Mitchell Feiger shall enter into an Employment Agreement with
Coal City and Coal City Bank, to become effective at the Company Merger
Effective Time and be assumed by Avondale as the Surviving Corporation at such
time, in such form as shall be reasonably acceptable to the Board of Directors
of Avondale, which contract shall contain such provisions as are normal for a
bank holding company of similar size.
3.11 Minority Interest in Manufacturers National. Coal City agrees to
use its best efforts to cause, prior to the Company Merger Effective Time, all
shares of capital stock of Manufacturers National to be owned by Coal City free
and clear of all Encumbrances.
3.12 Preferred Stock. Coal City shall use its best efforts to redeem
(or cause the conversion of), prior to the Company Merger Effective Time, all of
its issued and outstanding shares of Coal City Class B Preferred Stock.
3.13 Accountants' Letters. Each party agrees to use its respective best
efforts to deliver to the other, and such other party's directors and officers
who sign the Registration Statement, a letter of its independent auditors, dated
(i) the date on which the Registration Statement shall become effective and (ii)
a date on or shortly prior to the date of Closing, and addressed to such other
party, and such directors and officers, in form and substance customary for
"comfort" letters delivered by independent accountants in connection with
registration statements similar to the Registration Statement.
ARTICLE IV
CONDITIONS OF THE COMPANY MERGER;
TERMINATION OF AGREEMENT
4.1 General Conditions. The obligations of each party to effect the
Company Merger shall be subject to the satisfaction (or written waiver by such
party, to the extent such condition is waivable) of the following conditions
before the Company Merger Effective Time:
(a) Stockholder Approval. The holders of the outstanding
shares of Avondale and Coal City Common Stock shall have approved or adopted
this Agreement as specified in Section 1.7 hereof or as otherwise required by
applicable law.
(b) No Proceedings. No order shall have been entered and
remain in force restraining or prohibiting the Company Merger in any legal,
administrative, arbitration, investigatory or other proceedings by any
governmental or judicial or other authority.
(c) Governmental Approvals. To the extent required by
applicable law or regulation, all approvals of or filings with any governmental
or regulatory authority (collectively, "Governmental
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Approvals") shall have been obtained or made, and any waiting periods shall have
expired in connection with the consummation of the Company Merger, provided
however that none of the preceding shall be deemed obtained or made if it shall
be conditioned or restricted in a manner that would have or result in a material
adverse effect on Avondale as the Surviving Corporation as the parties hereto
shall reasonably and in good faith agree. All other statutory or regulatory
requirements for the valid consummation of the Company Merger shall have been
satisfied.
(d) Registration Statement. The Registration Statement shall
have been declared effective and shall not be subject to a stop order of the SEC
(and no proceedings for that purpose shall have been initiated or threatened by
the SEC) and, if the offer and sale of the Surviving Corporation Common Stock in
the Company Merger pursuant to this Agreement is subject to the securities laws
of any state, shall not be subject to a stop order of any state securities
authority.
(e) Federal Tax Opinion. Each party shall have received an
opinion of its tax counsel, dated as of the Company Merger Effective Time, to
the effect that for federal income tax purposes:
(i) The Company Merger will qualify as a
"reorganization" under Section 368(a) of the Internal Revenue
Code.
(ii) No gain or loss will be recognized by Avondale
or Coal City by reason of the Company Merger.
(iii) No gain or loss will be recognized by any
stockholder of Coal City upon the exchange of Coal City Common
Stock solely for Avondale Common Stock in the Company Merger.
(iv) The basis of the Avondale Common Stock received
by each stockholder of Coal City who exchanges Coal City
Common Stock for Avondale Common Stock in the Company Merger
will be the same as the basis of the Coal City Common Stock
surrendered in exchange therefor (subject to any adjustments
required as the result of receipt of cash in lieu of a
fractional share of Surviving Corporation Common Stock).
(v) The holding period of the Avondale Common Stock
received by a stockholder of Coal City in the Company Merger
will include the holding period of the Coal City Common Stock
surrendered in exchange therefore, provided that such shares
of Coal City Common Stock were held as a capital asset by such
stockholders at the Company Merger Effective Time.
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(vi) Cash received by a Coal City shareholder in lieu
of a fractional share interest of Avondale Common Stock as
part of the Company Merger will be treated as having been
received as a distribution in full payment in exchange for the
fractional share interest of Avondale Common Stock which such
stockholder would otherwise be entitled to receive and will
qualify as capital gain or loss (assuming the Coal City stock
was a capital asset in such stockholder's hands at the Company
Merger Effective Time).
(f) Third Party Consents. All consents or approvals of all
persons (other than the Governmental Approvals referenced in Section 4.1(c)
herein) required for the execution, delivery and performance of this Agreement
and the consummation of the Company Merger shall have been obtained and shall be
in full force and effect, unless the failure to obtain any such consent or
approval is not reasonably likely to have, individually or in the aggregate, a
material adverse effect on Avondale as the Surviving Corporation as the parties
hereto shall reasonably and in good faith agree.
(g) Listing. The shares of Avondale Common Stock to be issued
in the Company Merger shall have been approved for listing on the Nasdaq
National Market, subject to official notice of issuance.
4.2 Conditions to Obligations of Avondale. The obligations of Avondale
to effect the Company Merger and the other transactions contemplated hereby
shall be subject to the satisfaction or written waiver by Avondale of the
following additional conditions before the Company Merger Effective Time:
(a) No Material Adverse Effect. Between the date of this
Agreement and the Closing, Coal City shall not have been effected by any event
or change which has had or caused a material adverse effect or material adverse
change on it.
(b) Representations and Warranties to be True; Fulfillment of
Covenants and Conditions. (i) The representations and warranties of Coal City
shall be true and correct (subject to Section 2.23 hereof) as of the date hereof
and at the Company Merger Effective Time with the same effect as though made at
the Company Merger Effective Time (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date) except
where the failure to be true and correct would not have, or would not reasonably
be expected to have, a material adverse effect, on Coal City; (ii) Coal City and
its Subsidiaries shall have performed all obligations and complied with each
covenant, in all material respects, and satisfied all conditions under this
Agreement on its part to be satisfied at or before the Company Merger Effective
Time; and (iii) Coal City shall have delivered to Avondale a certificate, dated
the Company Merger Effective Time and signed by its chief executive officer and
chief
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financial officer, certifying as to the satisfaction of clauses (i) and (ii)
hereof.
(c) No Litigation. Neither Coal City nor any Coal City
Subsidiary shall be subject to any pending litigation which, if determined
adversely to Coal City or any Coal City Subsidiary, would have a material
adverse effect on Coal City.
(d) Affiliate Letters. Avondale shall have received from Coal
City the letter agreements from all affiliates of Coal City as contemplated in
Section 3.5 herein.
(e) Manufacturers National. All of the issued and outstanding
shares of capital stock of Manufacturers National shall be owned by Coal City
free and clear of all Encumbrances (subject to any lien of LaSalle National
Bank).
(f) Coal City Preferred Stock. No shares of Coal City
Preferred Stock shall be issued or outstanding.
(g) Audited Financials. Coal City shall have delivered to
Avondale audited consolidated financial statements at and for the year ended
December 31, 1998, including an unqualified opinion of Coal City's independent
auditors related thereto.
(h) Feiger Employment Agreement. Mitchell Feiger shall have
entered into an Employment Agreement with Coal City and Coal City Bank in such
form as shall be reasonably acceptable to the Board of Directors of Avondale,
which contract shall contain such provisions as are normal for a bank holding
company of similar size.
(i) Accountants' Letters. Coal City shall have delivered to
Avondale, and the Avondale directors and officers who sign the Registration
Statement, a letter of its independent auditors, dated (i) the date on which the
Registration Statement shall become effective and (ii) a date on or shortly
prior to the date of Closing, and addressed to Avondale, and such directors and
officers, in form and substance reasonably satisfactory to Avondale and
customary for "comfort" letters delivered by independent accountants in
connection with registration statements similar to the Registration Statement.
4.3 Conditions to Obligations of Coal City. The obligations of Coal
City to effect the Company Merger and the other transactions contemplated hereby
shall be subject to the satisfaction or written waiver by Coal City of the
following additional conditions before the Company Merger Effective Time:
(a) No Material Adverse Effect. Between the date of this
Agreement and Closing, Avondale shall not have been effected by any event or
change which has had or caused a material adverse effect or material adverse
change on Avondale.
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(b) Representations and Warranties to be True; Fulfillment of
Covenants and Conditions. (i) The representations and warranties of Avondale
shall be true and correct (subject to Section 2.23 hereof) as of the date hereof
and at the Company Merger Effective Time with the same effect as though made at
the Company Merger Effective Time (or on the date when made in the case of any
representation or warranty which specifically relates to an earlier date) except
where the failure to be true and correct would not have, or would not reasonably
be expected to have, a material adverse effect on Avondale; (ii) Avondale and
its Subsidiaries shall have performed all obligations and complied with each
covenant, in all material respects, and satisfied all conditions under this
Agreement on its part to be satisfied at or before the Company Merger Effective
Time; and (iii) Avondale shall have delivered to Coal City a certificate, dated
the Company Merger Effective Time and signed by its chief executive officer and
chief financial officer, certifying as to the satisfaction of clauses (i) and
(ii) hereof.
(c) No Litigation. Neither Avondale nor any Avondale
Subsidiary shall be subject to any pending litigation which, if determined
adversely to Avondale or any Avondale Subsidiary, would have a material adverse
effect on Avondale.
(d) Audited Financials. Avondale shall have delivered to Coal
City audited consolidated financial statements at and for the year ended
December 31, 1998, including an unqualified opinion of Avondale's independent
auditors related thereto.
(e) Transferor's Interests. The aggregate present value of the
Transferor's (as defined in the related Pooling and Servicing Agreements)
interests owned by Avondale or any of its Subsidiaries in Avondale Home Equity
Loan Trusts 1996-1, 1997-1, 1997-2 and 1998- 1 (each, a "Heloc Trust") as set
forth in each respective offering circular (the "Securitization Value"), as
calculated below as of the most recent month-end cut-off date at least 20 days
prior to the Closing (the "Calculation Date"), shall not be less than the sum of
(i) $14,935,729, plus (ii) the accounting gain on sale, in the aggregate,
recognized on the transfer of additional loans into Heloc Trust 1998-1 after
June 30, 1998. The Securitization Value shall be calculated from the Heloc Trust
information set forth in the Investor Reports as of the Calculation Date
utilizing (a) a discount rate of 15%, (b) for each Heloc Trust, the average
prepayment rate, computed as a "CPR," for such Heloc Trust during the three
month period ending on the Calculation Date, and (c) for each Heloc Trust, the
average charge-off rate, computed as a "CPR," for such Heloc Trust during the
three month period ending on the Calculation Date.
(f) Accountants' Letters. Avondale shall have delivered to
Coal City a letter of its independent auditors dated (i) the date on which the
Registration Statement shall become effective and (ii) a date on or shortly
prior to the date of Closing, and addressed to Coal City, in form and substance
reasonably satisfactory to Coal
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City and customary for "comfort" letters delivered by independent accountants in
connection with registration statements similar to the Registration Statement.
4.4 Termination of Agreement and Abandonment of Merger. This Agreement
may be terminated at any time before the Company Merger Effective Time, whether
before or after approval thereof by the stockholders of Avondale or Coal City,
as provided below:
(a) Mutual Consent. By mutual consent of the parties,
evidenced by their written agreement.
(b) Closing Delay. At the election of either party, evidenced
by written notice, if (i) the Closing shall not have occurred on or before June
30, 1999, or such later date as shall have been agreed to in writing by the
parties, provided however that the right to terminate under this Section 4.4(b)
shall not be available to any party whose failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the Closing
to occur on or before such date; (ii) any approval or authorization of any
governmental entity, the lack of which would result in the failure to satisfy
the closing condition set forth in Section 4.1(c) hereof, shall have been denied
by such governmental entity, or such governmental entity shall have requested
the withdrawal of any application therefor or indicated an intention to deny, or
impose a condition of a type referred to in the proviso to Section 4.1(c) with
respect to, such approval or authorization, or (iii) the approval of the
stockholders of Avondale or Coal City referred to in Section 4.1(a) shall not
have been obtained, provided that the electing party is not then in breach of
its obligations under Section 3.4 hereof.
(c) Conditions to Avondale Performance Not Met. By Avondale
upon delivery of written notice of termination to Coal City if any event occurs
which renders impossible of satisfaction in any material respect one or more of
the conditions to the obligations of Avondale to effect the Company Merger set
forth in Sections 4.1 and 4.2 and noncompliance is not waived in writing by
Avondale.
(d) Conditions to Coal City Performance Not Met. By Coal City
upon delivery of written notice of termination to Avondale if any event occurs
which renders impossible of satisfaction in any material respect one or more of
the conditions to the obligations of Coal City to effect the Company Merger set
forth in Sections 4.1 and 4.3 and noncompliance is not waived in writing by Coal
City.
(e) Breach. By either Avondale or Coal City if there has been
a material breach of the other party's representations and warranties (as
contemplated in this Agreement), covenants or agreements set forth in this
Agreement of which written notice has been given to such breaching party and
which has not been fully cured or cannot be fully cured within the earlier of
(i) 30 days of receipt of such notice or (ii) five days prior to the Closing and
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which breach would, in the reasonable opinion of the non-breaching party,
individually or in the aggregate, have, or be reasonably likely to have, a
material adverse effect on the breaching party.
(f) Avondale Election. By Avondale if (i) the Board of
Directors of Coal City shall not have publicly recommended in the
Prospectus/Joint Proxy Statement that its stockholders approve and adopt this
Agreement or shall have withdrawn, modified or changed in a manner adverse to
Avondale its approval or recommendation of this Agreement, (ii) the Board of
Directors of Coal City shall have authorized Coal City to enter into any
agreement, letter of intent or agreement in principle with the intent to pursue
or effect a Takeover Proposal or (iii) the Board of Directors of Avondale shall
have failed to recommend to its stockholders the adoption of this Agreement or
shall have withdrawn, modified or changed such recommendation pursuant to the
exercise of its fiduciary obligations under Section 3.4 hereof.
(g) Coal City Election. By Coal City if (i) the Board of
Directors of Avondale shall not have publicly recommended in the
Prospectus/Joint Proxy Statement that its stockholders approve and adopt this
Agreement or withdrawn, modified or changed in a manner adverse to Coal City its
approval or recommendation of this Agreement, (ii) the Board of Directors of
Avondale shall have authorized Avondale to enter into any agreement, letter of
intent or agreement in principle with the intent to pursue or effect a Takeover
Proposal or (iii) the Board of Directors of Coal City shall have failed to
recommend to its stockholders the adoption of this Agreement or shall have
withdrawn, modified or changed such recommendation pursuant to the exercise of
its fiduciary obligations under Section 3.4 hereof.
ARTICLE V
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
5.1 Termination; Lack of Survival of Representations and Warranties. In
the event of the termination and abandonment of this Agreement pursuant to
Section 4.4 hereof, this Agreement shall become void and have no effect, except
(i) the provisions of Sections 2.7 (No Broker's or Finder's Fees), 3.7
(Publicity), 5.2 (Payment of Expenses), 7.2 (Confidentiality) and 7.12 (No
Employment Solicitation) hereof shall survive any such termination and
abandonment, and (ii) a termination pursuant to Section 4.4(e) of this Agreement
shall not relieve the breaching party from liability for any uncured intentional
and willful breach of a representation, warranty, covenant or agreement giving
rise to such termination. Moreover, the aggrieved party without terminating this
Agreement shall be entitled to specifically enforce the terms hereof against the
breaching party in order to cause the Merger to be consummated. Each party
acknowledges that there is not an adequate remedy at law to compensate the other
parties relating to the non-consummation of the Merger. To this end, each party,
to the extent permitted by law, irrevocably waives any defense it might have
based on the
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adequacy of a remedy at law which might be asserted as a bar to specific
performance, injunctive relief or other equitable relief.
The representations, warranties and agreements set forth in this
Agreement shall not survive the Company Merger Effective Time and shall be
terminated and extinguished at the Company Merger Effective Time, and from and
after the Company Merger Effective Time no party shall have any liability to the
other on account of any breach or failure of any of those representations,
warranties and agreements, provided however that the foregoing clause (i) shall
not apply to agreements of the parties which by their terms are intended to be
performed after the Company Merger Effective Time by the Surviving Corporation
or otherwise and (ii) shall not relieve any party or person for liability for
fraud, deception or intentional misrepresentation.
5.2 Payment of Expenses. Each party shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereby, except that the costs of printing and mailing the
Prospectus/Joint Proxy Statement shall be shared equally by the parties.
ARTICLE VI
CERTAIN POST-MERGER AGREEMENTS
6.1 Indemnification. (a) From and after the Company Merger Effective
Time, Avondale as the Surviving Corporation shall indemnify, defend and hold
harmless each person who is now, or who has been at any time before the date
hereof or who becomes before the Company Merger Effective Time, an officer or
director of either Avondale or Coal City or any of their respective Subsidiaries
(the "Indemnified Parties") against all losses, claims, damages, costs, expenses
(including attorney's fees), liabilities or judgments or amounts that are paid
in settlement (which settlement shall require the prior written consent of
Avondale as the Surviving Corporation, which consent shall not be unreasonably
withheld) of or in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, or administrative (each a "Claim"), in
which an Indemnified Party is, or is threatened to be made, a party based in
whole or in part on or arising in whole or in part out of the fact that such
person is or was a director or officer of either Avondale or Coal City or any of
their respective Subsidiaries if such Claim pertains to any matter or fact
arising, existing at or occurring before the Company Merger Effective Time
(including, without limitation, the Merger and the other transactions
contemplated hereby), regardless of whether such Claim is asserted or claimed
before, or at or after, the Company Merger Effective Time (the "Indemnified
Liabilities"), to the fullest extent permitted under applicable state or federal
law in effect as of the date hereof or as amended applicable to a time before
the Company Merger Effective Time and under Avondale's or Coal City's governing
corporation documents (as the case may be), and Avondale as the Surviving
Corporation shall pay expenses in advance of the
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final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by applicable state or federal law in effect as of the
date hereof or as amended applicable to a time before the Company Merger
Effective Time upon receipt of any undertaking required by applicable law. Any
Indemnified Party wishing to claim indemnification under this Section 6.1(a),
upon learning of any Claim, shall notify Avondale as the Surviving Corporation
(but the failure so to notify Avondale as the Surviving Corporation shall not
relieve it from any liability which it may have under this Section 6.1(a) except
to the extent such failure materially prejudices Avondale as the Surviving
Corporation) and shall deliver to Avondale as the Surviving Corporation the
undertaking, if any, required by applicable law. Avondale as the Surviving
Corporation shall insure, to the extent permitted under applicable law, that all
limitations of liability existing in favor of the Indemnified Parties as
provided in Avondale's or Coal City's governing corporation documents (as the
case may be), as in effect as of the date hereof, or allowed under applicable
state or federal law as in effect as of the date hereof or as amended applicable
to a time before the Company Merger Effective Time, with respect to claims or
liabilities arising from facts or events existing or occurring before the
Company Merger Effective Time (including, without limitation, the transactions
contemplated hereby), shall survive the Company Merger.
(b) For a period of six years from and after the Company
Merger Effective Time, Avondale as the Surviving Corporation shall cause to be
maintained in effect the current policies of directors' and officers' liability
insurance maintained by Coal City and the Coal City Subsidiaries (provided that
they may substitute therefor policies from financially capable insurers of at
least the same coverage and amounts and containing terms and conditions that are
carried by Avondale and its Subsidiaries in the ordinary course of business)
with respect to claims arising from facts or events which occurred before the
Company Merger Effective Time. Following consummation of the Company Merger, the
directors and officers of Avondale as the Surviving Corporation shall be covered
by the directors' and officers' liability insurance maintained by the Surviving
Corporation.
(c) The obligations of Avondale as the Surviving Corporation
provided under paragraphs (a) and (b) of this Section 6.1 are intended to be
enforceable against the Surviving Corporation directly by the Indemnified
Parties and shall be binding on all respective successors and permitted assigns
of Avondale as the Surviving Corporation.
6.2 Directors and Officers of the Surviving Corporation and
Coal City Bank
(a) Directors of the Surviving Corporation. The following
provisions, which are reflected in Exhibit 1.4(c), shall, to the
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greatest extent practicable, apply with respect to the Board of Directors of
Avondale as the Surviving Corporation:
(i) At the Company Merger Effective Time, but subject
to the following sentence, the Board of Directors of Avondale as the
Surviving Corporation shall consist of between 16 and 18 directors who
shall consist of (A) eight persons serving as directors of Avondale
(each, an "Avondale-Related Director") and (B) between eight and ten
persons serving as directors of Coal City(each, a "Coal City-Related
Director"), in each case serving in such capacity immediately prior to
the Company Merger Effective Time. Each of Avondale and Coal City shall
use its best efforts to ensure that they have eight directors and from
eight to ten directors, respectively, immediately prior to the Company
Merger Effective Time consisting of those persons named by them in
regulatory applications for approval of the Merger and in the
Prospectus/Joint Proxy Statement. If at any time during the three year
period following the Company Merger Effective Time any person who
becomes a director of Avondale as the Surviving Corporation at the
Company Merger Effective Time shall for any reason cease to serve as a
director or shall not stand for reelection as a director, it is the
intention of Avondale and Coal City and their respective Boards of
Directors that he or she will be replaced, if an Avondale- Related
Director, by the Avondale-Related Directors, and if a Coal City-Related
Director, by the Coal City-Related Directors. It is also the intention
of Avondale and Coal City and their respective Boards of Directors that
during such three-year period, the Coal City-Related Directors shall
have the right to appoint up to that number of persons equal to the
remainder of ten minus the number of Coal City-Related Directors at the
Company Merger Effective Time. The Avondale- Related Directors hereby
commit to vote in favor of any such nominees of the Coal City-Related
Directors for any such additional new directorships, and shall so vote,
except to the extent that any such vote shall be in violation of their
fiduciary duties under the DGCL.
(ii) The Board of Directors of Avondale as the
Surviving Corporation shall have an Executive Committee and such other
committees as the Board shall establish in accordance with Section 141
of the DGCL, its Certificate of Incorporation and these Bylaws. The
Executive Committee shall consist of six members: Robert S. Engelman,
Jr., who shall be Chairman of the Executive Committee, Mitchell Feiger,
two members selected by the Avondale-Related Directors and two members
selected by the Coal City-Related Directors. The Chairman of the Board,
the President and the Chief Executive Officer of Avondale as the
Surviving Corporation may each call meetings of the Board of Directors
and the Executive Committee. Prior to the Company Merger Effective
Time, Avondale and Coal City shall reasonably agree as to the
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initial members of each other committee of the Board of Directors of
Avondale as the Surviving Corporation. Each of such committees shall
have an even number of members, and at the Company Merger Effective
Time and for three years thereafter, one-half of the members of each
such other committee shall consist of Avondale-Related Directors and
the other half shall consist of Coal City-Related Directors, unless a
majority of the Avondale-Related Directors and a majority of the Coal
City-Related Directors shall otherwise agree.
(b) Chairman and Certain Officers of the Surviving
Corporation and Coal City Bank.
During the three year period following the Company
Merger Effective Time, as reflected with respect to Avondale as the Surviving
Corporation in Exhibit 1.4(c):
(i) Robert S. Engelman, Jr. shall be the Chairman of
the Board of Avondale as the Surviving Corporation.
(ii) Mitchell Feiger shall be the President and Chief
Executive Officer of Avondale as the Surviving Corporation and Chairman
of the Board of Coal City Bank as the
resulting financial institution.
(iii) Burton Field shall be the President and Chief
Executive Officer of Coal City Bank as the resulting financial
institution.
(iv) Howard Jaffe shall be the Chief Financial
Officer of Avondale as the Surviving Corporation and the Chief
Financial Officer of Coal City Bank as the resulting financial
institution.
(v) Thomas Panos shall be the Senior Loan Officer of
Coal City Bank as the resulting financial institution.
(c) Amendment. It is the intention of Avondale and Coal City
and their respective Boards of Directors that during the above-referenced
three-year period, that the provisions of the Bylaws reflected in Exhibit 1.4(c)
be amended only upon the affirmative vote of a majority of both the
Avondale-Related Directors and the Coal City-Related Directors.
(d) Directors of Coal City Bank. At the Bank Merger Effective
Time or Purchase and Assumption Time, the Board of Directors of Coal City Bank
shall consist of the persons serving as directors of Coal City Bank immediately
prior to the Bank Merger Effective Time or Purchase and Assumption Time and the
persons serving as directors of Avondale Bank immediately prior to the Company
Merger Effective Time who shall have advised the Chief
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Executive Officer of Avondale at least 15 days prior to any required regulatory
filing that they desire to serve on the Board of Directors of Coal City Bank.
(e) Survival of Section 6.2. The provisions of Section 6.2(a)
and (b) shall survive the Company Merger Effective Time and remain in effect
until the third anniversary of the Company Merger Effective Time, terminating
thereafter.
ARTICLE VII
GENERAL
7.1 Amendments. Subject to applicable law, this Agreement may be
amended, whether before or after any stockholder approval hereof, by an
agreement in writing executed in the same manner as this Agreement and
authorized or ratified by the Boards of Directors of the parties hereto,
provided that after the approval of this Agreement by the stockholders of either
party hereto, no such amendment may change the amount or form of the
consideration to be delivered hereunder pursuant to Section 1.3 herein without
their approval.
7.2 Confidentiality. All information disclosed by any party to any
other party, whether prior or subsequent to the date of this Agreement
including, without limitation, any information obtained pursuant to Section 3.1
hereof, shall be kept confidential by such other party and shall not be used by
such other party otherwise than as herein contemplated, all in accordance with
the terms of the confidentiality agreement between the parties dated May 29,
1998 (the "Confidentiality Agreement"). In the event of the termination of this
Agreement, each party shall use all reasonable efforts to return upon request to
the other party all documents (and reproductions thereof) received from such
other party (and, in the case of reproductions, all such reproductions) that
include information subject to the confidentiality requirement set forth above.
7.3 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Illinois without taking into account any provision regarding choice of
law, except to the extent certain matters may be governed by federal law by
reason of preemption.
7.4 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail or certified
mail, postage prepaid, addressed, as follows:
If to Avondale, to
Avondale Financial Corp.
20 N. Clark Street
Chicago, Illinois 60602
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Attention: Robert S. Engelman, Jr.
with a copy to:
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Suite 700
Washington, D.C. 20005
Attention: Barry P. Taff, P.C.
Christopher R. Kelly, P.C.
If to Coal City, to
Coal City Corporation
1200 North Ashland Avenue
Chicago, Illinois 60622-2298
Attention: Mitchell Feiger
with a copy to:
Schwartz, Cooper, Greenberger & Krauss
180 North LaSalle Street
Suite 2700
Chicago, Illinois 60601
Attention: Robert Dunn Glick
or such other address as shall be furnished in writing by either party to the
other, and any such notice or communication shall be deemed to have been given
two business days after the date of such mailing (except that the notice of
change of address shall not be deemed to have been given until received by the
addressee). Notices may also be sent by telegram, telex, facsimile transmission
or hand delivery and in such event shall be deemed to have been given as of the
date received by the addressee.
7.5 No Assignment. This Agreement may not be assigned by any
party hereto, by operation of law or otherwise, except as
contemplated hereby.
7.6 Headings. The descriptive headings of the several Articles and
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
7.7 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to each other party.
7.8 Construction and Interpretation. Except as the context otherwise
requires, all references herein to any state or federal regulatory agency shall
also be deemed to refer to any predecessor or successor agency, and all
references to state and federal statutes or regulations shall also be deemed to
refer to any successor statute or regulation.
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7.9 Entire Agreement. This Agreement, together with the schedules,
lists, exhibits and certificates required to be delivered hereunder, and any
amendment hereafter executed and delivered in accordance with Section 7.1,
constitutes the entire agreement of the parties and supersedes any prior written
or oral agreement or understanding among any parties pertaining to the Merger,
except that the Confidentiality Agreement shall remain in full force and effect
as contemplated in Section 7.2 herein and except with respect to the applicable
Stock Option Agreement.
7.10 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law then such provision will be ineffective only
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of the Agreement.
7.11 No Third Party Beneficiaries. Nothing in this Agreement shall
entitle any person (other than the parties hereto and their respective
successors and assigns permitted hereby) to any claim, cause of action, remedy
or right of any kind, except for those provisions which are intended to be for
the benefit of the persons covered thereby and may be enforced by such persons,
including without limitation, as provided in Sections 1.8, 6.1 and 6.2.
7.12 No Employment Solicitation. If this Agreement is terminated, the
parties hereto agree that, for a period of two years subsequent to such
termination (i) none of the parties shall, without first obtaining the prior
written consent of the other, directly or indirectly, actively solicit the
employment of any current director, officer or employee of the other party and
(ii) none of the parties will actively solicit business relationships with
clients of the other party solely as a result of review of the information
contemplated in Section 7.2 herein.
IN WITNESS WHEREOF, each party has caused this Agreement to be executed
on its behalf by its duly authorized officers as of the date set forth above.
AVONDALE FINANCIAL CORP. COAL CITY CORPORATION
By: /s/ Robert S. Engelman, Jr. By: /s/ Mitchell Feiger
---------------------------- --------------------
Robert S. Engelman, Jr. Mitchell Feiger
President and Chief President
Executive Officer
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EXHIBIT A
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of October 12, 1998, between Avondale
Financial Corp., a Delaware corporation ("Grantee"), and Coal City Corporation,
an Illinois corporation ("Issuer").
W I T N E S S E T H:
WHEREAS, Grantee, and Issuer have entered into an Agreement and Plan of
Merger on even date herewith (the "Merger Agreement");
WHEREAS, as an inducement to the willingness of Grantee to enter into the
Merger Agreement, Issuer has agreed to grant Grantee the Option (as hereinafter
defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant of the
Option and the Merger Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to an
aggregate of 9742 fully paid and nonassessable shares of the common stock, par
value $10.00 per share, of Issuer ("Common Stock") at a price per share of
$675.00; provided, however, that in the event Issuer issues or agrees to issue
any shares of Common Stock (other than shares of Common Stock issued pursuant to
stock options granted pursuant to any employee benefit plan prior to the date
hereof) at a price less than such price per share (as adjusted pursuant to
subsection (b) of Section 5), such price shall be equal to such lesser price
(such price, as adjusted if applicable, the "Option Price"); provided, further,
that in no event shall the number of shares for which this Option is exercisable
exceed 19.9% of the issued and outstanding shares of Common Stock. The number of
shares of Common Stock that may be received upon the exercise of the Option and
the Option Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5(a) hereof), the number of shares of Common Stock subject to the Option
shall be increased so that, after such issuance, such number together with any
shares of Common Stock previously issued pursuant hereto, equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing contained
in this Section l(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer to issue shares in breach of any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, if, but only if, both an Initial Triggering Event (as hereinafter
defined) and a Subsequent Triggering Event (as hereinafter defined) shall have
occurred prior to the occurrence of an Exercise Termination Event
<PAGE>
(as hereinafter defined), provided that the Holder shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 2) within
six months following such Subsequent Triggering Event (or such later period as
provided in Section 10). Each of the following shall be an Exercise Termination
Event: (i) the Company Merger Effective Time; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event except a termination by
Grantee pursuant to Section 4.4(e) of the Merger Agreement (but only if the
breach giving rise to the termination was willful) (a "Listed Termination");
(iii) the passage of 15 months (or such longer period as provided in Section 10)
after termination of the Merger Agreement if such termination follows the
occurrence of an Initial Triggering Event or is a Listed Termination or (iv) the
date on which the shareholders of the Grantee shall have voted and failed to
approve the Company Merger (unless (A) Issuer shall then be in material breach
of its covenants or agreements contained in the Merger Agreement or (B) on or
prior to such date, the stockholders of Issuer shall have also voted and failed
to approve and adopt the Merger Agreement). The term "Holder" shall mean the
holder or holders of the Option. Notwithstanding anything to the contrary
contained herein, (i) the Option may not be exercised at any time when Grantee
shall be in material breach of the Merger Agreement such that Issuer shall be
entitled to terminate the Merger Agreement pursuant to Section 4.4(e) thereof as
a result of a material breach and (ii) this Agreement shall automatically
terminate upon the proper termination of the Merger Agreement (x) by Issuer
pursuant to Section 4.4(e) thereof as a result of the material breach by
Grantee, or (y) by Issuer or Grantee pursuant to Section 4.4(b)(ii).
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring on or after the date hereof:
(i) Issuer or any Significant Subsidiary (as defined in Rule 1-02 of
Regulation S-X promulgated by the Securities and Exchange Commission (the
"SEC")) (an "Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as hereinafter defined) with any person (the term
"person" for purposes of this Agreement having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee
Subsidiary") or the Board of Directors of Issuer (the "Issuer Board")
shall have recommended that the shareholders of Issuer approve or accept
any Acquisition Transaction other than the Merger. For purposes of this
Agreement, (a) "Acquisition Transaction" shall mean (x) a merger or
consolidation, or any similar transaction, involving Issuer or any Issuer
Subsidiary (other than mergers, consolidations or similar transactions (i)
involving solely Issuer and/or one or more wholly-owned (except for
directors' qualifying shares and a de minimis number of other shares)
Subsidiaries of the Issuer, provided, any such transaction is not entered
into in violation of the terms of the Merger Agreement or (ii) in which
the shareholders of Issuer immediately prior to the completion of such
transaction own at least 65% of the Common Stock of the Issuer (or the
resulting or surviving entity in such transaction) immediately after
completion of such transaction, provided any such
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transaction is not entered into in violation of the terms of the Merger
Agreement), (y) a purchase, lease or other acquisition of all or any
substantial part of the assets or deposits of Issuer or any Issuer
Subsidiary, or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of securities
representing 10% or more of the voting power of Issuer or any Issuer
Subsidiary and (b) "Subsidiary" shall have the meaning set forth in Rule
12b-2 under the Exchange Act;
(ii) Any person other than the Grantee or any Grantee Subsidiary
shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act,
and the rules and regulations thereunder);
(iii) The shareholders of Issuer shall have voted and failed to
adopt the Merger Agreement at a meeting which has been held for that
purpose or any adjournment or postponement thereof, or such meeting shall
not have been held in violation of the Merger Agreement or shall have been
cancelled prior to termination of the Merger Agreement if, prior to such
meeting (or if such meeting shall not have been held or shall have been
cancelled, prior to such termination), it shall have been publicly
announced that any person (other than Grantee or any of its Subsidiaries)
shall have made, or publicly disclosed an intention to make, a proposal to
engage in an Acquisition Transaction;
(iv) (x) The Issuer Board shall have withdrawn or modified (or
publicly announced its intention to withdraw or modify) in any manner
adverse in any respect to Grantee its recommendation that the shareholders
of Issuer approve the transactions contemplated by the Merger Agreement,
(y) Issuer or any Issuer Subsidiary, without having received Grantee's
prior written consent, shall have authorized, recommended, proposed (or
publicly announced its intention to authorize, recommend or propose) an
agreement to engage in an Acquisition Transaction with any person other
than Grantee or a Grantee Subsidiary, or (z) Issuer shall have provided
information to or engaged in negotiations with a third party relating to a
possible Acquisition Transaction.
(v) Any person other than Grantee or any Grantee Subsidiary shall
have made a proposal to Issuer or its shareholders to engage in an
Acquisition Transaction and such proposal shall have been publicly
announced;
(vi) Any person other than Grantee or any Grantee Subsidiary shall
have filed with the SEC a registration statement or tender offer materials
with respect to a potential exchange or tender offer that would constitute
an Acquisition Transaction (or filed a preliminary proxy statement with
the SEC with respect to a potential vote by its shareholders to approve
the issuance of shares to be offered in such an exchange offer);
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(vii) Issuer shall have willfully breached any covenant or
obligation contained in the Merger Agreement in anticipation of engaging
in an Acquisition Transaction, and following such breach Grantee would be
entitled to terminate the Merger Agreement (whether immediately or after
the giving of notice or passage of time or both); or
(viii)Any person other than Grantee or any Grantee Subsidiary other
than in connection with a transaction to which Grantee has given its prior
written consent shall have filed an application or notice with the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board")
or other federal or state thrift or bank regulatory or antitrust
authority, which application or notice has been accepted for processing,
for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) The acquisition by any person (other than Grantee or any Grantee
Subsidiary) of beneficial ownership of 25% or more of the then outstanding
Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
clause (i) of subsection (b) of this Section 2, except that the percentage
referred to in clause (z) of the second sentence thereof shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event"), it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option (or any portion thereof), it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i) the
total number of shares it will purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 60 business
days from the Notice Date for the closing of such purchase (the "Closing Date");
provided, that if prior notification to or approval of the Federal Reserve Board
or any other regulatory or antitrust agency is required in connection with such
purchase, the Holder shall promptly file the required notice or application for
approval, shall promptly notify Issuer of such filing, and shall expeditiously
process the same and the period of time that otherwise would run pursuant to
this sentence shall run instead from the date on which any required notification
periods have expired or been terminated or such approvals have been obtained and
any requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall (i) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the
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<PAGE>
exercise of the Option in immediately available funds by wire transfer to a bank
account designated by Issuer and (ii) present and surrender this Agreement to
Issuer at its principal executive offices, provided that the failure or refusal
of the Issuer to designate such a bank account or accept surrender of this
Agreement shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder.
(h) Certificates for Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on file at
the principal office of Issuer and will be provided to the holder hereof
without charge upon receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "Securities Act") in the above
legend shall be removed by delivery of substitute certificate(s) without such
reference if the Holder shall have delivered to Issuer a copy of a letter from
the staff of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the Securities Act; (ii) the reference to the provisions of this
Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference in the opinion
of Counsel to the Holder; and (iii) the legend shall be removed in its entirety
if the conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed, subject to the receipt of any necessary regulatory
approvals, to be the holder of record of the shares of Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of Issuer
shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes and other
charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of the Holder or
its assignee, transferee or designee.
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<PAGE>
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all applicable premerger notification, reporting
and waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Bank Holding
Company Act of 1956, as amended or any state or other federal thrift or banking
law, prior approval of or notice to the Federal Reserve Board or to any state or
other federal regulatory authority is necessary before the Option may be
exercised, cooperating fully with the Holder in preparing such applications or
notices and providing such information to the Federal Reserve Board or such
state or other federal regulatory authority as they may require) in order to
permit the Holder to exercise the Option and Issuer duly and effectively to
issue shares of Common Stock pursuant hereto; and (iv) promptly to take all
action provided herein to protect the rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5.
(a) In the event of any change in, or distributions in respect of, the
Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or the like, the type and number of shares of Common Stock purchasable upon
exercise hereof shall be appropriately adjusted and proper provision shall be
made so that, in the event that any additional shares of Common Stock are to be
issued or otherwise become outstanding
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<PAGE>
as a result of any such change (other than pursuant to an exercise of the
Option), the number of shares of Common Stock that remain subject to the Option
shall be increased so that, after such issuance and together with shares of
Common Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Common Stock), it
equals 19.9% of the number of shares of Common Stock then issued and
outstanding.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Common Stock purchasable
prior to the adjustment and the denominator of which shall be equal to the
number of shares of Common Stock purchasable after the adjustment.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 12 months (or such later period as provided in Section 10) of
such Subsequent Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares of
Common Stock issued pursuant hereto), promptly prepare, file and keep current a
registration statement under the Securities Act covering any shares issued and
issuable pursuant to this Option and shall use its reasonable best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by Grantee. Issuer will use
its reasonable best efforts to cause such registration statement promptly to
become effective and then to remain effective for such period not in excess of
180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
Issuer shall bear the costs of such registrations (including, but not limited
to, Issuer's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration of
Option Shares as provided above, Issuer is in registration with respect to an
underwritten public offering by Issuer of shares of Common Stock, and if in the
good faith judgment of the managing underwriter or managing underwriters, or, if
none, the sole underwriter or underwriters, of such offering the offer and sale
of the Option Shares would interfere with the successful marketing of the shares
of Common Stock offered by Issuer, the number of Option Shares otherwise to be
covered in the registration statement contemplated hereby may be reduced;
provided, however, that after any such required reduction the number of Option
Shares to be included in such offering for the account of all Holders shall
constitute at least 25% of the total number of shares to be sold by the Holders
and Issuer in the aggregate; and provided further, however, that if such
reduction occurs, then Issuer shall file a registration statement for the
balance as promptly as practicable thereafter as to which no reduction pursuant
to this Section 6 shall be permitted or occur and the Holder shall thereafter be
entitled to one additional registration and the 12-month period referred to in
the first sentence of this section shall be increased to 24 months. Each such
Holder shall provide all information
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reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements for Issuer. Upon receiving
any request under this Section 6 from any Holder, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same, postage
prepaid, to the address of record of the persons entitled to receive such
copies. Notwithstanding anything to the contrary contained herein, in no event
shall the number of registrations that Issuer is obligated to effect be
increased by reason of the fact that there shall be more than one Holder as a
result of any assignment or division of this Agreement.
7. (a) At any time after the occurrence of a Repurchase Event (as defined
below) (i) at the request of the Holder, delivered prior to an Exercise
Termination Event (or such later period as provided in Section 10), Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a price
(the "Option Repurchase Price") equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered prior to an Exercise Termination Event (or such later period as
provided in Section 10), Issuer (or any successor thereto) shall repurchase such
number of the Option Shares from the Owner as the Owner shall designate at a
price (the "Option Share Repurchase Price") equal to the market/offer price
multiplied by the number of Option Shares so designated. The term "market/offer
price" shall mean the highest of (i) the price per share of Common Stock at
which a tender or exchange offer therefor has been made, (ii) the price per
share of Common Stock to be paid by any third party pursuant to an agreement
with Issuer, (iii) the highest closing price for shares of Common Stock within
the six-month period immediately preceding the date the Holder gives notice of
the required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, or (iv) in the event of a sale
of all or any substantial part of Issuer's assets or deposits, the sum of the
net price paid in such sale for such assets or deposits and the current market
value of the remaining net assets of Issuer as determined by a nationally
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to Issuer, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than cash
shall be determined by a nationally recognized investment banking firm selected
by the Holder or Owner, as the case may be, and reasonably acceptable to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. As promptly as practicable, and in any event
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within five business days after the surrender of the Option and/or certificates
representing Option Shares and the receipt of such notice or notices relating
thereto, Issuer shall deliver or cause to be delivered to the Holder the Option
Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor
or the portion thereof that Issuer is not then prohibited under applicable law
and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from repurchasing the
Option and/or the Option Shares in full, Issuer shall immediately so notify the
Holder and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the portion of the
Option Repurchase Price and the Option Share Repurchase Price, respectively,
that it is no longer prohibited from delivering, within five business days after
the date on which Issuer is no longer so prohibited; provided, however, that if
Issuer at any time after delivery of a notice of repurchase pursuant to
paragraph (b) of this Section 7 is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from delivering to the
Holder and/or the Owner, as appropriate, the Option Repurchase Price and the
Option Share Repurchase Price, respectively, in full (and Issuer hereby
undertakes to use its reasonable best efforts to obtain all required regulatory
and legal approvals and to file any required notices as promptly as practicable
in order to accomplish such repurchase), the Holder or Owner may revoke its
notice of repurchase of the Option and/or the Option Shares whether in whole or
to the extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate, that
portion of the Option Repurchase Price and/or the Option Share Repurchase Price
that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Holder, a new Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Agreement was
exercisable at the time of delivery of the notice of repurchase by a fraction,
the numerator of which is the Option Repurchase Price less the portion thereof
theretofore delivered to the Holder and the denominator of which is the Option
Repurchase Price, and/or (B) to the Owner, a certificate for the Option Shares
it is then so prohibited from repurchasing. If an Exercise Termination Event
shall have occurred prior to the date of the notice by Issuer described in the
first sentence of this subsection (c), or shall be scheduled to occur at any
time before the expiration of a period ending on the thirtieth day after such
date, the Holder shall nonetheless have the right to exercise the Option until
the expiration of such 30-day period.
(d) For purposes of this Section 7, a "Repurchase Event" shall be deemed
to have occurred upon the occurrence of any of the following events or
transactions after the date hereof:
(i) the acquisition by any person (other than Grantee or any Grantee
Subsidiary) of beneficial ownership of 50% or more of the then outstanding
Common Stock; or
(ii) the consummation of any Acquisition Transaction described in
Section 2(b)(i) hereof, except that the percentage referred to in clause
(z) shall be 50%.
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8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or a Grantee Subsidiary, or engage in a plan of exchange with
any person, other than Grantee or a Grantee Subsidiary and Issuer shall not be
the continuing or surviving corporation of such consolidation or merger or the
acquirer in such plan of exchange, (ii) to permit any person, other than Grantee
or a Grantee Subsidiary, to merge into Issuer or be acquired by Issuer in a plan
of exchange and Issuer shall be the continuing or surviving or acquiring
corporation, but, in connection with such merger or plan of exchange, the then
outstanding shares of Common Stock shall be changed into or exchanged for stock
or other securities of any other person or cash or any other property or the
then outstanding shares of Common Stock shall after such merger or plan of
exchange represent less than 50% of the outstanding shares and share equivalents
of the merged or acquiring company, or (iii) to sell or otherwise transfer all
or a substantial part of its or the Issuer Subsidiary's assets or deposits to
any person, other than Grantee or a Grantee Subsidiary, then, and in each such
case, the agreement governing such transaction shall make proper provision so
that the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged for,
an option (the "Substitute Option"), at the election of the Holder, of either
(x) the Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving person of a consolidation or merger with Issuer (if other than
Issuer), (ii) the acquiring person in a plan of exchange in which Issuer
is acquired, (iii) the Issuer in a merger or plan of exchange in which
Issuer is the continuing or surviving or acquiring person, and (iv) the
transferee of all or a substantial part of Issuer's assets or deposits (or
the assets or deposits of the Issuer Subsidiary).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the issuer of the Substitute Option upon exercise of the Substitute
Option.
(iii) "Assigned Value" shall mean the market/offer price, as defined
in Section 7.
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person,
as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as
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similar as possible and in no event less advantageous to the Holder. The issuer
of the Substitute Option shall also enter into an agreement with the then Holder
or Holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purpose to the provisions of Section 9),
which agreement shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option was exercisable
immediately prior to the event described in the first sentence of Section 8(a),
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option was exercisable immediately prior to the
event described in the first sentence of Section 8(a) and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer")
shall make a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (e)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (e). This difference in value shall be determined by a
nationally recognized investment banking firm selected by the Holder.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "Substitute Option Repurchase Price")
equal to the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised, and at the request of the owner (the "Substitute Share
Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price (the
"Substitute Share Repurchase Price") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
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(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective rights to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and/or certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable and in any event within five business days
after the surrender of the Substitute Option and/or certificates representing
Substitute Shares and the receipt of such notice or notices relating thereto,
the Substitute Option Issuer shall deliver or cause to be delivered to the
Substitute Option Holder the Substitute Option Repurchase Price and/or to the
Substitute Share Owner the Substitute Share Repurchase Price therefor or the
portion thereof which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation, or as a consequence of administrative policy, from
repurchasing the Substitute Option and/or the Substitute Shares in part or in
full, the Substitute Option Issuer shall immediately so notify the Substitute
Option Holder and/or the Substitute Share Owner and thereafter deliver or cause
to be delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and/or the Substitute Share Repurchase Price, respectively,
which it is no longer prohibited from delivering, within five business days
after the date on which the Substitute Option Issuer is no longer so prohibited;
provided, however, that if the Substitute Option Issuer is at any time after
delivery of a notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from delivering to the Substitute Option Holder and/or
the Substitute Share Owner, as appropriate, the Substitute Option Repurchase
Price and the Substitute Share Repurchase Price, respectively, in full (and the
Substitute Option Issuer shall use its reasonable best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder and/or Substitute
Share Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of prohibition, whereupon, in
the latter case, the Substitute Option Issuer shall promptly (i) deliver to the
Substitute Option Holder or Substitute Share Owner, as appropriate, that portion
of the Substitute Option Repurchase Price or the Substitute Share Repurchase
Price that the Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, and/or (B) to the Substitute Share Owner, a certificate for
the Substitute
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Option Shares it is then so prohibited from repurchasing. If an Exercise
Termination Event shall have occurred prior to the date of the notice by the
Substitute Option Issuer described in the first sentence of this subsection (c),
or shall be scheduled to occur at any time before the expiration of a period
ending on the thirtieth day after such date, the Substitute Option Holder shall
nevertheless have the right to exercise the Substitute Option until the
expiration of such 30-day period.
10. The 30-day, 6-month, 12-month, 18-month or 24-month periods for
exercise of certain rights under Sections 2, 6, 7, 9, 12 and 15 shall be
extended: (i) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights (for so long as the Holder, Owner, Substitute Option
Holder or Substitute Share Owner, as the case may be, is using commercially
reasonable efforts to obtain such regulatory approvals), and for the expiration
of all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the Exchange Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Issuer Board prior to the date hereof and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant thereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder; provided, however,
that until the date 15 days following the date on which the Federal Reserve
Board has approved an application by Grantee to acquire the shares of Common
Stock subject to the Option, Grantee may not assign its rights under the Option
except in (i) a widely dispersed public distribution, (ii) a private placement
in which no one party acquires the right to purchase in excess of 2% of the
voting shares of Issuer, (iii) an assignment to a single party (e.g., a broker
or investment banker) for the purpose of conducting a
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widely dispersed public distribution on Grantee's behalf or (iv) any other
manner approved by the Federal Reserve Board.
13. Each of Grantee and Issuer will use its reasonable best efforts to
make all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, but Grantee shall not be obligated to apply to
state banking authorities for approval to acquire the shares of Common Stock
issuable hereunder until such time, if ever, as it deems appropriate to do so.
14. (a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit (as hereinafter defined) exceed $1,800,000 and,
if it otherwise would exceed such amount, the Grantee, at its sole election,
shall either (a) reduce the number of shares of Common Stock subject to this
Option, (b) deliver to Issuer for cancellation Option Shares previously
purchased by Grantee, (c) pay cash to Issuer, or (d) any combination thereof, so
that Grantee's actually realized Total Profit shall not exceed $1,800,000 after
taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this Option may
not be exercised for a number of shares as would, as of the date of exercise,
result in a Notional Total Profit (as defined below) of more than $1,800,000;
provided that nothing in this sentence shall restrict any exercise of the Option
permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7, (ii) (x) the amount received by Grantee pursuant to Issuer's
repurchase of Option Shares pursuant to Section 7, less (y) Grantee's purchase
price for such Option Shares, (iii) (x) the net cash amounts received by Grantee
pursuant to the sale of Option Shares (or any other securities into which such
Option Shares are converted or exchanged) to any unaffiliated party, less (y)
the Grantee's purchase price of such Option Shares, (iv) any amounts received by
Grantee on the transfer of the Option (or any portion thereof) to any
unaffiliated party, and (v) any amount equivalent to the foregoing with respect
to the Substitute Option.
(d) As used herein, the term 'Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise this Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that this Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Grantee
and its affiliates as of such date, were sold for cash at the closing market
price for the Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions).
15. (a) Grantee may, at any time following a Repurchase Event and prior to
the occurrence of an Exercise Termination Event (or such later period as
provided in Section 10), relinquish the
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Option (together with any Option Shares issued to and then owned by Grantee) to
Issuer in exchange for a cash fee equal to the Surrender Price; provided,
however, that Grantee may not exercise its rights pursuant to this Section 15 if
Issuer has repurchased the Option (or any portion thereof) or any Option Shares
pursuant to Section 7. The "Surrender Price" shall be equal to $1,800,000 (i)
plus, if applicable, Grantee's purchase price with respect to any Option Shares
and (ii) minus, if applicable, the excess of (A) the net cash amounts, if any,
received by Grantee pursuant to the arms' length sale of Option Shares (or any
other securities into which such Option Shares were converted or exchanged) to
any unaffiliated party, over (B) Grantee's purchase price of such Option Shares.
(b) Grantee may exercise its right to relinquish the Option and any Option
Shares pursuant to this Section 15 by surrendering to Issuer, at its principal
office, a copy of this Agreement together with certificates for Option Shares,
if any, accompanied by a written notice stating (i) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender Price. The Surrender Price
shall be payable in immediately available funds on or before the second business
day following receipt of such notice by Issuer.
(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from paying the
Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee
and thereafter deliver or cause to be delivered, from time to time, to Grantee,
the portion of the Surrender Price that it is no longer prohibited from paying,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of surrender pursuant to paragraph (b) of this Section 15 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (i) Issuer shall (A)
use its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in order
to make such payments, (B) within five days of the submission or receipt of any
documents relating to any such regulatory and legal approvals, provide Grantee
with copies of the same, and (c) keep Grantee advised of both the status of any
such request for regulatory and legal approvals, as well as any discussions with
any relevant regulatory or other third party reasonably related to the same and
(ii) Grantee may revoke such notice of surrender by delivery of a notice of
revocation to Issuer and, upon delivery of such notice of revocation, the
Exercise Termination Event shall be extended to a date six months from the date
on which the Exercise Termination Event would have occurred if not for the
provisions of this Section 15(c) (during which period Grantee may exercise any
of its rights hereunder, including any and all rights pursuant to this Section
15).
16. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief. In connection therewith both
parties waive the posting of any bond or similar requirement.
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17. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7, the full number of shares of Common Stock
provided in Section l(a) hereof (as adjusted pursuant to Section l(b) or Section
5 hereof), it is the express intention of Issuer to allow the Holder to acquire
or to require Issuer to repurchase such lesser number of shares as may be
permissible, without any amendment or modification hereof.
18. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
fax, telecopy, or by registered or certified mail (postage prepaid, return
receipt requested) at the respective addresses of the parties set forth in the
Merger Agreement.
19. This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois, without regard to the conflict of law
principles thereof (except to the extent that mandatory provisions of Federal
law are applicable).
20. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
21. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
22. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assignees.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assignees, any rights, remedies, obligations or liabilities under or by reason
of this Agreement, except as expressly provided herein.
23. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
COAL CITY CORPORATION
By /s/ Mitchell Feiger
----------------------------------------
Mitchell Feiger
President
AVONDALE FINANCIAL CORP.
By /s/ Robert S. Engelman, Jr.
----------------------------------------
Robert S. Engelman, Jr.
President and Chief Executive Officer
17
<PAGE>
EXHIBIT B
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of October 12, 1998, between Coal City
Corporation, an Illinois corporation ("Grantee"), and Avondale Financial Corp.,
a Delaware corporation ("Issuer").
W I T N E S S E T H:
WHEREAS, Grantee, and Issuer have entered into an Agreement and Plan of
Merger on even date herewith (the "Merger Agreement");
WHEREAS, as an inducement to the willingness of Grantee to enter into the
Merger Agreement, Issuer has agreed to grant Grantee the Option (as hereinafter
defined); and
WHEREAS, the Board of Directors of Issuer has approved the grant of the
Option and the Merger Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to an
aggregate of 577,610 fully paid and nonassessable shares of the common stock,
par value $.01 per share, of Issuer ("Common Stock") at a price per share of
$7.40; provided, however, that in the event Issuer issues or agrees to issue any
shares of Common Stock (other than shares of Common Stock issued pursuant to
stock options granted pursuant to any employee benefit plan prior to the date
hereof) at a price less than such price per share (as adjusted pursuant to
subsection (b) of Section 5), such price shall be equal to such lesser price
(such price, as adjusted if applicable, the "Option Price"); provided, further,
that in no event shall the number of shares for which this Option is exercisable
exceed 19.9% of the issued and outstanding shares of Common Stock. The number of
shares of Common Stock that may be received upon the exercise of the Option and
the Option Price are subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are issued or
otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement and other than pursuant to an event described in
Section 5(a) hereof), the number of shares of Common Stock subject to the Option
shall be increased so that, after such issuance, such number together with any
shares of Common Stock previously issued pursuant hereto, equals 19.9% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing contained
in this Section l(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer to issue shares in breach of any provision of the Merger Agreement.
2. (a) The Holder (as hereinafter defined) may exercise the Option, in
whole or part, if, but only if, both an Initial Triggering Event (as hereinafter
defined) and a Subsequent Triggering Event (as hereinafter defined) shall have
occurred prior to the occurrence of an Exercise Termination Event
<PAGE>
(as hereinafter defined), provided that the Holder shall have sent the written
notice of such exercise (as provided in subsection (e) of this Section 2) within
six months following such Subsequent Triggering Event (or such later period as
provided in Section 10). Each of the following shall be an Exercise Termination
Event: (i) the Company Merger Effective Time; (ii) termination of the Merger
Agreement in accordance with the provisions thereof if such termination occurs
prior to the occurrence of an Initial Triggering Event except a termination by
Grantee pursuant to Section 4.4(e) of the Merger Agreement (but only if the
breach giving rise to the termination was willful) (a "Listed Termination");
(iii) the passage of 15 months (or such longer period as provided in Section 10)
after termination of the Merger Agreement if such termination follows the
occurrence of an Initial Triggering Event or is a Listed Termination or (iv) the
date on which the shareholders of the Grantee shall have voted and failed to
approve the Company Merger (unless (A) Issuer shall then be in material breach
of its covenants or agreements contained in the Merger Agreement or (B) on or
prior to such date, the stockholders of Issuer shall have also voted and failed
to approve and adopt the Merger Agreement). The term "Holder" shall mean the
holder or holders of the Option. Notwithstanding anything to the contrary
contained herein, (i) the Option may not be exercised at any time when Grantee
shall be in material breach of the Merger Agreement such that Issuer shall be
entitled to terminate the Merger Agreement pursuant to Section 4.4(e) thereof as
a result of a material breach and (ii) this Agreement shall automatically
terminate upon the proper termination of the Merger Agreement (x) by Issuer
pursuant to Section 4.4(e) thereof as a result of the material breach by
Grantee, or (y) by Issuer or Grantee pursuant to Section 4.4(b)(ii).
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring on or after the date hereof:
(i) Issuer or any Significant Subsidiary (as defined in Rule 1-02 of
Regulation S-X promulgated by the Securities and Exchange Commission (the
"SEC")) (an "Issuer Subsidiary"), without having received Grantee's prior
written consent, shall have entered into an agreement to engage in an
Acquisition Transaction (as hereinafter defined) with any person (the term
"person" for purposes of this Agreement having the meaning assigned
thereto in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder) other than Grantee or any of its Subsidiaries (each a "Grantee
Subsidiary") or the Board of Directors of Issuer (the "Issuer Board")
shall have recommended that the shareholders of Issuer approve or accept
any Acquisition Transaction other than the Merger. For purposes of this
Agreement, (a) "Acquisition Transaction" shall mean (x) a merger or
consolidation, or any similar transaction, involving Issuer or any Issuer
Subsidiary (other than mergers, consolidations or similar transactions (i)
involving solely Issuer and/or one or more wholly-owned (except for
directors' qualifying shares and a de minimis number of other shares)
Subsidiaries of the Issuer, provided, any such transaction is not entered
into in violation of the terms of the Merger Agreement or (ii) in which
the shareholders of Issuer immediately prior to the completion of such
transaction own at least 65% of the Common Stock of the Issuer (or the
resulting or surviving entity in such transaction) immediately after
completion of such transaction, provided any such
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<PAGE>
transaction is not entered into in violation of the terms of the Merger
Agreement), (y) a purchase, lease or other acquisition of all or any
substantial part of the assets or deposits of Issuer or any Issuer
Subsidiary, or (z) a purchase or other acquisition (including by way of
merger, consolidation, share exchange or otherwise) of securities
representing 10% or more of the voting power of Issuer or any Issuer
Subsidiary and (b) "Subsidiary" shall have the meaning set forth in Rule
12b-2 under the Exchange Act;
(ii) Any person other than the Grantee or any Grantee Subsidiary
shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act,
and the rules and regulations thereunder);
(iii) The shareholders of Issuer shall have voted and failed to
adopt the Merger Agreement at a meeting which has been held for that
purpose or any adjournment or postponement thereof, or such meeting shall
not have been held in violation of the Merger Agreement or shall have been
cancelled prior to termination of the Merger Agreement if, prior to such
meeting (or if such meeting shall not have been held or shall have been
cancelled, prior to such termination), it shall have been publicly
announced that any person (other than Grantee or any of its Subsidiaries)
shall have made, or publicly disclosed an intention to make, a proposal to
engage in an Acquisition Transaction;
(iv) (x) The Issuer Board shall have withdrawn or modified (or
publicly announced its intention to withdraw or modify) in any manner
adverse in any respect to Grantee its recommendation that the shareholders
of Issuer approve the transactions contemplated by the Merger Agreement,
(y) Issuer or any Issuer Subsidiary, without having received Grantee's
prior written consent, shall have authorized, recommended, proposed (or
publicly announced its intention to authorize, recommend or propose) an
agreement to engage in an Acquisition Transaction with any person other
than Grantee or a Grantee Subsidiary, or (z) Issuer shall have provided
information to or engaged in negotiations with a third party relating to a
possible Acquisition Transaction.
(v) Any person other than Grantee or any Grantee Subsidiary shall
have made a proposal to Issuer or its shareholders to engage in an
Acquisition Transaction and such proposal shall have been publicly
announced;
(vi) Any person other than Grantee or any Grantee Subsidiary shall
have filed with the SEC a registration statement or tender offer materials
with respect to a potential exchange or tender offer that would constitute
an Acquisition Transaction (or filed a preliminary proxy statement with
the SEC with respect to a potential vote by its shareholders to approve
the issuance of shares to be offered in such an exchange offer);
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(vii) Issuer shall have willfully breached any covenant or
obligation contained in the Merger Agreement in anticipation of engaging
in an Acquisition Transaction, and following such breach Grantee would be
entitled to terminate the Merger Agreement (whether immediately or after
the giving of notice or passage of time or both); or
(viii) Any person other than Grantee or any Grantee Subsidiary other
than in connection with a transaction to which Grantee has given its prior
written consent shall have filed an application or notice with the Office
of Thrift Supervision (the "OTS") or other federal or state thrift or bank
regulatory or antitrust authority, which application or notice has been
accepted for processing, for approval to engage in an Acquisition
Transaction.
(c) The term "Subsequent Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) The acquisition by any person (other than Grantee or any Grantee
Subsidiary) of beneficial ownership of 25% or more of the then outstanding
Common Stock; or
(ii) The occurrence of the Initial Triggering Event described in
clause (i) of subsection (b) of this Section 2, except that the percentage
referred to in clause (z) of the second sentence thereof shall be 25%.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event"), it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option (or any portion thereof), it shall send to Issuer a written notice (the
date of which being herein referred to as the "Notice Date") specifying (i) the
total number of shares it will purchase pursuant to such exercise and (ii) a
place and date not earlier than three business days nor later than 60 business
days from the Notice Date for the closing of such purchase (the "Closing Date");
provided, that if prior notification to or approval of the OTS or any other
regulatory or antitrust agency is required in connection with such purchase, the
Holder shall promptly file the required notice or application for approval,
shall promptly notify Issuer of such filing, and shall expeditiously process the
same and the period of time that otherwise would run pursuant to this sentence
shall run instead from the date on which any required notification periods have
expired or been terminated or such approvals have been obtained and any
requisite waiting period or periods shall have passed. Any exercise of the
Option shall be deemed to occur on the Notice Date relating thereto.
(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall (i) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated
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by Issuer and (ii) present and surrender this Agreement to Issuer at its
principal executive offices, provided that the failure or refusal of the Issuer
to designate such a bank account or accept surrender of this Agreement shall not
preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder.
(h) Certificates for Common Stock delivered at a closing hereunder may be
endorsed with a restrictive legend that shall read substantially as follows:
"The transfer of the shares represented by this certificate is
subject to certain provisions of an agreement between the registered
holder hereof and Issuer and to resale restrictions arising under the
Securities Act of 1933, as amended. A copy of such agreement is on file at
the principal office of Issuer and will be provided to the holder hereof
without charge upon receipt by Issuer of a written request therefor."
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "Securities Act") in the above
legend shall be removed by delivery of substitute certificate(s) without such
reference if the Holder shall have delivered to Issuer a copy of a letter from
the staff of the SEC, or an opinion of counsel, in form and substance reasonably
satisfactory to Issuer, to the effect that such legend is not required for
purposes of the Securities Act; (ii) the reference to the provisions of this
Agreement in the above legend shall be removed by delivery of substitute
certificate(s) without such reference if the shares have been sold or
transferred in compliance with the provisions of this Agreement and under
circumstances that do not require the retention of such reference in the opinion
of Counsel to the Holder; and (iii) the legend shall be removed in its entirety
if the conditions in the preceding clauses (i) and (ii) are both satisfied. In
addition, such certificates shall bear any other legend as may be required by
law.
(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed, subject to the receipt of any necessary regulatory
approvals, to be the holder of record of the shares of Common Stock issuable
upon such exercise, notwithstanding that the stock transfer books of Issuer
shall then be closed or that certificates representing such shares of Common
Stock shall not then be actually delivered to the Holder. Issuer shall pay all
expenses, and any and all United States federal, state and local taxes and other
charges that may be payable in connection with the preparation, issue and
delivery of stock certificates under this Section 2 in the name of the Holder or
its assignee, transferee or designee.
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3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all applicable premerger notification, reporting
and waiting period requirements specified in 15 U.S.C. Section 18a and
regulations promulgated thereunder and (y) in the event, under the Savings and
Loan Holding Company Act or any state or other federal thrift or banking law,
prior approval of or notice to the OTS or to any state or other federal
regulatory authority is necessary before the Option may be exercised,
cooperating fully with the Holder in preparing such applications or notices and
providing such information to the OTS or such state or other federal regulatory
authority as they may require) in order to permit the Holder to exercise the
Option and Issuer duly and effectively to issue shares of Common Stock pursuant
hereto; and (iv) promptly to take all action provided herein to protect the
rights of the Holder against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Agreements and
related Options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common Stock
that are purchasable upon exercise of the Option pursuant to Section 1 of this
Agreement, the number of shares of Common Stock purchasable upon the exercise of
the Option and the Option Price shall be subject to adjustment from time to time
as provided in this Section 5.
(a) In the event of any change in, or distributions in respect of, the
Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or the like, the type and number of shares of Common Stock purchasable upon
exercise hereof shall be appropriately adjusted and proper provision shall be
made so that, in the event that any additional shares of Common Stock are to be
issued or otherwise become outstanding
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as a result of any such change (other than pursuant to an exercise of the
Option), the number of shares of Common Stock that remain subject to the Option
shall be increased so that, after such issuance and together with shares of
Common Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Common Stock), it
equals 19.9% of the number of shares of Common Stock then issued and
outstanding.
(b) Whenever the number of shares of Common Stock purchasable upon
exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Common Stock purchasable
prior to the adjustment and the denominator of which shall be equal to the
number of shares of Common Stock purchasable after the adjustment.
6. Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, Issuer shall, at the request of Grantee
delivered within 12 months (or such later period as provided in Section 10) of
such Subsequent Triggering Event (whether on its own behalf or on behalf of any
subsequent holder of this Option (or part thereof) or any of the shares of
Common Stock issued pursuant hereto), promptly prepare, file and keep current a
registration statement under the Securities Act covering any shares issued and
issuable pursuant to this Option and shall use its reasonable best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Common Stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by Grantee. Issuer will use
its reasonable best efforts to cause such registration statement promptly to
become effective and then to remain effective for such period not in excess of
180 days from the day such registration statement first becomes effective or
such shorter time as may be reasonably necessary to effect such sales or other
dispositions. Grantee shall have the right to demand two such registrations. The
Issuer shall bear the costs of such registrations (including, but not limited
to, Issuer's attorneys' fees, printing costs and filing fees, except for
underwriting discounts or commissions, brokers' fees and the fees and
disbursements of Grantee's counsel related thereto). The foregoing
notwithstanding, if, at the time of any request by Grantee for registration of
Option Shares as provided above, Issuer is in registration with respect to an
underwritten public offering by Issuer of shares of Common Stock, and if in the
good faith judgment of the managing underwriter or managing underwriters, or, if
none, the sole underwriter or underwriters, of such offering the offer and sale
of the Option Shares would interfere with the successful marketing of the shares
of Common Stock offered by Issuer, the number of Option Shares otherwise to be
covered in the registration statement contemplated hereby may be reduced;
provided, however, that after any such required reduction the number of Option
Shares to be included in such offering for the account of all Holders shall
constitute at least 25% of the total number of shares to be sold by the Holders
and Issuer in the aggregate; and provided further, however, that if such
reduction occurs, then Issuer shall file a registration statement for the
balance as promptly as practicable thereafter as to which no reduction pursuant
to this Section 6 shall be permitted or occur and the Holder shall thereafter be
entitled to one additional registration and the 12-month period referred to in
the first sentence of this section shall be increased to 24 months. Each such
Holder shall provide all information
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reasonably requested by Issuer for inclusion in any registration statement to be
filed hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement relating
to the sale of such shares, but only to the extent of obligating itself in
respect of representations, warranties, indemnities and other agreements
customarily included in such underwriting agreements for Issuer. Upon receiving
any request under this Section 6 from any Holder, Issuer agrees to send a copy
thereof to any other person known to Issuer to be entitled to registration
rights under this Section 6, in each case by promptly mailing the same, postage
prepaid, to the address of record of the persons entitled to receive such
copies. Notwithstanding anything to the contrary contained herein, in no event
shall the number of registrations that Issuer is obligated to effect be
increased by reason of the fact that there shall be more than one Holder as a
result of any assignment or division of this Agreement.
7. (a) At any time after the occurrence of a Repurchase Event (as defined
below) (i) at the request of the Holder, delivered prior to an Exercise
Termination Event (or such later period as provided in Section 10), Issuer (or
any successor thereto) shall repurchase the Option from the Holder at a price
(the "Option Repurchase Price") equal to the amount by which (A) the
market/offer price (as defined below) exceeds (B) the Option Price, multiplied
by the number of shares for which this Option may then be exercised and (ii) at
the request of the owner of Option Shares from time to time (the "Owner"),
delivered prior to an Exercise Termination Event (or such later period as
provided in Section 10), Issuer (or any successor thereto) shall repurchase such
number of the Option Shares from the Owner as the Owner shall designate at a
price (the "Option Share Repurchase Price") equal to the market/offer price
multiplied by the number of Option Shares so designated. The term "market/offer
price" shall mean the highest of (i) the price per share of Common Stock at
which a tender or exchange offer therefor has been made, (ii) the price per
share of Common Stock to be paid by any third party pursuant to an agreement
with Issuer, (iii) the highest closing price for shares of Common Stock within
the six-month period immediately preceding the date the Holder gives notice of
the required repurchase of this Option or the Owner gives notice of the required
repurchase of Option Shares, as the case may be, or (iv) in the event of a sale
of all or any substantial part of Issuer's assets or deposits, the sum of the
net price paid in such sale for such assets or deposits and the current market
value of the remaining net assets of Issuer as determined by a nationally
recognized investment banking firm selected by the Holder or the Owner, as the
case may be, and reasonably acceptable to Issuer, divided by the number of
shares of Common Stock of Issuer outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than cash
shall be determined by a nationally recognized investment banking firm selected
by the Holder or Owner, as the case may be, and reasonably acceptable to Issuer.
(b) The Holder and the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that the Holder
or the Owner, as the case may be, elects to require Issuer to repurchase this
Option and/or the Option Shares in accordance with the provisions of this
Section 7. As promptly as practicable, and in any event
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within five business days after the surrender of the Option and/or certificates
representing Option Shares and the receipt of such notice or notices relating
thereto, Issuer shall deliver or cause to be delivered to the Holder the Option
Repurchase Price and/or to the Owner the Option Share Repurchase Price therefor
or the portion thereof that Issuer is not then prohibited under applicable law
and regulation from so delivering.
(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from repurchasing the
Option and/or the Option Shares in full, Issuer shall immediately so notify the
Holder and/or the Owner and thereafter deliver or cause to be delivered, from
time to time, to the Holder and/or the Owner, as appropriate, the portion of the
Option Repurchase Price and the Option Share Repurchase Price, respectively,
that it is no longer prohibited from delivering, within five business days after
the date on which Issuer is no longer so prohibited; provided, however, that if
Issuer at any time after delivery of a notice of repurchase pursuant to
paragraph (b) of this Section 7 is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from delivering to the
Holder and/or the Owner, as appropriate, the Option Repurchase Price and the
Option Share Repurchase Price, respectively, in full (and Issuer hereby
undertakes to use its reasonable best efforts to obtain all required regulatory
and legal approvals and to file any required notices as promptly as practicable
in order to accomplish such repurchase), the Holder or Owner may revoke its
notice of repurchase of the Option and/or the Option Shares whether in whole or
to the extent of the prohibition, whereupon, in the latter case, Issuer shall
promptly (i) deliver to the Holder and/or the Owner, as appropriate, that
portion of the Option Repurchase Price and/or the Option Share Repurchase Price
that Issuer is not prohibited from delivering; and (ii) deliver, as appropriate,
either (A) to the Holder, a new Agreement evidencing the right of the Holder to
purchase that number of shares of Common Stock obtained by multiplying the
number of shares of Common Stock for which the surrendered Agreement was
exercisable at the time of delivery of the notice of repurchase by a fraction,
the numerator of which is the Option Repurchase Price less the portion thereof
theretofore delivered to the Holder and the denominator of which is the Option
Repurchase Price, and/or (B) to the Owner, a certificate for the Option Shares
it is then so prohibited from repurchasing. If an Exercise Termination Event
shall have occurred prior to the date of the notice by Issuer described in the
first sentence of this subsection (c), or shall be scheduled to occur at any
time before the expiration of a period ending on the thirtieth day after such
date, the Holder shall nonetheless have the right to exercise the Option until
the expiration of such 30-day period.
(d) For purposes of this Section 7, a "Repurchase Event" shall be deemed
to have occurred upon the occurrence of any of the following events or
transactions after the date hereof:
(i) the acquisition by any person (other than Grantee or any Grantee
Subsidiary) of beneficial ownership of 50% or more of the then outstanding
Common Stock; or
(ii) the consummation of any Acquisition Transaction described in
Section 2(b)(i) hereof, except that the percentage referred to in clause
(z) shall be 50%.
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8. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or a Grantee Subsidiary, or engage in a plan of exchange with
any person, other than Grantee or a Grantee Subsidiary and Issuer shall not be
the continuing or surviving corporation of such consolidation or merger or the
acquirer in such plan of exchange, (ii) to permit any person, other than Grantee
or a Grantee Subsidiary, to merge into Issuer or be acquired by Issuer in a plan
of exchange and Issuer shall be the continuing or surviving or acquiring
corporation, but, in connection with such merger or plan of exchange, the then
outstanding shares of Common Stock shall be changed into or exchanged for stock
or other securities of any other person or cash or any other property or the
then outstanding shares of Common Stock shall after such merger or plan of
exchange represent less than 50% of the outstanding shares and share equivalents
of the merged or acquiring company, or (iii) to sell or otherwise transfer all
or a substantial part of its or the Issuer Subsidiary's assets or deposits to
any person, other than Grantee or a Grantee Subsidiary, then, and in each such
case, the agreement governing such transaction shall make proper provision so
that the Option shall, upon the consummation of any such transaction and upon
the terms and conditions set forth herein, be converted into, or exchanged for,
an option (the "Substitute Option"), at the election of the Holder, of either
(x) the Acquiring Corporation (as hereinafter defined) or (y) any person that
controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving person of a consolidation or merger with Issuer (if other than
Issuer), (ii) the acquiring person in a plan of exchange in which Issuer
is acquired, (iii) the Issuer in a merger or plan of exchange in which
Issuer is the continuing or surviving or acquiring person, and (iv) the
transferee of all or a substantial part of Issuer's assets or deposits (or
the assets or deposits of the Issuer Subsidiary).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the issuer of the Substitute Option upon exercise of the Substitute
Option.
(iii) "Assigned Value" shall mean the market/offer price, as defined
in Section 7.
(iv) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for one year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is
the issuer of the Substitute Option, the Average Price shall be computed
with respect to a share of common stock issued by the person merging into
Issuer or by any company which controls or is controlled by such person,
as the Holder may elect.
(c) The Substitute Option shall have the same terms as the Option,
provided that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as
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similar as possible and in no event less advantageous to the Holder. The issuer
of the Substitute Option shall also enter into an agreement with the then Holder
or Holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purpose to the provisions of Section 9),
which agreement shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares
of Substitute Common Stock as is equal to the Assigned Value multiplied by the
number of shares of Common Stock for which the Option was exercisable
immediately prior to the event described in the first sentence of Section 8(a),
divided by the Average Price. The exercise price of the Substitute Option per
share of Substitute Common Stock shall then be equal to the Option Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock for which the Option was exercisable immediately prior to the
event described in the first sentence of Section 8(a) and the denominator of
which shall be the number of shares of Substitute Common Stock for which the
Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option. In the
event that the Substitute Option would be exercisable for more than 19.9% of the
shares of Substitute Common Stock outstanding prior to exercise but for this
clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer")
shall make a cash payment to Holder equal to the excess of (i) the value of the
Substitute Option without giving effect to the limitation in this clause (e)
over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (e). This difference in value shall be determined by a
nationally recognized investment banking firm selected by the Holder.
(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 8 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
9. (a) At the request of the holder of the Substitute Option (the
"Substitute Option Holder"), the issuer of the Substitute Option (the
"Substitute Option Issuer") shall repurchase the Substitute Option from the
Substitute Option Holder at a price (the "Substitute Option Repurchase Price")
equal to the amount by which (i) the Highest Closing Price (as hereinafter
defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by
the number of shares of Substitute Common Stock for which the Substitute Option
may then be exercised, and at the request of the owner (the "Substitute Share
Owner") of shares of Substitute Common Stock (the "Substitute Shares"), the
Substitute Option Issuer shall repurchase the Substitute Shares at a price (the
"Substitute Share Repurchase Price") equal to the Highest Closing Price
multiplied by the number of Substitute Shares so designated. The term "Highest
Closing Price" shall mean the highest closing price for shares of Substitute
Common Stock within the six-month period immediately preceding the date the
Substitute Option Holder gives notice of the required repurchase of the
Substitute Option or the Substitute Share Owner gives notice of the required
repurchase of the Substitute Shares, as applicable.
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(b) The Substitute Option Holder and the Substitute Share Owner, as the
case may be, may exercise its respective rights to require the Substitute Option
Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to
this Section 9 by surrendering for such purpose to the Substitute Option Issuer,
at its principal office, the agreement for such Substitute Option (or, in the
absence of such an agreement, a copy of this Agreement) and/or certificates for
Substitute Shares accompanied by a written notice or notices stating that the
Substitute Option Holder or the Substitute Share Owner, as the case may be,
elects to require the Substitute Option Issuer to repurchase the Substitute
Option and/or the Substitute Shares in accordance with the provisions of this
Section 9. As promptly as practicable and in any event within five business days
after the surrender of the Substitute Option and/or certificates representing
Substitute Shares and the receipt of such notice or notices relating thereto,
the Substitute Option Issuer shall deliver or cause to be delivered to the
Substitute Option Holder the Substitute Option Repurchase Price and/or to the
Substitute Share Owner the Substitute Share Repurchase Price therefor or the
portion thereof which the Substitute Option Issuer is not then prohibited under
applicable law and regulation from so delivering.
(c) To the extent that the Substitute Option Issuer is prohibited under
applicable law or regulation, or as a consequence of administrative policy, from
repurchasing the Substitute Option and/or the Substitute Shares in part or in
full, the Substitute Option Issuer shall immediately so notify the Substitute
Option Holder and/or the Substitute Share Owner and thereafter deliver or cause
to be delivered, from time to time, to the Substitute Option Holder and/or the
Substitute Share Owner, as appropriate, the portion of the Substitute Option
Repurchase Price and/or the Substitute Share Repurchase Price, respectively,
which it is no longer prohibited from delivering, within five business days
after the date on which the Substitute Option Issuer is no longer so prohibited;
provided, however, that if the Substitute Option Issuer is at any time after
delivery of a notice of repurchase pursuant to subsection (b) of this Section 9
prohibited under applicable law or regulation, or as a consequence of
administrative policy, from delivering to the Substitute Option Holder and/or
the Substitute Share Owner, as appropriate, the Substitute Option Repurchase
Price and the Substitute Share Repurchase Price, respectively, in full (and the
Substitute Option Issuer shall use its reasonable best efforts to receive all
required regulatory and legal approvals as promptly as practicable in order to
accomplish such repurchase), the Substitute Option Holder and/or Substitute
Share Owner may revoke its notice of repurchase of the Substitute Option or the
Substitute Shares either in whole or to the extent of prohibition, whereupon, in
the latter case, the Substitute Option Issuer shall promptly (i) deliver to the
Substitute Option Holder or Substitute Share Owner, as appropriate, that portion
of the Substitute Option Repurchase Price or the Substitute Share Repurchase
Price that the Substitute Option Issuer is not prohibited from delivering; and
(ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new
Substitute Option evidencing the right of the Substitute Option Holder to
purchase that number of shares of the Substitute Common Stock obtained by
multiplying the number of shares of the Substitute Common Stock for which the
surrendered Substitute Option was exercisable at the time of delivery of the
notice of repurchase by a fraction, the numerator of which is the Substitute
Option Repurchase Price less the portion thereof theretofore delivered to the
Substitute Option Holder and the denominator of which is the Substitute Option
Repurchase Price, and/or (B) to the Substitute Share Owner, a certificate for
the Substitute
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Option Shares it is then so prohibited from repurchasing. If an Exercise
Termination Event shall have occurred prior to the date of the notice by the
Substitute Option Issuer described in the first sentence of this subsection (c),
or shall be scheduled to occur at any time before the expiration of a period
ending on the thirtieth day after such date, the Substitute Option Holder shall
nevertheless have the right to exercise the Substitute Option until the
expiration of such 30-day period.
10. The 30-day, 6-month, 12-month, 18-month or 24-month periods for
exercise of certain rights under Sections 2, 6, 7, 9, 12 and 15 shall be
extended: (i) to the extent necessary to obtain all regulatory approvals for the
exercise of such rights (for so long as the Holder, Owner, Substitute Option
Holder or Substitute Share Owner, as the case may be, is using commercially
reasonable efforts to obtain such regulatory approvals), and for the expiration
of all statutory waiting periods; and (ii) to the extent necessary to avoid
liability under Section 16(b) of the Exchange Act by reason of such exercise.
11. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Issuer Board prior to the date hereof and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant thereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
12. Neither of the parties hereto may assign any of its rights or
obligations under this Agreement or the Option created hereunder to any other
person, without the express written consent of the other party, except that in
the event a Subsequent Triggering Event shall have occurred prior to an Exercise
Termination Event, Grantee, subject to the express provisions hereof, may assign
in whole or in part its rights and obligations hereunder; provided, however,
that until the date 15 days following the date on which the OTS has approved an
application by Grantee to acquire the shares of Common Stock subject to the
Option, Grantee may not assign its rights under the Option except in (i) a
widely dispersed public distribution, (ii) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (iii) an assignment to a single party (e.g., a broker or investment
banker) for the purpose of conducting a widely dispersed public distribution on
Grantee's behalf or (iv) any other manner approved by the OTS.
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13. Each of Grantee and Issuer will use its reasonable best efforts to
make all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, but Grantee shall not be obligated to apply to
state banking authorities for approval to acquire the shares of Common Stock
issuable hereunder until such time, if ever, as it deems appropriate to do so.
14. (a) Notwithstanding any other provision of this Agreement, in no event
shall the Grantee's Total Profit (as hereinafter defined) exceed $1,800,000 and,
if it otherwise would exceed such amount, the Grantee, at its sole election,
shall either (a) reduce the number of shares of Common Stock subject to this
Option, (b) deliver to Issuer for cancellation Option Shares previously
purchased by Grantee, (c) pay cash to Issuer, or (d) any combination thereof, so
that Grantee's actually realized Total Profit shall not exceed $1,800,000 after
taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, this Option may
not be exercised for a number of shares as would, as of the date of exercise,
result in a Notional Total Profit (as defined below) of more than $1,800,000;
provided that nothing in this sentence shall restrict any exercise of the Option
permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 7, (ii) (x) the amount received by Grantee pursuant to Issuer's
repurchase of Option Shares pursuant to Section 7, less (y) Grantee's purchase
price for such Option Shares, (iii) (x) the net cash amounts received by Grantee
pursuant to the sale of Option Shares (or any other securities into which such
Option Shares are converted or exchanged) to any unaffiliated party, less (y)
the Grantee's purchase price of such Option Shares, (iv) any amounts received by
Grantee on the transfer of the Option (or any portion thereof) to any
unaffiliated party, and (v) any amount equivalent to the foregoing with respect
to the Substitute Option.
(d) As used herein, the term 'Notional Total Profit" with respect to any
number of shares as to which Grantee may propose to exercise this Option shall
be the Total Profit determined as of the date of such proposed exercise assuming
that this Option were exercised on such date for such number of shares and
assuming that such shares, together with all other Option Shares held by Grantee
and its affiliates as of such date, were sold for cash at the closing market
price for the Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions).
15. (a) Grantee may, at any time following a Repurchase Event and prior to
the occurrence of an Exercise Termination Event (or such later period as
provided in Section 10), relinquish the Option (together with any Option Shares
issued to and then owned by Grantee) to Issuer in exchange for a cash fee equal
to the Surrender Price; provided, however, that Grantee may not exercise its
rights pursuant to this Section 15 if Issuer has repurchased the Option (or any
portion
-14-
<PAGE>
thereof) or any Option Shares pursuant to Section 7. The "Surrender Price" shall
be equal to $1,800,000 (i) plus, if applicable, Grantee's purchase price with
respect to any Option Shares and (ii) minus, if applicable, the excess of (A)
the net cash amounts, if any, received by Grantee pursuant to the arms' length
sale of Option Shares (or any other securities into which such Option Shares
were converted or exchanged) to any unaffiliated party, over (B) Grantee's
purchase price of such Option Shares.
(b) Grantee may exercise its right to relinquish the Option and any Option
Shares pursuant to this Section 15 by surrendering to Issuer, at its principal
office, a copy of this Agreement together with certificates for Option Shares,
if any, accompanied by a written notice stating (i) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 15 and (ii) the Surrender Price. The Surrender Price
shall be payable in immediately available funds on or before the second business
day following receipt of such notice by Issuer.
(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, from paying the
Surrender Price to Grantee in full, Issuer shall immediately so notify Grantee
and thereafter deliver or cause to be delivered, from time to time, to Grantee,
the portion of the Surrender Price that it is no longer prohibited from paying,
within five business days after the date on which Issuer is no longer so
prohibited; provided, however, that if Issuer at any time after delivery of a
notice of surrender pursuant to paragraph (b) of this Section 15 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (i) Issuer shall (A)
use its reasonable best efforts to obtain all required regulatory and legal
approvals and to file any required notices as promptly as practicable in order
to make such payments, (B) within five days of the submission or receipt of any
documents relating to any such regulatory and legal approvals, provide Grantee
with copies of the same, and (c) keep Grantee advised of both the status of any
such request for regulatory and legal approvals, as well as any discussions with
any relevant regulatory or other third party reasonably related to the same and
(ii) Grantee may revoke such notice of surrender by delivery of a notice of
revocation to Issuer and, upon delivery of such notice of revocation, the
Exercise Termination Event shall be extended to a date six months from the date
on which the Exercise Termination Event would have occurred if not for the
provisions of this Section 15(c) (during which period Grantee may exercise any
of its rights hereunder, including any and all rights pursuant to this Section
15).
16. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief. In connection therewith both
parties waive the posting of any bond or similar requirement.
17. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or
-15-
<PAGE>
invalidated. If for any reason such court or regulatory agency determines that
the Holder is not permitted to acquire, or Issuer is not permitted to repurchase
pursuant to Section 7, the full number of shares of Common Stock provided in
Section l(a) hereof (as adjusted pursuant to Section l(b) or Section 5 hereof),
it is the express intention of Issuer to allow the Holder to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible,
without any amendment or modification hereof.
18. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
fax, telecopy, or by registered or certified mail (postage prepaid, return
receipt requested) at the respective addresses of the parties set forth in the
Merger Agreement.
19. This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois, without regard to the conflict of law
principles thereof (except to the extent that mandatory provisions of Federal
law are applicable).
20. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
21. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
22. Except as otherwise expressly provided herein or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assignees.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors except as
assignees, any rights, remedies, obligations or liabilities under or by reason
of this Agreement, except as expressly provided herein.
23. Capitalized terms used in this Agreement and not defined herein shall
have the meanings assigned thereto in the Merger Agreement.
-16-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
COAL CITY CORPORATION
By /s/ Mitchell Feiger
---------------------------------------
Mitchell Feiger
President
AVONDALE FINANCIAL CORP.
By /s/ Robert S. Engelman, Jr.
---------------------------------------
Robert S. Engelman, Jr.
President and Chief Executive Officer
17
<PAGE>
EXHIBIT C
October 12, 1998
Coal City Corporation
1200 North Ashland Avenue
Chicago, Illinois 60622-2298
Dear Sirs:
The undersigned understands that Avondale Financial Corp.
("Avondale") and Coal City Corporation ("Coal City") are entering into an
Agreement and Plan of Merger (the "Merger Agreement") providing for, among other
things, a merger between Avondale and Coal City (the "Merger"), in which all of
the outstanding shares of capital stock of Coal City will be exchanged for
shares of common stock, par value $.01 per share, of Avondale ( subject to the
issuance of cash in lieu of fractional shares).
The undersigned is a stockholder of Avondale and is entering
into this agreement to induce Coal City to enter into the Merger Agreement and
to consummate the transactions contemplated thereby.
The undersigned confirms its agreement with Coal City as
follows:
1. The undersigned represents, warrants and agrees that
Schedule I annexed hereto sets forth shares of the capital stock of Avondale of
which the undersigned is the record or beneficial owner (the "Shares") and that
the undersigned is on the date hereof the lawful owner of the Shares set forth
in Schedule I, free and clear of all liens, charges, encumbrances, voting
agreements and commitments of every kind, except as disclosed in Schedule I.
Except as set forth in the Schedule, the undersigned does not own or hold any
rights to acquire any additional shares of the capital stock of Avondale (by
exercise of stock options or otherwise) or any interest therein or any voting
rights with respect to any additional shares.
2. The undersigned agrees that the undersigned will not,
and will not permit any company, trust or other entity controlled by the
undersigned to, contract to sell, sell or otherwise transfer or dispose of any
of the Shares or any interest therein or securities convertible thereunto or any
voting rights with respect thereto until after the Avondale Stockholders'
Meeting (as defined in the Merger Agreement), other than (i) pursuant to the
Merger or (ii) with Coal City's prior written consent.
3. The undersigned agrees that all of the shares of capital
stock of Avondale
<PAGE>
Coal City Corporation
October 12, 1998
Page 2
beneficially owned by the undersigned, or over which the undersigned has voting
power or control, directly or indirectly, at the record date for any meeting of
stockholders of Avondale called to consider and vote to adopt the Merger
Agreement and/or the transactions contemplated thereby will be voted by the
undersigned in favor thereof.
4. The undersigned agrees to, and will cause any company,
trust or other entity controlled by the undersigned to, cooperate fully with
Coal City in connection with the Merger Agreement and the transactions
contemplated thereby. The undersigned agrees that the undersigned will not, and
will not permit any such company, trust or other entity to directly, or
indirectly (including through its officers, directors, employees or other
representatives) initiate, solicit or encourage any discussions, inquiries or
proposals with any third party relating to a Takeover Proposal (as defined in
the Merger Agreement), or provide any such person with information or assistance
or negotiate with any such person with respect to a Takeover Proposal or agree
to or otherwise assist in the effectuation of any Takeover Proposal except as
permitted by the Merger Agreement. Nothing herein is intended to preclude the
undersigned in his or her capacity as a director of Avondale to exercise his or
her fiduciary duties related to a Takeover Proposal (as defined in the Merger
Agreement).
5. The undersigned represents and warrants to Coal City that
(i) the undersigned has all necessary power and authority to enter into this
agreement and (ii) this agreement is the legal, valid and binding agreement of
the undersigned, and is enforceable against the undersigned in accordance with
its terms.
6. The undersigned agrees that damages are an inadequate
remedy for the breach by the undersigned of any term or condition of this
agreement and that Coal City shall be entitled to a temporary restraining order
and preliminary and permanent injunctive relief in order to enforce the
agreements provided herein.
7. This letter agreement may be terminated at the option of
any party at any time after the earlier of (i) termination of the Merger
Agreement and (ii) the day following the Closing (as defined in the Merger
Agreement).
8. This agreement may be amended, modified or supplemented at
any time by the written approval of such amendment, modification or supplement
by the undersigned and Coal City.
9. This agreement evidences the entire agreement among the
parties hereto with respect to the matters provided for herein and there are no
agreements, representations or warranties with respect to the matters provided
for herein other than those set forth herein and in the Merger Agreement.
<PAGE>
Coal City Corporation
October 12, 1998
Page 3
10. The parties agree that if any provision of this agreement
shall under any circumstances be deemed invalid or inoperative, this agreement
shall be construed with the invalid or inoperative provisions deleted and the
rights and obligations of the parties shall be construed and enforced
accordingly.
11. This agreement may be executed in two counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
12. The validity, construction, enforcement and effect of this
agreement shall be governed by the internal laws of the State of Illinois.
13. This agreement shall be binding upon and inure to the
benefit of Coal City and its successors, and the undersigned, the undersigned's
respective executors, personal representatives, administrators, heirs, legatees,
guardians and other legal representatives. This agreement shall survive the
death or incapacity of the undersigned.
14. Nothing in this Agreement shall be construed to give Coal
City any rights to exercise or direct the exercise of voting power as owner of
the shares, either beneficially or otherwise, for any purpose.
<PAGE>
Coal City Corporation
October 12, 1998
Page 4
Please confirm that the foregoing correctly states the understanding
between the undersigned and Coal City by signing and returning to Coal City a
counterpart hereof.
Very truly yours,
--------------------------
Signature
--------------------------
Name
Accepted as of the ___ day
of October, 1998
Coal City Corporation
By:_______________________
Mitchell Feiger
President
<PAGE>
Schedule I
Number of shares of Avondale common
stock beneficially owned.................................. ______
<PAGE>
EXHIBIT D
October 12, 1998
Avondale Financial Corp.
20 N. Clark Street
Chicago, Illinois 60602
Dear Sirs:
The undersigned understands that Avondale Financial Corp.
("Avondale") and Coal City Corporation ("Coal City") are entering into an
Agreement and Plan of Merger (the "Merger Agreement") providing for, among other
things, a merger between Avondale and Coal City (the "Merger"), in which all of
the outstanding shares of capital stock of Coal City will be exchanged for
shares of common stock, par value $.01 per share, of Avondale ( subject to the
issuance of cash in lieu of fractional shares).
The undersigned is a stockholder of Coal City and is entering
into this agreement to induce Avondale to enter into the Merger Agreement and to
consummate the transactions contemplated thereby.
The undersigned confirms its agreement with Avondale as
follows:
1. The undersigned represents, warrants and agrees that
Schedule I annexed hereto sets forth shares of the capital stock of Coal City of
which the undersigned is the record or beneficial owner (the "Shares") and that
the undersigned is on the date hereof the lawful owner of the Shares set forth
in Schedule I, free and clear of all liens, charges, encumbrances, voting
agreements and commitments of every kind, except as disclosed in Schedule I.
Except as set forth in the Schedule, the undersigned does not own or hold any
rights to acquire any additional shares of the capital stock of Coal City (by
exercise of stock options or otherwise) or any interest therein or any voting
rights with respect to any additional shares.
2. The undersigned agrees that the undersigned will not, and
will not permit any company, trust or other entity controlled by the undersigned
to, contract to sell, sell or otherwise transfer or dispose of any of the Shares
or any interest therein or securities convertible thereunto or any voting rights
with respect thereto until after the Coal City Stockholders' Meeting (as defined
in the Merger Agreement), other than (i) as contemplated by the Merger
Agreement, (ii) pursuant to the Merger or (iii) with Avondale 's prior written
consent.
3. The undersigned agrees that all of the shares of capital
stock of Coal City
<PAGE>
Avondale Financial Corp
October 12, 1998
Page 2
beneficially owned by the undersigned, or over which the undersigned has voting
power or control, directly or indirectly, at the record date for any meeting of
stockholders of Coal City called to consider and vote to adopt the Merger
Agreement and/or the transactions contemplated thereby will be voted by the
undersigned in favor thereof.
4. The undersigned agrees to, and will cause any company,
trust or other entity controlled by the undersigned to, cooperate fully with
Avondale in connection with the Merger Agreement and the transactions
contemplated thereby. The undersigned agrees that the undersigned will not, and
will not permit any such company, trust or other entity to directly, or
indirectly (including through its officers, directors, employees or other
representatives) initiate, solicit or encourage any discussions, inquiries or
proposals with any third party relating to a Takeover Proposal (as defined in
the Merger Agreement), or provide any such person with information or assistance
or negotiate with any such person with respect to a Takeover Proposal or agree
to or otherwise assist in the effectuation of any Takeover Proposal except as
permitted by the Merger Agreement. Nothing herein is intended to preclude the
undersigned in his or her capacity as a director of Coal City to exercise his or
her fiduciary duties related to a Takeover Proposal (as defined in the Merger
Agreement).
5. The undersigned represents and warrants to Avondale that
(i) the undersigned has all necessary power and authority to enter into this
agreement and (ii) this agreement is the legal, valid and binding agreement of
the undersigned, and is enforceable against the undersigned in accordance with
its terms.
6. The undersigned agrees that damages are an inadequate
remedy for the breach by the undersigned of any term or condition of this
agreement and that Avondale shall be entitled to a temporary restraining order
and preliminary and permanent injunctive relief in order to enforce the
agreements provided herein.
7. This letter agreement may be terminated at the option of
any party at any time after the earlier of (i) termination of the Merger
Agreement and (ii) the day following the Closing (as defined in the Merger
Agreement).
8. This agreement may be amended, modified or supplemented at
any time by the written approval of such amendment, modification or supplement
by the undersigned and Avondale .
9. This agreement evidences the entire agreement among the
parties hereto with respect to the matters provided for herein and there are no
agreements, representations or warranties with respect to the matters provided
for herein other than those set forth herein and in the Merger Agreement.
<PAGE>
Avondale Financial Corp
October 12, 1998
Page 3
10. The parties agree that if any provision of this agreement
shall under any circumstances be deemed invalid or inoperative, this agreement
shall be construed with the invalid or inoperative provisions deleted and the
rights and obligations of the parties shall be construed and enforced
accordingly.
11. This agreement may be executed in two counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same agreement.
12. The validity, construction, enforcement and effect of this
agreement shall be governed by the internal laws of the State of Illinois.
13. This agreement shall be binding upon and inure to the
benefit of Avondale and its successors, and the undersigned, the undersigned's
respective executors, personal representatives, administrators, heirs, legatees,
guardians and other legal representatives. This agreement shall survive the
death or incapacity of the undersigned.
14. Nothing in this Agreement shall be construed to give
Avondale any rights to exercise or direct the exercise of voting power as owner
of the shares, either beneficially or otherwise, for any purpose.
<PAGE>
Avondale Financial Corp
October 12, 1998
Page 4
Please confirm that the foregoing correctly states the understanding
between the undersigned and Avondale by signing and returning to Avondale a
counterpart hereof.
Very truly yours,
--------------------------
Signature
--------------------------
Name
Accepted as of the ___ day
of October, 1998
Avondale Financial Corp.
By:
-----------------------
Robert S. Engelman, Jr.
President and Chief Executive Officer
<PAGE>
Schedule I
Number of shares of Coal City common stock
beneficially owned........................................ ______
Number of shares of Coal City preferred
stock beneficially owned.................................. ______
<PAGE>
EXHIBIT 1.4(c)(A)
AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
AVONDALE FINANCIAL CORP.
Adopted by the Board of Directors on October 12, 1998
RESOLVED, that Article SIXTH, Section B. of the Certificate of
Incorporation of the Corporation be (subject to the requisite approval of the
stockholders of the Corporation) amended in its entirety as of the Company
Merger Effective Time as follows:
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled, except as otherwise provided in the By-laws
of the Corporation, only by a majority vote of the directors then in office,
though less than a quorum, and directors chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of office of
the class to which they have been appointed expires. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of any
incumbent director.
<PAGE>
EXHIBIT 1.4(C)(B)
AMENDMENT TO THE BY-LAWS
OF
AVONDALE FINANCIAL CORP.
Adopted by the Board of Directors on October 12, 1998
RESOLVED, that the By-laws of the Corporation be amended as of the
Company Merger Effective Time to add the following Section 10 to Article II of
the By-laws.
SECTION 10. Directors, Executive Officers and Committees. In accordance
with Section 6.2 of the Agreement and Plan of Merger by and between the
Corporation and Coal City Corporation, dated October 12, 1998 (the "Agreement"),
the following provisions shall govern directors, executive officers and
committees to the exclusion of any provision in these By-laws to the contrary.
Terms capitalized but not otherwise defined in this Section shall have the
meaning given to them in the Agreement.
(a) At the Company Merger Effective Time, the Board of Directors of
Avondale as the Surviving Corporation shall consist of between 16 and 18
directors who shall consist of (i) eight persons serving as directors of
Avondale (each, an "Avondale-Related Director") and (ii) between eight and ten
persons serving as directors of Coal City (each, a "Coal City-Related
Director"), in each case serving in such capacity immediately prior to the
Company Merger Effective Time. If at any time during the three year period
following the Company Merger Effective Time any person who becomes a director of
Avondale as the Surviving Corporation at the Company Merger Effective Time shall
for any reason cease to serve as a director or shall not stand for reelection as
a director, it is the intention of Avondale and Coal City and their respective
Boards of Directors that he or she will be replaced, if an Avondale-Related
Director, by the Avondale-Related Directors, and if a Coal City-Related
Director, by the Coal City-Related Directors. It is also the intention of
Avondale and Coal City and their respective Boards of Directors that during such
three year period, the Coal City- Related Directors shall have the right to
appoint up to that number of persons equal to the remainder of ten minus the
number of Coal City-Related Directors at the Company Merger Effective Time to
the Board of Directors of Avondale as the Surviving Corporation. The
Avondale-Related Directors hereby commit to vote in favor of any such nominees
of the Coal City-Related Directors for any such additional new directorships,
and shall so vote, except to the extent that any such vote shall be in violation
of their fiduciary duties under the DGCL.
(b) The Board of Directors of Avondale as the Surviving Corporation
shall have an Executive Committee and such other committees as the Board shall
establish in accordance with Section 141 of the DGCL, its Certificate of
Incorporation and these By-laws. The Executive Committee shall consist of six
members: Robert S. Engelman, Jr., who shall be Chairman of the Executive
Committee, Mitchell Feiger, two members selected by the Avondale-Related
Directors
<PAGE>
and two members selected by the Coal City-Related Directors. The Chairman of the
Board, the President and the Chief Executive Officer of Avondale as the
Surviving Corporation may each call meetings of the Board of Directors and the
Executive Committee. Each other committee shall have an even number of each
members, and at the Company Merger Effective Time and for three years
thereafter, one-half of the members of each such other committee shall consist
of Avondale-Related Directors and the other half shall consist of Coal
City-Related Directors, unless a majority of the Avondale-Related Directors and
a majority of the Coal City-Related Directors shall otherwise agree.
(c) It is the intention of Avondale and Coal City and their respective
Boards of Directors that during the above-referenced three-year period, this
Section 10 be amended only upon the affirmative vote of a majority of both the
Avondale-Related Directors and the Coal City-Related Directors.
(d) During the three year period following the Company Merger Effective
Time: Robert J. Engelman, Jr. shall be the Chairman of the Board of Avondale as
the Surviving Corporation; Mitchell Feiger shall be the President and Chief
Executive Officer of Avondale as the Surviving Corporation; and Howard Jaffe
shall be the Chief Financial Officer of Avondale as the Surviving Corporation.
<PAGE>
EXHIBIT 3.5
October 12, 1998
Avondale Financial Corp.
20 N. Clark Street
Chicago, IL 60602
Attn: Robert S. Engelman, Jr.
Ladies and Gentlemen:
I have been advised that I may be deemed to be, but do not
admit that I am, an "affiliate" of Coal City Corporation, an Illinois
corporation ("Coal City"), as that term is defined in Rule 145 promulgated by
the Securities and Exchange Commission (the "SEC") under the Securities Act of
1933, as amended (the "Securities Act"), and/or SEC Accounting Series Releases
130 and 135. I understand that pursuant to the terms of the Agreement and Plan
of Merger, dated as of October 12, 1998 (the "Merger Agreement"), by and between
Avondale Financial Corp. ("Avondale"), a Delaware corporation, and Coal City,
Avondale and Coal City will merge (the "Merger"). I further understand that as a
result of the Merger, I may receive shares of common stock, par value $.01 per
share, of Avondale ("Avondale Common Stock") in exchange for shares of common
stock, par value $10.00 per share, of Coal City ("Coal City Common Stock") and
that each outstanding option to purchase Coal City Common Stock will continue
outstanding as an option to purchase shares of Avondale Common Stock, as
determined under the terms of the Merger Agreement.
I have carefully read this letter and reviewed the Merger
Agreement and discussed their requirements and other applicable limitations upon
my ability to sell, transfer, or otherwise dispose of Avondale Common Stock, to
the extent I felt necessary, with my counsel or counsel for Coal City.
I represent, warrant and covenant with and to Avondale that:
1. I shall not make any sale, transfer, or other disposition of
Avondale Common Stock distributed to me pursuant to the Merger or
received by me upon the exercise of options received in the Merger
unless (i) such sale, transfer or other disposition has been
registered under the Securities Act, (ii) such sale, transfer or
other disposition is made
<PAGE>
in conformity with the provisions of Rule 145 under the Securities
Act (as such rule may be amended from time to time), or (iii) in
the opinion of counsel in form and substance reasonably
satisfactory to Avondale, or under a "no-action" letter obtained
by me from the staff of the SEC, such sale, transfer or other
disposition will not violate or is otherwise exempt from
registration under the Securities Act.
2. I understand that Avondale is under no obligation to register the
sale, transfer or other disposition of shares of Avondale Common
Stock by me or on my behalf under the Securities Act or to take
any other action necessary in order to make compliance with an
exemption from such registration available.
3. I understand that stop transfer instructions will be given to
Avondale's transfer agent with respect to shares of Avondale
Common Stock distributed to me pursuant to the Merger or received
by me upon the exercise of options received in the Merger and that
there will be placed on the certificates for such shares, or any
substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued in
connection with a transaction to which Rule 145 promulgated
under the Securities Act of 1933 applies. The shares
represented by this certificate may be transferred only in
accordance with the terms of a letter agreement, dated October
12, 1998, between the registered holder hereof and Avondale, a
copy of which agreement is on file at the principal offices of
Avondale."
4. I understand that, unless transfer by me of the Avondale Common
Stock distributed to me pursuant to the Merger or received by me
upon the exercise of options received in the Merger has been
registered under the Securities Act or such transfer is made in
conformity with the provisions of Rule 145(d) under the Securities
Act, Avondale reserves the right, in its sole discretion, to place
the following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired from
a person who received such shares in connection with a transaction
to which Rule 145 under the Securities Act of 1933 applies. The
shares have been acquired by the holder not with a view to, or for
resale in connection with, any distribution thereof within the
meaning of the Securities Act of 1933 and may not be offered,
sold, pledged or otherwise transferred except in accordance with a
registration under, or an exemption from the registration
requirements of, the Securities Act of 1933."
It is understood and agreed that the legends set forth in
paragraphs 3 and 4 above shall be removed by delivery of substitute certificates
without such legends if I shall have delivered to Avondale (i) a copy of a "no
action" letter from the staff of the SEC, or an opinion of counsel in form and
substance reasonably satisfactory to Avondale, to the effect that such legends
are not required for purposes of the Securities Act, or (ii) evidence or
representations satisfactory to
Avondale that the Avondale Common Stock represented by such certificates is
being or has been sold in conformity with the provisions of Rule 145(d).
2
<PAGE>
I further understand and agree that this letter agreement shall
apply to all shares of Avondale Common Stock that I am deemed to beneficially
own pursuant to applicable federal securities law.
Very truly yours,
--------------------------
Name:
Agreed and accepted this _____ day of
October, 1998.
Avondale Financial Corp.
By
------------------------
Robert S. Engelman, Jr.
President and Chief Executive Officer
3
<PAGE>
EXHIBIT 3.10(d)(A)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of this 12 day of October, 1998, by and between Avondale Financial Corp. (the
"Company") and Robert S. Engelman, Jr. (the "Employee").
WHEREAS, pursuant to an agreement dated the same date as this
Agreement, Coal City Corporation ("Coal City") shall merge (the "Holding Company
Merger") into the Company, which shall be the resulting corporation of the
Holding Company Merger, and the Company's wholly owned subsidiary, Avondale
Federal Savings Bank ("Avondale") shall merge (the "Bank Merger") into Coal
City's wholly owned subsidiary, Manufacturers Bank (the "Bank"), which shall be
the resulting bank of the Bank Merger (the "Definitive Agreement");
WHEREAS, prior to the Holding Company Merger and the Bank Merger, the
Employee serves as the President and Chief Executive Officer of the Company and
of Avondale;
WHEREAS, pursuant to Sections 6.2(a) and 6.2(b) of the Definitive
Agreement, after such mergers, the Employee shall be a director and Chairman of
the board of directors of the Company (the "Board of Directors") but not
President or Chief Executive Officer of the Company as the resulting entity of
the Holding Company Merger or President and Chief Executive Officer of the Bank
as the resulting entity of the Bank Merger;
WHEREAS, the Employee has an existing employment agreement with the
Company (the "Prior Employment Agreement") which he is willing to terminate in
consideration of this Agreement's becoming effective;
WHEREAS, the Board of Directors believes it is in the best interests of
the Company and its subsidiaries for the Company to enter into this Agreement
with the Employee in order to assure continuity of management of the Company and
its subsidiaries and to obtain for the Company the benefit of the services that
the Employee consents in this Agreement to perform and the covenant not to
compete provided for herein; and
WHEREAS, the Board of Directors has approved and authorized the
execution of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
(a) The term "Covenant Period" means the period commencing on
the Effective Date and concluding on January 31, 2004.
1
<PAGE>
(b) The term "Date of Termination" means the date upon which
the Employee's employment with the Company ceases, as specified in a notice
pursuant to Section 8 of this Agreement.
(c) The term "Employment Period" means the period commencing
on the consummation of the Holding Company Merger and concluding on the date of
the annual meeting of stockholders of the Company in the year 2000.
(d) The term "Good Reason" means any of the following without
the Employee's express written consent: (i) a material diminution of or
interference with his duties and responsibilities, compensation or benefits, as
set forth in this Agreement, (ii) a requirement that the Employee be based at
any place other than Chicago, Illinois, or within a radius of 35 miles from the
location of the Company's office as of the date of this Agreement, except for
reasonable travel on Company or Bank business; (iii) a reduction in the
Employee's salary or a material adverse change in the Employee's perquisites,
benefits, contingent benefits or vacation, other than as part of an overall
program applied uniformly and with equitable effect to all members of the senior
management of the Company; (iv) the failure of the shareholders of the Company
to elect him as a director of the Company; and (v) the failure of the Board of
Directors (or a board of directors of a successor of the Company) to elect him
as Chairman of the Board of Directors or any action by the Board of Directors
(or a board of directors of a successor of the Company) removing him from his
position as a director of the Company or as Chairman of the Board of Directors.
(e) The term "SERP" means the Avondale Federal Savings Bank
Supplemental Executive Retirement Plan, including the related Participation
Agreement between Avondale and the Employee dated June 10, 1996.
(f) The term "Termination for Cause" means termination of the
employment of the Employee by the Company prior to the expiration of the
Employment Period because of the Employee's personal dishonesty, willful
misconduct, breach of a fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
No act or failure to act by the Employee shall be considered willful unless the
Employee acted or failed to act with an absence of good faith and without a
reasonable belief that his action or failure to act was in the best interest of
the Company. Termination for Cause shall not occur unless and until there shall
have been delivered to the Employee a copy of a resolution stating that in the
good faith opinion of the Board of Directors the Employee has engaged in conduct
described in the preceding sentence, specifying the particulars thereof in
detail and duly adopted by the affirmative vote of not less than 75% of the
entire membership of the Board of Directors at a meeting of the Board duly
called and held for such purpose after reasonable notice to the Employee and an
opportunity for the Employee, together with the Employee's counsel, to be heard
before the Board.
2
<PAGE>
2. Termination of Prior Employment Agreement. The Prior Employment
Agreement shall terminate immediately prior to the consummation of the Holding
Company Merger with no obligation to the Employee thereunder on the part of the
Company, provided that nothing herein is intended to deprive the Employee of his
entitlement to a retirement bonus, which shall be honored under Section 3.10(a)
of the Definitive Agreement.
3. Employment. In addition to the Employee serving as a director of the
Company and as Chairman of the Board of Directors as provided in Sections 6.2(a)
and 6.2(b) of the Definitive Agreement, the Company shall employ the Employee
during the Employment Period to guide its activities in following areas: (i)
integration of the operations of Avondale into the operations of the Bank, (ii)
promoting the services offered by the Bank in the market areas of and
communities served by Avondale prior to the Effective Date, (iii) marketing to
the customers of Avondale, (iv) mergers and acquisitions by the Company and its
affiliates, (v) long term strategic planning for the Company and its affiliates,
and (vi) such additional matters as may be requested from time to time by the
Company. The Employee shall also render similar services to any subsidiary or
subsidiaries of the Company as requested by the Board of Directors from time to
time. The Employee shall devote his best efforts and reasonable time and
attention to the business and affairs of the Company and its affiliates to the
extent necessary to discharge his responsibilities hereunder. During the
Employment Period, the Employee may (i) serve on charitable boards or committees
and, in addition, on such corporate boards as are approved in a resolution
adopted by a majority of the Board of Directors, which approval shall not be
unreasonably withheld, and (ii) manage personal investments, so long as such
activities do not interfere materially with performance of his responsibilities
hereunder.
4. Cash Compensation.
(a) Salary. The Company agrees to pay the Employee during the
Employment Period a salary of $310,000 per year, except as provided in Section
7(b) and Section 7(c) of this Agreement. Such salary shall be paid no less
frequently than the salary payable to the executive officers of the Company
generally and shall be subject to customary tax withholding. Such salary shall
be payable pro rata for any portion of a year during the Employment Period.
(b) Bonuses. The Employee shall be entitled to a bonus of
$150,000 per year during the Employment Period, except as provided in Section
7(b) and Section 7(c) of this Agreement. Such bonus shall be payable pro rata
for any portion of a year during the Employment Period.
(c) Expenses. The Employee shall be entitled to receive prompt
reimbursement for all reasonable expenses incurred by the Employee in performing
services under Section 3 of this Agreement during the Employment Period in
accordance with the policies and procedures applicable to the executive officers
of the Company generally.
3
<PAGE>
5. Benefits.
(a) Participation in Benefit Plans. The Employee shall be
entitled to participate during the Employment Period, to the same extent as
executive officers of the Company generally, in all plans of the Company and the
Bank relating to pension, retirement, thrift, profit-sharing, savings, group or
other life insurance, hospitalization, medical and dental coverage, travel and
accident insurance, education, cash bonuses, and other retirement or employee
benefits or combinations thereof, except as provided in Section 7(b) and Section
7(c) of this Agreement.
(b) Fringe Benefits. The Employee shall be eligible to
participate during the Employment Period in, and receive benefits under, any
other fringe benefit plans or perquisites which are or may become generally
available to the Company's executive officers generally, including but not
limited to, incentive compensation, supplemental medical or life insurance
plans, company cars, club dues, physical examinations, financial planning and
tax preparation services, but excluding supplemental retirement benefits, except
as provided in Section 7(b) and Section 7(c) of this Agreement.
6. Vacations; Leave. The Employee shall be entitled during the
Employment Period (i) to annual paid vacation in accordance with the policies
established by the Board of Directors for executive officers, and (ii) to
voluntary leaves of absence, with or without pay, from time to time at such
times and upon such conditions as the Board of Directors may determine in its
discretion.
7. Termination of Employment Prior to Expiration of the Employment
Period.
(a) Termination by the Company Other Than For Cause and
Termination for Good Reason. In the event that, prior to the expiration of the
Employment Period, the Company terminates the employment of the Employee other
than Termination for Cause, or the Employee voluntarily terminates his
employment for Good Reason, the Company shall continue during the remainder of
the Employment Period to pay to the Employee the salary and bonus under Section
4 of this Agreement and to provide benefits to the Employee under Section 5 of
this Agreement as if the Employee had continued to be employed.
(b) Voluntary Termination by the Employee. Notwithstanding any
other provision of this Agreement, in the event that prior to the expiration of
the Employment Period, the Employee voluntarily terminates his employment other
than for Good Reason, the Company shall pay him salary and bonus under Section 4
of this Agreement and provide benefits under Section 5 of this Agreement only
through the date on which his employment terminates.
(c) Termination for Cause. In the event of Termination for
Cause, the Company shall pay the Employee salary and bonus under Section 4 of
this Agreement and provide benefits under Section 5 of this Agreement only
through the date on which his employment terminates.
4
<PAGE>
(d) Death of the Employee. Notwithstanding any other provision
of this Agreement, in the event of the death of the Employee during the
Employment Period and prior to any Termination for Cause, the Company shall pay
to the Employee's estate, or such person as the Employee may have previously
designated in writing, the amount of salary and bonus which was not previously
paid to the Employee and which he would have earned if he had continued to be
employed under this Agreement through the last day of the calendar month in
which the Employee died and shall have no obligation to him or to his estate
thereafter under this Agreement.
(e) Continued Health Benefits. Notwithstanding any other
provision of this Agreement, upon cessation of the employment of the Employee
for any reason, including expiration of the Employment Period, the Company (or
any successor, directly or through its subsidiaries) shall provide to the
Employee thereafter during his lifetime the same group life insurance,
hospitalization, medical, dental, prescription drug and other health benefits,
and long-term disability insurance (if any), as it provides to the executive
officers of the Company (or any successor) from time to time, for the benefit of
himself and his dependents and beneficiaries who would have been eligible for
such benefits if the Employee were an executive officer of the Company (or any
successor), on terms as favorable to the Employee, including amounts of coverage
and deductibles and other costs to him, as apply to executive officers of the
Company (or any successor) from time to time; provided that the Employee shall
reimburse the Company for the cost of premiums attributable to such coverage for
himself and his dependents and beneficiaries except to the extent, if any, that
Company is obligated to provide such coverage under Section 7(a) of this
Agreement.
(f) Termination of Employment Not to Affect Service as
Chairman. Termination of the employment of the Employee for any reason,
including expiration of the Employment Period, shall not affect the Employee's
right to serve as a director and Chairman of the Board of Directors of the
Company as provided in Sections 6.2(a) and 6.2(b) of the Definitive Agreement.
8. Notice of Termination. In the event that the Company desires to
terminate the employment of the Employee prior to the expiration of the
Employment Period, the Company shall deliver to the Employee a written notice of
termination, specifying the date upon which employment shall terminate. In the
event that the Employee desires to terminate his employment voluntarily prior to
the expiration of the Employment Period, he shall send a written notice to the
Company specifying the date upon which employment shall terminate and whether he
has Good Reason to terminate his employment, and, if so, stating the facts and
circumstances that constitute Good Reason.
9. Covenant Not to Compete.
(a) Covenant. The Employee agrees that during the Covenant
Period he shall not, without the prior written consent of the Board of
Directors, render services, whether or not compensated, as an employee,
independent contractor, director or otherwise, to any depository institution
insured by the Federal Deposit Insurance Corporation, or any affiliate of such
an institution, with respect to activity in the State of Illinois.
5
<PAGE>
(b) Compensation for Non-Competition. In consideration of the
Employee's covenant in Section 9(a) of this Agreement, after expiration of the
Employment Period, the Company shall pay to the Employee $310,000 per year for
so long as he lives during the Covenant Period. Such amount shall be payable in
regular increments no less frequently than the salary payable to the executive
officers of the Company generally. Such amount shall be paid pro rata for any
portion of a year during the Covenant Period.
10. SERP. The Covenant Period shall constitute a period of employment
by the Company for purposes of the SERP.
11. Attorneys' Fees. The Company shall pay all legal fees and related
expenses (including the costs of experts, evidence and counsel) incurred by the
Employee as a result of (i) the Employee's contesting or disputing any
termination of employment, or (ii) the Employee's seeking to obtain or enforce
any right or benefit provided by this Agreement or by any other plan or
arrangement maintained by the Company (or its successors) or any of its
subsidiaries under which the Employee is or may be entitled to receive benefits;
provided that the Company's obligation to pay such fees and expenses is subject
to the Employee's prevailing with respect to the matters in dispute in any
action initiated by the Employee or the Employee's having been determined to
have acted reasonably and in good faith with respect to any action initiated by
the Company.
12. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided that the Company shall require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place.
(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of the Company, or, if to the Employee, to such home or other address as the
Employee has most recently provided in writing to the Company.
14. Amendments. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.
6
<PAGE>
15. Headings. The headings used in this Agreement are included solely
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
State of Illinois.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Avondale Financial Corp.
/s/ Doria L. Koros /s/ Howard Jaffe
- ----------------------------- ----------------------------------
Secretary By: Howard Jaffe
Its: Executive Vice President
Employee
/s/ Robert S. Engelman, Jr.
----------------------------------
Robert S. Engelman, Jr.
8
EXHIBIT 99.1
[AVONDALE FINANCIAL CORPORATION LOGO]
PRESS RELEASE
<TABLE>
<CAPTION>
<S> <C>
FOR INFORMATION AT AVONDALE CONTACT: FOR INFORMATION AT COAL CITY OR
MANUFACTURERS BANK CONTACT:
ROBERT S. ENGELMAN, JR. -- PRESIDENT & CEO
HOWARD A. JAFFE -- VICE PRESIDENT & CFO -- (312) 782-6200 MITCHELL FEIGER -- PRESIDENT -- (773) 292-6271
E-MAIL: [email protected] KAREN A. PERLMAN -- DIRECTOR OF MARKETING -- (773) 292-6292
</TABLE>
FOR IMMEDIATE RELEASE
AVONDALE FINANCIAL CORP. AND COAL CITY CORPORATION AGREE TO MERGE
AND FORM MB FINANCIAL, INC.
CHICAGO, OCTOBER 13, 1998 -- AVONDALE FINANCIAL CORP. ("AVONDALE") (NASDAQ:
AVND), the holding company for Avondale Federal Savings Bank, and COAL CITY
CORPORATION, ("Coal City") the holding company for Manufacturers Bank, today
announced they had entered into a definitive agreement in connection with a
merger of equals. The combined company will be called MB Financial, Inc. ("MB
Financial") and have assets of approximately $1.4 billion.
Under the terms of the agreement, Coal City will be merged into Avondale and the
holding company will be renamed MB Financial, Inc. (the "Merger"). Immediately
following the Merger, Avondale's five retail branches will be merged into
Manufacturers Bank. Each share of Coal City will be converted into 83.5 shares
of MB Financial while each share of Avondale will be converted into 1 share of
MB Financial. On a pro forma basis, the total number of shares outstanding will
be approximately 7.0 million shares. Shareholders of Coal City will own
approximately 58.5% of the new holding company, while stockholders of Avondale
will own approximately 41.5%.
The Board of Directors of MB Financial will consist of the directors of Avondale
and Coal City as of the merger date. Mitchell Feiger, President of Coal City,
will be named President and Chief Executive Officer of the combined company.
Robert Engelman, President and CEO of Avondale, will be named Chairman of the
Board of MB Financial. Howard Jaffe will be named Vice President and Chief
Executive Officer of MB Financial and will coordinate the transition activities.
- more -
<PAGE>
Avondale Financial Corp.
Coal City Corporation
Page 2
The transaction is expected to close in the first quarter of 1999 and will be
accounted for as a purchase. Consummation of the transaction is subject to
regulatory approval, and the approval of the stockholders of both Avondale and
Coal City and certain other conditions.
Mitch Feiger said, "With over $1 billion in deposits and almost $100 million
regulatory capital, the bank is perfectly positioned to exploit the middle
market banking opportunities resulting from recent industry consolidation and
the sale of so many local competitors to out-of-state megabanks."
Engleman went on to say, "We are excited about this transaction and believe it
will have very positive benefits for our shareholders. It will allow the company
to expand its revenue base, provide enhanced service levels through expanded
distribution points, and realize various costs saving associated with its larger
scale and scope."
The transaction is expected to be accretive to earnings per share in the first
full year of combined operation. While both organizations believe revenue
enhancements are readily available as Manufacturers Bank offers its commercial
and retail banking products through the Avondale branch system, no revenue
enhancements were included in the merger analysis and expected earnings
accretion projection. A restructuring charge for severance payments, facilities
writedowns and other merger-related costs is estimated to be approximately $10
million pre-tax. This charge does not include the $6.0 million pre-tax writedown
of Avondale's interest-only strips referenced in a press release issued
concurrently with this release.
Cost savings of approximately $3 million, or 11% of the combined Company's
existing retail banking and administrative expenses are anticipated. The
projected cost savings do not include branch closings or sales as the two branch
networks complement one another without overlap.
In connection with the agreement, Avondale and Coal City granted each other an
option to acquire up to 19.9% of the outstanding common stock of the other firm
upon the occurrence of certain events.
As a result of the "Purchase" accounting treatment, Avondale, which currently
has approved a 5% stock repurchase plan, expects to continue its program as
market conditions dictate.
Avondale operates five retail banking offices in the Chicago metropolitan area
through its principal subsidiary, Avondale Federal Savings Bank. At June 30,
1998, Avondale had consolidated assets of $520 million and total stockholders
equity of $43 million.
- more -
<PAGE>
Avondale Financial Corp.
Coal City Corporation
Page 3
Coal City is a privately held bank holding company headquartered in Chicago
whose principal subsidiary, Manufacturers Bank, operates eight banking offices
in the Chicago metropolitan area. At June 30, 1998, Coal City had consolidated
assets of $870 million and total shareholders equity of $46 million. On July 21,
1998 Coal City completed a $25 million offering of floating rate trust preferred
securities pursuant to Rule 144A.
Except for the historical information contained herein, the matters contained in
this news release and other information in Avondale's SEC filings, may express
"forward looking statements" that involve risk and uncertainties, including
statement concerning future events of performance and assumptions and other
statements that are other than statements of historical facts. Avondale cautions
readers not to place undue reliance on any forward-looking statements, which
speak as of the date made. Readers are advised that various factors, including
but not limited to, changes in laws, regulations or Generally Accepted
Accounting Principals; Avondale's and the combined company's competitive
position within its market areas; unforeseen changes in interest rates;
unforseen downturns in the local or regional or national economies. These and
other factors may cause the combined company's actual results for future periods
to differ materially from those anticipated or projected. Avondale does not
undertake, and specifically disclaims any obligation, to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
###
EXHIBIT 99.2
AVONDALE
FINANCIAL CORP.
AVONDALE FINANCIAL CORP.
2 N. CLARK STREET
CHICAGO, ILLINOIS 60602
(312) 782-6200
NASDAQ: AVND
PRESS RELEASE
FOR INFORMATION AT AVONDALE CONTACT:
HOWARD A. JAFFE
VICE PRESIDENT AND CFO
(312) 782-6200
E-MAIL: [email protected]
FOR IMMEDIATE RELEASE
Avondale Financial Corp. will report a loss in the third quarter of 1998
after recording approximately $6.0 million in charges related to
the write-down of its Interest-Only strips
CHICAGO, OCTOBER 13, 1998 -- AVONDALE FINANCIAL CORP. (NASDAQ: AVND), the
holding company for Avondale Federal Savings Bank, announced today that as a
result of the current interest rate environment and their effect on prepayment
speeds along with current trends in the capital markets, including decreased
liquidity of securitized assets, the Company will record a writedown of $6.0
million to its interest-only strips.
In accordance with its quarterly process to determine fair market value, the
Company has reviewed its assumptions of prepayment speeds, discount rates and
loan losses. As a result of this analysis, the Company has revised its discount
rate to reflect liquidity and higher risk premiums being required by the
markets, adjusted prepayments to be in line with both historical experience and
expectations for the future, and adjusted loan losses to be consistent with the
Company's non-judgmental models.
Other than loans currently committed to securitized pools, the Company, as
economic conditions dictate, will not be securitizing its loan product, but
rather will be selling its loans on a whole loan basis, for cash.
Avondale expects to release its third quarter financial results on or about
October 27, 1998.
###
EXHIBIT 99.3
OFFERING MEMORANDUM CONFIDENTIAL
$25,000,000
COAL CITY CAPITAL TRUST I
Floating Rate Capital Securities
(Liquidation Amount $1,000 per Capital Security)
full and unconditionally guaranteed, to the extent described herein, by
COAL CITY CORPORATION
The Floating Rate Capital Securities (the "Capital Securities") offered
hereby will represent preferred beneficial interests in Coal City Capital Trust
I, a trust created under the laws of the State of Delaware (the "Trust"). Coal
City Corporation, an Illinois corporation (the "Corporation"), will be the owner
of all of the beneficial interests represented by common securities of the Trust
(the "Common Securities," and, together with the Capital Securities, the "Trust
Securities"). LaSalle National Bank is the Property Trustee of the Trust. The
Trust exists for the exclusive purpose of issuing the Trust Securities and
investing the proceeds thereof in the Floating Rate Junior Subordinated
Deferrable Interest Debentures (the "Junior Subordinated Debentures") to be
issued by the Corporation, and certain other limited activities described
herein. The Junior Subordinated Debentures are scheduled to mature on September
1, 2028 (the "Stated Maturity Date"). The Capital Securities will have a
preference over the Common Securities under certain circumstances with respect
to cash distributions and amounts payable on liquidation, redemption or
otherwise. See "Description of Capital Securities--Subordination of Common
Securities." (Continued on page 3)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE CAPITAL SECURITIES.
---------------------------
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF A BANK
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY
OTHER GOVERNMENTAL AGENCY.
---------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND,
UNLESS SO REGISTERED, MAY NOT BE OFFERED OR SOLD, EXCEPT PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS.
ACCORDINGLY, THE CAPITAL SECURITIES ARE BEING OFFERED AND SOLD ONLY TO (I)
"QUALIFIED INSTITUTIONAL BUYERS" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) IN COMPLIANCE WITH RULE 144A, AND (II) INSTITUTIONAL "ACCREDITED INVESTORS"
(AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT), AND
ARE SUBJECT TO TRANSFER RESTRICTIONS. SEE "NOTICE TO INVESTORS."
<TABLE>
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======================================= ============================ ===================== ===========================
Price to Investors (1) Commission (2) Proceeds to Trust (3)(4)
<S> <C> <C> <C>
Per Capital Security......................... $1,000 (4) $1,000
Total...........................................$25,000,000 (4) $25,000,000
======================================= ============================ ===================== ===========================
</TABLE>
(1) Plus accumulated Distributions, if any, from July 24, 1998.
(2) The Corporation and the Trust have agreed to indemnify the Initial
Purchaser (as defined below) against certain liabilities, including certain
liabilities under the Securities Act. See "Plan of Distribution."
(3) Estimated expenses of $280,000 are payable by the Corporation.
(4) In view of the fact that the proceeds of the sale of the Capital Securities
will be invested in the Junior Subordinated Debentures, the Corporation, as
issuer of the Junior Subordinated Debentures, has agreed to pay the Initial
Purchaser, as compensation, $27.50 per Capital Security (or $687,500 in the
aggregate). See "Plan of Distribution."
The Capital Securities are offered by Sandler O'Neill & Partners, L.P. (the
"Initial Purchaser"), subject to prior sale, when, as and if issued to and
accepted by the Initial Purchaser and subject to approval of certain legal
matters by counsel for the Initial Purchaser and to certain other conditions.
The Initial Purchaser reserves the right to withdraw, cancel or modify such
offer in whole or in part. It is expected that delivery of the Capital
Securities will be made through the facilities of The Depository Trust Company
("DTC") and, in certain circumstances, in certificated form in New York, New
York, on or about July 24, 1998 against payment therefor in immediately
available funds.
------------------------------------
SANDLER O'NEILL & PARTNERS, L.P.
------------------------------------
The date of this Offering Memorandum is July 21, 1998
<PAGE>
(Continued from cover page)
Except as provided below, the Capital Securities will be represented by a
global Capital Security in fully registered form, deposited with a custodian for
and registered in the name of a nominee of DTC. Beneficial interests in such
Capital Securities will be shown on, and transfers thereof will be effected
through, records maintained by DTC and its participants. Beneficial interests in
such Capital Securities will trade in DTC's Same-Day Funds Settlement System and
secondary market trading activity in such interests will therefore settle in
immediately available funds. Any Capital Securities sold other than in reliance
on Rule 144A will be issued in certificated form. The Capital Securities are
expected to be eligible for quotation on the Private Offerings, Resales and
Trading through Automated Linkages ("PORTAL") System of the National Association
of Securities Dealers, Inc. at the time of issuance thereof. The Capital
Securities will be issued and may be transferred only in blocks having a
Liquidation Amount (as defined herein) of not less than $100,000 (100 Capital
Securities) and multiples of $1,000 in excess thereof. See "Description of
Capital Securities--Restrictions on Transfer" and "Notice to Investors."
Holders of the Trust Securities will be entitled to receive cumulative cash
distributions ("Distributions") arising from the payment of interest on the
Junior Subordinated Debentures, accruing from the date of original issuance and
payable quarterly in arrears on March 1, June 1, September 1 and December 1 of
each year, commencing December 1, 1998, at a rate per annum, reset quarterly,
equal to 3-month LIBOR (as defined herein) plus 180 basis points (the
"Distribution Rate"). The amount of each Distribution with respect to the Trust
Securities will include amounts accrued to, but excluding, the date the
Distribution is due. So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, the Corporation will have the right to
defer payments of interest on the Junior Subordinated Debentures, at any time
and from time to time, for a period not exceeding 20 consecutive quarterly
periods with respect to each deferral period (each, an "Extension Period"),
provided that an Extension Period must end on an Interest Payment Date (as
defined herein) and may not extend beyond the Stated Maturity Date. Upon the
termination of any such Extension Period and the payment of all amounts then
due, the Corporation may elect to begin a new Extension Period, subject to the
requirements set forth herein. If and for so long as interest payments on the
Junior Subordinated Debentures are so deferred, Distributions on the Trust
Securities also will be deferred and the Corporation will not be permitted,
subject to certain exceptions described herein, to declare or pay any cash
distributions with respect to the Corporation's capital stock, to make any
payment with respect to debt securities of the Corporation that rank pari passu
with or junior to the Junior Subordinated Debentures, or make any guarantee
payments with respect to any guarantees by the Corporation of debt securities of
any subsidiary of the Corporation that rank pari passu with or junior to the
Junior Subordinated Debentures. During an Extension Period, interest on the
Junior Subordinated Debentures will continue to accrue (and the amount of
Distributions to which holders of the Trust Securities are entitled will
continue to accumulate) at the applicable periodic Distribution Rate compounded
quarterly from the relevant payment date for such interest, and holders of Trust
Securities will be required to accrue such deferred interest income for United
States federal income tax purposes prior to the receipt of the cash attributable
to such income. See "Description of Junior Subordinated Debentures--Option to
Extend Interest Payment Date" and "Certain Federal Income Tax
Consequences--Original Issue Discount."
The Corporation will, through the Guarantee, the Common Guarantee, the
Trust Agreement, the Junior Subordinated Debentures and the Indenture (each as
defined herein), taken together, guarantee all of the Trust's obligations under
the Trust Securities. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee--Guarantee." The Guarantee and the
Common Guarantee will guarantee payments of Distributions and payments upon
liquidation of the Trust or redemption of the Trust Securities, but in each case
only to the extent that the Trust holds funds on hand legally available therefor
and has failed to make such payments, as described herein. See "Description of
Guarantee." If the Corporation fails to make a required payment on the Junior
Subordinated Debentures, the Trust will not have sufficient funds to make the
related payments, including Distributions, on the Trust Securities. The
Guarantee and the Common Guarantee will not cover any such payment when the
Trust does not have sufficient funds on hand legally available therefor. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against the Corporation to enforce such holder's rights with respect to such
payment. See "Description of Junior Subordinated Debentures--Enforcement of
Certain Rights by Holders of Capital Securities." The obligations of the
Corporation under the Guarantee, the Common Guarantee and the Junior
Subordinated Debentures will be unsecured and will rank subordinate and junior
in right of payment to all Senior Indebtedness (as defined in "Description of
Junior Subordinated Debentures--Subordination"). See "Risk Factors--Ranking of
Subordinated Obligations under the Guarantee and the Junior Subordinated
Debentures." In addition, because the Corporation is a holding company, the
Junior Subordinated Debentures and the Guarantee effectively will be
subordinated to all existing and future liabilities, including deposits, of the
Corporation's subsidiaries.
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<PAGE>
The Trust Securities will be subject to mandatory redemption in a Like
Amount (as defined herein) (i) in whole but not in part, on the Stated Maturity
Date upon repayment of the Junior Subordinated Debentures; (ii) in whole but not
in part, at any time prior to September 1, 2008 (the "Initial Optional
Redemption Date"), contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Corporation upon the occurrence and continuation
of a Special Event (as defined herein); and (iii) in whole or in part, on or
after the Initial Optional Redemption Date, contemporaneously with the optional
prepayment by the Corporation of all or part of the Junior Subordinated
Debentures, in each case at a redemption price equal to 100% of the
corresponding principal amount of Junior Subordinated Debentures so repaid or
prepaid, as the case may be, plus accrued and unpaid interest thereon to the
date of redemption (the "Redemption Price"). See "Description of Capital
Securities--Redemption."
Subject to the Corporation having received any required regulatory
approval, the Junior Subordinated Debentures will be prepayable prior to the
Stated Maturity Date at the option of the Corporation (i) on or after the
Initial Optional Redemption Date, in whole or in part; or (ii) at any time prior
to the Initial Optional Redemption Date, in whole but not in part, upon the
occurrence and continuation of a Special Event, in either case at a prepayment
price equal to 100% of the principal amount of the Junior Subordinated
Debentures so prepaid, plus accrued and unpaid interest thereon to the date of
prepayment (the "Prepayment Price"). See "Description of Junior Subordinated
Debentures--Optional Prepayment" and "--Special Event Prepayment."
The Corporation will have the right at any time, including, without
limitation, upon the occurrence of a Tax Event (as defined herein), to dissolve
the Trust and, after satisfaction of liabilities of creditors of the Trust as
required by applicable law, to cause a Like Amount of the Junior Subordinated
Debentures to be distributed to the holders of the Trust Securities in
liquidation of the Trust, subject to (i) the Corporation having received an
opinion of counsel to the effect that such distribution will not be a taxable
event to holders of Capital Securities; and (ii) the receipt of any required
regulatory approval. Unless the Junior Subordinated Debentures are distributed
to the holders of the Trust Securities, in the event of a dissolution of the
Trust as described herein, after satisfaction of liabilities to creditors of the
Trust as required by applicable law, the holders of the Trust Securities
generally will be entitled to receive a liquidation amount of $1,000 per Trust
Security ("Liquidation Amount") plus accumulated and unpaid Distributions
thereon to the date of payment. See "Description of Capital
Securities--Liquidation of the Trust and Distribution of Junior Subordinated
Debentures."
THIS OFFERING MEMORANDUM IS FURNISHED BY THE CORPORATION AND THE TRUST ON A
CONFIDENTIAL BASIS IN CONNECTION WITH AN OFFERING EXEMPT FROM REGISTRATION UNDER
THE SECURITIES ACT SOLELY FOR THE PURPOSE OF ENABLING A PROSPECTIVE INVESTOR TO
CONSIDER THE PURCHASE OF THE PARTICULAR SECURITIES DESCRIBED HEREIN. THE
INFORMATION CONTAINED IN THIS OFFERING MEMORANDUM HAS BEEN PROVIDED BY THE
CORPORATION AND THE TRUST AND OTHER SOURCES IDENTIFIED HEREIN. NO REPRESENTATION
OR WARRANTY, EXPRESSED OR IMPLIED, IS MADE BY THE INITIAL PURCHASER AS TO THE
ACCURACY OR COMPLETENESS OF SUCH INFORMATION, AND NOTHING CONTAINED IN THIS
OFFERING MEMORANDUM IS, OR SHALL BE RELIED UPON AS, A PROMISE OR REPRESENTATION
BY THE INITIAL PURCHASER AS TO THE PAST OR THE FUTURE.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OR ANY STATE SECURITIES LAWS AND, UNLESS SO REGISTERED, MAY NOT BE OFFERED
OR SOLD, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS. AS A RESULT, THIS OFFERING IS BEING MADE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT FOR AN OFFER AND SALE OF
SECURITIES WHICH DOES NOT INVOLVE A PUBLIC OFFERING. ACCORDINGLY, EACH PURCHASER
OF CAPITAL SECURITIES, IN MAKING ITS PURCHASE, WILL BE DEEMED TO HAVE MADE
CERTAIN ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS RELATING TO TRANSFER
RESTRICTIONS, AS SET FORTH UNDER "NOTICE TO INVESTORS." INVESTORS SHOULD BE
AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THEIR INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
NO EMPLOYEE BENEFIT OR OTHER PLAN SUBJECT TO TITLE I OF THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF
THE
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<PAGE>
INTERNAL REVENUE CODE OF 1986, AS AMENDED ("CODE") (EACH, A "PLAN"), NO ENTITY
WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT
IN THE ENTITY (A "PLAN ASSET ENTITY") AND NO PERSON INVESTING "PLAN ASSETS" OF
ANY PLAN MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN,
UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE
UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION ("PTCE")
96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS
PURCHASE AND HOLDING OF CAPITAL SECURITIES IS NOT PROHIBITED BY SECTION 406 OF
ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY
PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE
DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER: (A)
IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA,
OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER
PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON
OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH
PURCHASE, OR (B) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER
SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO
APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS OFFERING MEMORANDUM IS SUBMITTED ON A CONFIDENTIAL BASIS TO A LIMITED
NUMBER OF INSTITUTIONAL INVESTORS FOR INFORMATIONAL USE SOLELY IN CONNECTION
WITH THE CONSIDERATION OF THE PURCHASE OF THE CAPITAL SECURITIES. ITS USE FOR
ANY OTHER PURPOSE IS NOT AUTHORIZED. IT MAY NOT BE COPIED OR REPRODUCED, IN
WHOLE OR IN PART, NOR MAY IT BE DISTRIBUTED OR ANY OF ITS CONTENTS DISCLOSED TO
ANYONE OTHER THAN THE PROSPECTIVE INVESTORS TO WHOM IT IS SUBMITTED.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE CORPORATION AND THE TRUST AND THE TERMS OF THIS OFFERING,
INCLUDING THE MERITS AND RISKS INVOLVED. THIS OFFERING IS BEING MADE ON THE
BASIS OF THIS OFFERING MEMORANDUM AND ANY DECISION TO PURCHASE THE CAPITAL
SECURITIES IN THIS OFFERING MUST BE BASED ON THE INFORMATION CONTAINED HEREIN.
NO REPRESENTATION IS MADE TO ANY OFFEREE OR PURCHASER OF THE CAPITAL SECURITIES
REGARDING THE LEGALITY OF AN INVESTMENT THEREIN BY SUCH OFFEREE OR PURCHASER
UNDER ANY APPLICABLE LEGAL INVESTMENT OR SIMILAR LAWS OR REGULATIONS. THE
CONTENTS OF THIS OFFERING MEMORANDUM ARE NOT TO BE CONSTRUED AS LEGAL, BUSINESS
OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ATTORNEY AND
BUSINESS AND TAX ADVISORS AS TO LEGAL, BUSINESS AND TAX ADVICE.
PROSPECTIVE INVESTORS ARE HEREBY OFFERED THE OPPORTUNITY, PRIOR TO
PURCHASING ANY CAPITAL SECURITIES, TO ASK QUESTIONS AND RECEIVE ANSWERS
CONCERNING THE TERMS AND CONDITIONS OF THE OFFERING OF THE CAPITAL SECURITIES
AND TO OBTAIN FROM THE CORPORATION AND THE TRUST ADDITIONAL INFORMATION, TO THE
EXTENT THAT THEY POSSESS SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE
EFFORT OR EXPENSE, THAT IS NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION
CONTAINED HEREIN OR PROVIDED PURSUANT HERETO.
THE CAPITAL SECURITIES DESCRIBED HEREIN HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT REVIEWED THIS OFFERING MEMORANDUM NOR CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS OFFERING MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
THE CORPORATION, THE TRUST AND THE INITIAL PURCHASER RESERVE THE RIGHT TO
REJECT ANY OFFER TO PURCHASE, IN WHOLE OR IN PART, FOR ANY REASON, OR TO SELL
LESS THAN OR MORE THAN THE FULL AMOUNT OF, THE CAPITAL SECURITIES OFFERED
HEREBY.
THIS OFFERING MEMORANDUM IS PERSONAL TO THE OFFEREE AND HAS BEEN PREPARED
SOLELY FOR USE IN CONNECTION WITH THE PLACEMENT OF THE CAPITAL SECURITIES AND
DOES NOT CONSTITUTE AN OFFER TO ANY OTHER PERSON OR TO THE PUBLIC GENERALLY TO
SUBSCRIBE FOR OR OTHERWISE ACQUIRE THE CAPITAL SECURITIES. DISTRIBUTION OF THIS
OFFERING MEMORANDUM TO ANY PERSON OTHER THAN THE OFFEREE AND THOSE PERSONS, IF
ANY, RETAINED TO ADVISE SUCH OFFEREE WITH RESPECT TO THE OFFER AND SALE OF THE
CAPITAL SECURITIES IS NOT AUTHORIZED, AND ANY DISCLOSURE OF ANY OF ITS CONTENTS
IS PROHIBITED. EACH OFFEREE, BY ACCEPTING DELIVERY OF THIS OFFERING MEMORANDUM,
AGREES TO THE FOREGOING AND TO MAKE NO COPIES OF THIS OFFERING MEMORANDUM, AND,
IF THE OFFEREE DOES NOT PURCHASE THE CAPITAL SECURITIES OR THE OFFERING IS
TERMINATED, TO RETURN THIS OFFERING MEMORANDUM TO: SANDLER O'NEILL & PARTNERS,
L.P., TWO WORLD TRADE CENTER, 104TH FLOOR, NEW YORK, NEW YORK 10048, ATTENTION:
SYNDICATE DEPARTMENT.
THE CAPITAL SECURITIES WILL BE ISSUED, AND MAY BE TRANSFERRED, ONLY IN
BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL
SECURITIES) AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF
CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000
SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED
TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR
ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON SUCH
CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO
INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES.
THE OFFER MADE HEREBY CAN BE WITHDRAWN AT ANY TIME BEFORE THE CLOSING OF
THE SALE OF THE CAPITAL SECURITIES AND IS SPECIFICALLY MADE SUBJECT TO THE TERMS
DESCRIBED IN THIS OFFERING MEMORANDUM AND IN THE PURCHASE AGREEMENT DESCRIBED
HEREIN. SEE "PLAN OF DISTRIBUTION."
IN CONNECTION WITH THE OFFERING MADE HEREBY, THE INITIAL PURCHASER MAY
ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET
PRICE OF THE CAPITAL SECURITIES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING AND THE PURCHASE OF CAPITAL SECURITIES TO COVER SHORT POSITIONS. ANY
OF THE FOREGOING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT
ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER
ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OF QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT, ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
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AVAILABLE INFORMATION
The Corporation submits quarterly to the Board of Governors of the Federal
Reserve System ("FRB") certain reports called "Consolidated Financial Statements
for Bank Holding Companies FR Y-9C" ("Call Reports"). The Call Reports are
publicly available at the Federal Reserve Bank of Chicago, 230 South LaSalle
Street, Chicago, Illinois 60603. Each Call Report consists of a Balance Sheet,
Income Statement, Changes in Equity Capital and other supporting schedules as of
and for the period to which the report relates. The Call Reports are prepared in
accordance with regulatory instructions issued by the Federal Financial
Institutions Examination Council ("FFIEC"). Because of the special supervisory,
regulatory and economic policy needs served by these Call Reports, those
regulatory instructions do not in all cases follow generally accepted accounting
principles. While the Call Reports are supervisory and regulatory documents, not
primarily accounting documents, and do not provide a complete range of financial
disclosure about the Corporation, the reports nevertheless provide important
information concerning the Corporation.
The Corporation has agreed that it will furnish to holders, beneficial
owners and prospective purchasers of the Capital Securities the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act
(or any successor statute) to permit compliance with Rule 144A in connection
with resales of the Capital Securities.
The Corporation will furnish to such holders, beneficial owners and
prospective purchasers, without charge, annual financial statements of the
Corporation audited by independent public accountants, and will furnish the Call
Reports to such holders, beneficial owners and prospective purchasers, upon
written request to the Secretary of the Corporation, 1200 North Ashland Avenue,
Chicago, Illinois 60622.
No separate financial statements of the Trust have been included herein and
no separate financial statements will be prepared in the future. The Corporation
and the Trust do not consider that such financial statements would be material
to holders of the securities offered hereby because (i) all of the Common
Securities of the Trust will be owned by the Corporation, (ii) the Trust has no
independent operations and exists for the sole purpose of issuing securities
representing undivided beneficial interests in the assets of the Trust and
investing the proceeds thereof in the Junior Subordinated Debentures issued by
the Corporation, and (iii) the obligations of the Trust under its Capital
Securities are fully and unconditionally guaranteed by the Corporation to the
extent the Trust has funds available to meet such obligations.
FORWARD-LOOKING STATEMENTS
Information contained in this Offering Memorandum includes forward-looking
statements which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should," "projected,"
"contemplates," "anticipates," or the negative thereof, or other variations
thereon or comparable terminology. No assurance can be given that the future
results covered by the forward-looking statements will be achieved. Such
information also includes cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the future
results covered in such forward-looking statements. Other factors, such as the
general state of the economy, could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
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SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Offering Memorandum. As used herein (i) the
"Indenture" means the Indenture, to be dated as of July 24, 1998, as amended and
supplemented from time to time, between the Corporation and LaSalle National
Bank, as trustee (the "Debenture Trustee"), relating to the Junior Subordinated
Debentures; (ii) the "Trust Agreement" means the Amended and Restated
Declaration of Trust relating to the Trust, among the Corporation, as Sponsor,
LaSalle National Bank, as Property Trustee (the "Property Trustee"), Wilmington
Trust Company, as Delaware Trustee (the "Delaware Trustee"), the Administrative
Trustees named therein (collectively, with the Property Trustee and Delaware
Trustee, the "Issuer Trustees") and the holders, from time to time, of undivided
beneficial interests in the assets of the Trust; (iii) the "Guarantee" means the
Capital Securities Guarantee Agreement relating to the Capital Securities, by
and between the Corporation and LaSalle National Bank, as Guarantee Trustee (the
"Guarantee Trustee"); and (iv) the "Common Guarantee" means the Common
Securities Guarantee Agreement relating to the Common Securities.
COAL CITY CORPORATION
GENERAL. The Corporation was incorporated in Illinois in 1986 and is a bank
holding company registered under the Federal Bank Holding Company Act of 1956,
as amended ("BCA"), and the Illinois Bank Holding Company Act of 1957, as
amended ("Illinois BCA"). The Corporation conducts a commercial banking business
through Manufacturers Bank, an Illinois banking corporation ("Manufacturers
Bank," or the "Bank"), which is wholly-owned by Manufacturers National
Corporation, an Illinois corporation ("MNC"), 96.5% of whose issued and
outstanding shares of common stock and all of whose issued and outstanding
shares of Class A Preferred Stock are owned by the Corporation.
On May 7, 1997, the Corporation acquired U.S. Bancorp, Inc. ("U.S.
Bancorp"), an Illinois corporation and the holding company for U.S. Bank, an
Illinois banking corporation ("U.S. Bank"), through the merger of a subsidiary
of MNC with and into U.S. Bancorp. On January 28, 1998, the Corporation
completed the sale of Coal City National Bank ("Coal City Bank"), a wholly-owned
subsidiary of the Corporation, to Kankakee Bancorp, Inc. In the transaction, the
Corporation received $7.8 million in cash and recorded a $4.1 million gain on
sale. See "Business--History and Development."
Manufacturers Bank has four distinct banking groups: Business Banking,
Convenient Retail Banking, Lease Banking and Korean Banking. The Business
Banking Group focuses on serving privately-owned companies, including
manufacturers, wholesalers, distributors, home developers, long-term health care
operators, real estate operators and investors, and selected types of service
companies. Manufacturers Bank provides these companies with credit, deposit,
cash management and investment products and services. The Convenient Retail
Banking Group targets consumers who live or work near the Bank's offices.
Manufacturers Bank offers consumer products to these individuals, including
checking accounts, savings accounts, money market accounts, time deposit
accounts, secured and unsecured consumer loans, residential mortgage loans, and
a variety of fee for service products, such as money orders and travelers
checks. The Lease Banking Group serves small and medium size equipment leasing
companies located throughout the United States. Manufacturers Bank provides full
banking services for these leasing companies, including financing the debt
portion of leveraged leases, providing short-term and long-term equity
financing, making working capital and bridge loans, and investing directly in
leased equipment. The Korean Banking Group focuses on the expanding Korean
community, providing complete banking services using the Korean language to
Korean consumers and Korean-owned businesses in the Chicago area. See "Business
- -- Business Areas."
At March 31, 1998, the Corporation had total assets, deposits and
stockholders' equity of approximately $762.7 million, $634.4 million and $54.8
million, respectively. See "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere herein.
The principal business offices of the Corporation are located at the main
banking premises of Manufacturers Bank, 1200 North Ashland Avenue, Chicago,
Illinois 60622 ("Main Banking Premises"). The telephone number of the
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Main Banking Premises is 773/278-4040. Manufacturers Bank also has seven other
offices, located on the far north side and the far south side of Chicago and in
the Chicago suburbs of Lansing, South Holland and Tinley Park, Illinois.
RECENT DEVELOPMENTS. Historically, the Corporation has maintained high
asset quality by utilizing strict loan underwriting standards and collection
efforts and by generally limiting its origination of mortgage loans to its
delineated lending area. The ratio of non-performing loans to total loans at
December 31, 1993, 1994, 1995 and 1996 was 0.17%, 0.26%, 0.34% and 0.35%,
respectively, and the ratio of non-performing assets to total assets at such
dates was 0.10%, 0.21%, 0.24% and 0.23%, respectively.
On May 7, 1997, the Corporation acquired $17.8 million in potential problem
loans and assets as part of the acquisition of U.S. Bancorp, which had been
identified as possible problem loans or assets during the due diligence
performed by the Corporation prior to the acquisition. Upon such acquisition,
these potential problem loans and assets constituted 3.60% of the Bank's total
loans. As a result of the U.S. Bancorp acquisition, the ratio of non-performing
loans to total loans and the ratio of non-performing assets to total assets at
December 31, 1997, was 1.87% and 1.70%, respectively.
As a result of the efforts of the Corporation to further reduce the amount
of non-performing assets, at March 31, 1998, the ratio of non-performing loans
to total loans and the ratio of non-performing assets to total assets were 1.78%
and 1.74%, respectively, and at June 30, 1998, these ratios had declined to
0.66% and 0.45%, respectively. From March 31, 1998 to June 30, 1998, the
Corporation lowered non-performing loans by $5.9 million, had net charge-offs of
$924,000, sold $3.4 million of OREO, and added $187,000 to its allowance for
loan losses. See "Recent Developments."
COAL CITY CAPITAL TRUST I
The Trust is a statutory business trust that was organized by the
Corporation under Delaware law on July 2, 1998 by the filing of a Certificate of
Trust with the Delaware Secretary of State. The Trust's business and affairs are
conducted by the Issuer Trustees, consisting of the Property Trustee, the
Delaware Trustee and the three individual Administrative Trustees (all of whom
are officers of the Corporation or the Bank). The Trust exists for the exclusive
purposes of (i) issuing and selling the Trust Securities; (ii) using the
proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures issued by the Corporation; and (iii) engaging in only
those other activities necessary, advisable or incidental thereto. Accordingly,
the Junior Subordinated Debentures will be the sole assets of the Trust and
payments under the Junior Subordinated Debentures will be the sole revenue of
the Trust. All of the Common Securities will be owned by the Corporation.
THE OFFERING
Securities Offered..................... $25.0 million aggregate Liquidation
Amount of Floating Rate Capital
Securities (Liquidation Amount $1,000
per Capital Security).
Offering Price......................... $1,000 per Capital Security plus
accumulated Distributions, if any, from
July 24, 1998.
Distributions.......................... Distributions on each Capital Security
will be payable at a rate per annum,
reset quarterly, equal to 3-month LIBOR
(as defined herein) plus 180 basis
points, will be cumulative, will accrue
from and including the date of issuance
of the Capital Securities and will be
payable quarterly in arrears on March
1, June 1, September 1 and December 1
of each year commencing on December 1,
1998. The amount of each Distribution
due with respect to the Capital
Securities will include amounts accrued
to but excluding the date the
Distribution is due.
Extension Periods...................... So long as no Debenture Event of
Default (as defined herein) has
occurred and is continuing,
Distributions on Capital Securities
will be deferred for the duration of
any Extension Period elected by the
Corporation with respect to the payment
of interest on the Junior Subordinated
Debentures. No Extension Period will
exceed 20 consecutive quarterly
periods, end on a date other than
9
<PAGE>
an Interest Payment Date or extend
beyond the Stated Maturity Date. During
an Extension Period, interest on the
Junior Subordinated Debentures will
continue to accrue (and the amount of
Distributions to which holders of the
Capital Securities are entitled will
continue to accumulate) at the
applicable periodic Distribution Rate
compounded quarterly. The holders of
the Capital Securities will be required
to accrue deferred interest income for
United States federal income tax
purposes prior to receipt of cash
attributable to such income. See
"Description of Junior Subordinated
Debentures--Option to Extend Interest
Payment Date" and "Certain Federal
Income Tax Consequences--Original Issue
Discount."
Ranking................................ The Capital Securities will rank pari
passu, and payments thereon will be
made pro rata, with the Common
Securities, except as described under
"Description of Capital
Securities--Subordination of Common
Securities." The Junior Subordinated
Debentures will rank pari passu with
all other junior subordinated
debentures, if any, issued by the
Corporation (the "Other Debentures"),
which are issued and sold, if at all,
to other trusts established by the
Corporation, if any, in each case
similar to the Trust ("Other Trusts"),
and will constitute unsecured
obligations of the Corporation and will
rank subordinate and junior in right of
payment to all Senior Indebtedness, to
the extent and in the manner set forth
in the Indenture. See "Description of
Junior Subordinated Debentures." The
Guarantee will rank pari passu with all
other guarantees, if any, issued by the
Corporation with respect to capital
securities, if any, issued by Other
Trusts ("Other Guarantees") and will
constitute an unsecured obligation of
the Corporation and will rank
subordinate and junior in right of
payment to all Senior Indebtedness, to
the extent and in the manner set forth
in the Guarantee Agreement. See
"Description of Guarantee." In
addition, because the Corporation is a
bank holding company, the Junior
Subordinated Debentures and the
Guarantee will be effectively
subordinated to all existing and future
liabilities of the Corporation's
subsidiaries, including deposit
liabilities of Manufacturers Bank. See
"Description of Junior Subordinated
Debentures--Subordination."
Distribution of Junior Subordinated
Debentures............................ The Corporation has the right at any
time to dissolve the Trust and cause
the Junior Subordinated Debentures to
be distributed to holders of Capital
Securities in liquidation of the Trust,
subject to the Corporation having
received prior approval of the FRB to
do so if then required under applicable
capital guidelines or policies of the
FRB. See "Description of Capital
Securities--Liquidation of Trust and
Distribution of Junior Subordinated
Debentures."
Redemption............................. The Trust Securities will be subject to
mandatory redemption in a Like Amount
(i) in whole but not in part, on the
Stated Maturity Date upon repayment of
the Junior Subordinated Debentures;
(ii) in whole, but not in part, at any
time prior to September 1, 2008,
contemporaneously with the optional
prepayment of the Junior Subordinated
Debentures by the Corporation upon the
occurrence and continuation of a
Special Event; and (iii) in whole or in
part, on or after September 1, 2008,
contemporaneously with the optional
prepayment by the Corporation of all or
part of the Junior Subordinated
Debentures, in each case at the
Redemption Price and, in the case of
(ii) and (iii) above, subject to
receiving prior approval of the FRB.
See "Description of Capital
Securities--Redemption" and
"Description of Junior Subordinated
Debentures--Special Event Prepayment."
10
<PAGE>
Transfer Restrictions.................. The Capital Securities have not been
registered under the Securities Act and
may not be offered, sold, pledged or
otherwise transferred, except as
described under "Notice to Investors."
The Capital Securities will be issued,
and may be transferred, only in blocks
having a Liquidation Amount of not less
than $100,000 (100 Capital Securities)
and multiples of $1,000 in excess
thereof. See "Description of Capital
Securities--Restrictions on Transfer."
Any such transfer of Capital Securities
in a block having a Liquidation Amount
of less than $100,000 shall be deemed
to be void and of no legal effect
whatsoever.
Absence of Market for the
Capital Securities.................... The Capital Securities will be a new
issue of securities for which there
currently is no market. Although the
Initial Purchaser has informed the
Trust and the Corporation that it
currently intends to make a market in
the Capital Securities, the Initial
Purchaser is not obligated to do so,
and any such market making may be
discontinued at any time without
notice. Accordingly, there can be no
assurance as to the development or
liquidity of any market for the Capital
Securities. The Trust and the
Corporation do not intend to apply for
listing of the Capital Securities on
any securities exchange or for
quotation through the Nasdaq Stock
Market. The Capital Securities are
expected to be eligible for quotation
on PORTAL. See "Plan of Distribution."
Use of Proceeds........................ All of the net proceeds to the Trust
from the sale of the Capital Securities
will be invested by the Trust in the
Junior Subordinated Debentures. The
Corporation intends to use the net
proceeds from the sale of Junior
Subordinated Debentures to (i) cause
Coal City Capital Trust 1997-A, a
Delaware business trust organized by
the Corporation in 1997 (the "1997
Trust"), to retire the $10.0 million of
trust preferred securities of the 1997
Trust (the "1997 Trust Preferred
Securities") that are currently issued
and outstanding; (ii) redeem the Class
B Preferred Stock of the Corporation
issued in connection with the U.S.
Bancorp acquisition; and (iii) repay a
portion of the Corporation's
outstanding indebtedness to LaSalle
National Bank. Any proceeds not so used
will be used for general corporate
purposes. Initially, the net proceeds
may be used to make short-term
investments. See "Use of Proceeds."
ERISA Considerations................... For a discussion of certain prohibited
transactions and fiduciary duty issues
pertaining to purchases by or on behalf
of an employee benefit plan, see "ERISA
Considerations" and "Notice to
Investors."
Voting Rights.......................... The holders of the Capital Securities
will have no voting rights, except in
limited circumstances. See "Description
of Capital Securities--Voting Rights;
Amendment of the Trust Agreement."
Risk Factors........................... For a discussion of considerations
relevant to an investment in the
Capital Securities which should be
carefully considered by prospective
investors, see "Risk Factors."
Available Information.................. The Corporation will provide holders of
the Capital Securities with annual
financial statements of the Corporation
audited by the Corporation's
independent public accountants and will
provide such holders with quarterly
Call Reports of the Corporation and its
subsidiaries, free of charge, upon
written request made to the Secretary
of the Corporation.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial and other
data of the Corporation. The selected statement of income and balance sheet
data, insofar as they relate to the five years and the five-year period ended
December 31, 1997, have been derived from the Corporation's audited consolidated
financial statements. The Consolidated Financial Statements and Notes thereto
for each of the three years in the period ended December 31, 1997 and as of
December 31, 1997 and December 31, 1996 are included elsewhere herein. The
selected financial data for the three month periods ended March 31, 1998 and
March 31, 1997 and as of March 31, 1998 and March 31, 1997 are derived from the
Corporation's unaudited interim financial statements. Such unaudited interim
financial statements include all adjustments (consisting only of normal,
recurring accruals) that the Corporation considers necessary for a fair
presentation of the financial position and the results of operation as of the
dates and for the periods indicated. Information for any interim period is not
necessarily indicative of results that may be anticipated for the full year. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT COMMON SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income ............................. $ 13,890 $ 10,074 $ 51,686 $ 39,530 $ 36,572 $ 21,860 $ 21,606
Interest expense ............................ 6,887 4,760 25,172 18,180 16,836 8,392 7,826
-------- -------- -------- -------- -------- -------- --------
Net interest income ..................... 7,003 5,314 26,514 21,350 19,736 13,468 13,780
Provision for loan losses ................... 188 171 971 572 240 90 400
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for loan losses ..................... 6,815 5,143 25,543 20,778 19,496 13,378 13,380
Other income (1) ............................ 5,500 820 4,935 2,939 1,899 688 2,545
Other expense ............................... 6,840 4,182 24,195 16,868 17,010 11,014 11,230
-------- -------- -------- -------- -------- -------- --------
Income before income taxes and
minority interest ................... 5,475 1,781 6,283 6,849 4,385 3,052 4,695
Applicable income taxes ..................... 1,885 737 2,402 2,576 1,504 457 1,500
-------- -------- -------- -------- -------- -------- --------
Income before minority interest ......... 3,590 1,044 3,881 4,273 2,881 2,595 3,195
Minority interest ........................... (32) (152) (432) (636) (444) (517) (1,123)
-------- -------- -------- -------- -------- -------- --------
Net income .............................. 3,558 892 3,449 3,637 2,437 2,078 2,072
Preferred stock dividend .................... 434 -- 276 -- 267 -- --
-------- -------- -------- -------- -------- -------- --------
Net income available to common
stockholders ........................ $ 3,124 $ 892 $ 3,173 $ 3,637 $ 2,170 $ 2,078 $ 2,072
-------- -------- -------- -------- -------- -------- --------
COMMON SHARE DATA:
Basic earnings per common share.............. $ 63.48 $ 17.92 $ 63.83 $ 73.28 $ 43.27 $ 41.94 $ 41.82
Book value per common share ................. $ 912 $ 797 $ 852 $ 786 $ 726 $ 637 $ 624
Weighted average common shares
outstanding .............................. 49,215 49,787 49,713 49,628 50,150 49,549 49,549
</TABLE>
(footnotes on following page)
12
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and due from banks .................. $ 36,318 $ 28,611 $ 36,302 $ 31,465 $ 27,013 $ 23,962 $ 29,856
Investments securities ................... 141,894 112,851 141,927 109,981 171,118 101,189 115,670
Federal funds sold ....................... -- 17,250 37,400 20,800 11,199 20,800 13,000
Loans, gross ............................. 526,914 397,778 527,321 388,302 339,326 222,211 227,902
Allowance for loan losses ................ 7,751 4,860 7,922 4,692 4,134 2,646 2,707
Total assets ............................. 762,675 595,185 802,696 587,798 579,946 382,603 395,323
Deposits ................................. 634,448 510,955 684,060 509,717 513,470 335,866 347,273
Long-term and short-term
borrowings ............................ 49,902 20,147 40,428 25,399 17,000 7,545 7,652
Corporation obligated mandatorily
redeemable preferred securities....... 10,000 10,000 10,000 -- -- -- --
Stockholders' equity ..................... 54,844 39,670 52,526 39,126 36,626 31,572 30,904
PERFORMANCE RATIOS:
Return on average assets ................. 1.83% 0.73% 0.54% 0.75% 0.55% 0.70% 0.86%
Return on average equity ................. 27.05% 9.22% 7.08% 9.74% 6.49% 6.72% 6.94%
Net interest margin ...................... 4.01% 4.21% 4.12% 4.23% 4.22% 3.97% 3.96%
Loans to deposits ........................ 83.05% 77.85% 77.09% 76.18% 66.08% 66.16% 65.63%
ASSETS QUALITY RATIOS:
Non-performing loans to total
loans ................................ 1.78% 0.11% 1.87% 0.35% 0.34% 0.26% 0.17%
Non-performing assets to total
assets ............................... 1.74% 0.09% 1.70% 0.23% 0.24% 0.21% 0.10%
Allowance for loan losses to total
loans ................................ 1.47% 1.22% 1.50% 1.21% 1.22% 1.19% 1.19%
Non-performing loans to allowance
for loan losses ...................... 120.81% 8.70% 124.73% 28.92% 27.75% 22.07% 14.22%
Net loan charge-offs to average
loans ................................ (0.03)% 0.00% 0.07% 0.00% 0.02% 0.07% 0.00%
CAPITAL RATIOS (2):
Tier 1 capital (to risk-weighted
assets) .............................. 7.40% 10.32% 7.09% 8.00% 7.84% 11.67% 12.87%
Total capital (to risk-weighted
assets) .............................. 9.58% 11.53% 10.00% 10.14% 10.02% 12.74% 13.99%
Tier 1 capital (to average assets) ....... 5.44% 8.18% 5.15% 6.16% 5.19% 7.78% 8.12%
OTHER:
Banking facilities ....................... 8 6 11 6 5 3 3
Full-time equivalent employees ........... 260 199 287 199 191 132 139
</TABLE>
- ----------
(1) For the three months ended March 31, 1998 other income includes a $4.1
million gain on the sale of Coal City Bank.
(2) Ratios presented are for the Corporation on a consolidated basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources."
13
<PAGE>
RISK FACTORS
Prospective purchasers of Capital Securities should carefully review the
information contained elsewhere in this Offering Memorandum and should
particularly consider the following factors, which do not necessarily appear in
the order of their importance. Investors should consider all of these factors to
be important. Because holders of Capital Securities may receive Junior
Subordinated Debentures in exchange therefor upon liquidation of the Trust,
prospective purchasers of Capital Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all the information regarding the Junior Subordinated Debentures
contained herein.
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE JUNIOR
SUBORDINATED DEBENTURES; LIMITATIONS ON SOURCE OF FUNDS
The obligations of the Corporation under the Guarantee, as well as under
the Junior Subordinated Debentures, will be unsecured and will rank subordinate
and junior in right of payment to all Senior Indebtedness to the extent and in
the manner set forth in the Guarantee and the Indenture, respectively. No
payment may be made of the principal of or interest on the Junior Subordinated
Debentures, or with respect to any redemption, retirement, purchase or other
acquisition of any of the Junior Subordinated Debentures, at any time when (i)
there shall have occurred and be continuing a default in any payment with
respect to any Senior Indebtedness, or there has been an acceleration of the
maturity thereof because of a default; or (ii) in the event of the acceleration
of the maturity of the Junior Subordinated Debentures, until payment has been
made on all Senior Indebtedness. At March 31, 1998, the Corporation had $6.0
million of Senior Indebtedness outstanding. Because the Corporation is a bank
holding company, the right of the Corporation to participate in any distribution
of assets of any subsidiary upon such subsidiary's liquidation or reorganization
or otherwise (and thus the ability of holders of the Capital Securities to
benefit indirectly from such distribution) is subject to the prior claims of
creditors of that subsidiary, including depositors, in the case of Manufacturers
Bank, except to the extent that the Corporation may itself be recognized as a
creditor of that subsidiary. At March 31, 1998, the subsidiaries of the
Corporation had total liabilities, excluding liabilities owed to the
Corporation, of $689.9 million.
Accordingly, the Junior Subordinated Debentures effectively will be
subordinated to all existing and future liabilities of the Corporation's
subsidiaries, including the deposit liabilities of Manufacturers Bank which
aggregated $635.3 million at March 31, 1998, and holders of Junior Subordinated
Debentures should look only to the assets of the Corporation for payments on the
Junior Subordinated Debentures. The Guarantee will constitute an unsecured
obligation of the Corporation and will rank subordinate and junior in right of
payment to all Senior Indebtedness in the same manner as the Junior Subordinated
Debentures. None of the Indenture, the Guarantee or the Trust Agreement places
any limitation on the amount of secured or unsecured debt, including Senior
Indebtedness, that may be incurred by the Corporation or any of its
subsidiaries. See "Description of Guarantee--Status of the Guarantee" and
"Description of Junior Subordinated Debentures--General" and "--Subordination."
The ability of the Trust to pay amounts due on the Capital Securities is
solely dependent upon the Corporation making payments on the Junior Subordinated
Debentures as and when required.
The Corporation is a bank holding company regulated by the FRB, and almost
all of the operating assets of the Corporation are owned by its second tier
subsidiary, Manufacturers Bank. The Corporation relies primarily on preferred
stock dividends from MNC, which in turn relies on common stock dividends from
Manufacturers Bank, to meet its obligations for payment of principal and
interest on its outstanding debt obligations and corporate expenses. There are
regulatory limitations (discussed in more detail below) on the payment of
dividends to the Corporation from MNC and to MNC from Manufacturers Bank. In
addition to restrictions on the payment of dividends, the Bank is subject to
certain restrictions imposed by federal law on any extensions of credit to, and
certain other transactions with, the Corporation and MNC and certain other
affiliates, and on investments in stock or other securities thereof. Such
restrictions prevent the Corporation and MNC and such other affiliates from
borrowing from Manufacturers Bank, unless the loans are secured by certain types
of collateral. Furthermore, such secured loans, other transactions and
investments by Manufacturers Bank are generally limited in amount as to each of
the Corporation, MNC and such other affiliates to 10% of Manufacturers Bank's
capital and surplus, and as to all of the Corporation, MNC and such other
affiliates to an
14
<PAGE>
aggregate of 20% of Manufacturers Bank's capital and surplus. As of March 31,
1998, approximately $12.1 million of credit was available to the Corporation
from the Bank under this limitation.
Manufacturers Bank is a state non-member bank of the Federal Reserve System
and is regulated by the FDIC and the Office of Banks and Real Estate of the
State of Illinois (the "Commissioner"). There are various regulatory limitations
applicable to the payment of dividends by MNC and Manufacturers Bank as well as
the payment of dividends by the Corporation to its shareholders. Under the laws
of Illinois, a state-chartered bank is permitted to declare and pay dividends in
amounts up to the amount of its accumulated net profits, provided that it shall
retain in its surplus at least one-tenth of its net profits since the date of
the declaration of its most recent previous dividend until said additions to
surplus, in the aggregate, equal at least the paid-in-capital of such bank. In
no event, therefore, may Manufacturers Bank, while it continues its banking
business, pay dividends in excess of its net profits then on hand (after
deduction for losses and bad debts). Under existing supervisory practices at
March 31, 1998, Manufacturers Bank could have paid additional dividends of up to
$1.5 million without regulatory approval and MNC could have paid $7.8 million of
dividends and complied with the minimum regulatory capital requirements
applicable to it. Bank regulatory agencies have authority to prohibit MNC,
Manufacturers Bank or the Corporation from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
the financial condition of Manufacturers Bank, MNC or the Corporation, could be
deemed to constitute such an unsafe or unsound practice. The FRB has stated
that, as a matter of prudent banking, a bank or bank holding company should not
maintain its existing rate of cash dividends on common stock unless (i) the
organization's net income available to common shareholders over the past year
has been sufficient to fund fully the dividends; and (ii) the prospective rate
of earnings retention appears consistent with the organization's capital needs,
asset quality, and overall financial condition.
Under the Federal Deposit Insurance Act ("FDIA"), insured depository
institutions such as Manufacturers Bank are prohibited from making capital
distributions, including the payment of dividends, if, after making any such
distributions, the institution would become "undercapitalized" (as such term is
used in the FDIA). Based on Manufacturers Bank's current financial condition,
the Corporation does not expect that this provision will have any impact on the
Bank's ability to pay dividends to MNC, or MNC's ability to pay dividends to the
Corporation.
The Corporation has two lines of credit with LaSalle National Bank, a $15.0
million line secured by the stock of MNC owned by the Corporation and a $4.5
million unsecured line. The borrowings under the two lines may not in the
aggregate exceed $15.0 million. If the Corporation were to default under the
secured line, its ability to rely on dividends from MNC to meet its obligations
for payment of principal and interest on its outstanding debt obligations and
corporate expenses would be adversely affected.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
So long as no Debenture Event of Default has occurred and is continuing,
the Corporation will have the right under the Indenture to defer payments of
interest on the Junior Subordinated Debentures at any time and from time to time
for a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that an Extension Period must end on an Interest
Payment Date and may not extend beyond the Stated Maturity Date. As a
consequence of any such deferral, quarterly Distributions on the Trust
Securities by the Trust will be deferred (and the amount of Distributions to
which holders of the Trust Securities are entitled will accumulate additional
Distributions thereon at the applicable periodic Distribution Rate, compounded
quarterly, but not exceeding the interest rate then accruing on the Junior
Subordinated Debentures) from the relevant payment date for such Distributions
during any such Extension Period. During the pendency of any Extension Period,
the Corporation generally will be prohibited from declaring or paying dividends
on the Corporation's capital stock. See "Description of Capital
Securities--Distributions."
Prior to the termination of any such Extension Period, the Corporation may
further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or to extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
interest then accrued and unpaid on the Junior Subordinated Debentures (together
with interest thereon at the applicable periodic Distribution Rate, compounded
quarterly, from the Interest Payment Date for such interest, to the extent
permitted by applicable law), the Corporation may elect to begin a new Extension
Period, subject to the above requirements. There is no limitation on the number
of times that the Corporation may elect to begin
15
<PAGE>
an Extension Period. See "Description of Capital Securities--Distributions" and
"Description of Junior Subordinated Debentures--Option to Extend Interest
Payment Date."
The Corporation has no current plan to exercise its right to defer payments
of interest on the Junior Subordinated Debentures. However, because the
Corporation has the right to defer payments of interest on the Junior
Subordinated Debentures, each holder of Trust Securities will recognize income
in the form of original issue discount ("OID") for United States federal income
tax purposes in advance of the receipt of cash and may not receive the cash
related to such income from the Trust if the holder disposes of the Capital
Securities prior to the record date for the payment of deferred Distributions
thereafter. See "Certain Federal Income Tax Consequences--Original Issue
Discount" and "--Sales of Capital Securities."
Should the Corporation elect to exercise its right to defer payments of
interest on the Junior Subordinated Debentures in the future, the market price
of the Capital Securities is likely to be affected. A holder that disposes of
its Capital Securities during an Extension Period, therefore, might not receive
the same return on its investment as a holder that continues to hold its Capital
Securities. In addition, the mere existence of the Corporation's right to defer
payments of interest on the Junior Subordinated Debentures may cause the market
price of the Capital Securities to be more volatile than the market prices of
other similar securities that are not subject to such deferrals.
SPECIAL EVENT REDEMPTION
Upon the occurrence and continuation of a Special Event, including an
Investment Company Event, a Regulatory Capital Event or a Tax Event (in each
case as defined under "Description of Junior Subordinated Debentures--Special
Event Prepayment"), prior to the Initial Optional Redemption Date, the
Corporation will have the right to prepay the Junior Subordinated Debentures, in
whole but not in part, at the Prepayment Price within 90 days following the
occurrence of such Special Event and therefore cause a mandatory redemption of
the Trust Securities at the Redemption Price. The exercise of such right is
subject to the Corporation having received any required regulatory approval. See
"Description of Capital Securities--Redemption."
Prospective investors should be aware that Enron Corporation ("Enron") has
filed a petition in the United States Tax Court challenging the proposed
disallowance by the Internal Revenue Service ("IRS") of the deduction of
interest expense on securities issued by Enron in 1993 and 1994 that are similar
to, although different in a number of respects from, the Junior Subordinated
Debentures. A decision of the Tax Court in the Enron case upholding the position
of the IRS would not necessarily affect the tax treatment of interest paid on
the Junior Subordinated Debentures because such a decision may be based on
factors that differ from those pertaining to the Junior Subordinated Debentures,
the Trust or the Corporation. However, it is possible that such a decision would
result in the receipt by the Corporation or the Trust of an opinion of counsel
that there is a more than insubstantial risk that interest payable on the Junior
Subordinated Debentures is not or will not be deductible. The receipt of such an
opinion would constitute a Tax Event, which would permit the Corporation to
cause a redemption of the Capital Securities. See "Description of the Capital
Securities--Redemption."
LIQUIDATION DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Corporation will have the right at any time to dissolve the Trust and,
after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to (i) the Corporation having received an opinion of counsel to the
effect that such distribution will not be a taxable event to the holders of
Capital Securities; and (ii) receipt of any required regulatory approval. Under
current United States federal income tax law, a distribution of Junior
Subordinated Debentures upon the dissolution of the Trust would not be a taxable
event to holders of the Capital Securities. Upon the occurrence of a Special
Event, a dissolution of the Trust in which holders of the Capital Securities
receive cash would be a taxable event to such holders. See "Certain Federal
Income Tax Considerations--Receipt of Junior Subordinated Debentures or Cash
Upon Liquidation of the Trust."
16
<PAGE>
POSSIBLE ADVERSE EFFECT ON MARKET PRICES
There can be no assurance as to the market prices for Capital Securities or
the Junior Subordinated Debentures that may be distributed in exchange for
Capital Securities if a dissolution of the Trust were to occur. Accordingly, the
Capital Securities or the Junior Subordinated Debentures may trade at a discount
from the price that the investor paid to purchase the Capital Securities offered
hereby. Because holders of Capital Securities may receive Junior Subordinated
Debentures in liquidation of the Trust and because Distributions are otherwise
limited to payments on the Junior Subordinated Debentures, prospective
purchasers of Capital Securities are also making an investment decision with
regard to the Junior Subordinated Debentures and should carefully review all the
information regarding the Junior Subordinated Debentures contained herein. See
"Description of Junior Subordinated Debentures."
RIGHTS UNDER THE GUARANTEE
The Guarantee will guarantee to the holders of the Capital Securities the
following payments, to the extent not paid by or on behalf of the Trust (i) any
accumulated and unpaid Distributions required to be paid on the Capital
Securities, to the extent that the Trust has funds on hand legally available
therefor at such time; (ii) the Redemption Price with respect to the Capital
Securities called for redemption, to the extent that the Trust has funds on hand
legally available therefor at such time; and (iii) upon a voluntary or
involuntary dissolution, winding up or liquidation of the Trust (unless the
Junior Subordinated Debentures are distributed to holders of the Capital
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment, to the extent that
the Trust has funds on hand legally available therefor at such time, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
the Capital Securities at such time, after the satisfaction of liabilities to
creditors of the Trust as provided by applicable law.
The holders of a majority in Liquidation Amount of the Capital Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee with respect to the
Guarantee or to direct the exercise of any trust power conferred upon the
Guarantee Trustee under the Guarantee. Any holder of the Capital Securities may
institute a legal proceeding directly against the Corporation to enforce its
rights under the Guarantee without first instituting a legal proceeding against
the Trust, the Guarantee Trustee or any other person or entity. If the
Corporation defaults on its obligation to pay amounts payable under the Junior
Subordinated Debentures, the Trust will not have sufficient funds for the
payment of Distributions or amounts payable on redemption of the Capital
Securities or otherwise, and, in such event, holders of the Capital Securities
will not be able to rely upon the Guarantee for payment of such amounts.
Instead, in the event a Debenture Event of Default shall have occurred and be
continuing and such event is attributable to the failure of the Corporation to
pay the principal of or interest (including Additional Sums and Compounded
Interest, each as defined herein, if any) on the Junior Subordinated Debentures
on the payment date on which such payment is due and payable, then a holder of
Capital Securities may institute a legal proceeding directly against the
Corporation for enforcement of payment to such holder of the principal of or
interest (including Additional Sums and Compounded Interest, if any) on such
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Capital Securities of such holder (a "Direct Action").
Notwithstanding any payments made to a holder of Capital Securities by the
Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of and interest (including Additional Sums and
Compounded Interest, if any) on the Junior Subordinated Debentures, and the
Corporation shall be subrogated to the rights of the holder of such Capital
Securities with respect to payments on the Capital Securities to the extent of
any payments made by the Corporation to such holder in any Direct Action. Except
as described herein, holders of Capital Securities will not be able to exercise
directly any other remedy available to the holders of the Junior Subordinated
Debentures or to assert directly any other rights in respect of the Junior
Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Enforcement of Certain Rights by Holders of Capital Securities,"
"--Debenture Events of Default" and "Description of Guarantee." The Trust
Agreement will provide that each holder of Capital Securities by acceptance
thereof agrees to the provisions of the Indenture. LaSalle National Bank will
act as Guarantee Trustee and will hold the Guarantee for the benefit of the
holders of the Capital Securities. LaSalle National Bank will also act as
Property Trustee under the Trust Agreement and as Debenture Trustee under the
Indenture. Wilmington Trust Company will act as Delaware Trustee under the Trust
Agreement.
17
<PAGE>
LIMITED VOTING RIGHTS
Holders of Capital Securities generally will have no voting rights other
than with respect to the modification of the Capital Securities and the exercise
of the Trust's rights as holder of Junior Subordinated Debentures. Holders of
Capital Securities will not be entitled to vote to appoint, remove or replace,
or to increase or decrease the number of, the Issuer Trustees, which voting
rights are vested exclusively in the holder of the Common Securities, except
upon the occurrence of certain events described herein. The Property Trustee,
the Administrative Trustees and the Corporation may amend the Trust Agreement
without the consent of holders of Capital Securities to ensure that the Trust
will be classified for United States federal income tax purposes as a grantor
trust or to ensure that the Trust will not be required to register as an
"investment company" under the Investment Company Act of 1940, as amended
("Investment Company Act"), even if such action adversely affects the interests
of such holders. Holders of Capital Securities will have no voting rights with
respect to any matters submitted to a vote of the Corporation's stockholders.
See "Description of Capital Securities--Removal of Issuer Trustees" and
"--Voting Rights; Amendment of the Trust Agreement."
TRADING CHARACTERISTICS OF THE CAPITAL SECURITIES
The Capital Securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder who uses the accrual method of accounting for
tax purposes (and a cash method holder, if the Junior Subordinated Debentures
are deemed to have been issued with OID) and who disposes of its Capital
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Junior Subordinated
Debentures through the date of disposition in income as ordinary income (i.e.,
interest or, possibly, OID), and to add such amount to its adjusted tax basis in
its share of the underlying Junior Subordinated Debentures deemed disposed of.
To the extent the selling price is less than the holder's adjusted tax basis
(which will include all accrued but unpaid interest), a holder will recognize a
capital loss. Subject to certain limited exceptions, capital losses cannot be
applied to offset ordinary income for United States federal income tax purposes.
See "Certain Federal Income Tax Considerations--Interest Income and Original
Issue Discount" and "--Sales of Capital Securities."
ABSENCE OF PUBLIC REPORTING
Neither the Corporation nor Manufacturers Bank is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), and none of the Corporation, Manufacturers Bank or the Trust will become
subject to such reporting requirements as a result of the offer and sale of the
Capital Securities or the Junior Subordinated Debentures as provided herein.
Therefore, holders of the Capital Securities or the Junior Subordinated
Debentures will not have access to the type and amount of financial or other
information required to be filed with the Commission by companies with publicly
traded securities outstanding. Although the Corporation has agreed to make
available to holders of the Capital Securities or the Junior Subordinated
Debentures material satisfying the information requirements of Rule 144A as
applicable to companies that are not subject to the reporting requirements of
the Exchange Act, audited financial statements and, upon request, quarterly Call
Reports, such information is substantially less in scope, detail and frequency
than the information required to be provided by companies with publicly traded
securities outstanding. The information requirements of Rule 144A require only
that the issuer provide, upon request; (i) a brief statement of the nature of
the business of the issuer and the products and services it offers; and (ii) the
issuer's balance sheets, profit and loss statements and retained earnings for
the two preceding fiscal years. Accordingly, the information concerning the
Corporation available to holders or potential holders of the Capital Securities
or the Junior Subordinated Debentures will be significantly less detailed than
the information contained in this Offering Memorandum.
ABSENCE OF RATINGS AND PUBLIC MARKET; TRANSFER RESTRICTIONS
The Capital Securities have not been rated by any rating agency.
Furthermore, the Capital Securities have not been registered under the
Securities Act and will be subject to transfer restrictions, including a
limitation on transfer to only blocks having a Liquidation Amount of not less
than $100,000 (100 Capital Securities) and multiples of $1,000 in excess
thereof. See "Notice to Investors." There is no existing market for the Capital
Securities and there can be no assurance as to the liquidity of any markets that
may develop for the Capital Securities, the ability of the holders to sell their
Capital Securities, or at what price holders of the Capital Securities will be
able to sell their Capital Securities. Future trading prices of the
18
<PAGE>
Capital Securities will depend on many factors including, among other things,
prevailing interest rates, the Corporation's operating results and the market
for similar securities. The Initial Purchaser has informed the Trust and the
Corporation that it intends to make a market in the Capital Securities. However,
the Initial Purchaser is not obligated to do so and any such market making
activity may be terminated at any time without notice to the holders of the
Capital Securities. In addition, such market making activity will be subject to
the limits of the Securities Act.
LENDING
There are risks inherent in making any loan, including risks with respect
to the period of time over which the loan may be repaid, risks resulting from
changes in economic and industry conditions, such as those in the local market
areas served by Manufacturers Bank, risks inherent in dealing with individual
borrowers and risks resulting from uncertainties as to the future value of
collateral. Manufacturers Bank's allowance for loan losses is established by
Management of the Bank at levels considered adequate to absorb anticipated loan
losses. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control, and such losses may exceed current estimates. There
is no assurance that the Bank's allowance for loan losses will prove sufficient
to cover actual losses in the future.
IMPACT OF THE ECONOMY ON OPERATIONS
Declines in the local economy, national economy or real estate market could
adversely affect the financial condition and results of operations of the
Corporation due to decreased demand for loans, increased competition for good
loans and increased non-performing loans and loan losses, resulting in
additional provisions for loan losses and losses on real estate owned by the
Bank. Although Management believes that the allowance for loan losses is
adequate in light of current economic conditions, many factors may require
unanticipated future additions to the allowance for loan losses, which would
adversely affect the Corporation's financial condition and results of operation.
These factors include (i) adverse changes in economic conditions and interest
rates that may affect the ability of borrowers to make payments on loans; (ii)
changes in the financial capability of individual borrowers; (iii) changes in
the local real estate market and the value of the Bank's loan collateral; and
(iv) future review and evaluation of the Bank's loan portfolio, internally or by
regulators. The amount of the allowance for loan losses at any time represents
estimates made by Management that are susceptible to significant changes due to
changes in values of collateral, national and regional economic conditions,
prevailing interest rates and other factors. Future adjustments to the allowance
also may be necessary if economic or other conditions differ substantially from
those underlying the assumptions used in making such estimates.
COMPETITION
Manufacturers Bank faces intense and increasing competition both in making
loans and in attracting savings deposits. The market area of Manufacturers Bank
has a high density of financial institutions, many of which have greater
financial resources, name recognition and market presence than Manufacturers
Bank, and all of which are competitors of Manufacturers Bank to varying degrees.
Particularly intense competition exists for savings deposits and the origination
of loan products. Manufacturers Bank's competition for loans comes principally
from commercial banks, savings banks, savings and loan associations, mortgage
banking companies, finance companies and credit unions. Manufacturers Bank's
competition for deposits comes principally from commercial banks, savings banks,
savings and loan associations and credit unions. In addition, Manufacturers Bank
faces increasing competition for savings deposits from non-bank institutions
such as brokerage firms, insurance companies, money market mutual funds, mutual
funds (such as corporate and government securities funds) and annuities. Trends
toward the consolidation of the banking industry and the lifting of interstate
banking and branching restrictions may make it more difficult for smaller
institutions, such as Manufacturers Bank, to compete effectively with large
national and regional banking institutions. See "Business."
INTEREST RATE RISK
The Corporation's operating results depend to a large extent on its net
interest income, which is the difference between the interest income earned on
interest earning assets and the interest expense incurred in connection with its
interest bearing liabilities. Changes in the general level of interest rates can
affect the Corporation's net interest income by affecting the spread between the
Corporation's interest earning assets and interest bearing liabilities. This may
be due to the disparate
19
<PAGE>
maturities or period to repricing of the Corporation's interest earning assets
and interest bearing liabilities. In addition to its effect on the Corporation's
interest rate spread, changes in the general level of interest rates also
affect, among other things, the ability of the Corporation to originate loans;
the value of the Corporation's interest earning assets and its ability to
realize gains from the sale of such assets; the average life of the
Corporation's interest earning assets; and the Corporation's ability to obtain
deposits in competition with other available investment alternatives. Interest
rates are highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions and other
factors beyond the control of the Corporation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset Liability
Management."
YEAR 2000 PROBLEM
The "Year 2000 Problem" centers on the inability of computer systems to
recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Corporation and the Bank may be
significantly affected by the Year 2000 Problem due to the nature of financial
information. Software, hardware and equipment, both within and outside the
direct control of the Corporation and the Bank, and with whom the Corporation
and the Bank electronically or operationally interface (e.g., third party
vendors providing data processing, information system management, maintenance of
computer systems and credit bureau information), are likely to be affected.
Furthermore, if computer systems are not adequately changed to identify the year
2000, many computer applications could fail or create erroneous results. As a
result, many calculations that rely on the date field information, such as
interest payment due dates and other operating functions, may generate results
that could be significantly misstated, and the Corporation could experience a
temporary inability to process transactions, send invoices or engage in similar
normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 Problem could adversely affect the
creditworthiness of the Bank's borrowers. Thus, if not adequately addressed, the
Year 2000 Problem could result in a significant adverse impact on the products,
services and competitive condition of the Corporation and the Bank.
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which the financial services industry and its
regulators must view the Year 2000 Problem by requiring the regulators to
conduct seminars for, and otherwise provide information and model approaches
concerning common problems to, the nation's financial institutions concerning
this problem. The regulators, acting through the FFIEC, have been compiling and
disseminating such information through industry-wide pronouncements which
emphasize that safety and soundness examinations would focus, among other
things, on the institutions' awareness and preparations with respect to the Year
2000 Problem. Failure to appropriately address the Year 2000 Problem may result
in supervisory actions, denials of regulatory applications and civil money
penalties.
In response to the foregoing regulatory guidance and pronouncements, the
Corporation and the Bank have been reviewing the Bank's operating procedures for
exposure to potential issues that the Year 2000 Problem might have on its
computer systems and programs. At the direction of the Bank's Board of
Directors, the Year 2000 Problem committee was established and has identified
major issues related to computer hardware, software and operating systems to
ensure that they will be capable of properly recognizing January 1, 2000 and
beyond. In addition, selected business customers have been contacted and
procedures have been put in place to survey these business customers to
understand their progress in regard to dealing with the Year 2000 Problem. The
Year 2000 Problem committee reports periodically to the Bank's Board of
Directors.
The Corporation and the Bank believe that due to their up-to-date computer
hardware and software systems, there will be no material costs to the
Corporation or any of its subsidiaries relating to their becoming compliant with
all necessary procedures for dealing with the Year 2000 Problem.
20
<PAGE>
COAL CITY CORPORATION
The Corporation was incorporated in Illinois in 1986 and is a bank holding
company registered under the BCA and the Illinois BCA. The Corporation conducts
a commercial banking business through Manufacturers Bank, which is wholly-owned
by MNC, 96.5% of whose issued and outstanding shares of common stock and all of
whose issued and outstanding shares of Class A Preferred Stock are owned by the
Corporation. Manufacturers Bank provides a complete range of banking services to
individuals and small and medium-sized businesses. These services include
checking and savings accounts, interest bearing deposit instruments, business
loans, personal loans, home and condominium mortgage loans, and other
consumer-oriented financial services, including night depository facilities. In
addition, customers are provided 24-hour banking services by means of automatic
teller machines that are part of Cash Station, Inc., a regional, shared ATM
network.
On May 7, 1997, the Corporation acquired U.S. Bancorp, the holding company
for U.S. Bank, through the merger of a subsidiary of MNC with and into U.S.
Bancorp. In connection with said merger, the former shareholders of U.S. Bancorp
received (i) $30.0 million in cash; and (ii) shares of Class B Preferred Stock
of the Corporation having an aggregate par value of $10.2 million. A portion of
the proceeds of this offering will be used to redeem the currently issued and
outstanding shares of Class B Preferred Stock of the Corporation. See "Use of
Proceeds."
On January 28, 1998, the Corporation completed the sale of Coal City Bank,
a wholly-owned subsidiary, to Kankakee Bancorp, Inc. In the transaction, the
Corporation received $7.8 million in cash and recorded a $4.1 million gain on
sale. See "Business--History and Development."
Manufacturers Bank has four distinct banking groups: Business Banking,
Convenient Retail Banking, Lease Banking and Korean Banking. The Business
Banking Group focuses on serving privately-owned companies, including
manufacturers, wholesalers, distributors, home developers, long-term health care
operators, real estate operators and investors, and selected types of service
companies. Manufacturers Bank provides these companies with credit, deposit,
cash management and investment products and services. The Convenient Retail
Banking Group targets consumers who live or work near the Bank's offices.
Manufacturers Bank offers consumer products to these individuals, including
checking accounts, savings accounts, money market accounts, time deposit
accounts, secured and unsecured consumer loans, residential mortgage loans, and
a variety of fee for service products, such as money orders and travelers
checks. The Lease Banking Group serves small and medium size equipment leasing
companies located throughout the United States. Manufacturers Bank provides full
banking services for these leasing companies, including financing the debt
portion of leveraged leases, providing short-term and long-term equity
financing, making working capital and bridge loans, and investing directly in
leased equipment. The Korean Banking Group focuses on the expanding Korean
community, providing complete banking services using the Korean language to
Korean consumers and Korean-owned businesses in the Chicago area. See "Business
- -- Business Areas."
At March 31, 1998, the Corporation had total assets, deposits and
stockholders' equity of $762.7 million, $634.4 million and $54.8 million
respectively. See "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto included elsewhere herein.
The principal business offices of the Corporation are located at the Main
Banking Premises. Manufacturers Bank also has offices on the far north side and
the far south side of Chicago and in the Chicago suburbs of Lansing, South
Holland and Tinley Park, Illinois.
21
<PAGE>
RECENT DEVELOPMENTS
Historically, the Corporation has maintained high asset quality by
utilizing strict loan underwriting standards and collection efforts and by
generally limiting its origination of mortgage loans to its delineated lending
area. The ratio of non-performing loans to total loans at December 31, 1993,
1994, 1995 and 1996 was 0.17%, 0.26%, 0.34% and 0.35%, respectively, and the
ratio of non-performing assets to total assets at such dates was 0.10%, 0.21%,
0.24% and 0.23%, respectively.
On May 7, 1997, the Corporation acquired $17.8 million in potential problem
loans and assets as part of the acquisition of U.S. Bancorp, which had been
identified as possible problem loans or assets during the due diligence
performed by the Corporation prior to the acquisition. Upon such acquisition,
these potential problem loans and assets constituted 3.60% of the Bank's total
loans. As a result of the U.S. Bancorp acquisition, the ratio of non-performing
loans to total loans and the ratio of non-performing assets to total assets at
December 31, 1997, was 1.87% and 1.70%, respectively.
As a result of the efforts of the Corporation to further reduce the amount
of non-performing assets, at March 31, 1998, the ratio of non-performing loans
to total loans and the ratio of non-performing assets to total assets were 1.78%
and 1.74%, respectively, and at June 30, 1998, these ratios had declined to
0.66% and 0.45%, respectively. From March 31, 1998 to June 30, 1998, the
Corporation lowered non-performing loans by $5.9 million, had net charge-offs of
$924,000, sold $3.4 million of OREO, and added $187,000 to its allowance for
loan losses. As a result, the allowance for loan losses as of June 30, 1998, was
$7.0 million and non-performing loans and non-performing assets changed as
follows.
<TABLE>
<CAPTION>
AT AT
JUNE 30, MARCH 31, DOLLAR PERCENT
1998 1998 CHANGE CHANGE
----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-performing loans.......... $ 3,474 $ 9,364 $ (5,890) (62.9)%
Other real estate owned....... 430 3,879 (3,449) (88.9)%
---------- ---------- ---------- ---------
Total non-performing
assets...................... $ 3,904 $ 13,243 $ (9,339) (70.5)%
========== ========== ========== =========
Non-performing loans
to total loans.............. 0.66% 1.78%
Non-performing loans
to allowance for loan
losses...................... 49.53% 120.81%
Allowance for loan
losses to total loans....... 1.32% 1.47%
</TABLE>
All of the charged-off loans were identified as of March 31, 1998 as
non-performing or potential problem loans by the Bank's internal classification
system, and substantially all of the loans charged-off and all of the OREO sold
since March 31, 1998 were acquired as part of the acquisition of U.S. Bancorp.
The Bank's potential problem loans declined from $6.5 million as of March
31, 1998 to $5.5 million as of June 30, 1998.
22
<PAGE>
USE OF PROCEEDS
The proceeds to the Trust from the offering of the Capital Securities will
be $25.0 million. All of the proceeds from the sale of the Capital Securities
and the Common Securities will be invested by the Trust in the Junior
Subordinated Debentures. As described below, the Corporation intends to use the
net proceeds from the sale of the Junior Subordinated Debentures to (i) cause
the 1997 Trust to retire the $10.0 million of 1997 Trust Preferred Securities,
(ii) redeem the Class B Preferred Stock of the Corporation issued in connection
with the U.S. Bancorp acquisition, and (iii) repay some or all of the
Corporation's indebtedness to LaSalle National Bank. Any proceeds not so used
will be used for general corporate purposes. Initially, the net proceeds may be
used to purchase short-term investment securities.
The Corporation owns all of the issued and outstanding trust common
securities (the "1997 Trust Common Securities") of the 1997 Trust. All of the
issued and outstanding 1997 Trust Preferred Securities (together with the 1997
Trust Common Securities, the "1997 Trust Securities") are owned by Coal City
Investors ("CCI"), an Illinois general partnership consisting of the members of
the Board of Directors of the Corporation. The 1997 Trust exists for the purpose
of issuing the 1997 Trust Securities and investing the proceeds thereof in
subordinated deferrable interest debentures (the "1997 Debentures") issued by
the Corporation. The 1997 Trust currently holds a 1997 Debenture in the
principal amount of $10.3 million. The annual net interest expense on the 1997
Debenture is $925,000. The principal of and accrued interest on the outstanding
1997 Debenture will be paid with a portion of the proceeds of this offering and,
thereafter, the 1997 Trust Securities will be retired by the 1997 Trust, and the
1997 Trust will be dissolved. As of June 30, 1998, there were approximately
$37,000 in unamortized costs associated with this transaction.
Simultaneously with the issuance and sale of the 1997 Trust Preferred
Securities to CCI by the 1997 Trust, the Corporation issued to CCI, at no
additional cost, the Corporation's warrant (the "1997 Warrant") for the purchase
of up to $10.0 million of common stock, without par value, of the Corporation at
certain predetermined prices set forth therein. Although the 1997 Warrant is not
scheduled to expire until February 5, 2007, CCI has agreed, in consideration of
the purchase of the 1997 Trust Preferred Securities by the Corporation for $10.0
million, to also return the 1997 Warrant to the Corporation, at no cost, at
which time the 1997 Warrant will be canceled by the Corporation.
The Class B Preferred Stock of the Corporation was issued in connection
with the acquisition of U.S. Bancorp. See "Business -- History and Development."
The Class B Preferred Stock has an annual dividend rate of 8.5%, or an aggregate
annual dividend of $867,000. Subsequent to the closing of this offering, the
Corporation will issue a notice of redemption of all of the outstanding Class B
Preferred Stock, with the date of redemption being 30 days after the date of
such notice. A holder of such Class B Preferred Stock may elect to convert such
stock into shares of common stock of the Corporation up to three days prior to
the date of redemption. If all of the Class B Preferred Stock is redeemed, the
aggregate redemption price will be $10.2 million, plus accrued dividends. If all
of the Class B Preferred Stock were to be converted into common stock of the
Corporation, the Corporation would be required to issue approximately 5,500
shares of its common stock in exchange for the converted shares of Class B
Preferred Stock. The Corporation is unable to predict what percentage of the
holders of its Class B Preferred Stock will elect to have their shares redeemed
for cash and what percentage of such holders will elect to convert to common
stock.
23
<PAGE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table sets forth the ratio of earnings to combined fixed
charges of the Corporation on a consolidated basis for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES:
Excluding interest on deposits..... 10.11x 5.87x 3.69x 7.90x 4.77x -- (1) -- (1)
Including interest on deposits..... 1.79x 1.37x 1.25x 1.38x 1.26x 1.36x 1.60x
</TABLE>
- ----------
(1) There were no fixed charges excluding interest on deposits.
For purposes of computing the ratio of earnings to combined fixed charges,
earnings represent net income before applicable income taxes, minority interest
and fixed charges. Fixed charges, excluding interest on deposits, include gross
interest expense (other than on deposits) and the portion deemed representative
of the interest factor of rent expense, net of income from subleases. Fixed
charges, including interest on deposits, include all interest expense and the
portion deemed representative of the interest factor of rent expense, net of
income from subleases.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Capital
Securities will be presented as a separate line item in the consolidated balance
sheets of the Corporation, entitled "Corporation Obligated Mandatorily
Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures," and appropriate disclosures about the Capital
Securities, the Guarantee and the Junior Subordinated Debentures will be
included in the notes to the consolidated financial statements of the
Corporation. For financial reporting purposes, the Corporation will record
Distributions payable on the Capital Securities as interest expense in its
consolidated statements of income.
24
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Corporation at March 31, 1998, and as adjusted to give effect to (i) the
consummation of the offering of the Capital Securities offered hereby, and (ii)
the use of the proceeds. The following data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Long-term Borrowings (1) ........................................ $20,537 $15,737
Minority Interest in Subsidiary ................................. 1,544 1,544
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures (2) ........................ 10,000 --
Corporation Obligated Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures (3) ............................... -- 25,000
Stockholders' Equity:
Preferred stock, Class B (4) .............................. 10,200 --
Common stock .............................................. 490 490
Additional paid-in capital ................................ 23,779 23,779
Retained earnings ......................................... 20,186 20,186
Accumulated other comprehensive income .................... 189 189
------- -------
Total stockholders' equity .............................. 54,844 44,644
------- -------
Total long-term liabilities and stockholders' equity .... $86,925 $86,925
------- -------
</TABLE>
- ----------
(1) Long-term borrowings include borrowings under the Corporation's two lines
of credit with LaSalle National Bank, a $15.0 million line secured by the
stock of MNC owned by the Corporation and a $4.5 million unsecured line.
The borrowings under the two lines may not in the aggregate exceed $15.0
million.
(2) The 1997 Trust Preferred Securities issued by the 1997 Trust will be
retired with a portion of the proceeds of this offering. See "Use of
Proceeds."
(3) As described herein, the sole assets of the Trust will be $25.8 million
aggregate principal amount of the Junior Subordinated Debentures issued in
connection with this offering.
(4) Reflects the redemption of all the Corporation's Class B Preferred Stock
for cash. Stockholders may elect to convert some or all of their shares
into common stock of the Corporation. See "Use of Proceeds."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to review the significant
factors affecting the financial condition and results of operations of the
Corporation for the three months ended March 31, 1998 and for the two-year
period ended December 31, 1997. On May 7, 1997, the Corporation acquired U.S.
Bancorp, the holding company for U.S. Bank, through a merger. On January 28,
1998, the Corporation sold Coal City Bank, its wholly owned subsidiary, to
Kankakee Bancorp, Inc. for $7.8 million in cash. These transactions
significantly affect the comparative information discussed below. This
discussion should be read in conjunction with the "Selected Consolidated
Financial and Other Data", "Business" and the Consolidated Financial Statements
and Notes thereto included elsewhere herein.
GENERAL
The profitability of the Corporation's operations depends primarily on its
net interest income, which is the difference between total interest earned on
interest earning assets and total interest paid on interest bearing liabilities.
The Corporation's net income is affected by its provision for loan losses as
well as other income and other expenses. The provision for loan losses reflects
the amount thought to be adequate to cover estimated losses in the loan
portfolio. Noninterest income or other income consists of service fees on
deposit accounts, lease financing income, net gains (losses) on the sale of
securities available for sale, and other operating income. Other expenses
include salaries and employee benefits along with occupancy and equipment
expenses, amortization expense and other operating expenses.
The amount of net interest income is affected by changes in the volume and
mix of earning assets, the level of interest rates earned on those assets, the
volume and mix of interest bearing liabilities, and the level of interest rates
paid on those interest bearing liabilities. The provision for loan losses is
dependent on changes in the loan portfolio and Management's assessment of the
collectibility of the loan portfolio, as well as economic and market conditions.
Other income and other expenses are impacted by growth of operations and growth
in the number of accounts through both acquisitions and core banking business
growth. Growth in operations affects other expenses as a result of additional
employees, branch facilities and promotional marketing expenses. Growth in the
number of accounts affects other income including service fees as well as other
expenses such as computer services, supplies, postage, telephone and other
miscellaneous expenses.
ANALYSIS OF NET INTEREST INCOME
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES. The following
tables set forth the average daily balances, income from interest earning
assets, expenses of interest bearing liabilities, their associated yield or
interest rate and net interest income, interest rate spread and net yield on
interest earning assets for the periods presented.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
1998 1997
------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- ------------ ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1) (2) ..................................... $524,452 $ 11,159 8.63% $394,642 $ 8,202 8.43%
Taxable investment securities ..................... 174,822 2,531 5.87% 105,694 1,625 6.24%
Investment securities exempt from federal
income taxes (3) ............................ 4,182 124 12.03% 7,656 189 10.01%
Federal funds sold ................................ 8,748 118 5.47% 9,908 122 4.99%
-------- -------- -------- -------
Total interest earning assets ................ 712,204 13,932 7.93% 517,900 10,138 7.94%
-------- -------
Non-interest earning assets .................. 85,096 61,440
-------- --------
Total assets ................................. $797,300 $579,340
======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market deposit
accounts ................................. $146,342 1,179 3.27% $134,446 1,091 3.29%
Savings deposits ............................. 88,586 540 2.47% 61,894 368 2.41%
Time deposits ................................ 283,439 3,874 5.54% 213,918 2,849 5.40%
Long-term borrowings (4) .......................... 28,871 563 7.91% 17,544 367 8.48%
Short-term borrowings ............................. 57,564 731 5.15% 6,281 85 5.49%
-------- -------- -------- -------
Total interest bearing liabilities ........... 604,802 6,887 4.62% 434,083 4,760 4.45%
-------- ------- ----
Demand deposits - non-interest bearing ............ 123,400 91,215
Other non-interest bearing liabilities ............ 13,263 8,475
Minority interest in subsidiary ................... 2,482 6,345
Stockholders' equity .............................. 53,353 39,222
-------- --------
Total liabilities and stockholders'
equity ................................. $797,300 $579,340
======== ========
Net interest income/interest rate
spread (5) ............................... $ 7,045 3.31% $ 5,378 3.49%
======= ==== ======= ====
Net interest margin (6) ...................... 4.01% 4.21%
==== ====
</TABLE>
- ----------
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $251,000 and $99,000 for
the three months ended March 31, 1998 and 1997, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 34% tax rate.
(4) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
27
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans (1) (2) ................. $ 482,049 $ 41,313 8.57% $355,486 $ 30,107 8.47% $298,416 $ 26,271 8.80%
Taxable investment
securities ................ 138,037 8,527 6.18% 128,517 7,941 6.18% 137,091 7,719 5.63%
Investment securities exempt
from federal income
taxes (3) ................. 7,720 656 8.50% 11,937 1,020 8.54% 12,091 1,238 0.24%
Federal funds sold ............ 21,299 1,413 6.63% 17,228 809 4.70% 30,027 1,760 5.86%
Other ......................... -- -- -- -- -- -- 51 5 9.80%
------- ------ ------- ------ ------- -----
Total interest earning
assets ............. 649,105 51,909 8.00% 513,168 39,877 7.77% 477,676 36,993 7.74%
--------
Non-interest earning
assets .............. 75,979 55,396 49,640
-------- -------- --------
Total assets ........... $725,084 $568,564 $527,316
======== ======== ========
INTEREST BEARING LIABILITIES:
Deposits:
NOW and money market
deposit accounts ... $151,544 4,873 3.22% $130,972 4,115 3.14% $123,987 3,822 3.08%
Saving deposits ........ 86,445 2,187 2.53% 65,306 1,578 2.42% 65,620 1,665 2.54%
Time deposits .......... 265,477 14,557 5.48% 206,357 10,836 5.25% 176,403 9,733 5.52%
Long-term borrowings .......... 23,632 2,202 9.32% 13,653 982 7.19% 12,453 1,153 9.26%
Short-term borrowings ......... 20,066 1,353 6.74% 10,012 669 6.68% 7,256 463 6.38%
------- ------ ------- ------ ------- -----
Total interest bearing
liabilities ........ 547,164 25,172 4.60% 426,300 18,180 4.26% 385,719 16,836 4.36%
--------
Demand deposits - non-interest
bearing .................. 113,355 91,380 92,822
Other non-interest bearing
liabilities ............... 10,965 7,312 5,569
Minority interest in
subsidiary ................ 4,890 6,216 5,663
Stockholders' equity .......... 48,710 37,354 37,543
--------
Total liabilities and
stockholders' equity .. $725,084 $568,564 $527,316
======== ======== ========
Net interest
income/interest rate
spread (5) ......... $ 26,737 3.40% $ 21,697 3.51% $ 20,157 3.38%
======== ==== ======== ==== ======== ====
Net interest margin (6) 4.12% 4.23% 4.22%
==== ==== ====
</TABLE>
- ----------
(1) Non-accrual loans are included in average loans.
(2) Interest income includes loan origination fees of $1.0 million, $505,000
and $469,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis
assuming a 34% tax rate.
(4) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
(5) Interest rate spread represents the difference between the average yield on
interest earning assets and the average cost of interest bearing
liabilities.
(6) Net interest margin represents net interest income as a percentage of
average interest earning assets.
28
<PAGE>
RATE VOLUME ANALYSIS. The following tables set forth the extent to which
changes in interest rates and changes in volumes of interest earning assets and
interest bearing liabilities have historically affected the Corporation's
interest income and interest expense for the periods presented. Information is
provided on changes in each category attributable to (i) changes due to volume
(changes in volume multiplied by prior period rate); (ii) changes due to rate
(changes in rate multiplied by current period volume); and (iii) total changes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
COMPARED TO MARCH 31, 1997
------------------------------------------------
CHANGE CHANGE
DUE TO DUE TO TOTAL
VOLUME RATE CHANGE
------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans ........................................................ $ 2,698 $ 259 $ 2,957
Taxable investment securities ................................ 1,065 (159) 906
Investment securities exempt from federal income taxes (1) ... (86) 21 (65)
Federal funds sold ........................................... (14) 10 (4)
------- ------- -------
Total increase in interest income .................. 3,663 131 3,794
------- ------- -------
INTEREST BEARING LIABILITIES:
NOW and money market deposit accounts ........................ 96 (8) 88
Savings deposits ............................................. 159 13 172
Time deposits ................................................ 927 98 1,025
Long-term borrowings (2) ..................................... 237 (41) 196
Short-term borrowings ........................................ 694 (48) 646
------- ------- -------
Total increase in interest expense ................. 2,113 14 2,127
------- ------- -------
Increase in net interest income .................... $ 1,550 $ 117 $ 1,667
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-----------------------------------------------------------------------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
-----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans ................................ $ 10,718 $ 488 $ 11,206 $ 5,023 $ (1,187) $ 3,836
Taxable investment securities ........ 586 -- 586 (483) 705 222
Investment securities exempt from
federal income taxes (1) ......... (361) (3) (364) (16) (202) (218)
Federal funds sold ................... 192 412 604 (750) (201) (951)
Other ................................ -- -- -- (5) -- (5)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest income ............ 11,135 897 12,032 3,769 (885) 2,884
-------- -------- -------- -------- -------- --------
INTEREST BEARING LIABILITIES:
NOW and money market deposit
accounts ........................ 646 112 758 215 78 293
Savings deposits ..................... 511 98 609 (8) (79) (87)
Time deposits ........................ 3,104 617 3,721 1,653 (550) 1,103
Long-term borrowings (2) ............. 718 502 1,220 111 (282) (171)
Short-term borrowings ................ 672 12 684 176 30 (206)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in
interest expense ............ 5,651 1,341 6,992 2,147 (803) 1,344
-------- -------- -------- -------- -------- --------
Increase (decrease) in net
interest income ............. $ 5,484 $ (444) $ 5,040 $ 1,622 $ (82) $ 1,540
-------- -------- -------- -------- -------- --------
</TABLE>
- ----------
(1) Non-taxable investment income is presented on a fully tax equivalent tax
basis utilizing a 34% rate.
(2) Long-term borrowings include corporation obligated mandatorily redeemable
preferred securities.
29
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997
GENERAL. The Corporation's net income was $3.6 million for the three months
ended March 31, 1998, compared to net income of $892,000 for the three months
ended March 31, 1997, an increase of $2.7 million. The increase in net income
for the three months ended March 31,1998 as compared with the prior year period
resulted primarily from the sale of the Corporation's subsidiary, Coal City
Bank, and the gain associated with the sale.
NET INTEREST INCOME. Net interest income increased $1.7 million, or 31.8%,
to $7.0 million for the three months ended March 31, 1998 from $5.3 million for
the comparable period of 1997. This increase in net interest income resulted
from a $3.8 million, or 37.9%, increase in interest income, partially offset by
a $2.1 million, or 44.7%, increase in interest expense. Interest income
increased due to a $194.3 million, or 37.5%, increase in average interest
earning assets while interest expense rose as a result of an increase of $170.7
million, or 39.3%, in average interest bearing liabilities. Overall, total loans
increased $129.1 million, or 32.5%, to $526.9 million at March 31, 1998 from
$397.8 million at March 31, 1997. Total deposits increased $123.5 million, or
24.2%, to $634.4 million at March 31, 1998 from $511.0 million at March 31,
1997. The increases in total loans and total deposits were primarily due to the
U.S. Bancorp acquisition in May 1997, and overall growth in the Corporation's
core banking business along with increases in other borrowings. The
Corporation's net interest margin of 4.01% for the three months ended March 31,
1998 decreased from 4.21% for the comparable period in 1997 due to an increase
of $9.0 million in non-accrual loans directly attributable to the U.S. Bancorp
acquisition, an issuance of $10.0 million in corporation obligated mandatorily
redeemable preferred securities utilized to obtain funds for the U.S. Bancorp
acquisition and an increase of $51.3 million in the average amount of short-term
borrowings outstanding.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$188,000 for the three months ended March 31, 1998 from $171,000 for the three
months ended March 31, 1997. The increase in the provision for loan losses is
the result of Management's intention to maintain the allowance at a sufficient
level given continued growth in the loan portfolio. The allowance for loan
losses represented 1.47% of total loans at March 31, 1998 compared to 1.50% of
total loans at December 31, 1997. Management believed the allowance for loan
losses was adequate to cover potential losses in the loan portfolio.
OTHER INCOME. Other income increased $4.7 million to $5.5 million for the
three months ended March 31, 1998, compared to $820,000 for the three months
ended March 31, 1997. The increase was primarily due to a $4.1 million gain on
the sale of Coal City Bank, a $274,000 increase in service fees directly
attributable to the U.S. Bancorp acquisition, a $200,000 gain on the sale of a
trust business acquired with the U.S. Bancorp acquisition and a $74,000 increase
in automatic teller machine fees charged.
OTHER EXPENSES. Other expenses increased $2.7 million, or 63.6%, to $6.8
million for the three months ended March 31, 1998 from $4.2 million for the
three months ended March 31, 1997. Salaries and employee benefits expense
increased $1.4 million, or 61.6%, amortization expense increased $402,000, or
98.3%, while occupancy and equipment expense increased $465,000, or 96.7%, from
the prior period in 1997. These increases were primarily due to the U.S. Bancorp
acquisition.
INCOME TAXES. The Corporation recorded an income tax expense of $1.9
million for the three months ended March 31, 1998 compared to $737,000 for the
comparable period in 1997, reflecting the increase in the Corporation's income
before taxes in 1998. The effective tax rate was 34.4% for the three months
ended March 31, 1998 compared to 41.4% for the three months ended March 31,
1997. The decrease in 1998 is due to the Corporation's higher investment in U.S.
Treasury and agency securities which reduces state income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. The Corporation's net income was $3.4 million for the year ended
December 31, 1997, compared to net income of $3.6 million for the year ended
December 31, 1996, a decrease of $188,000 or 5.2%. The decrease in net income in
1997 resulted from the increase in amortization expense as a result of the U.S.
Bancorp acquisition in May 1997.
30
<PAGE>
NET INTEREST INCOME. Net interest income increased $5.2 million, or 24.2%,
to $26.5 million in 1997 from $21.4 million in 1996. This increase in net
interest income resulted from a $12.2 million, or 30.8%, increase in interest
income, partially offset by a $7.0 million, or 38.5%, increase in interest
expense. Interest income increased due to a $135.9 million, or 26.5%, increase
in average interest earning assets while interest expense rose as a result of an
increase of $120.9 million, or 28.4%, in average interest bearing liabilities.
Overall, total loans increased $139.0 million, or 35.8%, to $527.3 million at
December 31, 1997 from $388.3 million at December 31, 1996 primarily due to the
acquisition of U.S. Bancorp, which had total loans of $126.8 million as of the
acquisition date. Total deposits increased $174.3 million, or 34.2%, to $684.1
million at December 31, 1997 from $509.7 million at December 31, 1996 primarily
due to the acquisition of U.S. Bancorp, which had deposits of $169.4 million as
of the acquisition date. Increases in interest income and interest expense were
caused to a lesser extent by an overall growth in the Corporation's core banking
business along with increases in other borrowings. The Corporation's net
interest margin of 4.12% in 1997 decreased from 4.23% in 1996 due to increased
market rates on higher yielding deposit accounts, an increase of $9.9 million in
non-accrual loans directly attributable to the purchase of U.S. Bancorp, an
issuance of $10.0 million in corporation obligated mandatorily redeemable
preferred securities and a $5.8 million increase in long-term borrowings
primarily attributable to the purchase of U.S. Bancorp.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$971,000 for the year ended December 31, 1997 from $572,000 for the year ended
December 31, 1996. The increase in the provision for loan losses was the result
of an increase in total loans and Management's intention to maintain the
allowance at a sufficient level based upon continued growth in the portfolio.
The allowance for loan losses represented 1.50% of total loans at December 31,
1997 compared to 1.21% of total loans at December 31, 1996. Management believed
the allowance for loan losses was adequate to cover potential losses in the loan
portfolio.
OTHER INCOME. Other income increased $2.0 million, or 67.9 %, to $4.9
million in 1997, compared to $2.9 million in 1996. Service fees increased $1.0
million, or 48.6%, to $3.1 million in 1997 as compared to $2.1 million in 1996.
The increase in service fees is directly attributable to the increase in
deposits due to the acquisition of U.S. Bancorp, which had total deposits of
$169.4 million as of the acquisition date. Net lease financing income increased
$777,000 to $1.2 million in 1997 from $395,000 in 1996. Net lease financing
income represents income on equipment owned by the Corporation and leased to
others. At December 31, 1997, the Corporation had $22.9 million in leased
equipment, up $4.3 million from $18.6 million at December 31, 1996.
OTHER EXPENSES. Other expenses increased $7.3 million, or 43.4%, to $24.2
million in 1997 from $16.9 million in 1996 primarily due to the acquisition of
U.S. Bancorp. Salaries and employee benefits expense increased $2.9 million, or
33.3%, amortization expense increased $1.3 million, or 64.3%, while occupancy
and equipment expense increased $767,000, or 35.4% from 1996. Additional
increases in other operating expenses included a $370,000 increase in computer
services due to improvements made to the Corporation's computer systems and a
$302,000 increase in marketing expense resulting from costs associated with the
mergers of the U.S. Bancorp, U.S. Bank, Peterson Bank and Manufacturers Bank
subsidiaries.
INCOME TAXES. The Corporation recorded an income tax expense of $2.4
million for 1997 compared to $2.6 million for 1996 reflecting the decrease in
the Corporation's income before taxes in 1997. The effective tax rate was 38.2%
in 1997 compared to 37.6% in 1996.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. The Corporation's net income increased $1.2 million, or 49.2%, to
$3.6 million for the year ended December 31, 1996, from $2.4 million for the
year ended December 31,1995. The increase in net income in 1996 was primarily
attributable to an increase in net interest income and other income in addition
to a decrease in other expenses.
NET INTEREST INCOME. Net interest income increased $1.6 million, or 8.2%,
to $21.3 million for the year ended December 31, 1996 from $19.7 million for the
year ended December 31, 1995. This increase in net interest income resulted from
a $2.9 million, or 8.1%, increase in interest income, partially offset by a $1.3
million, or 8.0%, increase in interest expense in 1996. Average interest earning
assets increased $35.5 million, or 7.4%, to $513.2 million in 1996
31
<PAGE>
from $477.7 million in 1995 as the Corporation experienced strong loan demand
and shifted lower-yielding investment securities and federal funds sold to
higher yielding loans. In addition, average interest earning assets increased
from year to year as Peterson Bank was purchased on February 28, 1995, and 1995
included only ten months of Peterson Bank averages. Average interest bearing
liabilities increased $40.6 million, or 10.5%, due to growth in time deposits.
Overall the net interest margin increased to 4.23% in 1996 from 4.22% in 1995 as
loan growth more than offset the increase in higher yielding deposits.
PROVISION FOR LOAN LOSSES. The provision for loan losses increased to
$572,000 for the year ended December 31, 1996 from $240,000 for the year ended
December 31, 1995, primarily due to the Corporation's desire to maintain its
allowance for loan losses at a sufficient level relative to the strong loan
demand. Total loans increased $49.0 million, or 14.4%, to $388.3 million at
December 31, 1996 from $339.3 million at December 31, 1995. The allowance for
loan losses represented 1.21% of total loans at December 31, 1996, compared to
1.22% of total loans at December 31, 1995. Management believed the allowance for
loan losses was adequate to cover potential losses in the loan portfolio.
OTHER INCOME. Other income increased $1.0 million, or 54.8%, to $2.9
million in 1996 from $1.9 million in 1995. Service fees increased $448,000, or
27.5%, to $2.1 million in 1996 from $1.6 million in 1995. Service fees increased
due to higher product fees and better fee collection practices. In addition, net
gains (losses) on the sale of securities increased $633,000 to $75,000 in 1996
from ($558,000) in 1995 due to the sale of lower yielding securities to fund
higher yielding loan demand.
OTHER EXPENSES. Other expenses decreased $142,000, or 0.8%, to $16.9
million in 1996 from $17.0 million in 1995. FDIC fees, which are included in
other operating expenses, decreased $520,000 due to nationwide rate reductions.
Other expenses also decreased due to a $146,000 or 6.7% decrease in amortization
expense to $2.0 million in 1996 from $2.2 million in 1995 as the amortization
costs related to the purchase of MNC in 1992 were lower in 1996 than in 1995.
The Corporation utilizes an accelerated amortization method which amortizes more
of the purchase premium in early years than in later years. See "--Core Deposit
Intangibles and Goodwill." Decreases in other expenses were offset by a $250,000
increase in occupancy and equipment expense, a $149,000 increase in operating
losses, due to a loss on the sale of OREO property, which are included in other
operating expenses, and a $66,000 increase in salaries and employee benefits.
INCOME TAXES. The Corporation recorded income tax expense of $2.6 million
for 1996 compared to $1.5 million for 1995 reflecting the increase in the
Corporation's income before income taxes in 1996. The effective tax rate was
37.6% in 1996 compared to 34.3% in 1995.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 TO DECEMBER 31, 1997
Total assets decreased $40.0 million, or 5.0% from $802.7 million at
December 31, 1997 to $762.7 million at March 31, 1998. This decrease was due to
the sale of Coal City Bank on January 28, 1998. Coal City Bank's total assets as
of the date of sale were $56.0 million. Offsetting the decrease in total assets
was growth in the loan portfolio and an increase in securities. Total loans were
$527.3 million at December 31, 1997 and $526.9 million at March 31, 1998. Total
securities were $141.9 million at December 31, 1997 and March 31, 1998. At
December 31, 1997 approximately $18.0 million in loans and $15.5 million in
securities were attributable to Coal City Bank. New loans were funded by the
sale of federal funds sold and also by the increase in short term borrowings
which increased by $11.4 million in the same time period. The decrease in
deposits of $49.6 million was due primarily to the sale of Coal City Bank, which
had total deposits of $52.1 million at the date of sale.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 TO DECEMBER 31, 1996
Total assets increased by $214.9 million from $587.8 million at December
31, 1996 to $802.7 million at December 31, 1997 primarily due to the acquisition
of U.S. Bancorp, which had total assets of $205.0 million at the date of
acquisition. The acquisition cost was $40.2 million which was funded by the
issuance of the Class B Preferred Stock of the Corporation of $10.2 million,
cash held by the Corporation of $15.8 million and cash held by U.S. Bancorp of
$14.2 million. The excess
32
<PAGE>
cost over the fair value of net assets acquired (goodwill) was $8.6 million.
Approximately $5.7 million of the purchase price was allocated to the fair value
of the core deposit intangible asset.
CORE DEPOSIT INTANGIBLES AND GOODWILL
In acquiring its subsidiary banks, the Corporation recorded a portion of
the purchase price as core deposit intangibles, which represented value assigned
to the existing deposit base for which the annual interest and servicing costs
are below market rates. In addition, the excess cost over fair value of net
assets acquired is recorded as goodwill.
The following table sets forth the core deposit intangible and goodwill
amortization expense for each acquisition for the last five years and the
expected expense for 1998 to 2002.
<TABLE>
<CAPTION>
PLANNED AMORTIZATION FOR THE YEAR ENDING DECEMBER 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Coal City National Bank (1984) .................. $ -- $ -- $ -- $ -- $ --
Manufacturers National Corporation (1992) ....... 248 248 248 302 367
Peterson Bank (1995) ............................ 531 730 770 970 1,025
U.S. Bancorp, Inc. (1997) ...................... 724 827 1,042 1,378 1,902
--- --- ----- ----- -----
Total intangible amortization expense ... $1,503 $1,805 $2,060 $2,650 $3,294
====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
ACTUAL AMORTIZATION FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Coal City National Bank (1984) ................. $ 9 $ 9 $ 9 $ 9 $ 9
Manufacturers National Corporation (1992) ...... 382 497 562 627 691
Peterson Bank (1995) ........................... 1,196 1,515 1,596 -- --
U.S. Bancorp, Inc. (1997) ..................... 1,734 -- -- -- --
------ ------ ------ ------ ------
Total intangible amortization expense ... $3,321 $2,021 $2,167 $ 636 $ 700
====== ====== ====== ====== ======
</TABLE>
The table demonstrates that in each of the years immediately following an
acquisition, the Corporation amortizes more of the purchase premium than in
later years. This has the effect of increasing other expense (decreasing net
income) in early years and decreasing other expense (increasing net income) in
later years. Amortization of purchase intangibles is a non-cash expense.
CASH EARNINGS
The purchase method of accounting has been used to record each of the
Corporation's acquisitions. As a result, the recorded basis of the net assets of
the acquired entities has been adjusted to fair value. Adjustments included
recording core deposit intangibles to reflect the difference between the fair
value and underlying basis of deposits purchased and recording goodwill for the
excess of the acquisition cost over the fair value of net assets acquired. Core
deposit intangibles and goodwill are being amortized as a non-cash expense over
periods of up to 8 and 20 years, respectively. Other fair value adjustments made
to assets such as investment securities, loans, and buildings are also being
amortized or depreciated over varying periods, ranging from 8 to 35 years.
Amortization/depreciation expense reduces net income during the amortization
periods.
If the Corporation's acquisitions had met certain accounting rules, the
pooling of interest method of accounting may have been used to account for the
Corporation's acquisitions. Under this method of accounting, no goodwill or core
deposit intangibles would have been recorded or other fair value adjustments
made. Consequently net income is not reduced for the amortization of core
deposit intangibles, goodwill or other fair value adjustments. Since application
of the two methods can result in dramatically different net income, Management,
certain analysts, and certain peer financial institutions have been computing
cash earnings in order to compare results. At present, cash earnings is not a
defined term or concept under generally accepted accounting principles.
33
<PAGE>
The following table sets forth the Corporation's cash earnings, which
is defined by Management as net income, excluding amortization of purchase
accounting non-cash items and the related deferred income tax effect.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------------
1998 1997 1996 1995
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income ........................................................ $ 3,558 $ 3,449 $ 3,637 $ 2,437
Goodwill amortization ............................................. 235 801 570 515
Core deposit intangibles amortization (net of deferred tax) ....... 380 1,663 958 1,090
Other fair value adjustment amortization (net of deferred tax) .... 3 (29) (62) (68)
------- ------- ------- -------
Cash earnings ..................................................... 4,176 5,884 5,103 3,974
Preferred dividends ............................................... (434) (276) -- (267)
------- ------- ------- -------
Cash earnings to common stockholders .............................. $ 3,742 $ 5,608 $ 5,103 $ 3,707
======= ======= ======= =======
Cash earnings per share:
Basic .......................................................... $ 76.03 $112.81 $102.83 $ 73.92
Diluted ........................................................ $ 76.03 $112.81 $102.83 $ 73.92
Performance ratios:
Cash return on average tangible assets (1) ..................... 2.20% 0.90% 1.03% 0.86%
Cash return on average tangible equity (1) ..................... 71.01% 24.95% 20.78% 16.82%
</TABLE>
- ----------
(1) Cash return on average tangible assets and equity have been annualized for
the quarter ended March 31, 1998 and include the $4.1 million gain on sale
of Coal City Bank. Cash return on average tangible assets and equity,
excluding the gain on sale of Coal City Bank, would have been 0.79% and
19.68%, respectively.
ASSET QUALITY
GENERAL. The Corporation manages asset quality through various control,
monitoring and review procedures. Asset quality is important in two areas: the
credit quality of securities in the Bank's investment portfolio and the credit
quality of loans in the Bank's loan portfolio. With regard to the Bank's
investment portfolio, it is the Bank's policy to only invest in securities of
the U.S. Treasury and agencies of, and corporations sponsored by, the U.S.
Government, corporate and municipal securities rated in one of the top four
grading categories by Standard & Poors, or Moody's, or local municipal non-rated
securities for which the Bank has sufficient credit information to render an
informed credit decision. Consequently, the Bank maintains a very high quality
investment portfolio that has no nonaccruing or past due securities. The quality
of loans in the Bank's loan portfolio is evidenced by the level of
non-performing loans and assets as well as potential problem loans, which are
discussed below.
NON-PERFORMING LOANS AND NON-PERFORMING ASSETS. Non-performing loans
include (i) loans accounted for on a non-accrual basis, (ii) accruing loans
contractually past due 90 days or more as to interest and principal; and (iii)
loans whose terms have been renegotiated to provide reduction or deferral of
interest or principal because of a deterioration in the financial position of
the borrower. Management reviews the loan portfolio for problem loans on an
ongoing basis. During the ordinary course of business, Management becomes aware
of borrowers that may not be able to meet the contractual requirements of loan
agreements. Such loans are placed under close supervision with consideration
given to placing the loan on a non-accrual status, increasing the allowance for
loan losses, and (if appropriate) partial or full charge-off. Those loans with
respect to which Management does not expect to collect interest in the normal
course of business are placed on a non-accrual status. After a loan is placed on
non-accrual status, any current year interest previously accrued but not yet
collected is reversed against current income. If interest payments are received
on non-accrual loans, such payments will be applied
34
<PAGE>
to principal and not taken into income. Loans will not be placed back on accrual
status unless all back interest and principal payments are made. If interest on
non-accrual loans had been accrued, such income would have amounted to $158,700,
$383,700 and $34,600 for the three months ended March 31, 1998, and the years
ended December 31, 1997 and 1996, respectively.
Non-performing assets consist of OREO, which represents properties acquired
through foreclosure or other proceedings and is recorded at the lower of cost or
fair value less the estimated cost of disposal. OREO is evaluated regularly to
ensure that the recorded amount is supported by its current fair value.
Valuation allowances to reduce the carrying amount to fair value less estimated
costs of disposal are recorded as necessary. Revenues and expenses from the
operations of OREO and changes in the valuation are included in other income and
other expenses on the income statement.
The following table sets forth the amounts of non-performing loans and
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, ---------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Non-accrual loans ............................ $9,364 $9,879 $ 454 $ 173 $ 31 $ 138
Loans 90 days or more past due, still
accruing interest ....................... -- 2 903 974 553 247
Restructured loans ........................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total ......................................... 9,364 9,881 1,357 1,147 584 385
Other real estate owned ............................ 3,879 3,726 -- 216 217 --
------ ------ ------ ------ ------ ------
Total non-performing assets .................. $3,243 $3,607 $1,357 $1,363 $ 801 $ 385
====== ====== ====== ====== ====== ======
Non-performing loans to total loans ................ 1.78% 1.87% 0.35% 0.34% 0.26% 0.17%
Non-performing loans to allowance for loan losses .. 120.81% 124.73% 28.92% 27.75% 22.07% 14.22%
Non-performing assets to total assets .............. 1.74% 1.70% 0.23% 0.24% 0.21% 0.10%
</TABLE>
The increase in non-accrual loans of $9.4 million from December 31, 1996 to
December 31, 1997 is directly attributable to the acquisition of U.S. Bancorp.
As of March 31, 1998, $7.9 million, or 84.0%, of non-accruing loans represented
loans that were acquired with U.S. Bancorp. Non-accrual loans consisted of 22
loans totaling $9.4 million. Of these loans, $8.3 million are secured by a first
lien on real estate, $146,000 are secured by a mix of collateral, and $864,000
are secured by leases. Management is aggressively pursuing collection efforts
with respect to these non-performing loans.
As of March 31, 1998, all OREO, totaling $3.9 million, was attributable to
the acquisition of U.S. Bancorp. At that date, OREO consisted of seven
properties with recently appraised values totaling $5.1 million. Of these
properties, the largest was a $2.9 million residential development property.
This property was sold in June 1998. Three other properties, totaling $502,000,
are occupied commercial properties paying rent to the Bank, while one of the
remaining properties is an unoccupied commercial building valued at $385,000.
The other two properties, totaling $114,000, are residential. Management is
aggressively seeking the sale of the OREO properties.
There were no loans identified as impaired as of March 31, 1998 or during
the years ended December 31, 1997 and 1996. A loan is classified as impaired
when it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In contrast, a loan is
classified as non-accrual when Management does not expect to collect interest in
the normal course of business.
POTENTIAL PROBLEM LOANS. The Bank utilizes an internal asset classification
system as a means of reporting problem and potential problem assets. At each
scheduled Board of Directors meeting, a watch list is presented, showing all
loans listed as "Special Mention," "Substandard," "Doubtful" and "Loss." An
asset is classified Substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the Bank will sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have all the weaknesses inherent in those
classified Substandard with the added
35
<PAGE>
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets
which do not currently expose the Bank to sufficient risk to warrant
classification in one of the aforementioned categories, but possess weaknesses
which may or may not be out of the control of the customer, are deemed to be
Special Mention.
When the Bank classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it establishes a general valuation allowance for loan
losses ("General Valuation Allowance") in an amount deemed prudent by
Management. General Valuation Allowance is a term which represents loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to specific problem assets. When the Bank classifies one or more
assets, or portions thereof, as Loss, it either establishes a specific allowance
for losses equal to 100% of the amount of the asset so classified or charges-off
such amount.
The Bank's determination as to the classification of its assets and the
amount of its valuation allowances is subject to review by the Bank's primary
regulators, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, has adopted an interagency policy statement on the allowance for loan
and lease losses. The policy statement provides guidance for financial
institutions on both the responsibilities of Management for the assessment and
establishment of adequate allowances and guidance for banking agency examiners
to use in determining the adequacy of general valuation guidelines. Generally,
the policy statement recommends that (i) institutions have effective systems and
controls to identify, monitor and address asset quality problems; (ii)
Management has analyzed all significant factors that affect the collectibility
of the portfolio in a reasonable manner; and (iii) Management has established
acceptable allowance evaluation processes that meet the objectives set forth in
the policy statement. Management believes it has established an adequate
allowance for possible loan losses. The Bank analyzes its process regularly,
with modifications made if needed, and reports those results four times per year
at Board of Directors meetings. However, there can be no assurance that the
regulators, in reviewing the Bank's loan portfolio, will not request the Bank to
materially increase its allowance for loan losses at the time. Although
Management believes that adequate specific and general loan loss allowances have
been established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loan loss allowances may
become necessary.
The aggregate principal amounts of potential problem loans rated
Substandard, Doubtful, or Loss, excluding non-performing loans, as of March 31,
1998 and December 31, 1997 were approximately $6.5 million and $7.7 million,
respectively. All loans classified as loss have been charged-off. Loans in this
category generally include loans that were classified for regulatory purposes.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an amount that
Management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectibility of loans and prior loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While Management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their examinations.
36
<PAGE>
The following table presents an analysis of the allowance for loan losses
for the periods presented.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, ------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance at beginning of period ........... $ 7,922 $ 4,692 $ 4,134 $ 2,646 $ 2,707 $ 2,305
Additions resulting from acquisitions ...... -- 2,574 -- 1,317 -- --
Decreases resulting from sale of
subsidiary ............................. (399) -- -- -- -- --
Charge-offs:
Commercial ......................... -- 178 -- 70 145 --
Commercial loans collateralized by
assignment of lease payments .. -- -- -- -- -- --
Real estate - construction ......... -- -- -- -- -- --
Real estate - mortgage ............. 4 97 -- -- -- --
Installment ........................ -- 68 29 4 6 2
------- ------- ------- ------- ------- -------
Total charge-offs .......................... 4 343 29 74 151 2
------- ------- ------- ------- ------- -------
Recoveries:
Commercial ......................... -- -- 15 5 -- --
Commercial loans collateralized by
assignment of lease payments .. -- -- -- -- -- --
Real estate - construction ......... -- 10 -- -- -- --
Real estate - mortgage ............. 31 -- -- -- -- --
Installment ........................ 13 18 -- -- -- 4
------- ------- ------- ------- ------- -------
Total recoveries ........................... 44 28 15 5 -- 4
------- ------- ------- ------- ------- -------
Net charge-offs (recoveries) ............... (40) 315 14 69 151 (2)
Provision for loan losses .................. 188 971 572 240 90 400
------- ------- ------- ------- ------- -------
Allowance at end of period ................. $ 7,751 $ 7,922 $ 4,692 $ 4,134 $ 2,646 $ 2,707
------- ------- ------- ------- ------- -------
Allowance to total loans ................... 1.47% 1.50% 1.21% 1.22% 1.19% 1.19%
Net charge-offs to average loans ........... (0.03)% 0.07% 0.00% 0.02% 0.07% 0.00%
</TABLE>
The following table sets forth the allocation of the allowance for loan
losses for the periods presented and the percentage of loans in each category to
total loans. An allocation for a loan classification is only for internal
analysis of the adequacy of the allowance and is not an indication of expected
or anticipated losses. The allowance is available for all loan losses.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ---------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- ---------------- --------------- --------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------- ---------------- ---------------- ---------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ........... $1,204 19.56% $1,430 21.24% $1,030 24.22% $ 537 20.71% $1,230 33.30% $ 913 33.43%
Commercial loans
collateralized by
assignment of
lease payments .. 220 16.85% 215 16.25% 285 29.35% 271 31.89% 323 32.64% 420 36.98%
Real estate .......... 4,217 50.99% 2,695 48.75% 554 40.89% 193 43.62% 64 30.63% 502 27.27%
Real estate
construction ..... -- 6.81% -- 7.03% -- 1.82% -- 2.03% -- 1.67% -- 0.34%
Installment .......... 92 5.79% 73 6.73% 55 3.72% 38 1.75% 27 1.76% 33 1.98%
Unallocated .......... 2,018 -- 3,509 -- 2,768 -- 3,095 -- 1,002 -- 839 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ........... $7,751 100.00% $7,922 100.00% $4,692 100.00% $4,134 100.00% $2,646 100.00% $2,707 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
37
<PAGE>
The Bank's loan quality is continually monitored by Management and is
reviewed by the Board of Directors and the loan committee of the Bank on a
monthly basis. In addition, independent external review of the loan portfolio is
conducted by regulatory authorities and by independent public accountants in
conjunction with their annual audit. The amount of additions to the allowance
for loan losses which are charged to earnings through the provision for loan
losses is determined based on a variety of factors, including actual charge-offs
and anticipated charge-offs, delinquent loans, historical loss experience and
economic conditions in the Bank's market area. Although Management believes the
allowance for loan losses is sufficient to cover potential losses, there can be
no assurance that the allowance will prove sufficient to cover actual loan
losses in the future.
At December 31, 1997, the allowance for loan losses was $7.9 million,
representing an increase of $3.2 million from December 31, 1996. The increase
was primarily due to the acquisition of U.S. Bancorp, which had an allowance for
loan losses of $2.6 million at the date of acquisition.
ASSET LIABILITY MANAGEMENT
The Corporation's net interest income is subject to "interest rate risk" to
the extent that it can vary based on changes in the general level of interest
rates. It is the Corporation's policy to maintain an acceptable level of
interest rate risk over a range of possible changes in interest rates while
remaining responsive to market demand for loan and deposit products. The
strategy employed by the Bank to manage its interest rate risk is to measure its
risk using an asset/liability simulation model and adjust the maturity of
securities in its investment portfolio to manage that risk. Also, to limit risk,
the Bank generally does not make fixed rate loans or accept fixed rate deposits
with terms of more than five years.
Based on simulation modeling as of December 31, 1997 and March 31, 1998,
respectively, the Corporation's net interest income would change over a one-year
time period due to changes in interest rates as follows:
<TABLE>
<CAPTION>
CHANGE IN CHANGE IN
NET INTEREST INCOME NET INTEREST INCOME
OVER ONE-YEAR HORIZON OVER ONE-YEAR HORIZON
AS OF DECEMBER 31, 1997 AS OF MARCH 31, 1998
CHANGES IN ------------------------------------- ---------------------------------------
LEVEL OF DOLLAR PERCENTAGE DOLLAR PERCENTAGE
INTEREST RATES CHANGE CHANGE CHANGE CHANGE
- ------------------- ------------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
+2.00% $ 237,000 0.90% $ 141,000 0.52%
+1.00% $ 102,000 0.39% $ 80,000 0.30%
(1.00)% $(133,000) (0.50)% $ (66,000) (0.24)%
(2.00)% $(232,000) (0.88)% $(124,000) (0.46)%
</TABLE>
Simulations used by the Corporation assume the following:
o Changes in interest rates are immediate.
o With the exception of NOW, money market and savings accounts, all
interest rates change by the same amount at the same time.
o NOW, money market and savings accounts rates change by 0.25% for every
1.00% change in interest rates and by 0.50% for every 2.00% change in
interest rates. Management believes, and experience has shown, that
these deposit accounts take longer to change rates when economic
conditions change and do not change rates as much as other general
interest rates, such as prime or federal funds.
It is the Bank's policy that interest rate exposure due to a 2.00% interest
rate rise or fall be limited to 7.50% of the Bank's annual net interest income
as forecasted by the simulation model. As demonstrated by the table above, the
Bank's interest rate risk exposure was within this policy at December 31, 1997
and March 31, 1998.
38
<PAGE>
Interest rate risk can also be measured by analyzing the extent to which
the repricing of assets and liabilities are mismatched to create an interest
sensitivity "gap." An asset or liability is said to be interest rate sensitive
within a specific time period if it will mature or reprice within that time
period. The interest rate sensitivity gap is defined as the difference between
the amount of interest earning assets maturing or repricing within a specific
time period and the amount of interest bearing liabilities maturing or repricing
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, therefore, a negative gap would tend
to adversely affect net interest income. Conversely, during a period of falling
interest rates, a negative gap position would tend to result in an increase in
net interest income.
The following table sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at March 31, 1998, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined based on the earlier of the term to repricing or the term to
repayment of the asset or liability. The table is intended to provide an
approximation of the projected repricing of assets and liabilities at March 31,
1998 on the basis of contractual maturities and scheduled rate adjustments
within a three-month period and subsequent selected time intervals. The loan
amounts in the table reflect principal balances expected to be reinvested and/or
repriced as a result of contractual amortization and rate adjustments on
adjustable-rate loans. Loan and investment security prepayments are not
considered significant and therefore contractual maturities or repricing is not
adjusted for possible prepayments. While NOW, money market and savings deposit
accounts have adjustable rates, it is assumed that the interest rates on these
accounts will not adjust immediately to changes in other interest rates.
Therefore, the table is calculated assuming that these accounts will reprice as
follows: 25% in the first three months, 25% in the next nine months, and 50%
after one year.
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
----------- ------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Net loans (1) .......................... $260,706 $ 70,112 $177,311 $ 1,670 $509,799
Investment securities .................. 5,175 83,640 51,009 2,070 141,894
-------- -------- -------- -------- --------
Total interest earning assets ....... $265,881 $153,752 $228,320 $ 3,740 $651,693
======== ======== ======== ======== ========
INTEREST BEARING LIABILITIES:
NOW and money market deposit
accounts ........................... $ 34,910 $ 34,910 $ 69,820 $ -- $139,640
Savings deposits ....................... 21,364 21,363 42,726 -- 85,453
Time deposits .......................... 164,432 98,273 16,319 -- 279,024
Long-term borrowings (2) ............... -- -- -- 30,537 30,537
Short-term borrowings .................. 29,365 -- -- -- 29,365
-------- -------- -------- -------- --------
Total interest bearing liabilities .. $250,071 $154,546 $128,865 $ 30,537 $564,019
======== ======== ======== ======== ========
Rate sensitive assets (RSA) ............ $265,881 $419,633 $647,953 $651,693 $651,693
Rate sensitive liabilities (RSL) ....... 250,071 404,617 533,482 564,019 564,019
Cumulative GAP ......................... 15,810 15,016 114,471 87,674 87,674
(GAP = RSA - RSL)
RSA/Total assets ....................... 34.86% 55.02% 84.96% 85.45% 85.45%
RSL/Total assets ....................... 32.79% 53.05% 69.95% 73.95% 73.95%
GAP/Total assets ....................... 2.07% 1.97% 15.01% 11.50% 11.50%
GAP/RSA ................................ 5.95% 3.58% 17.67% 13.45% 13.45%
</TABLE>
- ----------
(1) Less non-accrual loans totaling $9.4 million.
(2) Includes corporation obligated mandatorily redeemable preferred securities.
39
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets may lag behind
changes in market rates. Additionally, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Therefore, the Corporation does not
rely solely on a gap analysis to manage its interest rate risk, but rather it
uses what it believes to be the more reliable simulation model relating to
changes in net interest income presented earlier.
LIQUIDITY
BANK LIQUIDITY. The Bank's primary sources of funds are retail and
commercial deposits, short term and long term borrowings, and funds generated
from operations. Funds from operations include principal and interest payments
received on loans and securities and proceeds from the sale of securities and
loans. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing on
sources of funds.
The Bank has no required regulatory liquidity ratios to maintain; however,
it adheres to a Liquidity Policy, approved by its Board of Directors, which sets
certain guidelines for liquidity purposes. This policy requires that the Bank
maintain the following liquidity ratios:
o Liquidity ratio (defined as cash, short-term investments, marketable
securities, and investment grade scheduled lease loan payments due in
one year or less divided by deposits plus short-term liabilities)
greater than 20%
o Loans to deposit ratio less than 85%
o Loans to deposits minus public funds ratio less than 80%
At March 31, 1998, the Bank was in substantial compliance with the foregoing
policy. Generally, when the Bank's loan to deposit ratios become higher than
policy guidelines, the Bank sells Lease Loans to reduce the volume of total
loans and provide a source of funds. In 1997, the Bank sold approximately $30
million of Lease Loans to remain in compliance with the Liquidity Policy.
Management expects to continue to sell Lease Loans in the future as the need
arises to remain in compliance with the Liquidity Policy. Liquidity management
is monitored by the Asset/Liability Committee of the Bank, which takes into
account the marketability of assets, the sources and stability of funding and
the level of unfunded commitments.
At March 31, 1998, the Bank had outstanding origination loan commitments
and unused commercial and retail lines of credit of $87.4 million. The amount of
loan commitments and unused lines of credit has remained approximately the same
for the last several years. The Bank anticipates that it will have sufficient
funds available to meet its current origination and other lending commitments.
Certificates of deposit that are scheduled to mature within one year totaled
$262.7 million at March 31, 1998. The Bank expects a substantial majority of
these certificates of deposit to remain with the Bank.
In the event that additional short-term liquidity is needed, the Bank has
established relationships with several large regional banks to provide
short-term borrowings in the form of federal funds purchases. While there are no
firm lending commitments in place, the Bank has borrowed, and Management
believes that the Bank could again borrow, more than $30.0 million for a short
time from these banks on a collective basis. Additionally, the Bank is a member
of the Federal Home Loan Bank of Chicago ("FHLB") and has the ability to borrow
approximately $13.0 million on a short- or long-term basis without collateral.
The Bank could borrow an additional $29.0 million from the FHLB by providing
collateral in the form of U.S. Treasury or agency securities or certain whole
loans.
CORPORATION LIQUIDITY. The Corporation's main sources of liquidity at the
holding company level are dividends from the Bank passed on to the Corporation
through MNC and lines of credit maintained with a large regional correspondent
40
<PAGE>
bank in the amount of $15.0 million. As of March 31, 1998, the Corporation had
$9.0 million undrawn and available under its lines of credit.
The Bank is subject to various regulatory capital requirements administered
by federal and state banking agencies, which affect the Bank's ability to pay
dividends to the Corporation. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's financial
statements. Additionally, Bank policy requires that dividends cannot be declared
in an amount that would cause the Bank's capital to fall below the minimum
amount required for the Bank to be considered "well capitalized" for regulatory
purposes. At March 31, 1998, the Bank could pay $14.6 million of dividends and
comply with such minimum regulatory capital requirements, and MNC could pay $7.8
million of dividends and comply with the minimum regulatory capital
requirements.
CAPITAL RESOURCES
The Bank is subject to the risk based capital guidelines administered by
the banking regulatory agencies. The risk based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profiles among banks to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under the guidelines, assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk weighted assets and off-balance sheet items. The
guidelines currently require all banks to maintain a minimum ratio of total risk
based capital to total risk weighted assets of 8%, including a minimum ratio of
Tier 1 capital to total risk weighted assets of 4% and a Tier 1 capital to
average adjusted assets of 4%. 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. As of March 31, 1998, the most recent notification
from the federal banking regulators categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. Under the capital
adequacy guidelines, a well capitalized institution must maintain a minimum
total risk based capital to total risk weighted assets ratio of at least 10%, a
minimum Tier 1 capital to total risk weighted assets ratio of at least 6%, a
minimum leverage ratio of at least 5% and is not subject to any written order,
agreement or directive. There are no conditions or events since that
notification that Management believes have changed the Bank's capital
classification.
The Corporation and the Bank were in full compliance with all capital
adequacy requirements to which they are subject as of December 31, 1997 and
March 31, 1998, respectively. The required and actual amounts and ratios for the
Corporation and Bank as of March 31, 1998 (unaudited) are presented below.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- --------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total capital (to risk-weighted assets):
Consolidated ........................... $54,861 9.58% $45,831 8.00% N/A N/A
Manufacturers Bank ..................... 60,523 10.55% 45,881 8.00% $57,352 10.00%
Tier 1 capital (to risk-weighted assets):
Consolidated ........................... 42,379 7.40% 22,916 4.00% N/A N/A
Manufacturers Bank ..................... 53,400 9.31% 22,941 4.00% 34,411 6.00%
Tier 1 capital (to average assets):
Consolidated ........................... 42,379 5.44% 31,186 4.00% N/A N/A
Manufacturers Bank ..................... 53,400 7.05% 30,295 4.00% 37,869 5.00%
</TABLE>
STATEMENTS OF CASH FLOWS
The Bank's cash flows are composed of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities. Net cash provided by operating activities, consisting
primarily
41
<PAGE>
of earnings, was $13.2 million for the year ended December 31, 1997, $13.5
million for the year ended December 31, 1996 and $9.7 million for the year ended
December 31, 1995. Net cash provided by operating activities increased $3.8
million from 1995 to 1996 primarily due to an increase in the non-cash
adjustment for depreciation for lease investments. Net cash used in investing
activities, consisting primarily of loan and investment funding, was $37.9
million, $13.1 million and $39.0 million for the years ended December 31, 1997,
1996 and 1995, respectively. Net cash provided by financing activities,
consisting principally of deposit growth and other borrowings, was $29.6
million, $4.1 million and $32.4 million for the years ended December 31, 1997,
1996 and 1995, respectively.
YEAR 2000
For a discussion of costs associated with the Year 2000 Problem see, "Risk
Factors -- Year 2000 Problem" and "Supervision and Regulation -- Year 2000
Problem."
EFFECTS OF INFLATION
The Consolidated Financial Statements and the Notes thereto and the related
financial data concerning the Corporation have been prepared in accordance with
generally accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation. Inflation can have a significant effect on the operating results of
all businesses, however the effects of inflation in the local economy and on the
Corporation's operating results have been minimal for the past several years,
although there can be no assurance that this will continue in the future. Since
the majority of the Corporation's assets and liabilities are monetary in nature,
such as cash, securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do not
necessarily change in accordance with inflation rates.
The most significant impact of inflation on the Corporation would be
reflected in increased operating costs. Increases in interest rates affect the
ability of the Corporation's borrowers to repay their debt. Furthermore,
inflation can directly affect the value of loan collateral in general, and real
estate collateral in particular. These factors are taken into account as loans
are approved. The Corporation believes that it has systems in place to continue
to manage the rates, liquidity and interest rate sensitivity of the
Corporation's assets and liabilities. See "--Asset Liability Management."
BUSINESS
GENERAL
The Corporation was incorporated in Illinois in 1986 and is registered as a
bank holding company under the BCA and the Illinois BCA, and has its principal
business offices at the Main Banking Premises.
The Corporation owns 96.5% of the issued and outstanding shares of common
stock and all of the issued and outstanding shares of Class A Preferred Stock of
MNC, which is also registered as a bank holding company under the BCA and the
Illinois BCA. MNC owns all of the issued and outstanding shares of common stock
of Manufacturers Bank.
Manufacturers Bank owns all of the issued and outstanding shares of common
stock of three special purpose Illinois corporations, Ashland Management Agency,
Inc. ("Ashland"), MB1200 Corporation ("MB1200"), and Manufacturers Deferred
Exchange Corporation ("MDEC"), all of which have their principal business
offices at the Main Banking Premises. The principal purpose of Ashland is to act
as manager of certain real estate owned by Manufacturers Bank; the principal
purpose of MB1200 is to hold title to any real estate that Manufacturers Bank
may receive pursuant to a foreclosure or other resolution of a non-performing
loan; and the principal purpose of MDEC is to hold escrowed funds relating to
certain tax advantaged real estate exchanges entered into by the customers of
Manufacturers Bank. The Corporation also owns all of the issued and outstanding
1997 Trust Common Securities, making the 1997 Trust a subsidiary of the
Corporation for financial reporting purposes. See "Use of Proceeds."
42
<PAGE>
HISTORY AND DEVELOPMENT
The Corporation was originally established as a one-bank holding company
for Coal City Bank by Messrs. Thomas Carey, Alfred Feiger, Lawrence Gilford,
Richard Gilford, David Husman, Clarence Mann and the late Marvin Neland, who, as
a group, constituted the Corporation's initial Board of Directors (collectively,
the "Director Group"). For many years prior to the establishment of the
Corporation, these individuals (all of whom, except the late Mr. Neland, are
still on the Corporation's Board of Directors), had been active in the Chicago
banking community establishing and acquiring a series of independent banks that
were eventually brought together under a single bank holding company known as
Affiliated Banc Group, Inc. ("Affiliated"). In 1987, by which time Affiliated
had seven banking subsidiaries with total assets of approximately $750 million,
Affiliated was sold to Manufacturers National Corporation, a multi-bank holding
company headquartered in Detroit, Michigan (which is unrelated to MNC).
The Director Group had made Affiliated an attractive acquisition target by
positioning its subsidiary banks as important players in the small and middle
market business segment in the Chicago area, serving mainly privately owned
entrepreneur-operated companies with annual sales in the range of $1.0 million
to $10.0 million. Targeted customers for Affiliated were manufacturers,
wholesalers, distributers, commercial real estate companies and selected service
providers. When the Director Group left Affiliated three years after the time of
its sale, they left behind a financial institution that had strong earnings, a
high quality loan portfolio and a premier base of small and middle market
customers. The success of the Director Group at Affiliated had also been based
upon several other key factors, such as the ability to make rapid decisions,
flexible loan underwriting, knowledge of the Chicago area business community and
providing customer access to senior management of the subsidiary banks.
In 1992, the Director Group decided to re-enter the marketplace of
mid-sized banks serving small and middle market businesses in Chicago, because
it believed that most of the mid-sized banks serving the Chicago market were, at
the time, being absorbed by larger financial institutions, leaving a noticeable
gap in the banking community. Accordingly, the Corporation acquired an 80.1%
interest in MNC, which owned Manufacturers Bank. In addition to servicing the
special needs of the manufacturing, wholesaling and distributing industries,
Manufacturers Bank also had specific expertise, and niche business, in the field
of servicing equipment leasing companies throughout the country. Burton Field,
who was at that time the President and a long-time employee of Manufacturers
Bank, continued in that position after the acquisition and joined the
Corporation's Board of Directors, where he remains to this date. At the same
time, Mitchell Feiger, an Executive Vice President of Affiliated, joined the
Corporation as its President and a member of the Board of Directors, where he,
too, remains to this date.
The Corporation, through additional stock purchases, increased its
ownership of MNC's outstanding common stock to 96.5% as of June 30, 1998. The
Corporation also owns all of MNC's outstanding Class A Preferred Stock. It is
possible that the Corporation may acquire the outstanding 3.5% of MNC that it
does not currently own through the exercise by the other MNC stockholders of
their right to put their MNC common stock to the Corporation, which right
expires on October 31, 1998. The number of shares of MNC common stock that could
be tendered under these put rights is 79,912, and the price that the Corporation
would be required to pay for such stock, if tendered, is $11.66 per share (or
$931,774 in the aggregate if all of such shares are tendered).
In February 1995, the Corporation and MNC acquired a controlling interest
in Peterson Bank, located on Chicago's far north side, and by December 31, 1995
owned 100% of Peterson Bank. In 1997 MNC acquired the Corporation's interest in
Peterson Bank, making Peterson Bank a wholly-owned subsidiary of MNC. At the
date of acquisition, Peterson Bank had assets of $172.1 million and operated out
of a main office and a single branch facility. Peterson Bank specialized in
serving the banking needs of real estate investors and operators, long-term
health care companies and Chicago's Korean community.
In May 1997, MNC acquired 100% of U.S. Bancorp, the single-bank holding
company for U.S. Bank. At the time of this acquisition, U.S. Bancorp had assets
of $205.0 million and operated out of a main office and four branch facilities,
all located either on Chicago's south side or in the southern Chicago suburbs of
Tinley Park, Lansing and South Holland, Illinois. U.S. Bank specialized in
serving home developers whose projects were located throughout the Chicago
metropolitan area and northwest Indiana.
43
<PAGE>
In 1997, the Corporation caused Peterson Bank to be merged into
Manufacturers Bank, and Manufacturers Bank to be merged into U.S. Bank, with the
latter entity changing its name to "Manufacturers Bank." The Corporation also
caused U.S. Bancorp, which was then a mid-tier bank holding company wholly owned
by MNC, to be merged into Manufacturers Bank in order to eliminate the costs
associated with an unnecessary third holding company layer.
In January, 1998, the Corporation sold 100% of the outstanding common stock
of Coal City Bank to Kankakee Bancorp, Inc., the parent holding company of
Kankakee Federal Savings Bank, which is headquartered in Kankakee, Illinois.
Coal City Bank is located in Coal City, Illinois, more than 50 miles from
downtown Chicago, in a community where Management believed business lending
opportunities are limited. Management decided that the Corporation could no
longer benefit from a presence in the Coal City marketplace, and that continued
ownership of Coal City Bank, although then profitable, would divert the
Corporation, its Management and staff from their principal focus of growing the
business of Manufacturers Bank. It was also decided that the capital required to
operate Coal City Bank would be better utilized in the operation of
Manufacturers Bank.
The Corporation, through MNC, currently owns a single bank, Manufacturers
Bank, which, in turn, owns three single purpose corporate subsidiaries: Ashland,
MB 1200 and MDEC. Manufacturers Bank at March 31, 1998 had $762.7 million in
assets and operated from a total of eight offices, including the Main Banking
Premises.
BUSINESS AREAS
Manufacturers Bank concentrates its business efforts on serving small and
middle market businesses, such as manufacturers, wholesalers, distributors,
long-term health care operators, real estate operators and investors, and home
developers located throughout the entire Chicago metropolitan area. The
Corporation, through its acquisition program and through careful selection of
officers and employees, has moved to position Manufacturers Bank to take a
leading role in filling this attractive niche in the market. In order to further
the ability of Manufacturers Bank to play such a leading role, Management has
also caused Manufacturers Bank to divide its business into four distinctly
recognizable areas, referred to as Business Banking, Convenient Retail Banking,
Lease Banking and Korean Banking.
BUSINESS BANKING. The Business Banking Group focuses on serving
privately-owned companies run by entrepreneurs. The kinds of companies served
are manufacturers, wholesalers, distributors, home developers, long-term health
care operators, real estate operators and investors, and selected types of
service companies. Manufacturers Bank provides a full set of credit, deposit,
cash management and investment products to these companies. These products are
specifically designed for companies with sales of between $1 million and $25
million, with marketing principally aimed at companies with sales between $3
million and $25 million. The products developed for this target market include:
Credit products:
o Working capital loans and lines of credit, including accounts
receivable and inventory financing
o Equipment loans and leasing
o Business acquisition loans
o Owner occupied real estate loans
o Financial, performance and commercial letters of credit
Deposit and cash management products:
o Corporate InterConnect - a PC banking product for businesses
o Zero balance accounts
o Automated tax payments
o ATM access
o Merchant credit card program
o Telephone banking
o Lockbox services
o Direct deposit (ACH)
o Account reconciliation
44
<PAGE>
o Controlled disbursement
o Detail and general information reporting
o Wire transfers
o A variety of international banking services
For real estate operators and investors, Manufacturers Bank also offers a full
set of products, including, in addition to those listed above, the following:
o Commercial mortgages
o Residential, commercial, retail and industrial construction loans
o Land acquisition and development loans
The Bank's strategy is to provide rapid service, customer access to
decision makers, flexible loan underwriting, modern, technologically advanced
banking products, and talented, experienced lending officers. The goal of
Manufacturers Bank in this area is to build a high quality, controlled risk loan
portfolio that consistently grows in excess of average market growth.
Manufacturers Bank currently has more than 1,000 Business Banking customers with
more than $300 million of commercial loans, and over $300 million of commercial
deposits.
CONVENIENT RETAIL BANKING. The target market for the Convenient Retail
Banking group consists of consumers who live or work near Manufacturers Bank's
offices. Manufacturers Bank offers a full set of consumer products to these
individuals, including checking accounts, savings accounts, money market
accounts, time deposit accounts, secured and unsecured consumer loans,
residential mortgage loans, and a variety of fee for service products, such as
money orders and travelers checks. Manufacturers Bank refers to this area of its
business as "Convenient Retail Banking," because it targets only those consumers
for whom Manufacturers Bank's offices are a convenient place to perform the
customers' financial transactions.
The Chicago retail banking market is very large with correspondingly high
advertising and marketing costs. Several banks have in excess of 100 branches in
the Chicago metropolitan area. Furthermore, these banks have the resources to
advertise and market on a large scale and can afford to target consumers located
throughout the entire area. Manufacturers Bank is far smaller, has only eight
offices and, consequently, cannot compete directly with the large banks for
consumers on a mass basis. Moreover, seven of the eight offices of Manufacturers
Bank are located in low growth markets - five in Chicago, one in Lansing,
Illinois and one in South Holland, Illinois. The eighth office is located in
rapidly growing Tinley Park, Illinois. Manufacturers Bank faces considerable
retail banking competition from other local banks and thrifts, large regional
banks that have local offices, and brokerage and mutual fund companies that
market their products through mass media and direct mail. Therefore,
Manufacturers Bank has chosen a strategy that leverages one of the most
important reasons that consumers choose a bank--convenience. By targeting
consumers who live or work in the trade area immediately surrounding each
banking office, Manufacturers Bank hopes to attract consumers who want this
convenience for their banking transactions. Manufacturers Bank wins business by
keeping deposit rates above most competitors' rates, and loan rates at the
market rate, offering a complete selection of consumer products, and providing
superior, personal service on a price competitive basis. Manufacturers Bank
currently has over $300 million of deposits and $18 million of loans
attributable to its Convenient Retail Banking group.
LEASE BANKING. The target market for the Lease Banking group consists of
small and medium size equipment leasing companies located throughout the United
States. Manufacturers Bank has provided Lease Banking services to these
companies for more than 20 years. Competition in servicing this equipment
leasing market generally comes from large banks, financing companies, large
industrial companies and some community banks in certain segments of the
business. Manufacturers Bank provides rapid service and decision making, and
flexible financial solutions, to meet its customers' needs in this market. The
Bank provides full banking services for these leasing companies by financing the
debt portion of leveraged leases ("Lease Loans"), providing short-term and
long-term equity financing, making working capital and bridge loans, and
investing directly in leased equipment. The volume of Lease Loans is closely
managed, in order to control the Bank's level of total risk adjusted assets.
45
<PAGE>
Assets generated by the Lease Banking group fall into three categories:
Lease Loans, working capital loans to leasing companies and investments in
leased equipment. A Lease Loan arises when a leasing company discounts the
equipment rental revenue stream owed to the leasing company by a lessee.
Generally, Manufacturers Bank receives repayment of its loan directly from the
lessee in the form of lease rental payments. Loan yields and returns on equity
for this type of lending tend to be low. Thus, Manufacturers Bank views this
kind of lending as an adjunct to its investment portfolio. Generally, such a
loan is made only when the lessee has a public debt rating in one of the top
four rating categories of Moody's or Standard & Poors. If the lessee does not
have a public debt rating, then Manufacturers Bank will lend when its own
analysis indicates that if the lessee did have a debt rating it would be in one
of those top four categories. Since these loans are very high quality,
short-term, and made to companies with well known names, they are easily sold to
other banks. During 1997, Manufacturers Bank sold approximately $30 million of
Lease Loans to large and small banks in the Chicago area (retaining the
servicing rights, however). As of the end of the past several years,
Manufacturers Bank has carried between $72.5 million and $114.0 million of Lease
Loans, varying the amount as needed to manage its risk adjusted asset totals.
Working capital loans made to leasing companies are made in a manner
similar to the loans made by the Business Banking group. In addition to loans
made to support the day-to-day operating needs of the leasing company, loans are
made to facilitate the purchase and sale of equipment. Manufacturers Bank tends
to have between $5 million and $20 million of these kinds of loans to leasing
companies outstanding at any one time.
Manufacturers Bank also invests in equipment leased to other companies. In
this case, the Bank owns the equipment that is leased to the user. The credit
quality of the lessee generally must be in one of the top four rating categories
of Moody's or Standard & Poors. Over the last four years, the Bank has increased
its investment in leased equipment from virtually nothing to $21.8 million at
March 31, 1998. In most cases, during the early years of a lease, Manufacturers
Bank recognizes a loss on its investment, and in later years a gain.
Consequently, as Manufacturers Bank has built its leased equipment portfolio,
current earnings have been reduced. Gains, if any, on leased equipment result
when a lessee renews a lease or purchases the equipment at the end of a lease.
Individual lease transactions can, however, result in a loss. This generally
happens when, at the end of a lease, the lessee does not renew the lease or
purchase the equipment. To mitigate this risk of loss, Manufacturers Bank limits
individual leased equipment investments to approximately $500,000 per
transaction, and seeks to diversify both the type of equipment leased and the
industries in which the lessees to whom such equipment is leased participate.
KOREAN BANKING. The Korean Banking group focuses on the expanding Korean
community located principally on the north side of Chicago and in Chicago's
northwestern suburbs. Manufacturers Bank serves ethnic Korean consumers and
Korean-owned businesses by providing complete banking services using the Korean
language. Korean commercial customers tend to be small owner-operated, cash
businesses, such as dry cleaners, gift shops and restaurants. While continuing
to serve these customers, Manufacturers Bank is also targeting those
Korean-owned businesses with annual sales between $2 million and $20 million.
Personnel in the Korean Banking group, as well as a number of other individuals
in key service positions at the Bank speak Korean. The Bank's automated
telephone account access services are provided in the Korean language as well.
Competition in this growing market segment is quite limited because of the need
to provide all banking services in Korean. Currently, Manufacturers Bank has
approximately $44 million of loans and $25 million of deposits attributable to
the Korean Banking group.
LENDING ACTIVITIES
As of March 31, 1998, Manufacturers Bank's outstanding loans, net of loan
loss allowance, totaled $519.2 million, representing 68.1% of total assets of
the Corporation. Manufacturers Bank is primarily a business lender and the loan
portfolio consists almost entirely of loans to businesses or for business
purposes. Of the total loans outstanding on March 31, 1998, only $30.5 million
represented installment loans. Lease Loans comprised 16.9% of total loans
outstanding as of March 31, 1998. Also, of the $304.6 million of real estate
loans outstanding on that date, 71.0% were secured by commercial properties,
many of which were owner occupied. Virtually all commercial, real estate, real
estate construction and installment loans were made to companies located in the
Chicago metropolitan area. Lease Loans, on the other hand, are distributed
around the country.
46
<PAGE>
Manufacturers Bank's underwriting philosophy is to lend money on a secured
basis to companies or individuals who have a record of success in their business
or job, as demonstrated by sufficient cash flow on an historical basis to fully
service their loans. Additionally, borrowers generally have a secondary source
of repayment without having to liquidate loan collateral. Also, loans to
businesses are almost always guaranteed by the owners of the business.
The primary source of income for Manufacturers Bank (and thus, the
Corporation) comes from interest on loans. Net loans as a percentage of total
assets increased to 64.7% at December 31, 1997 from 57.0% at December 31, 1993.
Total loans increased $299.4 million during this period. The majority of the
increase from 1994 to 1995 was due to the acquisition of Peterson Bank, which
had total loans of $90.3 million at the acquisition date. The majority of the
increase from 1996 to 1997 was due to the acquisition of U.S. Bancorp, which had
total loans of $126.8 million at the acquisition date.
The following table sets forth the composition of the Bank's loan portfolio
in dollars and as a percentage of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
MARCH 31, ---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
--------------- ---------------- --------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $103,055 19.56% $112,010 21.24% $ 94,066 24.22% $ 70,255 20.71% $ 73,998 33.30% $ 76,178 33.43%
Commercial loans
collateralized by
assignment of lease
payments....... 88,793 16.85% 85,658 16.25% 113,960 29.35% 108,223 31.89% 72,529 32.64% 84,280 36.98%
Real estate........ 268,683 50.99% 257,074 48.75% 158,792 40.89% 148,010 43.62% 68,055 30.63% 62,157 27.27%
Real estate
construction... 35,902 6.81% 37,079 7.03% 7,057 1.82% 6,890 2.03% 3,709 1.67% 783 0.34%
Installment........ 30,481 5.79% 32,500 6.73% 14,427 3.72% 5,948 1.75% 3,920 1.76% 4,504 1.98%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans.. 526,914 100.00% 527,321 100.00% 388,302 100.00% 339,326 100.00% 222,211 100.00% 277,902 100.00%
====== ====== ====== ====== ====== ======
Allowance for
loan losses... (7,751) (7,922) (4,692) (4,134) (2,646) (2,707)
-------- -------- -------- -------- -------- --------
Net loans... $519,163 $519,399 $383,610 $335,192 $219,565 $225,195
======== ======== ======== ======== ======== -------
</TABLE>
COMMERCIAL LENDING. The Bank makes commercial loans to small and middle
market businesses. The borrowers tend to be privately-owned and are generally
manufacturers, wholesalers, distributors, long-term health care operators, and
selected types of service providers. The loan products offered are primarily
working capital loans and lines of credit. These general product classifications
include accounts receivable and inventory financing, equipment loans and
business acquisition loans. The Bank also offers financial, performance and
commercial letters of credit. Most commercial loans are short-term in nature,
being one year or less, although the maximum allowable term is five years.
The Bank's lines of credit are typically secured, established for one
year, and are subject to renewal upon satisfactory review of the borrower's
financial statements and credit history. Secured short-term commercial business
loans are usually collateralized by accounts receivable, equipment or real
estate. Such loans are typically guaranteed by the owners of the business.
Interest rates tend to be at or above the prime rate, although there has been
considerable recent market pressure to make loans at a spread above LIBOR.
Commercial loans have grown from $70.3 million at December 31, 1995 to
$103.1 million at March 31, 1998, an annual growth rate of 18.4%. This increase
is partially related to the purchase of U.S. Bancorp as well as to internal loan
growth. Commercial loans represented 19.6% of the total loan portfolio at March
31, 1998, as compared to 24.2% of the total loan portfolio at December 31, 1996.
47
<PAGE>
COMMERCIAL REAL ESTATE LENDING. Manufacturers Bank originates
commercial real estate mortgage loans that are generally secured by one or more
of the following kinds of properties: multi-unit residential property, owner and
nonowner occupied commercial and industrial property, and residential property
for development. Loans are also made to acquire and develop land. Manufacturers
Bank's loan policy and underwriting procedures provide that commercial real
estate loans may be made in amounts up to the lesser of (i) 80% of the appraised
value of multi-family properties; (ii) 75% of the appraised value of commercial
and non-residential construction property; (iii) 70% of the appraised value of
commercial land development property (generally held for subdivision or
industrial park land development); and (iv) 60% of the appraised value of
undeveloped land. In addition to restrictions on the amount of loan to value,
Manufacturers Bank's underwriting procedures provide that commercial real estate
loans may be made in amounts up to Manufacturers Bank's current legal lending
limit. Regarding the properties described in (iii) and (iv) above, Manufacturers
Bank usually engages in this type of lending only with experienced local
developers operating in Manufacturer Bank's primary market. Such loans are
typically offered for the construction of residential properties that are
pre-sold or for commercial or retail properties where end financing is readily
available. As of March 31, 1998, Manufacturers Bank had approximately $50
million in a variety of acquisition, development and construction ("ADC") loans
in its commercial real estate lending area. Manufacturers Bank's policy is not
to make construction loans for purposes of speculation. While the number and
volume of this type of specialized lending is presently limited, it should be
noted that Manufacturers Bank intends to continue to emphasize its commercial
real estate, including ADC loan activity.
Manufacturers Bank's commercial mortgage loans are generally made at
fixed rates, although some float with prime. Terms of up to 10 years are
permissible, but most loans mature in 5 years and have a 15 to 25 year
amortization schedule. In reaching a decision as to whether or not to make a
commercial real estate loan, Manufacturers Bank considers the qualifications of
the borrower as well as the underlying property. Some of the factors considered
are: the net operating income of the mortgaged premises before debt service and
depreciation, the debt service ratio (i.e., the ratio of the property's net cash
flow to debt service requirements), which must be a minimum of 1.20, the ratio
of loan amount to appraised value and the creditworthiness of the borrower.
Real estate and real estate construction loans have increased from
$154.9 million at December 31, 1995, to $304.6 million at March 31, 1998, an
increase of $149.7 million. This increase is primarily attributable to the
acquisition of U.S. Bancorp, which had total real estate and real estate
construction loans of $116.4 million at the acquisition date.
LEASE LOANS. Manufacturers Bank lends money to small and mid-sized
leasing company customers to finance the debt portion of leveraged leases (i.e.,
Lease Loans). A Lease Loan arises when a leasing company discounts with
Manufacturers Bank the equipment rental revenue stream owed to the leasing
company by a lessee. Lease Loans are generally non-recourse to the leasing
company, and, consequently, Manufacturers Bank underwrites Lease Loans by
examining the creditworthiness of the lessee rather than the lessor. Lease Loans
are secured by the equipment being leased. The lessee acknowledges Manufacturers
Bank's security interest in the leased equipment and agrees to make lease
payments to Manufacturers Bank. Lessees tend to be Fortune 500 or Fortune 1000
companies and must have a public debt rating in one of the top four rating
categories by Moody's or Standard & Poors. If the lessee does not have a public
debt rating, then Manufacturers Bank lends when its own credit analysis
indicates that if the lessee did have a debt rating it would be in one of the
top four categories. Lease Loans are fully amortizing, with maturities ranging
from two to five years. Loan rates are fixed at a spread of 1% to 2% over the
U.S. Treasury curve.
Manufacturers Bank uses Lease Loans to manage its risk adjusted asset
totals. Since these loans are very high quality and made to well-known public
companies, the loans are marketable. Manufacturers Bank regularly sells loans to
correspondents that range from a large regional bank to several small community
banks. During 1997, Manufacturers Bank sold approximately $30 million of Lease
Loans. As commercial loans and commercial real estate loans outstanding
increase, Manufacturers Bank expects to sell more and more Lease Loans, creating
a significant stream of revenue from servicing Lease Loans sold. As a result,
Lease Loans outstanding (identified as "Commercial loans collateralized by
assignment of lease payments" in the table above) have fluctuated, having
outstanding balances as high as $114.0 million, and as low as $85.7 million,
over the last two and one-quarter years. From December 31, 1996 to December 31,
1997, Lease Loans decreased $28.3 million, or 24.8%.
48
<PAGE>
LOAN APPROVAL POLICY. Generally, each lending officer may approve a
loan within a specified limit, the maximum of which is $1.0 million, with the
exception of investment grade Lease Loans up to $4.0 million, which may be
approved by the President or Executive Vice-President of the Bank. Loans (which
are not investment grade Lease Loans) in excess of $1.0 million but less than
$6.0 million, and Lease Loans in excess of $4.0 million but less than $6.0
million, must be approved by the Executive Loan Committee of the Bank (comprised
primarily of members of the Board of Directors), and loans in excess of $6.0
million must be approved by the Bank's Board of Directors.
LOAN MATURITIES. The following table sets forth the maturities of
commercial and real estate construction loans outstanding at March 31, 1998.
Also set forth are amounts of such loans classified according to sensitivity to
changes in interest rates.
<TABLE>
<CAPTION>
DUE IN ONE
YEAR OR DUE AFTER ONE YEAR DUE AFTER
LESS THROUGH FIVE YEARS FIVE YEARS
-------------------- ------------------ ---------------------
FLOATING FLOATING FLOATING
FIXED RATE FIXED RATE FIXED RATE TOTAL
---------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial loans, commercial loans
collateralized by assignment of
lease payments and real estate
construction loans...................... $ 51,872 $ 117,754 $ 58,124 $ -- $ -- $ -- $ 227,750
========= ========= ======== ======== ========= ======== ==========
</TABLE>
INVESTMENT SECURITIES
Manufacturers Bank maintains an investment portfolio consisting
primarily of securities of the U.S. Treasury and agencies of, and corporations
sponsored by, the U.S. Government. Because the Bank maintains a relatively high
loan-to-deposit ratio, in order to maintain a prudent amount of liquidity, the
Bank has found it necessary to keep the duration and average maturity of its
investment portfolio short. The primary purpose of the investment portfolio is
to provide a source of earnings for liquidity management purposes, and control
interest rate risk. In managing the portfolio, the Bank seeks to obtain the
objectives of safety of principal, liquidity, diversification and maximized
return on funds. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," --Asset Liability Management" and
"--Liquidity."
The following table sets forth the amortized cost and fair value of the
Corporation's securities by accounting classification category and by type of
security as indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ---------------------------------------------------------------------
1998 1997 1996 1995
------------------------ ---------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
-------------- -------- --------- ----------- --------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securitie $ 97,179 $ 97,328 $ 119,160 $ 119,380 $ 76,919 $ 76,936 $ 35,769 $ 35,975
U.S. government agencies
and corporations.... 33,680 33,691 9,971 10,116 10,844 11,118 101,493 102,457
Mortgage-backed
securities.......... 5,513 5,651 7,022 7,189 12,132 12,416 17,753 18,231
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities.. $ 136,372 $ 136,670 $ 136,153 $ 136,685 $ 99,895 $ 100,470 $ 155,015 $ 156,663
========= ========= ========= ========= ========= ========= ========= =========
SECURITIES HELD TO MATURITY:
States and political
subdivisions......... $ 4,256 $ 4,669 $ 4,423 $ 4,860 $ 8,192 $ 8,678 $ 13,320 $ 13,935
Other securities........ 968 969 819 819 1,319 1,317 1,135 1,134
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities.. $ 5,224 $ 5,638 $ 5,242 $ 5,679 $ 9,511 $ 9,995 $ 14,455 $ 15,069
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
49
<PAGE>
U.S. Treasury securities and securities of U.S. Government agencies and
corporations generally consist of fixed rate securities with maturities of three
months to three years. State and political subdivision investment securities
consist of investment grade and local non-rated issues with maturities of less
than six years. The average term of mortgage-backed securities generally ranges
between two and six years.
There are no securities of any single issuer, other than the U.S.
Treasury or U.S. Government agencies and corporations, which had a book value in
excess of 10% of the Corporation's stockholders' equity at March 31, 1998.
The following table sets forth certain information regarding
contractual maturities and the weighted average yields of the Bank's securities
portfolio at March 31, 1998.
<TABLE>
<CAPTION>
DUE AFTER ONE DUE AFTER FIVE
DUE IN ONE YEAR THROUGH YEARS THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS TEN YEARS TEN YEARS
-----------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury (1)......... $ 57,951 6.37% $ 39,377 6.22% $ -- -- $ -- --
U.S. Government agencies and
corporations (1)..... 26,700 6.59% 6,991 5.99% -- -- -- --
Mortgage-backed (2)....... 1,466 8.23% 3,581 8.40% 354 8.75% 250 10.20%
--------- --------- ------- -------
Total... $ 86,117 $ 49,949 $ 354 $ 250
========= ========== ======= =======
SECURITIES HELD TO MATURITY:
States and political
subdivisions (3)...... $ 871 9.66% $ 3,216 11.35% $ 169 7.76% $ -- --
Other securities.......... 5 5.50% 303 7.50% 660 6.26% -- --
--------- ---------- ------- -------
Total... $ 876 $ 3,519 $ 829 $ --
========= ========== ======= ========
</TABLE>
- ----------------------
(1) Yields on U.S. Treasury and certain U.S. Government agency and corporation
securities are reflected to include the state tax benefit.
(2) These securities are presented based upon contractual maturities.
(3) Yield is reflected on a fully tax equivalent basis utilizing a 34% tax
rate.
SOURCES OF FUNDS
GENERAL. Deposits, long-term and short-term borrowings, loan and
investment security repayments and prepayments, proceeds from sales of
securities, and cash flows generated from operations are the primary sources of
the Bank's funds for lending, investing, leasing and other general purposes.
Loan repayments are a relatively predictable source of funds except during
periods of significant interest rate declines, while deposit flows tend to
fluctuate with prevailing interest rates, money market conditions, general
economic conditions and competition.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's core deposits consist of regular (passbook)
savings accounts, statement savings accounts, checking accounts, NOW accounts,
money market accounts, and non-public certificates of deposit. These deposits,
along with public fund deposits and long-term and short-term borrowings are used
to support the Bank's asset base. The Bank's deposits are obtained predominantly
from the geographic trade areas surrounding each of the Bank's office locations.
The Bank relies primarily on customer service and long-standing relationships
with customers to attract and retain deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits.
The Bank also has deposits of $41.0 million from a single public entity
located in Illinois. These deposits have been with the Bank for more than 13
years and while the Bank does not consider these deposits to be core deposits,
it does believe that they are stable. Management of the Bank is careful to
consider the impact of the possible withdrawal of these deposits on the Bank's
liquidity and overall funding needs.
50
<PAGE>
BORROWINGS. The Corporation has access to a variety of borrowing
sources and uses short-term and long-term borrowings to support its asset base.
Short-term borrowings include federal funds purchased, securities sold under
agreements to repurchase, and U.S. Treasury demand notes. From time to time, the
Bank enters into short-term low-risk arbitrage transactions pursuant to which it
purchases U.S. Treasury securities and a few days later permanently funds the
purchase by entering into a reverse repurchase agreement with a securities
dealer. These transactions have the effect of inflating short-term borrowings.
The Bank also offers a deposit account that sweeps balances in excess of an
agreed upon target amount into overnight repurchase agreements. As business
customers have grown more sophisticated in managing their daily cash position,
demand for the sweep product has increased, thus increasing short-term
borrowings on the Bank's balance sheet. As a result, short-term borrowings
increased from $9.4 million at December 31, 1996, to $18.0 million at December
31, 1997, to $29.4 million at March 31, 1998. Management expects short-term
borrowings to continue to increase.
Long-term borrowings include notes payable to other banks to support a
portfolio of equipment that the Bank owns and leases to other companies as well
as general debt incurred to fund recent corporate acquisitions. Long-term
borrowings increased to $22.4 million at December 31, 1997 from $16.0 million at
December 31, 1996 due to funding the acquisition of U.S. Bancorp. From December
31, 1997 through March 31, 1998 long-term borrowings declined by $1.9 million,
to $20.5 million, as a result of increased debt used to support the Bank's
leased equipment portfolio which was more than offset by the repayment of part
of the Corporation's acquisition debt. The repayment of the acquisition debt was
funded with the proceeds from the sale of Coal City Bank.
The following table sets forth the distribution of the Bank's average
deposit accounts and average borrowings for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------------------------------------------
MARCH 31, 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ --------- ----------- --------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW and money market
deposit accounts....... $ 146,342 20.10% $ 151,544 22.94% $ 130,972 25.30% $ 123,987 25.91%
Savings deposits........... 88,586 12.16% 86,445 13.09% 65,306 12.62% 65,620 13.71%
Time deposits.............. 283,439 38.92% 265,477 40.19% 206,357 39.86% 176,403 36.86%
Demand deposits - non-
interest bearing....... 123,400 16.95% 113,355 17.16% 91,380 17.65% 92,822 19.40%
----------- -------- ---------- --------- --------- ------- --------- --------
Total deposits..... 641,767 88.13% 616,821 93.38% 494,015 95.43% 458,832 95.88%
Long-term borrowings (1)... 28,871 3.96% 23,632 3.58% 13,653 2.64% 12,453 2.60%
Short-term borrowings...... 57,564 7.91% 20,066 3.04% 10,012 1.93% 7,256 1.52%
----------- -------- ---------- -------- --------- ------- --------- --------
Total deposits and
borrowings............. $ 728,202 100.00% $ 660,519 100.00% $ 517,680 100.00% $ 478,541 100.00%
=========== ======== ========== ======== ========= ======= ========= ========
</TABLE>
- ----------------------
(1) Long-term borrowings include corporation obligated mandatorily redeemable
preferred stock.
51
<PAGE>
The following table sets forth the maturities of certificates of
deposits and other time deposits at March 31, 1998 and December 31, 1997.
AT AT
MARCH 31, DECEMBER 31,
1998 1997
-------------- -------------
(IN THOUSANDS)
Maturing within three months............... $ 164,432 $ 151,010
After three but within six months.......... 45,535 62,637
After six but within twelve months......... 52,738 54,072
After twelve months........................ 16,319 22,621
----------- ------------
Total................................ $ 279,024 $ 290,340
=========== ===========
PROPERTIES
At March 31, 1998, the net book value of the Corporation's total
investments in premises and equipment was $11.1 million. The Bank owns the Main
Banking Premises at 1200 North Ashland Avenue, in Chicago, and five of its
branch facilities. The Lansing facility is leased for a remaining term of three
years and the motor bank on the far north side of Chicago for a remaining term
of five years. The Bank also owns a residence within walking distance of its
facility on the far north side of Chicago which it leases to a third party. The
Corporation believes that all of its properties and equipment are well
maintained, in good operating condition and adequate for all present and
anticipated needs of the Corporation and its subsidiaries.
COMPETITION
Vigorous competition exists in the major market areas in which
Manufacturers Bank is presently engaged in business. Competition includes not
only commercial banks but also other financial institutions, including savings
and loan associations, money market and other mutual funds, mortgage companies,
leasing and finance companies and a variety of financial services and advisory
companies. Manufacturers Bank competes by providing quality of services to its
customers, ease of access to facilities and competitive pricing of services
(including interest rates paid on deposits, interest rates charged on loans and
fees charged for other non-loan or non-deposit services).
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Corporation or any of its subsidiaries is a party.
PERSONNEL
As of March 31, 1998, the Corporation had 223 full time employees and
105 part-time employees. The employees are not represented by a collective
bargaining unit, and the Corporation considers its relationship with its
employees to be good.
52
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
directors and executive officers of the Corporation as of the date hereof.
PRINCIPAL OCCUPATION; POSITION
------------------------------
NAME AGE WITH THE CORPORATION
- ---- --- --------------------
Thomas Carey 65 President and General Manager of
Hawthorne Race Track (Maywood,
Illinois); Director of the
Corporation
Alfred Feiger 73 Chairman of the Board, Chief
Executive Officer and Director of
the Corporation
Mitchell Feiger 40 President and Director of the
Corporation
Burton Field 63 President of Manufacturers Bank;
Senior Executive Vice President
and Director of the Corporation
Lawrence Gilford 75 Private Investor; Director of the
Corporation
Richard Gilford 74 Private Investor; Director of the
Corporation
David Husman 64 Private Investor; Director of the
Corporation
Clarence Mann 73 Private Investor; Director of the
Corporation
Thomas Carey has served as a Director of Manufacturers Bank since
January 1997. Mr. Carey previously served as a Director of each of the seven
banks that were owned by Affiliated. Mr. Carey is also an attorney and is
currently the President of Hawthorne Race Track in Maywood, Illinois.
Alfred Feiger, Lawrence Gilford, Richard Gilford, David Husman and
Clarence Mann each has over 45 years of banking experience, having served in
various executive capacities during such period. Each gentleman also served as a
director of the seven banks that were owned by Affiliated. In addition, each of
these gentleman has served as a Director of Manufacturers Bank since its
acquisition by the Corporation in 1992, with Mr. Feiger also serving as the
Chairman of the Board of the Bank.
Mitchell Feiger began his career as an Associate Consultant with Touche
Ross & Company in 1982, and then joined Affiliated in 1984 where he worked in
various capacities until eventually becoming Executive Vice President. Mr.
Feiger became President and a Director of the Corporation, and a Director of the
Bank, in 1992.
Burton Field has served as President of Manufacturers Bank since 1983,
and as a Director of the Bank since 1977. Mr. Field has over 40 years of banking
and finance experience, mainly in the areas of commercial lending and leasing.
Mr. Field began his career in 1958 at Investors Commercial Corporation, where he
worked until 1966 in various capacities,
53
<PAGE>
including Commercial and Consumer Loan Officer and Corporation Treasurer. From
1966 through 1969, Mr. Field was employed by Mercantile Leasing as a Commercial
Leasing Officer. Mr. Field was also employed by LaSalle National Bank for a
short period as a Commercial Lending Officer until he joined Manufacturers Bank
in 1970 as Executive Vice President in charge of commercial lending.
Alfred Feiger is Mitchell Feiger's father. Lawrence Gilford and Richard
Gilford are cousins.
SUPERVISION AND REGULATION
GENERAL
Banks and their holding companies are regulated under both federal and
state laws. Consequently, the Corporation, MNC and Manufacturers Bank
(collectively, the "Regulated Companies") may be materially affected by
applicable statutes, regulations and policies promulgated by regulatory agencies
with jurisdiction over the Regulated Companies, such as the FRB, the FDIC and
the Commissioner. The effects of such statutes, regulations and policies may be
significant and are often unpredictable because they change from time to time.
Furthermore, such statutes, regulations and policies are intended to protect
bank depositors and the FDIC's deposit insurance fund, not the stockholders of
any of the Regulated Companies.
Banks and their holding companies are subject to enforcement actions by
their regulators for violations of the applicable regulatory statutes,
regulations and policies. In addition to compliance with regulatory limitations
concerning financial and operating matters, the Regulated Companies must file
periodic and other reports and information with their regulators and are subject
to examination by each of their regulators.
The statutory requirements applicable to the regulatory supervision of
bank holding companies and banks have increased significantly and undergone
substantial change in recent years. To a great extent, these changes are
embodied in the Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in August 1989, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), enacted in December 1991, and the
regulations promulgated under FIRREA and FDICIA.
Adequately capitalized and managed bank holding companies are
permitted, subject to regulatory approval and certain other limitations, to
acquire control of a bank in any state. In addition, interstate branching
legislation permits banks to merge across state lines, thereby creating a bank
chartered in one state with branches in one or more other states. Approval of
interstate bank mergers will be subject to certain conditions: adequate
capitalization; adequate management; Community Reinvestment Act ("CRA")
compliance; deposit concentration limits; and compliance with federal and state
antitrust laws. An interstate merger transaction may involve the acquisition of
a branch without the acquisition of the bank only if the law of the state in
which the branch is located permits out-of-state banks to acquire a branch of a
bank in that state without acquiring the bank. Following the consummation of an
interstate transaction, the resulting bank may establish additional branches at
any location where any bank involved in the transaction could have established a
branch under applicable federal or state law if such bank had not been a party
to the merger transaction. The interstate branching by merger provisions became
effective on June 1, 1997.
The effects on the Regulated Companies of such recent changes in
interstate banking law cannot be accurately predicted, but it is likely that
there will be increased competition from national and regional banking firms
headquartered outside of Illinois that may have greater resources than the
Regulated Companies.
REGULATION OF BANK HOLDING COMPANIES
Each of the Corporation and MNC is a registered bank holding company
within the meaning of the BCA. As such, the Corporation and MNC are subject to
regulation, supervision and examination by the FRB. The Corporation and MNC are
also subject to the limitations and requirements of the Illinois BCA. The
business and affairs of the Corporation and MNC are therefore regulated in a
variety of ways, including limitations on acquiring control of other banks and
bank holding companies, on activities and investments, on interstate
acquisitions, on regulatory capital requirements and on payment of
54
<PAGE>
dividends. Also, the FRB could require the Corporation and MNC to commit
resources to support their respective banking subsidiaries in circumstances in
which they might not otherwise do so.
ACQUISITION OF BANKS AND BANK HOLDING COMPANIES. Under the BCA, a bank
holding company generally may not (i) acquire, directly or indirectly, more than
5% of the outstanding shares of any class of voting securities of a bank or bank
holding company; (ii) acquire control of a bank or another bank holding company;
(iii) acquire all or substantially all the assets of a bank; or (iv) merge or
consolidate with another bank holding company, without first obtaining FRB
approval. In addition, both the Change in Bank Control Act of 1978 and the
Illinois Banking Act ("IBA") would require regulatory approval before any one or
more individuals or other entities may acquire control of the Corporation, MNC
or Manufacturers Bank.
The BCA generally imposes certain limitations on extensions of credit
and other transactions by and between banks that are members of the Federal
Reserve System and other banks and non-bank companies in the same holding
company. Under the BCA and the FRB's regulations, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
PERMITTED NON-BANKING ACTIVITIES. The BCA generally prohibits a bank
holding company from engaging in activities or acquiring or controlling,
directly or indirectly, the voting securities or assets of any company engaged
in any activity other than banking, managing or controlling banks and bank
subsidiaries or another activity that the FRB has determined, by regulation or
otherwise, to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Subject to certain exceptions, before making
any such acquisition or engaging in any such activity, a bank holding company
must obtain the approval of the FRB as provided in applicable regulations.
On May 13, 1998, the U.S. House of Representatives adopted, by a narrow
margin, a bill known as H.R.10, The Financial Services Act of 1998 ("H.R.10").
The principal purpose of H.R.10 is to enhance competition in the financial
services industry, in order to foster innovation and efficiency. It is also
aimed at reducing or eliminating many of the restrictions placed on U.S. banks
by the so-called Glass-Steagall Act of 1933. Among the restrictions that would
no longer apply or would be liberalized if H.R.10 were to be similarly adopted
by the U.S. Senate and signed into law by the President, would be those
statutory provisions and regulations separating commercial banking and
investment banking activities, as well as restrictions that currently limit the
securities underwriting and insurance marketing activities of banks and their
holding companies. H.R. 10 would also create financial holding companies which
may engage in any activity, and acquire and retain the shares of any company
engaged in any activity, which the FRB has determined to be financial in nature
or incidental to such financial activity. H.R.10 also would create a new type of
entity called a wholesale financial institution ("WFI"), which could be
chartered at the state or national level, which would not be insured, and which
could not take retail deposits or any deposits of less than $100,000. WFI's
would be subject to regulation as if they were bank holding companies. H.R.10
would also shift a significant amount of regulatory authority over
newly-hybridized institutions to the FRB, although the FRB would be required to
take into account the rules, regulations and pronouncements of other traditional
regulators, such as the Commission and state insurance regulators, although
other provisions of H.R.10 make clear that federal preemption in this area would
keep state authorities from blocking Congress' intent to liberalize the
financial services industry so that it can better compete in a globalized
economic environment. It is currently unknown whether H.R.10 will be adopted by
the U.S. Senate either in its present, or some other, form (the Senate is
currently debating its own version of a bill that would have much the same
effect), or whether the President would sign such a bill even if passed by
Congress. Accordingly, it is impossible to predict what effect H.R.10, or a bill
like it, would have on the Corporation or Manufacturers Bank, except that any
such law, if enacted, would be bound to increase the pressure on all financial
institutions to become involved, to some extent, in economic activities that may
be non-traditional for them in order to remain competitive.
CAPITAL REQUIREMENTS. Regulatory capital requirements applicable to all
regulated financial institutions, including bank holding companies and banks,
have increased significantly in recent years and further increases are possible
in future periods. The FRB has adopted risk-based capital standards for bank
holding companies. The articulated objectives of Congress and the FRB in
establishing a risk-based method of measuring capital adequacy are (i) to make
regulatory capital requirements applicable to bank holding companies more
sensitive to differences in risk profiles among bank holding companies, (ii) to
factor off-balance sheet liabilities into the assessment of capital adequacy,
(iii) to reduce disincentives for
55
<PAGE>
bank holding companies to hold liquid, low risk assets, and (iv) to achieve
greater consistency in the evaluation of capital adequacy of major banking
organizations throughout the world by conforming to the framework developed
jointly by supervisory authorities from countries that are parties to the
so-called "Basle Accord" adopted by such supervisory authorities in July 1988.
The FRB requires bank holding companies to maintain a minimum ratio of
risk-weighted capital to total risk- adjusted assets. Banking organizations,
however, generally are expected to operate well above the minimum risk-based
ratios, without significant reliance on intangibles. Risk-adjusted assets
include a "credit equivalent amount" of off-balance sheet items, determined in
accordance with conversion formulae set forth in the FRB's regulations. Each
asset and off- balance sheet item, after certain adjustments, is assigned to one
of four risk-weighing categories, 0%, 20%, 50% or 100%, and the risk-adjusted
values then are added together to determine risk-weighted assets.
The failure of a bank holding company to meet its risk-weighted capital
ratios may result in supervisory action, as well as inability to obtain approval
of any regulatory applications and, potentially, increased frequency of
examination.
The FRB also requires bank holding companies, such as the Corporation
and MNC, to maintain a minimum leverage capital requirement of not less than
3.0% Tier 1 capital to total assets for banks in the strongest financial and
managerial condition, with a CAMEL Rating of 1 (the highest examination rating
of the FDIC for banks). For all other banks, the minimum leverage capital
requirement is 3.0% plus an additional cushion of at least 100 to 200 basis
points. Tier 1 capital is comprised of the sum of common stockholders' equity,
non-cumulative perpetual preferred stock (including any related surplus) and
minority interests in consolidated subsidiaries, minus all intangible assets
(other than qualifying servicing rights). The FRB and the federal regulators of
depository institutions have each proposed amendments to their minimum capital
regulations to provide that the minimum leverage capital ratio for a bank
holding company or a depository institution, as the case may be, that has been
assigned the highest composite rating of 1 under the Uniform Financial
Institutions Rating System will be 3.0% and that the minimum leverage capital
ratio for any other depository institution will be 4.0%, unless a higher
leverage capital ratio is warranted by the particular circumstances or risk
profile of the depository institution.
The Regulated Companies are currently in compliance with the above
minimum capital requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Capital Resources" and the
Consolidated Financial Statements and Notes thereto.
Risk-based capital ratios focus principally on broad categories of
credit risk and do not incorporate factors that might affect the financial
condition of the Regulated Companies, such as overall interest rate risk
exposure, liquidity, funding and market risks, the quality and level of
earnings, investment or loan portfolio concentrations, the quality of loans and
investments, the effectiveness of loan and investment policies and Management's
ability to monitor and control financial and operating risks. For this reason,
the overall financial health of the Regulated Companies and the assessment of
the Regulated Companies by various regulatory agencies may differ from
conclusions that might be drawn solely from the level of the risk-based and
leverage capital ratios of the Regulated Companies.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies. In the policy statement, the FRB expressed
its view that a bank holding company experiencing earnings weaknesses should not
pay cash dividends which exceed its net income or which could only be funded in
ways that would weaken its financial health, such as by borrowing. The FRB also
may impose limitations on the payment of dividends as a condition to its
approval of certain applications, including applications for approval of mergers
and acquisitions.
REGULATION OF BANKS
Manufacturers Bank, as an Illinois banking corporation, is subject to
the rules, regulations, supervision and examination of the Commissioner. The
deposit accounts of Manufacturers Bank are insured up to the applicable limits
by the FDIC's Bank Insurance Fund ("BIF"). Thus, Manufacturers Bank is subject
to regulation, supervision and examination by the FDIC. Such regulations apply
to, among other things, insurance of deposit accounts, a bank's capital ratios,
payment of dividends, liquidity requirements, the nature and amount of the
investments that a bank may make, transactions with
56
<PAGE>
affiliates, community and consumer lending laws, internal policies and controls,
reporting by and examination of a bank and changes in control of a bank.
DEPOSIT INSURANCE. As an FDIC-insured institution, Manufacturers Bank
is required to pay deposit insurance premiums to the FDIC. Under FDICIA and the
FDIC regulations thereunder, Manufacturers Bank is required to pay deposit
insurance premiums based on the risk it poses to the BIF. The FDIC has authority
to raise or lower assessment rates on insured deposits in order to achieve
certain designated reserve ratios in the BIF and to impose special additional
assessments. The current assessment rate schedule provides for an assessment
range of zero to .27% of deposits, depending on capital and supervisory factors.
Each depository institution is assigned to one of three capital groups: "well
capitalized," "adequately capitalized" or "under capitalized." Within each
capital group, institutions are assigned to one of three supervisory subgroups:
Subgroup A, Subgroup B or Subgroup C. Subgroup A consists of financially sound
institutions with only a few, minor weaknesses. Subgroup B consists of
institutions that demonstrate weaknesses which, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the BIF. Subgroup C consists of institutions that pose a substantial probability
of loss to the BIF unless effective corrective action is taken. Accordingly,
there are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after hearing, that the institution has
engaged or is engaging in unsafe or unsound banking practices, is in a condition
that is unsafe or unsound for the continuation of operations or otherwise has
violated any applicable law, regulation or order, or any condition imposed in
writing by or in a written agreement with the FDIC. The FDIC also may suspend
deposit insurance temporarily during the pendency of a proceeding to terminate
insurance if the institution has no tangible capital.
On December 20, 1996, the FDIC adopted the updated Uniform Financial
Institutions Rating System ("UFIRS") as a policy statement of the FDIC. Under
the UFIRS, each financial institution is assigned a composite rating based on an
evaluation and rating of six essential components of an institution's financial
condition and operations. These component factors address the adequacy of
capital, the quality of assets, the capability of Management, the quality and
level of earnings, the adequacy of liquidity, and the sensitivity to market
risk. The UFIRS is intended to promote and complement efficient examination
processes and also serves as a useful vehicle for identifying problem or
deteriorating financial institutions, as well as for categorizing institutions
with deficiencies in particular component areas. Further, UFIRS assists Congress
in following safety and soundness of the financial industry.
DIVIDENDS. Under the IBA, a bank, such as Manufacturers Bank, is
permitted to declare and pay dividends in amounts up to the amount of its
accumulated net profits, provided that it shall retain in its surplus at least
one-tenth of its net profits since the date of the declaration of its most
recent previous dividend until said additions to surplus, in the aggregate,
equal at least the paid-in-capital of such bank. In no event may such bank,
while it continues its banking business, pay dividends in excess of its net
profits then on hand (after deductions for losses and bad debts).
INSIDER AND AFFILIATE TRANSACTIONS. Manufacturers Bank is subject to
certain restrictions imposed by the Federal Reserve Act (the "FRA") and, the IBA
(and, respectively, the regulations adopted under each), on, among other
transactions, any extensions of credit to the Corporation and its other
subsidiaries, investments in the stock or other securities of the Corporation
and its other subsidiaries and the acceptance of the stock or other securities
of the Corporation or its other subsidiaries as collateral for loans made by
Manufacturers Bank. Certain limitations and reporting requirements are also
placed on extensions of credit by Manufacturers Bank to principal stockholders
of the Corporation and its other subsidiaries, and to directors and certain
executive officers of the Corporation and its other subsidiaries, and to
"related interests" of such principal stockholders, directors and officers.
COMMUNITY INVESTMENT AND CONSUMER PROTECTION LAWS. In connection with
its lending activities, Manufacturers Bank is subject to a variety of federal
laws designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the Federal Home Mortgage
Disclosure Act, the Real Estate Settlement Procedures Act, the Truth-in-Lending
Act, the Equal Credit Opportunity Act ("ECOA"), the Fair Credit Reporting Act
and
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the CRA. Manufacturers Bank is also subject to similar Illinois laws applicable
to, among other things, usury, credit discrimination and general business
practices.
Under the CRA, a financial institution has a continuing and affirmative
obligation, consistent with the safe and sound operation of such institution, to
help meet the credit needs of its entire community, including low- and moderate-
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires each federal banking regulatory agency, in connection with its
examination of a financial institution, to assess and assign one of four ratings
to the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications by the
institution, including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions of assets or
assumptions of liabilities, and savings and loan holding company acquisitions.
The CRA also requires that all institutions make public disclosure of their CRA
ratings.
The federal banking regulatory agencies will take into account the CRA
ratings of combining organizations and their level of compliance with ECOA in
connection with acquisitions involving the change or control of a financial
institution and, if any of the combining institutions have CRA ratings of "needs
improvement" or "unsatisfactory," the agency in question may deny the
application on CRA grounds or require corrective action as a condition of its
approval. The current CRA rating for Manufacturers Bank is "satisfactory."
In April 1995, the FRB and other federal banking regulatory agencies
adopted amendments revising their CRA regulations. Among other things, the
amended CRA regulations establish a new evaluation system that rates an
institution based on its actual performance in meeting community needs. In
particular, the system focuses on three tests (i) a lending test, to evaluate
the institution's record of making loans in its assessment areas; (ii) an
investment test, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefitting low or
moderate income individuals and business; and (iii) a service test, to evaluate
the institution's delivery of services through its branches, ATMs and other
offices. The amended CRA regulations also clarify how an institution's CRA
performance should be considered in the application process.
FDICIA RULES. Certain rules pursuant to FDICIA include: (i) real estate
lending standards for banks, which provide guidelines concerning loan-to-value
ratios for various types of real estate loans; (ii) revisions to the risk-based
capital rules to account for interest rate risk, concentration of credit risk
and the risks posed by "non-traditional activities;" (iii) rules requiring
depository institutions to develop and implement internal procedures to evaluate
and control credit and settlement exposure to their correspondent banks; (iv)
rules implementing the FDICIA provision prohibiting, with certain exceptions,
state member banks from making equity investments of types and in amounts not
permissible for national banks; and (v) rules addressing various "safety and
soundness" issues, including operations and managerial standards, standards for
asset quality, earnings and stock valuations, and compensation standards for the
officers, directors, employees and principal stockholders of the depository
institution.
CHANGE IN CONTROL. As an Illinois banking corporation controlled by a
bank holding company, Manufacturers Bank is not only subject to the rules
regarding change of control contained in the FRA and the FDIA and the
regulations promulgated thereunder by the FRB, but it is also subject to the
rules regarding change in control of Illinois banks contained in the IBA. The
Corporation and MNC are also subject to these rules by virtue of their control
of Manufacturers Bank. Generally, the IBA provides that no person or entity or
group of affiliated persons or entities may, without the Commissioner's consent,
directly or indirectly, acquire control of an Illinois bank. Such control is
presumed if any person owns or controls 20% or more of the outstanding stock of
an Illinois bank or such lesser amount as would enable the holder or holders, by
applying cumulative voting, to elect one director of the bank. In evaluating an
application for acquisition of control of an Illinois bank or bank holding
company, in addition to the Commissioner's consideration of other factors deemed
relevant, the Commissioner must find that the character of the proposed
management of the bank after the change in control will assure reasonable
promise of successful, safe and sound operation; the future earnings prospects
of the bank after the proposed change in control are favorable; and any prior
involvement that the proposed controlling persons or the
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proposed management of the institution after the change in control have had with
any other financial institution has been conducted in a safe and sound manner.
YEAR 2000 PROBLEM
On March 20, 1998, the Examination Parity and Year 2000 Readiness for
Financial Institutions Act, P.L. 105-164, became law. In that statute, Congress
emphasized the seriousness with which the financial services industry and its
regulators must view the Year 2000 Problem by requiring the regulators to
conduct seminars for, and otherwise provide information and model approaches
concerning common problems to, the nation's financial institutions concerning
this problem. The regulators, acting through the FFIEC, had already begun
compiling and disseminating such information through industry-wide
pronouncements which emphasized that safety and soundness examinations would
focus on the institutions' awareness and preparations with respect to the Year
2000 Problem.
After passage of P.L. 105-164, the efforts of the FFIEC, as well as the
individual regulatory agencies, in regard to the Year 2000 Problem began
increasing and numerous Financial Institution Letters and other bulletins were
issued mandating various actions that financial institutions must take in order
to avoid possible sanctions. In FIL-51-98, issued on May 13, 1998, the FFIEC
discussed the position of the FDIC in regard to contingency planning for the
Year 2000 Problem, stating that it is imperative for the Board of Directors and
senior management of each FDIC-insured institution to adopt a proactive role in
developing and supervising the contingency planning process. Furthermore,
according to the FDIC, an institution's failure to appropriately address the
Year 2000 Problem may result in supervisory actions, including formal and
informal enforcement actions, denials of applications filed pursuant to the
FDIA, civil money penalties and reductions in the institution's management
component of composite ratings. It was also recommended that the institution's
readiness plan should focus, among other things, on the key issues of business
risk and testing, with the goal being to provide assurance that mission-critical
functions will continue even if one or more systems fail. The readiness plan for
the Year 2000 Problem must also be viewed as an evolving, and not static,
document, and must be reviewed, updated and validated on a continuous basis.
Each financial institution is also required to provide forthright and honest
responses to questions and concerns raised by customers and business partners
about the institution's readiness for the Year 2000 Problem. See "Risk
Factors--Year 2000 Problem."
COAL CITY CAPITAL TRUST I
The Trust is a statutory business trust that was organized by the
Corporation under Delaware law on July 2, 1998, by the filing of a Certificate
of Trust with the Delaware Secretary of State. The Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities; (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures; and (iii) engaging in only those other activities
necessary, advisable or incidental thereto. The Junior Subordinated Debentures
will be the sole assets of the Trust, and, accordingly, payments under the
Junior Subordinated Debentures will be the sole revenue of the Trust. All of the
Common Securities will be owned by the Corporation. The Corporation will acquire
Common Securities in a Liquidation Amount equal to at least 3% of the total
capital of the Trust. The Common Securities will rank pari passu, and payments
will be made thereon pro rata, with the Capital Securities, except that upon the
occurrence and continuance of an event of default under the Trust Agreement
resulting from a Debenture Event of Default, the rights of the Corporation as
holder of the Common Securities to payments in respect of Distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the Capital Securities. See "Description of Capital
Securities--Subordination of Common Securities." The Trust has a term of
approximately 35 years, but may dissolve earlier as provided in the Trust
Agreement. The Trust's business and affairs are conducted by the Issuer
Trustees, each appointed by the Corporation as holder of the Common Securities.
The Issuer Trustees for the Trust will be LaSalle National Bank, as the Property
Trustee, Wilmington Trust Company, as the Delaware Trustee, and three
Administrative Trustees who are officers of the Corporation or the Bank. LaSalle
National Bank will also act as trustee under the Indenture and under the
Guarantee. See "Description of Junior Subordinated Debentures" and "Description
of Guarantee." The holder of the Common Securities of the Trust or, if an Event
of Default under the Trust Agreement has occurred and is continuing, the holders
of not less than a majority in Liquidation Amount of the Capital Securities will
be entitled to appoint, remove or replace the Property Trustee and/or the
Delaware Trustee. In no event will
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the holders of the Capital Securities have the right to vote to appoint, remove
or replace the Administrative Trustees; such rights will be vested exclusively
in the holder of the Common Securities. The duties and obligations of each
Issuer Trustee are governed by the Trust Agreement. The Corporation, as issuer
of the Junior Subordinated Debentures, will pay all fees, expenses, debts and
obligations (other than the payment of principal or interest on the Trust
Securities) related to the Trust and the offering of the Capital Securities and
will pay, directly or indirectly, all ongoing costs, expenses and liabilities of
the Trust. The principal executive office of the Trust is located at the Main
Banking Premises.
DESCRIPTION OF CAPITAL SECURITIES
The Capital Securities will represent preferred beneficial interests in
the Trust, and the holders thereof will be entitled to a preference over the
Common Securities in certain circumstances with respect to Distributions and
amounts payable on redemption of the Trust Securities or liquidation of the
Trust. See "--Subordination of Common Securities." The Trust Agreement will not
be qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). By its terms, however, the Trust Agreement will incorporate
certain provisions of the Trust Indenture Act. This summary of certain
provisions of the Capital Securities, the Common Securities and the Trust
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Trust Agreement,
including the definitions therein of certain terms.
GENERAL
The Capital Securities will be limited to $25.0 million aggregate
Liquidation Amount at any one time outstanding. The Capital Securities will rank
pari passu, and payments will be made thereon pro rata, with the Common
Securities, except as described under "--Subordination of Common Securities."
Legal title to the Junior Subordinated Debentures will be held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
Guarantee will not guarantee payment of Distributions or amounts payable on
redemption of the Capital Securities or liquidation of the Trust when the Trust
does not have funds on hand legally available for such payments. See
"Description of Guarantee."
DISTRIBUTIONS
Distributions on the Capital Securities will be cumulative, will
accumulate from July 24, 1998, and will be payable quarterly in arrears on March
1, June 1, September 1 and December 1 of each year, commencing December 1, 1998,
at a rate per annum, reset quarterly, to equal 3-month LIBOR (as defined below)
plus 180 basis points to the holders of the Capital Securities on the relevant
record dates. The record dates will be the 15th day of the month immediately
preceding the month in which the relevant payment occurs. The amount of
Distributions payable for any period will be computed on the basis of the actual
number of days elapsed in such period and a 360-day year. In the event that any
date on which Distributions are payable on the Capital Securities is not a
Business Day (as defined below), payment of the Distribution payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect to any such delay), except that if such
next succeeding Business Day falls in the next succeeding calendar month, such
payment shall be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). A "Business Day" shall mean any day other than a Saturday or a Sunday or
a legal holiday on which banking institutions in New York, New York or Chicago,
Illinois are open for business. The revenue of the Trust available for
distribution to holders of the Capital Securities will be limited to payments
under the Junior Subordinated Debentures in which the Trust will invest the
proceeds from the issuance and sale of the Trust Securities. See "Description of
Junior Subordinated Debentures--General." If the Corporation does not make
interest payments on the Junior Subordinated Debentures, the Property Trustee
will not have funds available to pay Distributions on the Capital Securities.
The payment of Distributions (if and to the extent the Trust has funds on hand
legally available for the payment of such Distributions) will be guaranteed by
the Corporation on a limited basis as set forth herein under "Description of
Guarantee."
The Distribution Rate on the Capital Securities for each quarter or
other period for which interest is payable will be determined on the
Determination Date (as defined below) for such quarter or other period for which
interest is payable
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and will be a per annum rate, reset quarterly, to 3-month LIBOR (determined as
set forth below), plus 180 basis points, and will be effective as of the first
day of such quarter or other period for which interest is payable.
DETERMINATION OF 3-MONTH LIBOR
The Calculation Agent will calculate the interest rate for each
interest period based on 3-month LIBOR commencing on the second London Banking
Day immediately following the Determination Date for such period. "3-month
LIBOR" means, with respect to an interest period relating to a Distribution
Date, the London interbank offered rate for three-month, Eurodollar deposits
determined in the following order of priority:
(a) the rate (expressed as a percentage per annum) for
Eurodollar deposits having a three-month maturity that appears on
Telerate Page 3750 as of 11:00 a.m. (London time) on the related
Determination Date;
(b) if such rate does not appear on Telerate Page 3750 as of
11:00 a.m. (London time) on the related Determination Date, 3-month
LIBOR will be the arithmetic mean of the rates (expressed as
percentages per annum) for Eurodollar deposits having a three-month
maturity that appear on Reuters Monitor Money Rates Page LIBO ("Reuters
Page LIBO") as of 11:00 a.m. (London time) on such Determination Date;
(c) if such rate does not appear on Reuters Page LIBO as of
11:00 a.m. (London time) on the related Determination Date, the
Calculation Agent will request the principal London offices of four
leading banks in the London interbank market to provide such banks'
offered quotations (expressed as percentages per annum) to prime banks
in the London interbank market for Eurodollar deposits having a
three-month maturity as of 11:00 a.m. (London time) on such
Determination Date. If at least two quotations are provided, 3-month
LIBOR will be the arithmetic mean of such quotations;
(d) if fewer than two such quotations are provided as
requested in clause (c) above, the Calculation Agent will request four
major New York City banks to provide such banks' offered quotations
(expressed as percentages per annum) to leading European banks for
loans in Eurodollars as of 11:00 a.m. (London time) on such
Determination Date. If at least two such quotations are provided,
3-month LIBOR will be the arithmetic mean of such quotations; and
(e) if fewer than two such quotations are provided as
requested in clause (d) above, 3-month LIBOR will be 3-month LIBOR
determined with respect to the interest period immediately preceding
such current interest period.
If the rate for Eurodollar deposits having a three-month maturity that
initially appears on Telerate Page 3750 or Reuters Page LIBO, as the case may
be, as of 11:00 a.m. (London time) on the related Determination Date is
superseded on Telerate Page 3750 or Reuters Page LIBO, as the case may be, by a
corrected rate before 12:00 noon (London time) on the London Banking Day
immediately following such Determination Date, the corrected rate as so
substituted on the applicable page will be the applicable 3-month LIBOR for such
Determination Date.
As used herein:
"Calculation Agent" means Wilmington Trust Company, Wilmington,
Delaware.
"Determination Date" means the date that is two London Banking Days
preceding the first day of any period for which a Distribution will be payable.
"London Banking Day" means a day on which dealings in deposits in U.S.
dollars are transacted in the London interbank market.
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"Telerate Page 3750" means the display designated as "Page 3750" on the
Dow Jones Telerate Service (or such other page as may replace Page 3750 on that
service or such other service or services as may be nominated by the British
Bankers' Association as the information vendor for the purpose of displaying
London interbank offered rates for U.S. dollar deposits).
All percentages resulting from any calculations on the Capital
Securities will be rounded, if necessary, to the nearest one hundred-thousandth
of a percentage point, with five one-millionths of a percentage point rounded
upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)),
and all dollar amounts used in or resulting from such calculation will be
rounded to the nearest cent (with one-half cent being rounded upward).
On the Determination Date, the Calculation Agent shall notify the
Corporation and the Paying Agent of the applicable Distribution Rate in effect
for the related Distribution Period. The Calculation Agent shall, upon the
request of the holder of any Capital Securities, provide the Distribution Rate
then in effect. All calculations made by the Calculation Agent in the absence of
manifest error shall be conclusive for all purposes and binding on the
Corporation and the holders of the Capital Securities.
OPTION TO DEFER INTEREST PAYMENTS
So long as no Debenture Event of Default shall have occurred and be
continuing, the Corporation will have the right under the Indenture to elect to
defer the payment of interest on the Junior Subordinated Debentures, at any time
or from time to time, for a period not exceeding 20 consecutive quarterly
periods with respect to each Extension Period, provided that no Extension Period
shall end on a date other than an Interest Payment Date, or extend beyond the
Stated Maturity Date. Upon any such election, quarterly Distributions on the
Capital Securities will be deferred by the Trust during such Extension Period.
Distributions to which holders of the Capital Securities are entitled during any
such Extension Period will accumulate additional Distributions thereon at the
applicable periodic Distribution Rate, compounded quarterly from the relevant
Distribution Date, but not exceeding the interest rate then accruing on the
Junior Subordinated Debentures. The term "Distributions," as used herein, shall
include any such additional Distributions.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, to end
on a date other than an Interest Payment Date or to extend beyond the Stated
Maturity Date. Upon the termination of any such Extension Period and the payment
of all amounts then due on any Interest Payment Date, the Corporation may elect
to begin a new Extension Period, subject to the above requirements. No interest
shall be due and payable during an Extension Period, except at the end thereof.
The Corporation must give the Property Trustee, the Administrative Trustees and
the Debenture Trustee notice of its election of any such Extension Period (or an
extension thereof) at least five Business Days prior to the earlier of (i) the
date the Distributions on the Capital Securities would have been payable except
for the election to begin such Extension Period; and (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or automated quotation system or to holders of such Capital Securities of the
record date or the date such Distributions are payable, but in any event not
less than five Business Days prior to such record date. There is no limitation
on the number of times that the Corporation may elect to begin an Extension
Period. See "Description of Junior Subordinated Debentures--Option to Extend
Interest Payment Date" and "Certain Federal Income Tax Consequences-- Original
Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
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reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock related to the
issuance of common stock or rights under any of the Corporation's benefit plans
for its directors, officers or employees). The Corporation has no current
intention to exercise its option to defer payments of interest on the Junior
Subordinated Debentures.
REDEMPTION
Upon the repayment on the Stated Maturity Date or prepayment, in whole
or in part, prior to the Stated Maturity Date of the Junior Subordinated
Debentures (other than following the distribution of the Junior Subordinated
Debentures to the holders of the Trust Securities), the proceeds from such
repayment or prepayment shall be applied by the Property Trustee to redeem a
Like Amount (as defined below) of the Trust Securities, upon not less than 30
nor more than 60 days' notice of a date of redemption (the "Redemption Date"),
at the Redemption Price, which shall be equal to the principal of, and accrued
and unpaid interest on, the Junior Subordinated Debentures being redeemed. See
"Description of Junior Subordinated Debentures--Optional Prepayment" and
"--Special Event Prepayment." If less than all of the Junior Subordinated
Debentures are to be prepaid on a Redemption Date, then the proceeds of such
prepayment shall be allocated pro rata to the Trust Securities. Upon the entry
of an order for the dissolution of the Trust by a court of competent
jurisdiction, the Debentures thereafter will be subject to optional prepayment,
in whole, but not in part, on or after the Initial Optional Redemption Date.
"Like Amount" means (i) with respect to a redemption of the Trust
Securities, Trust Securities having a Liquidation Amount equal to the principal
amount of Junior Subordinated Debentures to be paid in accordance with their
terms; and (ii) with respect to a distribution of Junior Subordinated Debentures
upon the liquidation of the Trust, Junior Subordinated Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
holder to whom such Junior Subordinated Debentures are distributed.
The Corporation will have the option to prepay the Junior Subordinated
Debentures (i) in whole or in part, on or after the Initial Optional Redemption
Date; and (ii) in whole but not in part, at any time prior to the Initial
Optional Redemption Date, upon the occurrence of a Special Event, in each case,
at the Prepayment Price and subject to the receipt of any required regulatory
approval. See "Description of Junior Subordinated Debentures--Optional
Prepayment" and "--Special Event Prepayment."
LIQUIDATION OF THE TRUST AND DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
The Corporation will have the right at any time to dissolve the Trust
and, after satisfaction of liabilities to creditors of the Trust as required by
applicable law, to cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Securities in liquidation of the Trust. Such right is
subject to (i) the Corporation having received an opinion of counsel to the
effect that such distribution will not be a taxable event to holders of Capital
Securities; and (ii) receipt of any required regulatory approval.
The Trust shall automatically dissolve upon the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Corporation;
(ii) the distribution of a Like Amount of the Junior Subordinated Debentures to
the holders of the Trust Securities, if the Corporation, as Sponsor, has given
written direction to the Property Trustee to dissolve the Trust (which direction
is optional and, except as described above, wholly within the discretion of the
Corporation, as Sponsor); (iii) redemption of all of the Trust Securities as
described under "--Redemption;" (iv) expiration of the term of the Trust; and
(v) the entry of an order for the dissolution of the Trust by a court of
competent jurisdiction.
If a dissolution occurs as described in clause (i), (ii), (iv), or (v)
above, the Trust shall be liquidated by the Issuer Trustees as expeditiously as
the Issuer Trustees determine to be possible by distributing, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practicable, in which event
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such holders will be entitled to receive out of the assets of the Trust legally
available for distribution to holders, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, an amount equal to the
aggregate of the Liquidation Amount plus accumulated and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets on hand legally available to pay in
full the aggregate Liquidation Distribution, then the amounts payable directly
by the Trust on the Trust Securities shall be paid on a pro rata basis, except
that if a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities. See
"--Subordination of Common Securities."
If the Corporation elects not to prepay the Junior Subordinated
Debentures prior to maturity in accordance with their terms and either elects
not to or is unable to liquidate the Trust and distribute the Junior
Subordinated Debentures to holders of the Trust Securities, the Trust Securities
will remain outstanding until the repayment of the Junior Subordinated
Debentures on the Stated Maturity Date.
After the liquidation date is fixed for any distribution of Junior
Subordinated Debentures to holders of the Trust Securities (i) the Trust
Securities will no longer be deemed to be outstanding; (ii) DTC or its nominee
will receive, in respect of each registered global certificate, if any,
representing Trust Securities and held by it, a registered global certificate or
certificates representing the Junior Subordinated Debentures to be delivered
upon such distribution; and (iii) any certificates representing Trust Securities
not held by DTC or its nominee will be deemed to represent Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of such
Trust Securities, and bearing accrued and unpaid interest in an amount equal to
the accumulated and unpaid Distributions on such Trust Securities until such
certificates are presented to the Administrative Trustees or their agent for
cancellation, whereupon the Corporation will issue to such holder, and the
Debenture Trustee will authenticate, a certificate representing such Junior
Subordinated Debentures.
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Securities if a dissolution and liquidation of the Trust
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Trust, may trade at a discount to the price
that the investor paid to purchase the Capital Securities offered hereby.
REDEMPTION PROCEDURES
If applicable, Trust Securities shall be redeemed at the applicable
Redemption Price with the proceeds from the contemporaneous repayment or
prepayment of the Junior Subordinated Debentures. Any redemption of Trust
Securities shall be made, and the applicable Redemption Price shall be payable,
on the Redemption Date only to the extent that the Trust has funds legally
available for the payment of such applicable Redemption Price. See also
"--Subordination of Common Securities."
If the Trust gives a notice of redemption in respect of the Capital
Securities, then, by 12:00 noon, Chicago time, on the Redemption Date, to the
extent funds are legally available, with respect to the Capital Securities held
by DTC or its nominees, the Property Trustee will deposit or cause the Paying
Agent (as defined herein) to deposit irrevocably with DTC funds sufficient to
pay the applicable Redemption Price. See "--Form, Denomination, Book Entry
Procedures and Transfer." With respect to the Capital Securities held in
certificated form, the Property Trustee, to the extent funds are legally
available, will irrevocably deposit with the Paying Agent for the Capital
Securities funds sufficient to pay the applicable Redemption Price and will give
such Paying Agent irrevocable instructions and authority to pay the applicable
Redemption Price to the holders thereof upon surrender of their certificates
evidencing the Capital Securities. See "--Payment and Paying Agency."
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date shall be payable to the holders of such Capital Securities on
the relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
date of such deposit, all rights of the holders of the Capital Securities called
for redemption will cease, except the right of the holders of such Capital
Securities to receive the applicable Redemption Price, but without interest on
such Redemption Price, and such Capital Securities will cease to be outstanding.
In the event that any Redemption Date of Capital Securities is not a Business
Day, then the applicable Redemption Price
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payable on such date will be paid on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such next succeeding Business Day falls in the next calendar
month, such payment shall be made on the immediately preceding Business Day. In
the event that payment of the applicable Redemption Price is improperly withheld
or refused and not paid either by the Trust or by the Corporation pursuant to
the Guarantee as described under "Description of Guarantee" (i) Distributions on
Capital Securities will continue to accumulate at the then applicable rate, from
the Redemption Date originally established by the Trust to the date such
applicable Redemption Price is actually paid; and (ii) the actual payment date
will be the Redemption Date for purposes of calculating the applicable
Redemption Price.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days prior to the Redemption Date to each holder of Trust Securities at
its registered address. Unless the Corporation defaults in payment of the
applicable Redemption Price on, or in the repayment of, the Junior Subordinated
Debentures, on and after the Redemption Date Distributions will cease to accrue
on the Trust Securities called for redemption.
Subject to applicable law (including, without limitation, United States
federal securities law), the Corporation or its subsidiaries may at any time and
from time to time purchase outstanding Capital Securities by tender, in the open
market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date or Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Capital Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the applicable
Redemption Price the full amount of such Redemption Price, shall have been made
or provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all Distributions on, or Redemption
Price of, the Capital Securities then due and payable.
In the case of any Event of Default, the Corporation as holder of the
Common Securities will be deemed to have waived any right to act with respect to
such Event of Default until the effect of such Event of Default shall have been
cured, waived or otherwise eliminated. Until any such Event of Default has been
so cured, waived or otherwise eliminated, the Property Trustee shall act solely
on behalf of the holders of the Capital Securities and not on behalf of the
Corporation as holder of the Common Securities, and only the holders of the
Capital Securities will have the right to direct the Property Trustee to act on
their behalf.
EVENTS OF DEFAULT; NOTICE
The occurrence of a Debenture Event of Default constitutes an "Event of
Default" under the Trust Agreement. See "Description of Junior Subordinated
Debentures--Debenture Events of Default."
Within 10 Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Capital Securities, the
Administrative Trustees and the Corporation, as Sponsor, unless such Event of
Default shall have been cured or waived. The Corporation, as Sponsor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Capital Securities shall have a preference over the Common Securities as
described under "--Liquidation of the Trust and Distribution of Junior
Subordinated Debentures" and "--Subordination of Common Securities."
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REMOVAL OF ISSUER TRUSTEES
Unless a Debenture Event of Default shall have occurred and be
continuing, any Issuer Trustee may be removed at any time by the holder of the
Common Securities. If a Debenture Event of Default has occurred and is
continuing, the Property Trustee and the Delaware Trustee may be removed at such
time by the holders of a majority in Liquidation Amount of the outstanding
Capital Securities. In no event will the holders of the Capital Securities have
the right to vote to appoint, remove or replace the Administrative Trustees,
which voting rights are vested exclusively in the Corporation as the holder of
the Common Securities. No resignation or removal of an Issuer Trustee and no
appointment of a successor trustee shall be effective until the acceptance of
appointment by the successor trustee in accordance with the provisions of the
Trust Agreement.
MERGER OR CONSOLIDATION OF ISSUER TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Issuer Trustee shall be a party, or
any Person succeeding to all or substantially all of the corporate trust
business of such Issuer Trustee, shall be the successor of such Issuer Trustee
under the Trust Agreement, provided such Person shall be otherwise qualified and
eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets as an
entirety or substantially as an entirety to any corporation or other Person,
except as described below or as otherwise described under "--Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." The Trust may, at the
request of the Corporation, as Sponsor, with the consent of the Administrative
Trustees but without the consent of the holders of the Capital Securities, merge
with or into, consolidate, amalgamate, or be replaced by or convey, transfer or
lease its properties and assets as an entirety or substantially as an entirety
to a trust organized as such under the laws of any State, provided, that (i)
such successor entity either (a) expressly assumes all of the obligations of the
Trust with respect to the Trust Securities, or (b) substitutes for the Trust
Securities other securities having substantially the same terms as the Trust
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Trust Securities rank in priority with respect to distributions
and payments upon liquidation, redemption and otherwise; (ii) the Corporation
expressly appoints a trustee of such successor entity possessing the same powers
and duties as the Property Trustee with respect to the Junior Subordinated
Debentures; (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Securities are then
listed or quoted, if any; (iv) if the Capital Securities (including any
Successor Securities) are rated by any nationally recognized statistical rating
organization prior to such transaction, such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not cause the
Capital Securities (including any Successor Securities) or, if the Junior
Subordinated Debentures are so rated, the Junior Subordinated Debentures, to be
downgraded by any such nationally recognized statistical rating organization;
(v) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect; (vi) such successor entity has a purpose identical to that of
the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Corporation has received an opinion from
independent counsel to the Trust experienced in such matters to the effect that
(a) such merger, consolidation, amalgamation, replacement, conveyance, transfer
or lease does not adversely affect the rights, preferences and privileges of the
holders of the Trust Securities (including any Successor Securities) in any
material respect (other than any dilution of such holders' interests in the new
entity), and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"); and
(viii) the Corporation or any permitted successor or assignee owns all of the
common securities of such successor entity and guarantees the obligations of
such successor entity under the Successor Securities at least to the extent
provided by the Guarantee and the Common Guarantee. Notwithstanding the
foregoing, the Trust shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Securities, consolidate, amalgamate, merge with
or into, or be replaced
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by or convey, transfer or lease its properties and assets as an entirety or
substantially as an entirety to, any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the Trust or the successor entity not to be classified as a grantor
trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "--Mergers, Consolidations,
Amalgamations or Replacements of the Trust" and "Description of
Guarantee--Amendments and Assignment" and as otherwise required by law and the
Trust Agreement, the holders of the Capital Securities will have no voting
rights.
The Trust Agreement may be amended from time to time by the
Corporation, the Property Trustee and the Administrative Trustees, without the
consent of the holders of the Trust Securities (i) to cure any ambiguity,
correct or supplement any provisions in the Trust Agreement that may be
inconsistent with any other provision, or to make any other provisions with
respect to matters or questions arising under the Trust Agreement, which shall
not be inconsistent with the other provisions of the Trust Agreement; or (ii) to
modify, eliminate or add to any provisions of the Trust Agreement to such extent
as shall be necessary to ensure that the Trust will be classified for United
States federal income tax purposes as a grantor trust at all times that any
Trust Securities are outstanding or to ensure that the Trust will not be
required to register as an "investment company" under the Investment Company
Act; provided, however, that in the case of clause (i), such action shall not
adversely affect in any material respect the interests of the holders of the
Trust Securities. Any amendments of the Trust Agreement pursuant to the
foregoing shall become effective when notice thereof is given to the holders of
the Trust Securities. The Trust Agreement may be amended by the Issuer Trustees
and the Corporation (i) with the consent of holders representing a majority
(based upon Liquidation Amount) of the outstanding Trust Securities; and (ii)
upon receipt by the Issuer Trustees of an opinion of counsel experienced in such
matters to the effect that such amendment or the exercise of any power granted
to the Issuer Trustees in accordance with such amendment will not affect the
Trust's status as a grantor trust for United States federal income tax purposes
or the Trust's exemption from status as an "investment company" under the
Investment Company Act, provided that, without the consent of each holder of
Trust Securities, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date; or (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Debenture Trustee with respect to
the Junior Subordinated Debentures; (ii) waive certain past defaults under the
Indenture; (iii) exercise any right to rescind or annul a declaration of
acceleration of the maturity of the principal of the Junior Subordinated
Debentures; or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in Liquidation Amount of all outstanding Capital Securities;
provided, however, that where a consent under the Indenture would require the
consent of each holder of Junior Subordinated Debentures affected thereby, no
such consent shall be given by the Property Trustee without the prior approval
of each holder of the Capital Securities. The Issuer Trustees shall not revoke
any action previously authorized or approved by a vote of the holders of the
Capital Securities except by subsequent vote of such holders. The Property
Trustee shall notify each holder of Capital Securities of any notice of default
with respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of such holders of the Capital Securities, prior to taking
any of the foregoing actions, the Issuer Trustees shall obtain an opinion of
counsel experienced in such matters to the effect that the Trust will not be
classified as an association taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Capital Securities may be given at
a meeting of such holders convened for such purpose or pursuant to written
consent. The Property Trustee will cause a notice of any meeting at which
holders of Capital Securities are entitled to vote, or of any matter upon which
action by written consent of such holders has been taken, to be given to each
holder of record of Capital Securities in the manner set forth in the Trust
Agreement.
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No vote or consent of the holders of Capital Securities will be
required for the Trust to redeem and cancel the Capital Securities in accordance
with the Trust Agreement.
Notwithstanding that holders of the Capital Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by the Corporation, the Issuer Trustees or any
affiliate of the Corporation or of any Issuer Trustee, shall, for purposes of
such vote or consent, be treated as if they were not outstanding.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Capital Securities are being offered and sold to qualified
institutional buyers ("QIBs") in reliance on Rule 144A ("Rule 144A Capital
Securities"). Capital Securities also may be offered and sold to institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) ("Institutional Accredited Investors") in transactions exempt
from registration under the Securities Act not made in reliance on Rule 144A
("Other Capital Securities").
In the event that Capital Securities are issued in certificated form,
the Capital Securities will be issued in blocks having a Liquidation Amount of
not less than $100,000 (100 Capital Securities) and multiples of $1,000 in
excess thereof and may be transferred or exchanged only in such blocks in the
manner and at the offices described below.
Rule 144A Capital Securities initially will be represented by one or
more Capital Securities in registered, global form (collectively, the "Global
Capital Securities"). The Global Capital Securities will be deposited upon
issuance with the Property Trustee as custodian for DTC, in Chicago, Illinois,
and registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Capital Securities may be
transferred, in whole and not in part, only to another nominee of DTC or to a
successor of DTC or its nominee and only in amounts that would not cause a
holder to own less than 100 Capital Securities. Beneficial interests in the
Global Capital Securities may not be exchanged for Capital Securities in
certificated form, except in the limited circumstances described below. See
"--Exchange of Book-Entry Capital Securities for Certificated Capital
Securities."
Other Capital Securities will be issued only in registered,
certificated (i.e., non-global) form. Other Capital Securities may not be
exchanged for beneficial interests in any Global Capital Securities, except in
the limited circumstances described below. See "--Exchange of Certificated
Capital Securities for Book-Entry Capital Securities."
Rule 144A Capital Securities and Other Capital Securities will be
subject to certain restrictions on transfer and will bear a restrictive legend
as described under "Notice to Investors." In addition, transfer of beneficial
interests in the Global Capital Securities will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants, which may
change from time to time.
DEPOSITARY PROCEDURES
DTC has advised the Trust and the Corporation that DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Initial Purchaser), banks, trust companies, clearing corporations
and certain other organizations. Indirect access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interest and transfer of ownership
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interest of each actual purchaser of each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Trust and the Corporation that, pursuant to
procedures established by it, (i) upon deposit of the Global Capital Securities,
DTC will credit the accounts of Participants designated by the Initial Purchaser
with portions of the Liquidation Amount of the Global Capital Securities, and
(ii) ownership of such interests in the Global Capital Securities will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or by the Participants and
the Indirect Participants (with respect to other owners of beneficial interests
in the Global Capital Securities).
Investors in the Global Capital Securities may hold their interests
therein directly through DTC if they are Participants, or indirectly through
organizations that are Participants. All interests in a Global Capital Security
will be subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Capital Security to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Capital Security to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the Capital Securities, see "--Exchange
of Book-Entry Capital Securities for Certificated Capital Securities" and
"--Exchange of Certificated Capital Securities for Book-Entry Capital
Securities."
Except as described below, owners of interests in the Global Capital
Securities will not have Capital Securities registered in their name, will not
receive physical delivery of Capital Securities in certificated form and will
not be considered the registered owners or holders thereof under the Trust
Agreement for any purpose.
Payments in respect of the Global Capital Security registered in the
name of DTC, or its nominee, will be payable by the Property Trustee to DTC in
its capacity as the registered holder under the Trust Agreement. Under the terms
of the Trust Agreement, the Property Trustee will treat the persons in whose
names the Capital Securities, including the Global Capital Securities, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Property
Trustee nor any agent thereof has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Global Capital Securities or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Capital Securities; or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Trust and the Corporation that its current practice, upon receipt of
any payment in respect of securities such as the Capital Securities, is to
credit the accounts of the relevant Participants with the payment on the payment
date, in amounts proportionate to their respective holdings in Liquidation
Amount of beneficial interests in the relevant security as shown on the records
of DTC unless DTC has reason to believe it will not receive payment on such
payment date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Capital Securities will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
DTC, the Property Trustee, the Trust or the Corporation. None of the Trust, the
Corporation or the Property Trustee will be liable for any delay by DTC or any
of its Participants or Indirect Participants in identifying the beneficial
owners of the Capital Securities, and the Trust, the Corporation and the
Property Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Any secondary market trading activity in interests in the Global
Capital Securities will settle in immediately available funds, subject in all
cases to the rules and procedures of DTC and its Participants. Transfers between
Participants in DTC will be effected in accordance with DTC's procedures, and
will settle in same-day funds.
DTC has advised the Trust and the Corporation that it will take any
action permitted to be taken by a holder of Capital Securities (including,
without limitation, the presentation of Capital Securities for exchange as
described below) only
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at the direction of one or more Participants to whose account with DTC interests
in the Global Capital Securities are credited and only in respect of such
portion of the Liquidation Amount of the Capital Securities as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the Trust Agreement, DTC reserves the right to
exchange the Global Capital Securities for legended Capital Securities in
certificated form and to distribute such Capital Securities to its Participants.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Trust and the Corporation believe
to be reliable, but neither the Trust nor the Corporation takes responsibility
for the accuracy thereof.
Although DTC has agreed to the foregoing procedures to facilitate
transfers of interests in the Global Capital Securities among Participants in
DTC, it is under no obligation to perform or to continue to perform such
procedures, and such procedures may be discontinued at any time. None of the
Trust, the Corporation or the Property Trustee will have any responsibility for
the performance by DTC or its Participants or Indirect Participants of any of
their respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY CAPITAL SECURITIES FOR CERTIFICATED CAPITAL SECURITIES
A Global Capital Security is exchangeable for Capital Securities in
registered certificated form if (i) DTC (a) notifies the Trust that it is
unwilling or unable to continue as Depositary for the Global Capital Security
and the Trust thereupon fails to appoint a successor Depositary within 90 days
of receipt of such notice, or (b) has ceased to be a clearing agency registered
under the Exchange Act and the Trust thereupon fails to appoint a successor
Depositary within 90 days of becoming aware of such condition; (ii) the
Corporation in its sole discretion elects to cause the issuance of the Capital
Securities in certificated form; or (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of time
or both would be an Event of Default under the Trust Agreement. In addition,
beneficial interests in a Global Capital Security may be exchanged by or on
behalf of DTC for certificated Capital Securities upon request by DTC, but only
upon at least 20 days prior written notice given to the Property Trustee in
accordance with DTC's customary procedures. In all cases, certificated Capital
Securities delivered in exchange for any Global Capital Security or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the Depositary (in accordance with
its customary procedures) and will bear the restrictive legend referred to in
"Notice to Investors," unless the Property Trustee determines otherwise in
compliance with applicable law.
EXCHANGE OF CERTIFICATED CAPITAL SECURITIES FOR BOOK-ENTRY CAPITAL SECURITIES
Other Capital Securities, which will be issued in certificated form,
may not be exchanged for beneficial interests in any Global Capital Security,
unless such exchange occurs in connection with a transfer of such Other Capital
Securities and the transferor first delivers to the Property Trustee a written
certificate (in the form provided in the Trust Agreement) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Capital Securities.
PAYMENT AND PAYING AGENCY
Payments with respect to the Capital Securities held in global form
shall be made to the Depositary, which shall credit the relevant accounts at the
Depositary on the applicable Distribution Dates, or with respect to the Capital
Securities that are not held by the Depositary, such payments shall be made by
check mailed to the address of the holder entitled thereto as such address shall
appear on the register. The paying agent (the "Paying Agent") shall initially be
the Property Trustee and any co-paying agent chosen by the Property Trustee and
acceptable to the Administrative Trustees and the Corporation. The Paying Agent
shall be permitted to resign as Paying Agent upon 30 days notice to the Property
Trustee, the Administrative Trustees and the Corporation. In the event that the
Property Trustee shall no longer be the Paying Agent, the Administrative
Trustees shall appoint a successor (which shall be a bank or trust company
acceptable to the Administrative Trustees and the Corporation) to act as Paying
Agent.
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RESTRICTIONS ON TRANSFER
The Capital Securities will be issued, and may be transferred, only in
blocks having a Liquidation Amount of not less than $100,000 (100 Capital
Securities) and multiples of $1,000 in excess thereof. Any attempted sale,
transfer or other disposition of Capital Securities in a block having a
Liquidation Amount of less than $100,000 shall be deemed to be void and of no
legal effect whatsoever. Any such purported transferee shall be deemed not to be
the holder of such Capital Securities for any purpose, including but not limited
to the receipt of Distributions on such Capital Securities, and such purported
transferee shall be deemed to have no interest whatsoever in such Capital
Securities.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the
Capital Securities.
Registration of transfers of the Capital Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange. The Trust will not be required to register or cause to be
registered the transfer of the Capital Securities after they have been called
for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, will undertake to perform only such duties as are
specifically set forth in the Trust Agreement and, during the existence of an
Event of Default, must exercise the same degree of care and skill as a prudent
person would exercise or use in the conduct of his or her own affairs. Subject
to this provision, the Property Trustee is under no obligation to exercise any
of the powers vested in it by the Trust Agreement at the request of any holder
of Trust Securities, unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Capital
Securities or the Common Securities are entitled under the Trust Agreement to
vote, then the Property Trustee shall take such action as is directed by the
Corporation and, if not so directed, shall take such action as it deems
advisable and in the best interests of the holders of the Trust Securities and
will have no liability, except for its own bad faith, negligence or willful
misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that (i) the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act; (ii) the Trust will be classified as a grantor trust for
United States federal income tax purposes; and (iii) the Junior Subordinated
Debentures will be treated as indebtedness of the Corporation for United States
federal income tax purposes. The Corporation and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Trust Agreement, that the Corporation
and the Administrative Trustees determine in their discretion to be necessary or
desirable for such purposes, as long as such action does not materially
adversely affect the interests of the holders of the Trust Securities.
The Trust Agreement provides that (i) holders of the Trust Securities
have no preemptive or similar rights to subscribe for any additional Trust
Securities, and (ii) the issuance of Trust Securities is not subject to
preemptive rights.
The Trust may not borrow money, issue debt, execute mortgages or pledge
any of its assets.
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DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the
Indenture, as supplemented from time to time. The Indenture will not be
qualified under the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). By its terms, however, the Indenture will incorporate certain
provisions of the Trust Indenture Act. This summary of certain terms and
provisions of the Junior Subordinated Debentures and the Indenture does not
purport to be complete, and where reference is made to particular provisions of
the Indenture, such provisions, including the definitions of certain terms, some
of which are not otherwise defined herein, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture by the Trust Indenture Act.
GENERAL
Concurrently with the issuance of the Capital Securities, the Trust
will invest the proceeds thereof, together with the consideration paid by the
Corporation for the Common Securities, in Junior Subordinated Debentures issued
by the Corporation. The Junior Subordinated Debentures will bear interest from
July 24 , 1998 at the rate per annum reset quarterly equal to 3-month LIBOR plus
180 basis points ("Interest Rate"), payable quarterly in arrears on March 1,
June 1, September 1 and December 1 of each year (each, an "Interest Payment
Date"), commencing December 1, 1998. It is anticipated that, until the
liquidation (if any) of the Trust, the Junior Subordinated Debentures will be
held in the name of the Property Trustee in trust for the benefit of the holders
of the Trust Securities. The amount of interest payable for any period will be
computed on the basis of the actual number of days elapsed in such period and a
360-day year. In the event that any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay), except that if such next succeeding Business Day falls in the next
succeeding calendar month, then such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. To the extent permitted by applicable law, accrued interest that
is not paid on the applicable Interest Payment Date will bear interest thereon
at the applicable periodic Interest Rate, compounded quarterly for each
quarterly period ("Compounded Interest"). The term "interest," as used herein,
shall include quarterly interest payments, interest on quarterly interest
payments not paid on the applicable Interest Payment Date and Additional Sums
(as defined below), as applicable.
The Interest Rate and amount of interest payable will be calculated or
determined in the same manner as the Distribution Rate and amounts of
Distributions payable, respectively, as described under "Description of Capital
Securities--Distributions."
The Junior Subordinated Debentures will be issued in denominations of
$100,000 and multiples of $1,000 in excess thereof. The Junior Subordinated
Debentures will mature on September 1, 2028 (the "Stated Maturity Date").
The Junior Subordinated Debentures will rank pari passu with all Other
Debentures and will be unsecured and will rank subordinate and junior in right
of payment to all Senior Indebtedness to the extent and in the manner set forth
in the Indenture. See "--Subordination."
The Corporation is a bank holding company regulated by the FRB, and
almost all of the operating assets of the Corporation are owned by its second
tier subsidiary, Manufacturers Bank. The Corporation relies primarily on
preferred stock dividends from MNC, which in turn relies on common stock
dividends from Manufacturers Bank, to meet its obligations for payment of
principal and interest on its outstanding debt obligations and corporate
expenses. There are regulatory limitations (discussed in more detail below) on
the payment of dividends to the Corporation from MNC and to MNC from
Manufacturers Bank. In addition to restrictions on the payment of dividends, the
Bank is subject to certain restrictions imposed by federal law on any extensions
of credit to, and certain other transactions with, the Corporation and MNC and
certain other affiliates, and on investments in stock or other securities
thereof. Such restrictions prevent the Corporation and MNC and such other
affiliates from borrowing from Manufacturers Bank, unless the loans are secured
by certain types of collateral. Furthermore, such secured loans, other
transactions and investments by Manufacturers Bank are generally limited in
amount as to each of the Corporation, MNC and such other affiliates to 10% of
Manufacturers Bank's capital and surplus, and as to all of the Corporation, MNC
and such other affiliates to an aggregate of 20% of Manufacturers
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Bank's capital and surplus. As of March 31, 1998, approximately $12.1 million of
credit was available to the Corporation from the Bank under this limitation.
Manufacturers Bank is a state non-member bank of the Federal Reserve
System and is regulated by the FDIC and the Commissioner. There are various
regulatory limitations applicable to the payment of dividends by MNC and
Manufacturers Bank as well as the payment of dividends by the Corporation to its
shareholders. Under the laws of Illinois, a state-chartered bank is permitted to
declare and pay dividends in amounts up to the amount of its accumulated net
profits, provided that it shall retain in its surplus at least one-tenth of its
net profits since the date of the declaration of its most recent previous
dividend until said additions to surplus, in the aggregate, equal at least the
paid-in-capital of such bank. In no event, therefore, may Manufacturers Bank,
while it continues its banking business, pay dividends in excess of its net
profits then on hand (after deduction for losses and bad debts). Under existing
supervisory practices at March 31, 1998, Manufacturers Bank could have paid
additional dividends of up to $1.5 million without regulatory approval and MNC
could have paid $7.8 million of dividends and complied with the minimum
regulatory capital requirements applicable to it. Bank regulatory agencies have
authority to prohibit MNC, Manufacturers Bank or the Corporation from engaging
in an unsafe or unsound practice in conducting their business. The payment of
dividends, depending upon the financial condition of Manufacturers Bank, MNC or
the Corporation, could be deemed to constitute such an unsafe or unsound
practice. The FRB has stated that, as a matter of prudent banking, a bank or
bank holding company should not maintain its existing rate of cash dividends on
common stock unless (i) the organization's net income available to common
shareholders over the past year has been sufficient to fund fully the dividends;
and (ii) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality, and overall financial condition.
FORM, REGISTRATION AND TRANSFER
If the Junior Subordinated Debentures are distributed to the holders of
the Trust Securities, the Junior Subordinated Debentures may be represented by
one or more global certificates registered in the name of Cede & Co., as the
nominee of DTC. The depositary arrangements for such Junior Subordinated
Debentures are expected to be substantially similar to those in effect for the
Capital Securities. For a description of DTC and the terms of the depositary
arrangements relating to payments, transfers, voting rights, redemptions and
other notices and other matters, see "Description of Capital Securities--Form,
Denomination, Book-Entry Procedures and Transfer."
PAYMENT AND PAYING AGENTS
Payment of principal of and interest on Junior Subordinated Debentures
will be made at the office of the Debenture Trustee in Chicago, Illinois or at
the office of such Paying Agent or Paying Agents as the Corporation may
designate from time to time, except that at the option of the Corporation
payment of any interest may be made, except in the case of Junior Subordinated
Debentures in global form (i) by check mailed to the address of the Person
entitled thereto as such address shall appear in the register for Junior
Subordinated Debentures; or (ii) by transfer to an account maintained by the
Person entitled thereto as specified in such register, provided that proper
transfer instructions have been received by the relevant record date. Payment of
any interest on any Junior Subordinated Debenture will be made to the Person in
whose name such Junior Subordinated Debenture is registered at the close of
business on the record date for such interest, except in the case of defaulted
interest. The Corporation may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, the Corporation will at
all times be required to maintain a Paying Agent in each place of payment for
the Junior Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any Paying Agent, or
then held by the Corporation in trust, for the payment of the principal of or
interest on any Junior Subordinated Debenture and remaining unclaimed for two
years after such principal or interest has become due and payable shall, at the
request of the Corporation, be repaid to the Corporation and the holder of such
Junior Subordinated Debenture shall thereafter look, as a general unsecured
creditor, only to the Corporation for payment thereof.
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OPTION TO EXTEND INTEREST PAYMENT DATE
So long as no Debenture Event of Default has occurred and is
continuing, the Corporation will have the right under the Indenture to defer the
payment of interest on the Junior Subordinated Debentures, at any time and from
time to time, for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period shall end on
a date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. At the end of such Extension Period, the Corporation must pay all interest
then accrued and unpaid (together with interest thereon at the applicable
periodic Interest Rate, compounded quarterly, to the extent permitted by
applicable law). During an Extension Period, interest will continue to accrue
and, if the Junior Subordinated Debentures have been distributed to holders of
the Trust Securities, holders of Junior Subordinated Debentures (or holders of
the Trust Securities while Trust Securities are outstanding) will be required to
accrue such deferred interest income for United States federal income tax
purposes prior to the receipt of cash attributable to such income. See "Certain
Federal Income Tax Consequences--Original Issue Discount."
During any such Extension Period, the Corporation may not (i) declare
or pay any dividends or distributions on, or redeem, purchase, acquire, or make
a liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, or interest or premium, if any, on or
repay, repurchase or redeem any debt securities of the Corporation (including
any Other Debentures) that rank pari passu with or junior in right of payment to
the Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including any Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock of the
Corporation related to the issuance of common stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees or any of
the Corporation's dividend reinvestment plans). The Corporation has no current
intention to exercise its option to defer payments of interest on the Junior
Subordinated Debentures.
Prior to the termination of any such Extension Period, the Corporation
may further extend such Extension Period, provided that such extension does not
cause such Extension Period to exceed 20 consecutive quarterly periods, end on a
date other than an Interest Payment Date or extend beyond the Stated Maturity
Date. Upon the termination of any such Extension Period and the payment of all
amounts then due, the Corporation may elect to begin a new Extension Period,
subject to the requirements set forth herein. No interest shall be due and
payable during an Extension Period, except at the end thereof. The Corporation
must give the Property Trustee, the Administrative Trustees and the Debenture
Trustee notice of its election of any Extension Period (or an extension thereof)
at least five Business Days prior to the earlier of (i) the date the
Distributions on the Trust Securities would have been payable except for the
election to begin or extend such Extension Period; or (ii) the date the
Administrative Trustees are required to give notice to any securities exchange
or to holders of Capital Securities of the record date or the date such
Distributions are payable, but in any event not less than five Business Days
prior to such record date. The Debenture Trustee shall give notice of the
Corporation's election to begin or extend a new Extension Period to the holders
of the Capital Securities. There is no limitation on the number of times that
the Corporation may elect to begin an Extension Period.
OPTIONAL PREPAYMENT
The Junior Subordinated Debentures will be prepayable, in whole or in
part, at the option of the Corporation on or after September 1, 2008 (the
"Initial Optional Redemption Date"), subject to the Corporation having received
any required regulatory approval, at a price (the "Prepayment Price") equal to
100% of the principal amount of the Junior Subordinated Debentures so prepaid,
plus accrued and unpaid interest thereon to the date of prepayment.
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SPECIAL EVENT PREPAYMENT
Prior to the Initial Optional Redemption Date, if a Special Event has
occurred and is continuing, the Corporation may, at its option and subject to
receipt of any required regulatory approval, elect to prepay the Junior
Subordinated Debentures, in whole but not in part, which election shall be made
at any time within 90 days of the occurrence of such Special Event, at the
Prepayment Price. If, following the occurrence of a Special Event, the
Corporation exercises its option to prepay the Junior Subordinated Debentures,
then the proceeds of that prepayment must be applied to redeem a Like Amount of
Trust Securities at the Redemption Price. See "Description of Capital
Securities--Redemption."
A "Special Event" means an Investment Company Event, a Regulatory
Capital Event or a Tax Event, as the case may be.
An "Investment Company Event" means the receipt by the Corporation and
the Trust of an opinion of independent securities counsel experienced in such
matters to the effect that as a result of (a) any amendment to, or change
(including any announced prospective change) in, the laws or any regulation
thereunder of the United States or any rules, guidelines or policies of any
applicable regulatory authority for the Corporation, or (b) any official
administrative or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or which pronouncement or
decision is announced on or after the date of original issuance of the Trust
Securities, the Trust is, or within 90 days of the date of such opinion will be,
considered an Investment Company that is required to be registered under the
Investment Company Act.
A "Regulatory Capital Event" means the receipt by the Corporation of an
opinion of independent bank regulatory counsel experienced in such matters to
the effect that, as a result of (i) any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any rules, guidelines or policies of an applicable
regulatory agency, or (ii) any official administrative pronouncement or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or which pronouncement or decision is announced on or after
the date of original issuance of the Trust Securities, the Capital Securities do
not constitute, or within 90 days of the date of such opinion, would not
constitute, Tier 1 Capital (or its then equivalent if the Corporation were
subject to such capital requirement).
A "Tax Event" means the receipt by the Corporation and the Trust of an
opinion of independent tax counsel experienced in such matters to the effect
that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws or any regulations thereunder of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such pronouncement or decision is announced on or after the date of
original issuance of the Trust Securities, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the date of such
opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures; (ii) interest payable
by the Corporation on the Junior Subordinated Debentures is not, or within 90
days of the date of such opinion will not be, deductible by the Corporation, in
whole or in part, for United States federal income tax purposes; or (iii) the
Trust is, or will be within 90 days of the date of such opinion, subject to more
than a de minimis amount of other taxes, duties or other governmental charges.
Notice of any prepayment will be mailed at least 30 days but not more
than 60 days before the prepayment date to each holder of Junior Subordinated
Debentures to be prepaid at its registered address. Unless the Corporation
defaults in payment of the prepayment price, on and after the prepayment date
interest shall cease to accrue on such Junior Subordinated Debentures called for
prepayment.
If the Trust is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, the Corporation will pay as
additional amounts on the Junior Subordinated Debentures such amounts as may be
necessary in order that the amount of Distributions then due and payable by the
Trust on the outstanding Trust Securities shall not be reduced as a result of
any additional taxes, duties or other governmental charges to which the Trust
has become subject as a result of a Tax Event ("Additional Sums").
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CERTAIN COVENANTS OF THE CORPORATION
The Corporation will also covenant that it will not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Corporation's capital stock;
(ii) make any payment of principal of, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Corporation (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Junior Subordinated Debentures; or (iii) make any guarantee payments with
respect to any guarantee by the Corporation of the debt securities of any
subsidiary of the Corporation (including any Other Guarantees) if such guarantee
ranks pari passu with or junior in right of payment to the Junior Subordinated
Debentures (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, common stock of the
Corporation, (b) any declaration of a dividend in connection with the
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, (c) payments under the Guarantee, (d) as a result of a
reclassification of the Corporation's capital stock or the exchange or
conversion of one class or series of the Corporation's capital stock for another
class or series of the Corporation's capital stock, (e) the purchase of
fractional interests in shares of the Corporation's capital stock pursuant to
the conversion or exchange provisions of such capital stock or the security
being converted or exchanged, and (f) purchases of common stock of the
Corporation related to the issuance of common stock or rights under any of the
Corporation's benefit plans for its directors, officers or employees or any of
the Corporation's dividend reinvestment plans), if at such time: (A) there shall
have occurred any event of which the Corporation has actual knowledge that (1)
is, or with the giving of notice or the lapse of time, or both, would be, a
Debenture Event of Default, and (2) with respect to which the Corporation shall
not have taken reasonable steps to cure; (B) the Corporation shall be in default
with respect to its payment of any obligations under the Guarantee; or (C) the
Corporation shall have given notice of its election to exercise its right to
commence an Extension Period as provided in the Indenture and such Extension
Period, or any extension thereof, shall have commenced and be continuing.
So long as the Trust Securities remain outstanding, the Corporation
also will covenant (i) to directly or indirectly maintain 100% direct or
indirect ownership of the Common Securities; provided, however, that any
permitted successor of the Corporation under the Indenture may succeed to the
Corporation's ownership of such Common Securities; (ii) to use its reasonable
efforts to cause the Trust (a) to remain a business trust, except in connection
with the distribution of Junior Subordinated Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities, or certain mergers, consolidations or amalgamations, each as
permitted by the Trust Agreement, and (b) to otherwise continue to be classified
as a grantor trust and not an association taxable as a corporation for United
States federal income tax purposes; (iii) to use its reasonable efforts to cause
each holder of Trust Securities to be treated as owning an undivided beneficial
interest in the Junior Subordinated Debentures; and (iv) to not cause, as
sponsor of the Trust, or permit, as holder of the Common Securities, the
dissolution, winding up or liquidation of the Trust, except as provided in the
Trust Agreement.
MODIFICATION OF INDENTURE
From time to time the Corporation and the Debenture Trustee may,
without the consent of the holders of Junior Subordinated Debentures, amend the
Indenture for specified purposes, including, among other things, curing
ambiguities, defects or inconsistencies, provided that any such action does not
materially adversely affect the interest of the holders of Junior Subordinated
Debentures, and qualifying, or maintaining the qualification of, the Indenture
under the Trust Indenture Act. The Indenture contains provisions permitting the
Corporation and the Debenture Trustee, with the consent of the holders of a
majority in aggregate principal amount of Junior Subordinated Debentures, to
modify the Indenture in a manner affecting the rights of the holders of Junior
Subordinated Debentures; provided, however, that no such modification may,
without the consent of the holders of each outstanding Junior Subordinated
Debenture so affected, (i) change the Stated Maturity Date, (ii) reduce the
principal amount of the Junior Subordinated Debentures or reduce the amount
payable on prepayment thereof or reduce the rate or extend the time of payment
of interest thereon except pursuant to the Corporation's right under the
Indenture to defer the payment of interest as provided therein (see "--Option to
Extend Interest Payment Date"), (iii) make the principal of, or interest on, the
Junior Subordinated Debentures payable in any coin or currency other than that
provided in the Junior Subordinated Debentures, (iv) impair or affect the right
of any holder of Junior Subordinated Debentures to institute suit for the
payment thereof, or (v) reduce the percentage of principal amount of Junior
Subordinated Debentures, the holders of which are required to consent to any
such modification of the Indenture.
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DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures constitutes a
"Debenture Event of Default" (whatever the reason for such Debenture Event of
Default and whether it shall be voluntary or involuntary or be effected by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(i) failure for 30 days to pay any interest (including
Compounded Interest and Additional Sums, if any) on the Junior
Subordinated Debentures or any Other Debentures, when due (subject to
the deferral of any due date in the case of an Extension Period with
respect to the Junior Subordinated Debentures or Other Debentures, as
the case may be); or
(ii) failure to pay any principal or premium, if any, on the
Junior Subordinated Debentures or any Other Debentures when due whether
at maturity, upon prepayment, by declaration of acceleration of
maturity or otherwise; or
(iii) failure to observe or perform any other covenant
contained in the Indenture for 90 days after written notice to the
Corporation from the Debenture Trustee or to the Corporation and the
Debenture Trustee from the holders of at least 25% in aggregate
outstanding principal amount of Junior Subordinated Debentures; or
(iv) certain events related to bankruptcy, insolvency or
reorganization of the Corporation.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures have, subject to certain exceptions, the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Debenture Trustee. The Debenture Trustee or the holders
of not less than 25% in aggregate outstanding principal amount of the Junior
Subordinated Debentures may declare the principal due and payable immediately
upon a Debenture Event of Default. The holders of a majority in aggregate
outstanding principal amount of the Junior Subordinated Debentures may annul
such declaration and waive the default if the default (other than the
non-payment of the principal of the Junior Subordinated Debentures which has
become due solely by such acceleration) has been cured and a sum sufficient to
pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee.
The holders of a majority in aggregate outstanding principal amount of
the Junior Subordinated Debentures affected thereby may, on behalf of the
holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal due otherwise than by acceleration has been deposited with the
Debenture Trustee) or a default in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Junior Subordinated Debenture.
The Indenture requires the annual filing by the Corporation with the
Debenture Trustee of a certificate as to the absence of certain defaults under
the Indenture.
The Indenture provides that the Debenture Trustee may withhold notice
of a Debenture Event of Default from the holders of the Junior Subordinated
Debentures if the Debenture Trustee considers it in the interest of such holders
to do so.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF CAPITAL SECURITIES
If a Debenture Event of Default shall have occurred and be continuing
and shall be attributable to the failure of the Corporation to pay the principal
of or interest (including Compounded Interest and Additional Sums, if any) on
the Junior Subordinated Debentures on the due date, a holder of Capital
Securities may institute a Direct Action. The Corporation may not amend the
Indenture to remove the foregoing right to bring a Direct Action without the
prior written consent of the holders of all of the Capital Securities.
Notwithstanding any payments made to a holder of Capital Securities by the
Corporation in connection with a Direct Action, the Corporation shall remain
obligated to pay the principal of or interest (including, Compounded Interest
and Additional Sums, if any) on the Junior Subordinated Debentures, and the
Corporation
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shall be subrogated to the rights of the holder of such Capital Securities with
respect to payments on the Capital Securities to the extent of any payments made
by the Corporation to such holder in any Direct Action.
The holders of the Capital Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Junior Subordinated Debentures, unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of Capital Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that the Corporation shall not consolidate with
or merge into any other Person or convey, transfer or lease its properties as an
entirety or substantially as an entirety to any Person, and no Person shall
consolidate with or merge into the Corporation or convey, transfer or lease its
properties as an entirety or substantially as an entirety to the Corporation,
unless (i) in case the Corporation consolidates with or merges into another
Person or conveys or transfers its properties as an entirety or substantially as
an entirety to any Person, the successor Person is organized under the laws of
the United States or any State or the District of Columbia, and such successor
Person expressly assumes the Corporation's obligations under the Indenture with
respect to the Junior Subordinated Debentures; (ii) immediately after giving
effect thereto, no Debenture Event of Default, and no event which, after notice
or lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; and (iii) certain other conditions as prescribed in
the Indenture are met.
The general provisions of the Indenture do not afford holders of the
Junior Subordinated Debentures protection in the event of a highly leveraged or
other transaction involving the Corporation that may adversely affect holders of
the Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at maturity or called for prepayment within one year, and the Corporation
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal and interest
(including Compounded Interest and Additional Sums, if any) to the date of the
prepayment or to the Stated Maturity Date, as the case may be, then the
Indenture will cease to be of any further effect (except as to the Corporation's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and the
Corporation will be deemed to have satisfied and discharged the Indenture.
SUBORDINATION
In the Indenture, the Corporation has covenanted and agreed that any
Junior Subordinated Debentures issued thereunder will be subordinate and junior
in right of payment to all Senior Indebtedness to the extent provided in the
Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, all Senior Indebtedness must be paid
in full before the holders of Junior Subordinated Debentures will be entitled to
receive or retain any payment in respect thereof.
In the event of the acceleration of the maturity of Junior Subordinated
Debentures, the holders of all Senior Indebtedness outstanding at the time of
such acceleration will first be entitled to receive payment in full of such
Senior Indebtedness before the holders of Junior Subordinated Debentures will be
entitled to receive or retain any payment with respect to the Junior
Subordinated Debentures.
No payments on account of principal or interest, if any, with respect
to the Junior Subordinated Debentures may be made if there shall have occurred
and be continuing a default in any payment with respect to Senior Indebtedness,
or an
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event of default with respect to any Senior Indebtedness resulting in the
acceleration of the maturity thereof, or if any judicial proceeding, shall be
pending with respect to any such default.
"Indebtedness" shall mean (i) every obligation of the Corporation for
money borrowed; (ii) every obligation of the Corporation evidenced by bonds,
debentures, notes or other similar instruments, including obligations incurred
in connection with the acquisition of property, assets or businesses; (iii)
every reimbursement obligation of the Corporation with respect to letters of
credit, banker's acceptances or similar facilities issued for the account of the
Corporation; (iv) every obligation of the Corporation issued or assumed as the
deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business); (v)
every capital lease obligation of the Corporation; (vi) all indebtedness of the
Corporation, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products, including
interest rate, foreign exchange rate and commodity forward contracts, options
and swaps and similar arrangements; and (vii) every obligation of the type
referred to in clauses (i) through (vi) of another Person and all dividends of
another Person the payment of which, in either case, the Corporation has
guaranteed or is responsible or liable for, directly or indirectly, as obligor
or otherwise.
"Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures" shall mean (i) Indebtedness, whether outstanding on the date of
execution of the Indenture or thereafter created, assumed or incurred, to the
extent such Indebtedness by its terms ranks equally with and not prior to the
Junior Subordinated Debentures in right of payment upon the happening of the
dissolution, winding-up, liquidation or reorganization of the Corporation, and
(ii) all other debt securities, and guarantees with respect to those debt
securities, issued to any trust other than the Trust, or a trustee of such
trust, partnership or other entity affiliated with the Corporation that is a
financing vehicle of the Corporation (a "financing entity") in connection with
the issuance by such financing entity of equity securities or other securities
guaranteed by the Corporation pursuant to an instrument that ranks pari passu
with or junior in right of payment to the Guarantee. The securing of any
Indebtedness, otherwise constituting Indebtedness Ranking on a Parity with the
Junior Subordinated Debentures, shall not be deemed to prevent such Indebtedness
from constituting Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures.
"Indebtedness Ranking Junior to the Junior Subordinated Debentures"
shall mean any Indebtedness, whether outstanding on the date of execution of the
Indenture or thereafter created, assumed or incurred, to the extent such
Indebtedness by its terms ranks junior to and not equally with or prior to the
Junior Subordinated Debentures (and any other Indebtedness Ranking on a Parity
with the Junior Subordinated Debentures) in right of payment upon the happening
of the dissolution, winding-up, liquidation or reorganization of the
Corporation. The securing of any Indebtedness, otherwise constituting
Indebtedness Ranking Junior to the Junior Subordinated Debentures, shall not be
deemed to prevent such Indebtedness from constituting Indebtedness Ranking
Junior to the Junior Subordinated Debentures.
"Senior Indebtedness" shall mean all Indebtedness, whether outstanding
on the date of execution of the Indenture or thereafter created, assumed or
incurred, except Indebtedness Ranking on a Parity with the Junior Subordinated
Debentures or Indebtedness Ranking Junior to the Junior Subordinated Debentures,
and any deferrals, renewals or extensions of such Senior Indebtedness.
RESTRICTIONS ON TRANSFER
The Junior Subordinated Debentures will be issued and may be
transferred only in blocks having an aggregate principal amount of not less than
$100,000 and multiples of $1,000 in excess thereof. Any such transfer of Junior
Subordinated Debentures in a block having an aggregate principal amount of less
than $100,000 shall be deemed to be void and of no legal effect whatsoever. Any
such purported transferee shall be deemed not to be the holder of such Junior
Subordinated Debentures for any purpose, including but not limited to the
receipt of payments on such Junior Subordinated Debentures, and such purported
transferee shall be deemed to have no interest whatsoever in such Junior
Subordinated Debentures.
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GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed
by and construed in accordance with the laws of the State of New York.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee is under no obligation to exercise any of the
powers vested in it by the Indenture at the request of any holder of Junior
Subordinated Debentures, unless offered reasonable indemnity by such holder
against the costs, expenses and liabilities which might be incurred thereby. The
Debenture Trustee is not required to expend or risk its own funds or otherwise
incur personal financial liability in the performance of its duties under the
Indenture.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Corporation
concurrently with the issuance by the Trust of the Capital Securities for the
benefit of the holders from time to time of the Capital Securities. LaSalle
National Bank will act as Guarantee Trustee under the Guarantee. The Guarantee
will not be qualified under the Trust Indenture Act. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions therein of certain terms, and the Trust
Indenture Act. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Capital Securities.
GENERAL
The Corporation will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Capital Securities, as and when due, regardless of any
defense, right of set-off or counterclaim that the Trust may have or assert
other than the defense of payment. The following payments with respect to the
Capital Securities, to the extent not paid by or on behalf of the Trust (the
"Guarantee Payments"), will be subject to the Guarantee (i) any accumulated and
unpaid Distributions required to be paid on the Capital Securities, to the
extent that the Trust has funds on hand legally available therefor at such time;
(ii) the applicable Redemption Price with respect to the Capital Securities
called for redemption, to the extent that the Trust has funds on hand legally
available therefor at such time; and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of the Trust (other than in connection
with the distribution of the Junior Subordinated Debentures to holders of the
Capital Securities or the redemption of all Capital Securities), the lesser of
(a) the Liquidation Distribution, to the extent the Trust has funds legally
available therefor at the time, and (b) the amount of assets of the Trust
remaining available for distribution to holders of Capital Securities after
satisfaction of liabilities to creditors of the Trust as required by applicable
law. The Corporation's obligation to make a Guarantee Payment may be satisfied
by direct payment of the required amounts by the Corporation to the holders of
the Capital Securities or by causing the Trust to pay such amounts to such
holders.
The Guarantee will be an irrevocable guarantee on a subordinated basis
of the Trust's obligations under the Capital Securities, but will apply only to
the extent that the Trust has funds sufficient to make such payments. If the
Corporation does not make interest payments on the Junior Subordinated
Debentures held by the Trust, the Trust will not be able to pay the
Distributions on the Capital Securities and will not have funds legally
available therefor. See "Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee."
The Guarantee will rank subordinate and junior in right of payment to
all Senior Indebtedness to the extent provided therein. See "--Status of the
Guarantee." Because the Corporation is a holding company, the right of the
Corporation to participate in any distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization or otherwise is subject to the
prior claims of creditors of that subsidiary (including creditors and
Manufacturers Bank), except to the extent the Corporation may itself be
recognized as a creditor of that subsidiary. Accordingly, the Corporation's
obligations under the Guarantee effectively will be subordinated to all existing
and future liabilities of the Corporation's subsidiaries, including
Manufacturers Bank's deposit liabilities, and all liabilities of any future
subsidiaries of the Corporation. Claimants should look only to the assets of the
Corporation for payments under the Guarantee. See "Description of the Junior
Subordinated
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Debentures--General." The Guarantee does not limit the incurrence or issuance of
other secured or unsecured debt of the Corporation, including Senior
Indebtedness, whether under the Indenture, any other indenture that the
Corporation may enter into in the future or otherwise.
The Corporation will, through the Guarantee, the Trust Agreement, the
Junior Subordinated Debentures and the Indenture, taken together, fully,
irrevocably and unconditionally guarantee all of the Trust's obligations under
the Capital Securities. No single document standing alone, or operating in
conjunction with fewer than all of the other documents, constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full, irrevocable and unconditional guarantee of the
Trust's obligations under the Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the
Corporation and will rank subordinate and junior in right of payment to all
Senior Indebtedness in the same manner as the Junior Subordinated Debentures.
The Guarantee will rank pari passu with all Other Guarantees issued by
the Corporation after the Issue Date with respect to preferred beneficial
interests, if any, issued by Other Trusts. The Guarantee does not limit the
amount of secured or unsecured debt, including Senior Indebtedness, that may be
incurred by the Corporation or any of its subsidiaries. The Corporation expects
from time to time that it will incur additional indebtedness and that its
subsidiaries will also incur additional liabilities. The Guarantee will
constitute a guarantee of payment and not of collection (i.e., the guaranteed
party may institute a legal proceeding directly against the Corporation to
enforce its rights under the Guarantee without first instituting a legal
proceeding against any other person or entity). The Guarantee will be held for
the benefit of the holders of the Capital Securities. The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution to the holders of the Capital Securities
of the Junior Subordinated Debentures. The Guarantee does not place a limitation
on the amount of additional Senior Indebtedness that may be incurred by the
Corporation.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of
the Corporation to perform any of its payment or other obligations thereunder;
provided, however, that except with respect to a default in payment of any
Guarantee Payment, the Corporation shall have received notice of default and
shall not have cured such default within 60 days after receipt of such notice.
The holders of not less than a majority in Liquidation Amount of the Capital
Securities will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of the Capital Securities may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Trust, the Guarantee
Trustee or any other person or entity.
The Corporation, as guarantor, will be required to file annually with
the Guarantee Trustee a certificate as to whether or not the Corporation is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely
affect the rights of holders of the Capital Securities (in which case no vote
will be required), the Guarantee may not be amended without the prior approval
of the holders of a majority of the Liquidation Amount of such outstanding
Capital Securities. The manner of obtaining any such approval will be as set
forth under "Description of Capital Securities--Voting Rights; Amendment of the
Trust Agreement."
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All guarantees and agreements contained in the Guarantee Agreement shall bind
the successors, assigns, receivers, trustees and representatives of the
Corporation and shall inure to the benefit of the holders of the Capital
Securities then outstanding.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force or effect upon
full payment of the applicable Redemption Price of all outstanding Capital
Securities, upon full payment of the Liquidation Amount payable upon liquidation
of the Trust or upon distribution of Junior Subordinated Debentures to the
holders of the Capital Securities. The Guarantee will continue to be effective
or will be reinstated, as the case may be, if at any time any holder of the
Capital Securities must restore payment of any sums paid under the Capital
Securities or the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Corporation in performance of the Guarantee, will undertake
to perform only such duties as are specifically set forth in the Guarantee and,
in case a default with respect to the Guarantee has occurred, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee will be under no obligation to exercise any of the powers vested in it
by the Guarantee at the request of any holder of the Capital Securities unless
it is offered reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
GUARANTEE
Payments of Distributions and other amounts due on the Capital
Securities (to the extent the Trust has funds on hand legally available for the
payment of such Distributions) will be irrevocably guaranteed by the Corporation
as and to the extent set forth under "Description of Guarantee." Taken together,
the Corporation's obligations under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement and the Guarantee will provide, in the aggregate,
an irrevocable guarantee of payments of Distributions and other amounts due on
the Capital Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing an irrevocable guarantee of the Trust's obligations under
the Capital Securities. If and to the extent that the Corporation does not make
the required payments on the Junior Subordinated Debentures, the Trust will not
have sufficient funds to make the related payments, including Distributions, on
the Capital Securities. The Guarantee will not cover any such payment when the
Trust does not have sufficient funds on hand legally available therefor. In such
event, the remedy of a holder of Capital Securities is to institute a Direct
Action. The obligations of the Corporation under the Guarantee will be
subordinate and junior in right of payment to all Senior Indebtedness.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount or Prepayment Price of the Junior
Subordinated Debentures will be equal to the sum of the Liquidation Amount or
Redemption Price, as applicable, of the Trust Securities; (ii) the interest rate
and interest and other payment dates on the Junior Subordinated Debentures will
match the Distribution Rate and Distribution and other payment dates for the
Trust Securities; (iii) the Corporation, as Sponsor, shall pay for all and any
costs, expenses and liabilities of the
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Trust, except the Trust's obligations to holders of Trust Securities under such
Trust Securities; and (iv) the Trust Agreement will provide that the Trust is
not authorized to engage in any activity that is not consistent with the limited
purposes thereof.
ENFORCEMENT RIGHTS OF HOLDERS OF CAPITAL SECURITIES
A holder of any Capital Security may institute a legal proceeding
directly against the Corporation to enforce its rights under the Guarantee
without first instituting a legal proceeding against the Guarantee Trustee, the
Trust or any other person or entity.
A default or event of default under any Senior Indebtedness would not
constitute a default or Event of Default under the Trust Agreement. However, in
the event of payment defaults under, or acceleration of, Senior Indebtedness,
the subordination provisions of the Indenture will provide that no payments may
be made with respect to the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default under the Trust Agreement.
LIMITED PURPOSE OF THE TRUST
The Capital Securities will represent beneficial interests in the
Trust, and the Trust exists for the sole purpose of issuing and selling the
Trust Securities, using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures and engaging in only those other
activities necessary, advisable or incidental thereto. A principal difference
between the rights of a holder of a Capital Security and a holder of a Junior
Subordinated Debenture is that a holder of a Junior Subordinated Debenture will
be entitled to receive from the Corporation the principal amount of and interest
on Junior Subordinated Debentures held, while a holder of Capital Securities is
entitled to receive Distributions from the Trust (or, in certain circumstances,
from the Corporation under the Guarantee) if and to the extent the Trust has
funds on hand legally available for the payment of such Distributions.
RIGHTS UPON DISSOLUTION
Unless the Junior Subordinated Debentures are distributed to holders of
the Trust Securities, upon any voluntary or involuntary dissolution, winding-up
or liquidation of the Trust, after satisfaction of the liabilities of creditors
of the Trust as required by applicable law, the holders of the Trust Securities
will be entitled to receive, out of assets held by the Trust, the Liquidation
Distribution in cash. See "Description of Capital Securities-Liquidation of the
Trust and Distribution of Junior Subordinated Debentures." Upon any voluntary or
involuntary liquidation or bankruptcy of the Corporation, the Property Trustee,
as holder of the Junior Subordinated Debentures, would be a subordinated
creditor of the Corporation, subordinated in right of payment to all Senior
Indebtedness as set forth in the Indenture, but entitled to receive payment in
full of principal and interest, before any stockholders of the Corporation
receive payments or distributions. Since the Corporation will be the guarantor
under the Guarantee and will agree to pay all costs, expenses and liabilities of
the Trust (other than the Trust's obligations to the holders of its Trust
Securities), the positions of a holder of Capital Securities and a holder of
Junior Subordinated Debentures relative to other creditors and to stockholders
of the Corporation in the event of liquidation or bankruptcy of the Corporation
are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of certain of the material United States
federal income tax consequences of the purchase, ownership and disposition of
Capital Securities held as capital assets by a holder who purchases such Capital
Securities upon initial issuance. The statements of law and legal conclusions
set forth in the summary regarding the tax consequences to the beneficial owners
of the Capital Securities, represent the opinion of Schwartz, Cooper,
Greenberger & Krauss, Chartered, special federal income tax counsel to the
Corporation and the Trust ("Special Tax Counsel"). The
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summary does not deal with special classes of holders such as banks, thrifts,
real estate investment trusts, regulated investment companies, insurance
companies, dealers in securities or currencies, tax-exempt investors, United
States Alien Holders (as defined below) engaged in a U.S. trade or business or
persons that will hold the Capital Securities as a position in a "straddle," as
part of a "synthetic security" or "hedge," as part of a "conversion transaction"
or other integrated investment, or as other than a capital asset. This summary
also does not address the tax consequences to persons that have a functional
currency other than the U.S. dollar or the tax consequences to shareholders,
partners or beneficiaries of a holder of Capital Securities. Further, it does
not include any description of any alternative minimum tax consequences or the
tax laws of any state or local government or of any foreign government that may
be applicable to the Capital Securities. This summary is based on the Code,
Treasury regulations thereunder and the administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. An opinion of Special Tax Counsel is
not binding on the Internal Revenue Service ("IRS") or the courts. No rulings
have been or are expected to be sought from the IRS with respect to any of the
transactions described herein and no assurance can be given that the IRS will
not take contrary positions. Moreover, no assurance can be given that the
opinions expressed herein will not be challenged by the IRS or, if challenged,
that such a challenge would not be successful.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Corporation intends to take the position that the Junior
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Corporation. Special Tax Counsel will render its
opinion generally to the effect that, under then current law and based on the
representations, facts and assumptions set forth in this Offering Memorandum,
and assuming full compliance with the terms of the Indenture (and other relevant
documents), and based on certain assumptions and qualifications referenced in
the opinion, the Junior Subordinated Debentures will be characterized for United
States federal income tax purposes as debt of the Corporation. The Corporation,
the Trust and the holders of the Capital Securities (by acceptance of a
beneficial interest in a Capital Security) will agree to treat the Junior
Subordinated Debentures as indebtedness of the Corporation for all United States
federal income tax purposes. No assurance can be given, however, that such
position will not be challenged by the IRS or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Junior Subordinated Debentures will be classified as indebtedness of the
Corporation for United States federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Capital Securities, Special Tax
Counsel will render its opinion generally to the effect that, under then current
law and assuming full compliance with the terms of the Trust Agreement and the
Indenture (and certain other documents), and based on certain facts and
assumptions contained in such opinion, the Trust will be classified for United
States federal income tax purposes as a grantor trust and not as an association
taxable as a corporation. Accordingly, for United States federal income tax
purposes, each holder of Capital Securities generally will be considered the
owner of an undivided interest in the Junior Subordinated Debentures, and each
holder will be required to include in its gross income any interest (or OID
accrued) with respect to its allocable share of those Junior Subordinated
Debentures.
ORIGINAL ISSUE DISCOUNT
Under the Indenture, the Corporation has the right to defer the payment
of interest on the Junior Subordinated Debentures at any time or from time to
time for a period not exceeding 20 consecutive quarterly periods with respect to
each Extension Period, provided that no Extension Period shall end on a date
other than an Interest Payment Date or extend beyond the Stated Maturity Date.
Under federal income tax regulations, all interest payable on the Junior
Subordinated Debentures will be treated as OID, unless the Indenture or Junior
Subordinated Debentures contain terms or conditions that make the exercise of
the deferral option remote. Because the Corporation does not have a policy of
paying dividends on its common stock and instead reinvests its earnings in its
business, and because the Corporation intends to redeem all of its Class B
Preferred Stock (see "Use of Proceeds"), the covenant in the Indenture
prohibiting the Corporation from paying dividends during an Extension Period
does not provide an effective deterrent to the Corporation's exercise of the
deferral option. As a result, Special Tax Counsel to the Corporation is unable
to conclude that the Indenture or the Junior Subordinated Debentures contain
terms or conditions that make the exercise of the deferral option remote.
Accordingly, a holder will
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recognize income (in the form of OID) on a daily basis over the term of the
Junior Subordinated Debentures (including any Extension Period, during which the
Corporation would not make actual cash payments), regardless of the receipt of
cash with respect to the period to which such income is attributable, and actual
distributions of stated interest would not be so includable. The amount of OID
that accrues in any quarterly period (other than an Extension Period) will equal
approximately the amount of the interest that accrues on the Junior Subordinated
Debentures in that quarterly period at the stated interest rate. In the event
that the interest payment period is extended, holders will include OID in gross
income in advance of the receipt of cash, and any holders who dispose of the
Capital Securities prior to the record date for the payment of Distributions
following such Extension Period will include OID in gross income but will not
receive any cash related thereto from the Corporation.
Because income on the Capital Securities will constitute OID, corporate
holders of the Capital Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Capital
Securities.
RECEIPT OF JUNIOR SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
The Corporation will have the right at any time to liquidate the Trust
and cause the Junior Subordinated Debentures to be distributed to the holders of
the Trust Securities. Under current law, such a distribution, for United States
federal income tax purposes, would be treated as a nontaxable event to each
holder, and each holder would receive an aggregate tax basis in the Junior
Subordinated Debentures equal to such holder's aggregate tax basis in its
Capital Securities. A holder's holding period in the Junior Subordinated
Debentures so received in liquidation of the Trust would include the period
during which the Capital Securities were held by such holder. A holder will
account for interest received or receivable from the Trust with respect to the
Junior Subordinated Debentures in the manner described above under "--Original
Issue Discount," including accrual of OID attributed to the Junior Subordinated
Debentures upon the distribution.
Under certain circumstances described herein (see "Description of
Capital Securities"), the Junior Subordinated Debentures may be prepaid for cash
and the proceeds of such prepayment distributed to holders in redemption of
their Capital Securities. Under current law, such a redemption would, for United
States federal income tax purposes, constitute a taxable disposition of the
redeemed Capital Securities, and a holder could recognize gain or loss as if it
sold such redeemed Capital Securities for cash. See "--Sales of Capital
Securities."
SALES OF CAPITAL SECURITIES
A holder that sells Capital Securities (including a redemption of the
Capital Securities by the Corporation for cash) will recognize gain or loss
equal to the difference between its adjusted tax basis in the Capital Securities
and the amount realized on the sale of such Capital Securities (other than with
respect to accrued and unpaid interest which has not yet been included in
income, which will be treated as ordinary income). A holder's adjusted tax basis
in the Capital Securities generally will be its initial purchase price increased
by OID previously includable in such holder's gross income to the date of
disposition and decreased by payments (if any) received on the Capital
Securities with respect to OID. Such gain or loss generally will be a capital
gain or loss. Pursuant to the Taxpayer Relief Act of 1997, Capital Securities
constituting a capital asset which are acquired by an individual after July 28,
1997, and held for more than 18 months are accorded a maximum United States
federal capital gains tax rate of 20% (or rate of 10%, if the individual
taxpayer is in the 15% tax bracket). Effective in 2001, the 20% rate drops to
18% (and the 10% drops to 8%) for capital assets acquired after the year 2000
and held more than five years; however, the requirement that the capital asset
be acquired after the year 2000 does not apply to the 8% rate. Capital
Securities held by an individual for more than one year, but not more than 18
months, are accorded a United States federal capital gains tax rate of 28%. If
pending legislation which has passed Congress is enacted in its current form,
such 18 month holding period would be reduced to 12 months for such sales of
Capital Securities occurring after December 31, 1997. However, there is no
certainty that such legislation will be enacted.
The Capital Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A holder who disposes of his Capital Securities
between record dates for payments of distributions thereon will be required to
include accrued but unpaid OID on the Junior Subordinated Debentures through the
date of disposition in income as ordinary income, and to add such amount to his
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adjusted tax basis in his pro rata share of the underlying Junior Subordinated
Debentures deemed disposed of. To the extent the selling price is less than the
holder's adjusted tax basis (which will include all accrued but unpaid OID) a
holder will recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes.
UNITED STATES ALIEN HOLDERS
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is not a U.S. Holder
for United States federal income tax purposes.
A "U.S. Holder" is a holder of Capital Securities who or which is a
citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for federal income tax purposes, a corporation or
partnership (except to the extent provided in Regulations) created or organized
in or under the laws of the United States or any political subdivision thereof,
or estate the income of which is includable in its gross income for federal
income tax purposes without regard to its source, or a trust if, and only if,
(i) a court within the United States is able to exercise primary supervision
over the administration of the trust, and (ii) one or more United States
trustees have the authority to control all substantial decisions of the trust.
Under present United States federal income tax laws (i) payments by the
Trust or any of its paying agents to any holder of Capital Securities who or
which is a United States Alien Holder will not be subject to United States
federal withholding tax; provided that (a) the beneficial owner of the Capital
Securities does not actually or constructively own 10 percent or more of the
total combined voting power of all classes of stock of the Corporation entitled
to vote, (b) the beneficial owner of the Capital Securities is not a controlled
foreign corporation that is related to the Corporation through stock ownership,
and (c) either (A) the beneficial owner of the Capital Securities certifies to
the Trust or its agent, under penalties of perjury, that it is not a United
States holder and provides its name and address, or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Capital Securities in such capacity, certifies to
the Trust or its agent, under penalties of perjury, that such statement has been
received from the beneficial owner by it or by a Financial Institution between
it and the beneficial owner and furnishes the Trust or its agent with a copy
thereof; and (ii) a United States Alien Holder of Capital Securities will not be
subject to federal withholding tax on any gain realized upon the sale or other
disposition of Capital Securities. Final Treasury Regulations (the "Withholding
Regulations") would provide alternative methods for satisfying the certification
requirement described in clause (i)(c) above. The Withholding Regulations are to
be effective for certain payments made to United States Alien Holders after
December 31, 1999.
INFORMATION REPORTING TO HOLDERS
Generally, income on the Capital Securities will be reported to each
holder on a Form 1099, which form should be mailed to each holder of Capital
Securities by January 31 following each calendar year.
BACKUP WITHHOLDING
Payments made on, and proceeds from the sale of, the Capital Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's United States federal income tax, provided the
required information is provided to the IRS.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
HOLDER'S PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CAPITAL SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN
UNITED STATES FEDERAL OR OTHER TAX LAWS.
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ERISA CONSIDERATIONS
Each of the Corporation (the obligor with respect to the Junior
Subordinated Debentures held by the Trust), and its affiliates and the Property
Trustee may be considered a "party in interest" (within the meaning of ERISA) or
a "disqualified person" (within the meaning of Section 4975 of the Code) with
respect to many plans that are subject to ERISA and certain employee
benefit-related provisions of the Code. The purchase and/or holding of Capital
Securities by a plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975 of the Code
(including individual retirement arrangements and other plans described in
Section 4975(e)(1) of the Code) and with respect to which the Corporation, the
Property Trustee or any affiliate is a service provider (or otherwise is a party
in interest or a disqualified person) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Capital
Securities are acquired pursuant to and in accordance with an applicable
exemption, such as Prohibited Transaction Class Exemption ("PTCE") 84-14 (an
exemption for certain transactions determined by an independent qualified
professional asset manager), PTCE 91-38 (an exemption for certain transactions
involving banks' collective investment funds), PTCE 90-1 (an exemption for
certain transactions involving insurance company pooled separate accounts), PTCE
95-60 (an exemption for transactions involving certain insurance company general
accounts) or PTCE 96- 23 (an exemption for certain transactions determined by an
in-house asset manager). Accordingly, each purchaser of Capital Securities, by
its acceptance thereof, shall be deemed to have represented to the Corporation,
Trust and Initial Purchaser either (1) that it is not a Plan, a trustee or other
person acting on behalf of a plan or any other person or entity using the assets
of any plan to finance such purchase, or (2) that such purchase will not result
in a prohibited transaction under Section 406 of ERISA or Section 4975 of the
Code for which there is no applicable statutory or administrative exemption. In
addition, a plan fiduciary considering the purchase of Capital Securities should
be aware that the assets of the Trust may be considered "plan assets" for ERISA
purposes. In such event, any persons exercising discretion with respect to the
Junior Subordinated Debentures may become fiduciaries, parties in interest or
disqualified persons with respect to investing plans. Accordingly, each
investing plan, by purchasing the Capital Securities, will be deemed to have
directed the Trust to invest in the Junior Subordinated Debentures and to have
consented to the appointment of the Property Trustee. In this regard, it should
be noted that, in an Event of Default, the Corporation may not remove the
Property Trustee without the approval of a majority of the holders of the
Capital Securities.
A plan fiduciary should consider whether the purchase of Capital
Securities could result in a delegation of fiduciary authority to the Property
Trustee, and, if so, whether such a delegation of authority is consistent with
the terms of the plan's governing instrument or any investment management
agreement with the plan. Further, prior to an Event of Default with respect to
the Junior Subordinated Debentures, the Property Trustee will have only limited
custodial and ministerial authority with respect to Trust assets.
THE SALE OF INVESTMENTS TO PLANS IS IN NO RESPECT A REPRESENTATION BY
THE TRUST, THE CORPORATION, THE PROPERTY TRUSTEE, THE INITIAL PURCHASER OR ANY
OTHER PERSON ASSOCIATED WITH THE SALE OF THE CAPITAL SECURITIES THAT SUCH
SECURITIES MEET ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY
PLANS GENERALLY OR ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE
APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING
TO ACQUIRE CAPITAL SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT WITH ITS
COUNSEL.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") by and among the Corporation, the Trust and Sandler
O'Neill & Partners, L.P. (the "Initial Purchaser"), the Corporation and the
Trust have agreed that the Trust will sell to the Initial Purchaser, and the
Initial Purchaser has agreed to purchase from the Trust, all of the Capital
Securities.
The Initial Purchaser proposes to offer the Capital Securities for
resale at the offering price set forth on the cover of this Offering Memorandum.
After the initial offering, the offering price and other selling terms may be
changed. Each
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purchaser of the Capital Securities offered hereby in making its purchase will
be deemed to have made certain representations and agreements as set forth under
"Notice to Investors."
The Purchase Agreement provides that the obligation of the Initial
Purchaser to pay for and accept delivery of the Capital Securities is subject to
certain conditions, including delivery of certain legal opinions by counsel for
the Initial Purchaser. The nature of the Initial Purchaser's obligations under
the Purchase Agreement are such that it is required to purchase all of the
Capital Securities if it purchases any of the Capital Securities.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Corporation, the Purchase Agreement provides that the Corporation will pay
as compensation an amount of $27.50 per Capital Security for the account of the
Initial Purchaser.
The Capital Securities have not been registered under the Securities
Act and may not be offered or sold in the United States or to, or for the
account or benefit of, U.S. Persons unless the Capital Securities are registered
under the Securities Act or an exemption from the registration requirements of
the Securities Act is available. See "Notice to Investors."
The Initial Purchaser has agreed that it will offer or sell the Capital
Securities only to (i) Persons whom it reasonably believes to be QIBs in
reliance on Rule 144A under the Securities Act, and (ii) a limited number of
Institutional Accredited Investors within the meaning of Rule 501(a)(l), (2),
(3) or (7) of Regulation D under the Securities Act.
The Capital Securities are new issues of securities with no established
trading market. The Corporation has been advised by the Initial Purchaser that
it intends to make a market in the Capital Securities, but it is not obligated
to do so and such market making may be interrupted or discontinued without
notice. No assurance can be given about the liquidity of the trading market for
the Capital Securities.
The Capital Securities are expected to be eligible for quotation on
PORTAL.
The Corporation and the Trust have agreed in the Purchase Agreement
that, subject to certain conditions, prior to 90 days following the Issue Date,
neither will, directly or indirectly, issue, sell, offer or agree to sell, grant
any option for the sale of, or otherwise dispose of, Capital Securities, any
securities convertible into, exchangeable or exercisable for Capital Securities
or the Junior Subordinated Debentures or any debt securities substantially
similar to the Junior Subordinated Debentures or any equity security
substantially similar to the Capital Securities, except with the prior written
consent of the Initial Purchaser and except for any disposal of the Junior
Subordinated Debentures following a liquidation of the Trust.
The Corporation and the Trust have agreed to indemnify the Initial
Purchaser and certain other persons against certain liabilities, including
liabilities under the Securities Act, and will contribute to payments the
Initial Purchaser may be required to make with respect thereto.
The Initial Purchaser may serve as a financial advisor to the
Corporation from time to time in the future.
Until the placement of the Capital Securities is completed, rules of
the Commission may limit the ability of the Initial Purchaser to bid for and
purchase the Capital Securities. As an exception to these rules, the Initial
Purchaser is permitted to engage in certain transactions that stabilize the
price of the Capital Securities. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Capital
Securities. If the Initial Purchaser creates a short position in the Capital
Securities in connection with the offering (i.e., if it sells more Capital
Securities than are contemplated on the cover page of this Offering Memorandum),
the Initial Purchaser may reduce that short position by purchasing Capital
Securities in the open market. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price of
the security to be higher than it might otherwise be in the absence of such
purchases.
None of the Corporation, the Trust or the Initial Purchaser makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions contemplated in the preceding paragraph may have on the price
of the Capital
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Securities. In addition, none of the Corporation, the Trust or the Initial
Purchaser makes any representation that the Initial Purchaser will engage in
such transactions or that such transactions, once commenced, will not be
discontinued.
NOTICE TO INVESTORS
Because of the following restrictions, purchasers of Capital Securities
are advised to consult legal counsel prior to making any offer, resale or pledge
of Capital Securities.
Each purchaser of Capital Securities, by its acceptance thereof, will
be deemed to have acknowledged, represented to and agreed with the Trust, the
Corporation and the Initial Purchaser as follows:
(1) It understands and acknowledges that the Capital
Securities have not been registered under the Securities Act or any
other applicable securities law, are being offered for resale in
transactions not requiring registration under the Securities Act or any
other securities laws, and none of the Capital Securities or Junior
Subordinated Debentures may be offered, sold, pledged or otherwise
transferred except in compliance with the registration requirements of
the Securities Act or any other applicable securities laws, pursuant to
an exemption therefrom or in a transaction not subject thereto and, in
each case, in compliance with the conditions for transfer set forth in
paragraph (4) below.
(2) It is not an "affiliate" (as defined in Rule 144 under the
Securities Act) of the Corporation, or acting on behalf of the
Corporation or the Trust, and it is either:
(a) a QIB (as defined in Rule 144A promulgated under
the Securities Act), and is aware that any sale of the Capital
Securities to it will be made in reliance on Rule 144A; and
such acquisition will be for its own account or for the
account of another QIB over which it exercises sole investment
discretion; or
(b) an Institutional Accredited Investor within the
meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act or, if the Capital Securities are to
be purchased for one or more accounts ("investor accounts")
for which it is acting as fiduciary or agent (except if it is
a bank as defined in Section 3(a)(2) of the Securities Act, or
a savings and loan association or other institution as
described in Section 3(a)(5)(A) of the Securities Act, whether
acting in its individual or in a fiduciary capacity), each
such investor account is an Institutional Accredited Investor
on a like basis; in the normal course of its business, it
invests in or purchases securities similar to the Capital
Securities, and it has such knowledge and experience in
financial and business matters that it is capable of
evaluating the merits and risks of purchasing the Capital
Securities; and it is aware that it (or any investor account)
may be required to bear the economic risk of an investment in
the Capital Securities for an indefinite period of time and it
(or such investor account) is able to bear such risk for an
indefinite period.
(3) It understands and acknowledges that none of the Trust,
the Corporation, the Initial Purchaser or any person representing the
Trust, the Corporation or the Initial Purchaser has made any
representation to it with respect to the Trust, the Corporation or the
offering or sale of the Capital Securities, other than the information
contained or incorporated by reference in this Offering Memorandum,
which Offering Memorandum has been delivered to it and upon which it is
relying in making its investment decision with respect to the Capital
Securities; and it has had access to such financial and other
information concerning the Trust, the Corporation and the Capital
Securities as it has deemed necessary in connection with its decision
to purchase the Capital Securities, including an opportunity to ask
questions of and receive information from the Trust, the Corporation
and the Initial Purchaser, and it has received and reviewed all
information which it has requested.
(4) It is purchasing the Capital Securities for its own
account, or for one or more investor accounts for which it is acting as
a fiduciary or agent, in each case for investment, and not with a view
to, or for offer or sale in connection with, any distribution thereof
in violation of the Securities Act or other applicable securities laws,
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subject to any requirement of law that the disposition of its property
or the property of such investor account or accounts be at all times
within its or their control and subject to its or their ability to
resell such Capital Securities pursuant to an effective registration
statement under the Securities Act or under Rule 144A or any other
exemption from registration available under the Securities Act; and it
agrees on its own behalf and on behalf of any investor account for
which it is purchasing Capital Securities, and each subsequent holder
of Capital Securities by its acceptance thereof will be deemed to
agree, to offer, sell or otherwise transfer such Capital Securities
prior to the date which is two years after the later of the original
issuance date thereof and the last date on which the Corporation or any
"affiliate" of the Corporation was the owner of such Capital Securities
(or any predecessor Capital Securities) (the "Resale Restriction
Termination Date") only (a) to the Corporation, (b) pursuant to a
registration statement which has been declared effective under the
Securities Act, (c) as long as the Capital Securities are eligible for
resale pursuant to Rule 144A, to a person it reasonably believes is a
QIB that purchases for its own account or for the account of a QIB to
whom notice is given that the transfer is being made in reliance on
Rule 144A, (d) to an Institutional Accredited Investor within the
meaning of subparagraph (a)(l), (2), (3) or (7) of Rule 501 under the
Securities Act that is purchasing the Capital Securities for its own
account or for the account of such an Institutional Accredited Investor
for investment purposes and not with a view to, or for offer or sale in
connection with, any distribution in violation of the Securities Act,
or (e) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing
cases to any requirement of law that the disposition of its property or
the property of such investor account or accounts be at all times
within its or their control and to compliance with any applicable state
securities laws; it being understood that, if any resale or other
transfer of Capital Securities is proposed to be made pursuant to
clause (d) above prior to the Resale Restriction Termination Date, the
transferor shall deliver a letter substantially in the form of Annex A
hereto from the transferee to the Trust, which shall provide, among
other things, that the transferee is an Institutional Accredited
Investor within the meaning of subparagraph (a)(l), (2), (3) or (7) of
Rule 501 under the Securities Act and that it is acquiring such Capital
Securities for investment purposes and not for distribution in
violation of the Securities Act; it being understood further that the
Trust and the Corporation reserve the right prior to any offer, sale or
other transfer prior to the Resale Restriction Termination Date
pursuant to clause (d) or (e) above to require the delivery of an
opinion of counsel, certifications and other information satisfactory
to the Trust and the Corporation. Each purchaser acknowledges that each
certificate representing Capital Securities will contain a legend
substantially to the following effect:
THE CAPITAL SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE
SECURITIES LAW. NEITHER THESE CAPITAL SECURITIES NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED,
PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT
TO, REGISTRATION.
THE HOLDER OF THESE CAPITAL SECURITIES BY ITS ACCEPTANCE
HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THESE SECURITIES,
PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS
TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE
LAST DATE ON WHICH THE CORPORATION OR ANY AFFILIATE OF THE CORPORATION
WAS THE OWNER OF THESE CAPITAL SECURITIES (OR ANY PREDECESSOR OF THESE
CAPITAL SECURITIES) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A
REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (C) SO LONG AS THESE CAPITAL SECURITIES ARE ELIGIBLE
FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS
OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE
MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501
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UNDER THE SECURITIES ACT THAT IS ACQUIRING THESE CAPITAL SECURITIES FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED
INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER
OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM
THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE
RIGHT OF THE TRUST AND THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF
AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND (II) PURSUANT TO CLAUSE (D) TO
REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE
TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX A TO THE OFFERING
MEMORANDUM DATED JULY 21, 1998. SUCH HOLDER FURTHER AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THESE CAPITAL SECURITIES ARE TRANSFERRED
A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
THE HOLDER OF THESE CAPITAL SECURITIES BY ITS ACCEPTANCE
HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT EITHER: (1) IT IS NOT
AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION (3)(3) OF THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"),
OR A PLAN TO WHICH SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986,
AS AMENDED ("CODE"), IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON
BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR
ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE
SUCH PURCHASE, OR (2) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED
TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR
WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
(5) It agrees that in the event at some future time it wishes to
dispose of any of the Capital Securities, it will not do so unless such
disposition is made in accordance with any applicable securities laws of any
state of the United States and the legend set forth in paragraph (4).
(6) It understands and acknowledges that (a) the Capital Securities
will be issued and may be transferred only in blocks having an aggregate stated
Liquidation Amount of not less than $100,000 in the case of Capital Securities
and an aggregate stated principal amount of not less than $100,000 in the case
of Junior Subordinated Debentures, (b) any attempted transfer of Junior
Subordinated Debentures or Capital Securities, as the case may be, in a block
having an aggregate liquidation amount or an aggregate stated principal amount,
as the case may be, of less than $100,000 shall be void and of no legal effect
whatsoever, (c) any such purported transferee shall be deemed not to be the
holder of such Junior Subordinated Debentures or Capital Securities, as the case
may be, for any purpose, including but not limited to the receipt of payments on
such Junior Subordinated Debentures or Capital Securities, (d) such purported
transferee shall be deemed to have no interest whatsoever in such Junior
Subordinated Debentures or Capital Securities, as the case may be, and (e) the
Capital Securities and the Junior Subordinated Debentures will contain a legend
to the foregoing effect.
(7) It understands and acknowledges that the Capital Securities sold in
reliance on Rule 144A will be represented by the Global Capital Securities,
while Capital Securities sold other than in reliance on Rule l44A will be issued
only in certificated form.
(8) It understands and acknowledges that the Trust, the Corporation and
the Initial Purchaser and others will rely upon the truth and accuracy of the
foregoing acknowledgments, representations and agreements and agrees that, if
any of the acknowledgments, representations or agreements deemed to have been
made by it by its purchase of the Capital Securities are no longer accurate, it
shall promptly notify the Trust and the Initial Purchaser; and if it is
acquiring any Capital Securities as a fiduciary or agent for one or more
investor accounts, it represents that it has sole investment discretion with
respect to each such account and that it has full power to make the foregoing
acknowledgments, representations and agreements on behalf of each such account.
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(9) Either (1) it is not an employee benefit plan within the meaning of
Section 3(3) of ERISA, or a plan to which Section 4975 of the Code is
applicable, a trustee or other person acting on behalf of such an employee
benefit plan or plan, or any other person or entity using the assets of any
employee benefit plan or plan to finance such purchase, or (2) such purchase
will not result in a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code for which there is no applicable statutory or
administrative exemption.
LEGAL MATTERS
Certain legal matters will be passed upon for the Corporation and the
Trust by Schwartz, Cooper, Greenberger & Krauss, Chartered, and for the Initial
Purchaser by Thacher Proffitt & Wood. Certain matters of Delaware law relating
to the validity of the Capital Securities will be passed upon for the Trust by
Richards, Layton & Finger, special Delaware counsel to the Trust.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of the Corporation as of December
31, 1997 and 1996 and for each of the years in the three-year period ended
December 31, 1997 have been audited by McGladrey & Pullen, LLP, independent
certified public accountants, as set forth in their report included herein.
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ANNEX A
TRANSFEREE LETTER OF REPRESENTATION
Coal City Capital Trust I
1200 North Ashland Avenue
Chicago, Illinois 60622
Attn: Administrative Trustees
Ladies and Gentlemen:
In connection with the proposed transfer to us of the Floating Rate
Capital Securities (the "Capital Securities") of Coal City Capital Trust I (the
"Trust"), we confirm that:
1. We understand that the Capital Securities have not been
registered under the Securities Act of 1933, as amended (the
"Securities Act"), or other applicable securities laws, and may not be
offered, sold or otherwise transferred except as permitted in the
following sentence. We agree on our behalf and on behalf of any
investor account for which we are purchasing Capital Securities to
offer, sell or otherwise transfer such Capital Securities prior to the
date which is two years after the later of the date of original issue
thereof and the last date on which Coal City Corporation (the
"Corporation") or any "affiliate" of the Corporation was the owner of
such Capital Securities (or any predecessor thereto) (the "Resale
Restriction Termination Date") only (a) to the Corporation, (b)
pursuant to a registration statement which has been declared effective
under the Securities Act, (c) so long as the Capital Securities are
eligible for resale pursuant to Rule 144A under the Securities Act, to
a person we reasonably believe is a "qualified institutional buyer" (a
"QIB") as defined in Rule 144A of the Securities Act that purchases for
its own account or for the account of a QIB to whom notice is given
that the transfer is being made in reliance on Rule 144A, (d) to an
institutional "accredited investor" (an "Institutional Accredited
Investor") within the meaning of subparagraph (a)(l), (2), (3) or (7)
of Rule 501 under the Securities Act that is acquiring the Capital
Securities for its own account or for the account of such an
Institutional Accredited Investor for investment purposes and not with
a view to, or for offer and sale in connection with, any distribution
in violation of the Securities Act, or (e) pursuant to any other
available exemption from the registration requirements under the
Securities Act, subject to the right of the Trust and the Corporation
prior to any such offer, sale or transfer (i) pursuant to clause (d) or
(e) above to require the delivery of an opinion of counsel,
certifications and/or other information satisfactory to each of them,
and (ii) pursuant to clause (d) above to require that the transferor
deliver to the Trust a letter from the transferee substantially similar
to this letter.
2. We are an Institutional Accredited Investor purchasing for
our own account or for the account of such an Institutional Accredited
Investor for investment purposes and not with a view to, or for offer
or sale in connection with, any distribution in violation of the
Securities Act or any other applicable securities laws and we have such
knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the
Capital Securities, and we and any accounts for which we are acting are
each able to bear the economic risk of our or its investment for an
indefinite period.
3. We are acquiring the Capital Securities purchased by us for
our own account or for one or more accounts as to each of which we
exercise sole investment discretion.
4. You and the Corporation are entitled to rely upon this
letter and you are irrevocably authorized to produce this letter or a
copy hereof to any interested party in any administrative or legal
proceeding or official inquiry with respect to the matters covered
hereby.
A-1
<PAGE>
5. We are (1) not an employee benefit plan within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or a plan to which Section 4975 of the Internal
Revenue Code of 1986, as amended ("Code"), is applicable, a trustee or
other person acting on behalf of such an employee benefit plan or plan,
or any other person or entity using the assets of any employee benefit
plan or plan to finance such purchase, or (2) such purchase will not
result in a prohibited transaction under Section 406 of ERISA or
Section 4975 of the Code for which there is no applicable statutory or
administrative exemption.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH. THE
LAWS OF THE STATE OF NEW YORK.
Very truly yours,
Name of Purchaser:
------------------------------------
By:
------------------------------------
Date:
------------------------------------
The Capital Securities will be registered in the name of the beneficial owner as
follows:
Name:
------------------------------------
Address:
------------------------------------
Taxpayer ID Number:
------------------------------------
A-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditor's Report ................................................... F-2
Consolidated Balance Sheets at March 31, 1998 (unaudited) and December 31,
1997 and 1996 (audited) ....................................................... F-3
Consolidated Statements of Income for each of the years in the three year period
ended December 31, 1997 (audited) and for the three months ended March 31,
1998 and 1997 (unaudited) ..................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for each of the years
in the three year period ended December 31, 1997 (audited) and for the three
months ended March 31, 1998 (unaudited) ....................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three year
period ended December 31, 1997 (audited) and for the three months ended
March 31, 1998 and 1997 (unaudited) ........................................... F-6 and F-7
Notes to Financial Statements .................................................. F-8
</TABLE>
F-1
<PAGE>
[MCGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Coal City Corporation and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Coal City
Corporation and Subsidiaries, as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Coal City
Corporation and Subsidiaries, as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/S/ MCGLADREY & PULLEN, LLP
---------------------------
MCGLADREY & PULLEN, LLP
Mokena, Illinois
February 20, 1998
F-2
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
-----------------------
ASSETS (unaudited) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and due from banks $ 36,318 $ 36,302 $ 31,465
Investment securities:
Securities available for sale 136,670 136,685 100,470
Securities held to maturity (fair value of $5,638 at March 31, 1998,
$5,679 at December 31, 1997 and $9,995 at December 31, 1996) 5,224 5,242 9,511
Stock in Federal Home Loan Bank 615 615 -
Federal funds sold - 37,400 20,800
Loans (net of allowance for loan losses of $7,751 at March 31, 1998,
$7,922 at December 31, 1997 and $4,692 at December 31, 1996) 519,163 519,399 383,610
Lease investments, net 21,812 22,887 18,637
Premises and equipment, net 11,066 11,045 6,416
Other assets 10,702 10,703 4,871
Intangibles, net 21,105 22,418 12,018
----------------------------------
TOTAL ASSETS $ 762,675 $ 802,696 $ 587,798
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 130,331 $ 131,064 $ 96,678
Interest bearing 504,117 552,996 413,039
-----------------------------------
TOTAL DEPOSITS 634,448 684,060 509,717
Short-term borrowings 29,365 18,013 9,361
Long-term borrowings 20,537 22,415 160,38
Other liabilities 11,937 12,261 7,197
----------------------------------
TOTAL LIABILITIES 696,287 736,749 542,313
----------------------------------
Minority Interest in Subsidiary 1,544 3,421 6,359
----------------------------------
Corporation Obligated Mandatorily Redeemable Preferred Securities
Of Subsidiary Trust Holding Solely Junior Subordinated Debentures 10,000 10,000 -
----------------------------------
Stockholders' Equity
Preferred stock, Class B, $150,000 par value;
authorized 100 shares; issued 68 shares 10,200 10,200 -
Common stock, no par value, $10 stated value; authorized 200,000
shares; issued March 31, 1998 48,957 shares; December 31,
1997 49,707 shares; December 31, 1996 49,799 shares 490 497 498
Additional paid-in capital 23,779 24,446 24,524
Retained earnings 20,186 17,062 13,789
Accumulated other comprehensive income 189 321 315
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 54,844 52,526 39,126
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 762,675 $ 802,696 $ 587,798
==================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(STATEMENT AMOUNTS IN THOUSANDS EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-------------------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $ 11,159 $ 8,202 $ 41,313 30,107 $ 26,271
Investment securities:
Taxable 2,531 1,625 8,527 7,941 7,719
Nontaxable 82 125 433 673 817
Federal funds sold 118 122 1,413 809 1,760
Other - - - - 5
--------------------------------------------------------------------
TOTAL INTEREST INCOME 13,890 10,074 51,686 39,530 36,572
--------------------------------------------------------------------
Interest expense on:
Deposits 5,593 4,308 21,617 16,529 15,220
Short-term borrowings 731 85 1,353 669 463
Long-term borrowings 563 367 2,202 982 1,153
--------------------------------------------------------------------
TOTAL INTEREST EXPENSE 6,887 4,760 25,172 18,180 16,836
--------------------------------------------------------------------
NET INTEREST INCOME 7,003 5,314 26,514 21,350 19,736
Provision for loan losses 188 171 971 572 240
--------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,815 5,143 25,543 20,778 19,496
--------------------------------------------------------------------
Other income:
Service fees 790 514 3,085 2,076 1,628
Lease financing, net 245 228 1,172 395 263
Net gains (losses) on sale of securities available 15 29 138 75 (558)
for sale
Gain on sale of Coal City National Bank 4,099 - - - -
Other operating income 351 49 540 393 566
--------------------------------------------------------------------
5,500 820 4,935 2,939 1,899
--------------------------------------------------------------------
Other expenses:
Salaries and employee benefits 3,653 2,260 11,556 8,667 8,601
Occupancy and equipment expense 946 481 2,934 2,167 1,917
Amortization expense 811 409 3,321 2,021 2,167
Other operating expenses 1,430 1,032 6,384 4,013 4,325
--------------------------------------------------------------------
6,840 4,182 24,195 16,868 17,010
--------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST 5,475 1,781 6,283 6,849 4,385
Applicable income taxes 1,885 737 2,402 2,576 1,504
--------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 3,590 1,044 3,881 4,273 2,881
Minority interest (32) (152) (432) (636) (444)
--------------------------------------------------------------------
NET INCOME 3,558 892 3,449 3,637 2,437
Other comprehensive income, unrealized
securities gains (losses), net of income taxes (132) (447) 6 (576) 2,301
--------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,426 $ 445 $ 3,455 $ 3,061 $ 4,738
====================================================================
NET INCOME $ 3,558 $ 892 $ 3,449 $3,637 $ 2,437
Preferred stock dividend 434 - 276 - 267
--------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 3,124 $ 892 $ 3,173 $3,637 $ 2,170
====================================================================
Basic earnings per common share $ 63.48 $ 17.92 $ 63.83 $ 73.28 $ 43.27
====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED MARCH
31, 1998 (UNAUDITED)
(STATEMENT AMOUNTS IN THOUSANDS EXCEPT FOR SHARES INFORMATION)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Preferred Common Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ - $ 495 $ 24,167 $ 8,320 $ (1,410) $ 31,572
Issuance of 1,112 shares of
common stock - 12 694 - - 706
Issuance of 35 shares of
preferred stock 3,500 - - - - 3,500
Purchase and retirement of 200
shares of common stock - (2) (121) - - (123)
Redemption of 35 shares of
preferred stock (3,500) - - - - (3,500)
Dividends paid on preferred stock - - - (267) - (267)
Net income - - - 2,437 - 2,437
Change in accumulated other
comprehensive income,
net of tax of $1,401 - - - - 2,301 2,301
-----------------------------------------------------------------------------
Balance, December 31, 1995 - 505 24,740 10,490 891 36,626
Issuance of 405 shares of
common stock - 4 307 - - 311
Purchase and retirement of 1,067
shares of common stock - (11) (523) (338) - (872)
Net income - - - 3,637 - 3,637
Change in accumulated other
comprehensive income,
net of tax of $304 - - - - (576) (576)
-----------------------------------------------------------------------------
Balance, December 31, 1996 - 498 24,524 13,789 315 39,126
Issuance of 140 shares of common stock - 1 114 - - 115
Issuance of 68 shares of
preferred stock 10,200 - - - - 10,200
Purchase and retirement of 232
shares of common stock - (2) (192) - - (194)
Minority interest effect of premium
received over book value for
interest in Peterson Bank - - - 100 - 100
Dividends paid on preferred stock - - - (276) - (276)
Net income - - - 3,449 - 3,449
Change in accumulated other
comprehensive income,
net of tax of $3 - - - - 6 6
-----------------------------------------------------------------------------
Balance, December 31, 1997 10,200 497 24,446 17,062 321 52,526
Purchase and retirement of 750
shares of common stock (unaudited) - (7) (667) - - (674)
Dividends paid on preferred stock
(unaudited) - - - (434) - (434)
net income (unaudited) - - - 3,558 - 3,558
Change in accumulated other comprehensive
income, net of tax of $71 (unaudited) - - - - (132) (132)
-----------------------------------------------------------------------------
Balance, March 31, 1998 (unaudited) $ 10,200 $ 490 $ 23,779 $ 20,186 $ 189 $ 54,844
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
---------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,558 $ 892 $ 3,449 $ 3,637 $ 2,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,177 1,407 7,142 5,286 2,853
(Gain) loss on disposal of premises and equipment
and leased equipment 13 - 166 33 (10)
(Gain) on sale of Coal City National Bank (4,099) - - - -
Amortization of intangibles 811 410 3,320 2,192 2,167
Provision for loan losses 188 171 971 572 240
Provision (credit) for deferred income taxes (303) (64) (1,085) 263 (282)
Bond (accretion) amortization, net (484) (56) (325) (206) 304
Securities (gains) losses, net (15) (29) (131) (75) 558
Minority interest in net income 32 152 432 636 444
Decrease in accrued other assets 49 (966) 1,329 1,434 471
Increase (decrease) in other liabilities 222 1,115 (2,116) (321) 474
-------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,149 3,032 13,152 13,451 9,656
-------------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales, maturities and calls of securities
available for sale 61,758 8,138 110,772 86,987 107,137
Proceeds from maturities and calls of securities held to
maturity - 435 5,834 5,761 9,576
Purchase of securities available for sale (77,054) (11,697) (94,382) (31,564) (122,184)
Purchase of securities held to maturity - - (395) (841) (2,522)
Federal funds sold, net 17,900 3,550 (16,600) (9,601) 20,601
Increase in loans, net of principal collections (17,747) (9,214) (13,518) (48,997) (26,201)
Purchases of premises and equipment (1,658) (3,158) (1,805) (370) (1,502)
Proceeds from sales of premises and equipment and
leased equipment 3 - 737 220 12
Proceeds from sales of other real estate owned 73 - - - -
Purchase of leased equipment - - (9,835) (14,620) (5,425)
Principal collected on lease investments (187) 73 (264) 168 160
Purchase of minority interests (1,508) - (2,649) (227) (33)
Proceeds from sale of Coal City National Bank, net 5,481 - - - -
Purchase of U.S. Bancorp, Inc., net of cash acquired - - (15,800) - -
Purchase of Peterson Bank, net of cash acquired - - - - (18,601)
-------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (12,939) (11,873) (37,905) (13,084) (38,982)
-------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest bearing deposits 5,266 (5,250) 5,981 (4,071) 701
Net increase (decrease) in interest bearing deposits (2,826) 6,488 (1,065) 318 21,905
Net increase in short-term borrowings 11,352 1,611 8,652 6,245 (861)
Proceeds from long-term borrowings 5,622 10,000 15,179 6,942 19,785
Principal paid on long-term borrowings (7,500) (6,863) (8,802) (4,788) (9,469)
Corporation Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures - - 10,000 - -
Issuance of common stock - - 115 311 706
Purchase and retirement of common stock (674) - (194) (872) (123)
Issuance of preferred stock - - - - 3,500
Redemption of preferred stock - - - - (3,500)
Dividends paid on preferred stock (434) - (276) - (267)
-------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,806 5,986 29,590 4,085 32,377
-------------------------------------------------------
</TABLE>
(continued)
F-6
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(STATEMENT AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-----------------------------------------------------------
1998 1997
(unaudited) (unaudited) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS $ 16 $ (2,855) $ 4,837 $ 4,452 $ 3,051
Cash and due from banks:
Beginning 36,302 31,465 31,465 27,013 23,962
-----------------------------------------------------------
Ending $ 36,318 $ 28,610 $ 36,302 $ 31,465 $ 27,013
===========================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 6,170 $ 4,643 $ 21,179 $ 16,320 $ 15,965
Other interest paid 624 447 3,567 1,644 990
Income taxes paid, net of refunds - - 2,037 2,495 1,080
Supplemental Schedule of Noncash Investing Activities
Acquisitions of U.S. Bancorp, Inc. in 1997
and Peterson Bank in 1995
Assets acquired:
Securities available for sale $ 52,261 $ 53,910
Securities held to maturity 1,099 4,758
Federal funds sold - 11,000
Stock in Federal Home Loan Bank 615 -
Loans, net 124,248 89,666
Premises and equipment 5,020 3,003
Accrued interest and other assets 6,155 2,027
Core deposit intangibles 5,654 5,944
Excess of cost over fair value of net assets acquired 8,637 6,239
--------- --------
203,689 176,547
--------- --------
Liabilities assumed:
noninterest bearing deposits 28,405 23,491
Interest bearing deposits 141,022 131,507
Other liabilities 8,262 2,948
--------- ---------
177,689 157,946
--------- ---------
Net assets acquired 26,000 18,601
Issuance of preferred stock (10,200) -
--------- ----------
NET CASH PAYMENT $ 15,800 $ 18,601
========= ==========
Real estate acquired in settlement of losses $ 1,006
=========
Transfer of securities from held to maturity to available for sale $ 529
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Coal City Corporation (Company) is a multi-bank holding company providing
financial and other banking services to customers primarily located in the
Chicago/Northeastern Illinois area. The Company through its banking
subsidiaries, Coal City National Bank (formerly known as Allied Bank/Coal City
National) and Manufacturers Bank (Banks), makes loans to individuals as well as
commercial entities. Specific loan terms vary as to interest rate, repayment and
collateral requirements based on the type of loan requested and the credit
worthiness of the prospective borrower.
Principles of consolidation: The consolidated financial statements include the
accounts of Coal City Corporation and the following subsidiaries:
<TABLE>
<S> <C>
Coal City National Bank - 100% owned subsidiary
Manufacturers National Corporation - 90.61% owned subsidiary
Manufacturers Bank - 100% owned subsidiary of Manufacturers National
Corporation
Ashland Management Agency, Inc. - 100% owned subsidiary of Manufacturers Bank
MB 1200 - 100% owned subsidiary of Manufacturers Bank
Manufacturers Deferred Exchange Corp. - 100% owned subsidiary of Manufacturers Bank
</TABLE>
All material intercompany items and transactions have been eliminated in
consolidation.
During the year ended December 31, 1997, Manufacturers Bank, Peterson Bank, U.S.
Bank and U.S. Bancorp, Inc. were merged.
Unaudited interim financial statements: The consolidated financial statements as
of March 31, 1998 and for the three months ended March 31, 1998 and 1997, are
unaudited, but in the opinion of management reflect all adjustments (consisting
of only normal recurring accruals) necessary for a fair presentation of
financial condition at March 31, 1998, and results of operations for the three
months ended March 31, 1998 and 1997. The results of the interim period ended
March 31, 1998 are not necessarily indicative of the results expected for the
year ended December 31, 1998.
Basis of financial statement presentation: The accounting and reporting policies
of the Company conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the balance
sheet and revenues and expenses for the year. Actual results could differ from
those estimates.
Cash and cash equivalents: For purposes of reporting cash flows, cash and due
from banks includes cash on hand and amounts due from banks (including cash
items in process of clearing). Cash flows from loans originated by the Banks,
deposits, and federal funds purchased and sold and short-term borrowings are
reported net.
Securities held to maturity: Debt securities for which the Banks have both the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost. Amortization of premiums and
accretion of discounts, computed by the interest method over their contractual
lives, is included in interest income.
F-8
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities available for sale: Securities classified as available for sale are
those debt securities that the Banks intend to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Banks' assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains
or losses reported as a separate component of stockholders' equity, net of the
related deferred tax effect. The amortization of premiums and accretion of
discounts, computed by the interest method over their contractual lives, are
recognized in interest income. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in earnings.
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
discount and fees and an allowance for loan losses.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net amount amortized as an adjustment of the related loan's
yield. The Banks are amortizing these amounts over the contractual life of the
loan. Commitment fees based upon a percentage of a customer's unused line of
credit and fees related to standby letters of credit are recognized over the
commitment period.
Interest is accrued daily on the outstanding balances. For impaired loans,
accrual of interest is discontinued on a loan when management believes, after
considering collection efforts and other factors, that the borrower's financial
condition is such that collection of interest is doubtful. Cash collections on
impaired loans are credited to the loan balance, and no interest income is
recognized on those loans until the principal balance has been determined to be
collectible.
A loan is impaired when it is probable the Banks will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
loan losses.
F-9
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing loans, based on an evaluation of the collectibility
of loans and prior loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant changes
in economic conditions. In addition, regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowance for loan
losses, and may require the Banks to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
Lease investments: Manufacturers Bank's investment in assets leased to others is
reported as lease investments, net, using the direct finance and operating
methods of accounting. Direct financing leases are stated at the sum of
remaining minimum lease payments from lessees plus estimated residual values
less unearned lease income. Unearned lease income on direct financing leases is
recognized over the lives of the leases using the level-yield method. The
investment in equipment in operating leases is stated at cost less depreciation
using the straight-line method over a five-year life.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed primarily by the
straight-line method for buildings and primarily by the 200% declining balance
method for all other assets over the following estimated useful lives:
<TABLE>
<CAPTION>
Years
-----------
<S> <C>
Land improvements 20
Buildings 15-39
Leasehold and other improvements 5-20
Furniture and equipment 5-15
</TABLE>
Intangibles: In acquiring its subsidiary banks, the portion of the purchase
price which represents value assigned to the existing deposit base for which the
annual interest and servicing costs are below market rates (core deposit
intangibles) is being amortized by the declining balance method over three to
nine years. The excess of cost over fair value of net assets acquired (goodwill)
is being amortized on the straight-line method over twenty years. The Company
reviews its intangible assets annually to determine potential impairment by
comparing the carrying value of the intangibles with the anticipated future cash
flows of the related banks.
F-10
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes: The Company and its subsidiaries file consolidated income tax
returns.
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Basic earnings per common share: Basic earnings per share are calculated on the
basis of the weighted average number of shares outstanding after deducting the
dividends on preferred stock.
During 1997, the Company adopted Financial Accounting Standards Board Statement
No. 128, Earnings per Share, which provides for the presentation of basic
earnings per share and diluted earnings per share. Diluted earnings per share
does not differ from basic earnings per share since the inclusion of the granted
options and warrants would have an antidilutive effect on basic earnings per
share. The effect of adopting this statement had no effect on the previously
reported earnings per share for 1996.
Accounting for transfers and servicing of financial assets and extinguishment of
liabilities: Financial Accounting Standards Board Statement No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities (FAS 125), distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. A transfer of financial assets
in which the transferor surrenders control over those assets is accounted for as
a sale to the extent that consideration other than beneficial interest in the
transferred assets is received in exchange. FAS 125 also established standards
on the initial recognition and measurement of servicing assets and other
retained interest and servicing liabilities, and their subsequent measurement.
FAS 125 requires that debtors reclassify financial assets pledged as collateral
and that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control of
those assets. In addition, FAS 125 requires that a liability be derecognized
only if the debtor is relieved of its obligation through payment to the creditor
or by being legally released from being the primary obligor under the liability
either judicially or by the creditor.
FAS 125 was effective for transactions occurring after December 31, 1996, except
for transactions relating to secured borrowings and collateral for which the
effective date is December 31, 1997. On January 1, 1997, the Company adopted FAS
125 except as it relates to transactions involving secured borrowings and
collateral. The effect of adoption of this Statement was not material. The
Company also believes the adoption of FAS 125 for transactions related to
secured borrowings and collateral will not have a material impact on its
consolidated financial statements.
F-11
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive income: The Financial Accounting Standards Board has issued
Statement No. 130, Reporting Comprehensive Income, that the Company will be
required to adopt for its year ended December 31, 1998. This pronouncement is
not expected to have a significant impact on the Company's financial statements.
The Statement establishes standards for the reporting and presentation of
comprehensive income and its components. The Statement requires that items
recognized as components of comprehensive income be reported in a financial
statement. The Statement also requires that a company classify items of other
comprehensive income by their nature in a financial statement, and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Comprehensive income of the Company currently consists of
unrealized gains and losses on securities available for sale. The Company
adopted Statement No. 130 during the three months ended March 31, 1998, and the
effect of Statement No. 130 is reflected for all periods presented.
NOTE 2. PURCHASE OF U.S. BANCORP, INC. AND PETERSON BANK
On May 7, 1997, the Company, through its subsidiary, Manufacturers National
Corporation, completed the purchase of 100% of U.S. Bancorp, Inc. for
$40,210,000. The purchase price was paid through a series of transactions
involving cash of $15,800,000, preferred stock of $10,200,000 and cash held by
U.S. Bancorp, Inc. of $14,210,000. The acquisition was accounted for as a
purchase with the results of operations of U.S. Bancorp, Inc. and Subsidiary
subsequent to the effective date of the agreement, April 30, 1997, included in
the consolidated financial statements. The excess of cost over the fair value of
net assets acquired (goodwill) was $8,637,000. Goodwill is being amortized over
a twenty year period.
On February 22, 1995, the Company, through its subsidiary, Manufacturers
National Corporation, completed the purchase of 158,859 shares (95.2%) of
Peterson Bank common stock for cash of $25,878,000. Additional purchases of
Peterson Bank common stock during the year increased the level of ownership to
100% and the aggregate purchase price to $26,368,000. The acquisition was
accounted for as a purchase with the results of operations of Peterson Bank and
Subsidiary subsequent to February 21, 1995, included in the consolidated
financial statements. The excess of cost over the fair value of net assets
acquired (goodwill) was $6,239,000. Goodwill is being amortized over a twenty
year period.
The unaudited pro forma results of operations, which follow, assume that the
U.S. Bancorp, Inc. acquisition had occurred at January 1, 1996 and that the
Peterson Bank acquisition had occurred at January 1, 1995. In addition to
combining the historical results of operations of the companies, the pro forma
calculations include purchase accounting adjustments related to the acquisition
and interest on borrowed funds. The pro forma calculations do not include any
anticipated cost savings as a result of the acquisitions.
F-12
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2. PURCHASE OF U.S. BANCORP, INC. AND PETERSON BANK (CONTINUED)
Unaudited pro forma consolidated results of operations for the years ending
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Net interest income $ 56,833 $ 55,234 $ 38,589
============================================
Net income $ 2,157 $ 2,818 $ 2,430
============================================
Net income available to common stockholders $ 1,290 $ 1,951 $ 2,101
============================================
Basic earnings per common share $ 25.94 $ 39.32 $ 41.90
============================================
</TABLE>
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had the purchases actually been
made at the beginning of the respective periods, or of results which may occur
in the future.
NOTE 3. RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve balances in cash or on deposit with
the Federal Reserve Bank, based on a percentage of deposits. The total of those
reserve balances was approximately $11,770,000 and $4,480,000 at December 31,
1997 and 1996, respectively.
NOTE 4. INTANGIBLES
Intangibles consist of the following as of December 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------
Core Deposit Goodwill Total
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cost $ 13,418 $ 18,032 $ 31,450
Accumulated amortization 6,515 2,517 9,032
-----------------------------------------
$ 6,903 $ 15,515 $ 22,418
=========================================
1996
-----------------------------------------
Core Deposit Goodwill Total
- ---------------------------------------------------------------------------------------------------
Cost $ 7,764 $ 10,134 $ 17,898
Accumulated amortization 4,002 1,878 5,880
-----------------------------------------
$ 3,762 $ 8,256 $ 12,018
=========================================
</TABLE>
F-13
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4. INTANGIBLES (CONTINUED)
The cost of the core deposit intangible increased by $5,654,000 during the year
ended December 31, 1997 as a result of the U.S. Bancorp, Inc. acquisition. The
cost of goodwill increased by $7,898,000 during the year ended December 31, 1997
due to goodwill of $8,637,000 related to the U.S. Bancorp, Inc. acquisition, net
of a reduction of goodwill of $739,000 related to the purchase of the minority
interests in Manufacturers National Corporation.
The amount included in deferred tax liabilities which pertains to the core
deposit intangible is approximately $2,347,000 and $1,279,000 at December 31,
1997 and 1996.
NOTE 5. INVESTMENT SECURITIES
Carrying amounts and fair values of securities available for sale are summarized
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
AVAILABLE FOR SALE Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1998 (unaudited):
U.S. Treasury securities $ 97,179 $ 233 $ (84) $ 97,328
U.S. government agencies and corporations 33,680 91 (80) 33,691
Mortgage-backed securities 5,513 138 - 5,651
------------------------------------------------------------
TOTALS $ 136,372 $ 462 $ (164) $ 136,670
============================================================
December 31, 1997:
U .S. Treasury securities $ 119,160 $ 311 $ (91) $ 119,380
U.S. government agencies and corporations 9,971 145 - 10,116
Mortgage-backed securities 7,022 167 - 7,189
------------------------------------------------------------
TOTALS $ 136,153 $ 623 $ (91) $ 136,685
============================================================
December 31, 1996:
U.S. Treasury securities $ 76,919 $ 250 $ (233) $ 76,936
U.S. government agencies and corporations 10,844 274 - 11,118
Mortgage-backed securities 12,132 284 - 12,416
------------------------------------------------------------
TOTALS $ 99,895 $ 808 $ (233) $ 100,470
============================================================
</TABLE>
F-14
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
Gross realized gains and losses from the sale of securities available for sale
for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Realized gains $ 138 $ 114 $ 100
Realized (losses) - (39) (658)
-----------------------------------------------
NET GAINS (LOSSES) $ 138 $ 75 $ (558)
===============================================
</TABLE>
Carrying amounts and fair values of securities being held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
HELD TO MATURITY Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 1998 (unaudited):
States and political subdivisions $ 4,256 $ 413 $ - $ 4,669
Other securities 968 1 - 969
---------------------------------------------------
TOTALS $ 5,224 $ 414 $ - $ 5,638
===================================================
December 31, 1997:
States and political subdivisions $ 4,423 $ 437 $ - $ 4,860
Other securities 819 - - 819
---------------------------------------------------
TOTALS $ 5,242 $ 437 $ - $ 5,679
===================================================
December 31, 1996:
States and political subdivisions $ 8,192 $ 487 $ (1) $ 8,678
Other securities 1,319 - (2) 1,317
---------------------------------------------------
TOTALS $ 9,511 $ 487 $ (3) $ 9,995
===================================================
</TABLE>
F-15
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of securities, as of March 31, 1998 and
December 31, 1997, by contractual maturity are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary.
<TABLE>
<CAPTION>
March 31, 1998 (unaudited)
---------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 84,484 $ 84,651 $ 876 $ 886
Due after one year through five years 46,375 46,368 3,519 3,919
Due after five years through ten years - - 829 833
Due after ten years - - - -
Mortgage-backed securities 5,513 5,651 - -
---------------------------------------------------
TOTALS $ 136,372 $ 136,670 $ 5,224 $ 5,638
===================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
Available for Sale Held to Maturity
---------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 61,774 $ 62,000 $ 953 $ 969
Due after one year through five years 67,219 67,346 3,234 3,477
Due after five years through ten years - - 1,035 1,212
Due after ten years 138 150 20 21
Mortgage-backed securities 7,022 7,189 - -
---------------------------------------------------
TOTALS $ 136,153 $ 136,685 $ 5,242 $ 5,679
===================================================
</TABLE>
Securities with carrying amounts as follows were pledged as collateral on public
deposits and for other purposes as required or permitted by law:
<TABLE>
<CAPTION>
March 31, December 31,
1998 -------------------------------
(unaudited) 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Available for sale $ 67,178 $ 55,705 $ 70,917
Held to maturity - 2,306 6,106
</TABLE>
F-16
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5. INVESTMENT SECURITIES (CONTINUED)
The Company, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to 1% of its certain home loans. No ready market exists for the
stock, and it has no quoted market value. The stock is redeemable at par,
therefore, market value equals cost.
NOTE 6. LOANS
Net loans consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1998 --------------------------
(unaudited) 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Commercial $ 191,848 $ 197,668 $ 208,026
Commercial real estate 216,225 162,487 91,251
Residential real estate 52,458 94,587 67,541
Real estate construction 35,902 37,079 7,057
Installment and other 30,481 35,500 14,427
---------------------------------------------
526,914 527,321 388,302
Allowance for loan losses (7,751) (7,922) (4,692)
---------------------------------------------
Loans, net $ 519,163 $ 519,399 $ 383,610
=============================================
</TABLE>
The Banks make loans to individuals as well as commercial and tax exempt
entities. Specific loan terms vary as to interest rate, repayment and collateral
requirements based on the type of loan requested and the credit worthiness of
the prospective borrower. Credit risk tends to be geographically concentrated in
that the majority of the loan customers are located in the market serviced by
the Banks. At March 31, 1998, December 31, 1997 and December 31, 1996,
commercial loans included $88,793,000, $85,658,000 and $113,960,000,
respectively, of loans which were collateralized by assignment of leases
primarily for computers and related equipment.
There were no impaired loans during the years ended December 31, 1997 and 1996.
F-17
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 6. LOANS (CONTINUED)
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997 Years Ended December 31,
------------------------------------------------------------
(unaudited) (unaudited) 1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning $ 7,922 $ 4,692 $ 4,692 $ 4,134 $ 2,646
Decreases resulting from
sale of subsidiary (399) - - - -
Provision charged to operations 188 171 971 572 240
Amounts charged off (4) (4) (343) (29) (74)
Recoveries of amounts charged off 44 1 28 15 5
Addition resulting from
purchase of U.S. Bancorp, Inc. - - 2,574 - -
Addition resulting from
purchase of Peterson Bank - - - - 1,317
------------------------------------------------------------
Balance, ending $ 7,751 $ 4,860 $ 7,922 $ 4,692 $ 4,134
============================================================
</TABLE>
Loans outstanding to bank executive officers and directors, including companies
in which they have management control or beneficial ownership, at December 31,
1997 and 1996, were approximately $8,702,000 and $11,736,000, respectively. In
the opinion of management, these loans have similar terms to other customer
loans. An analysis of the activity related to these loans for the year ended
December 31, 1997 is as follows:
<TABLE>
<S> <C>
Balance, beginning $ 11,736
Additions 2,705
Principal payments and other reductions (5,739)
------------
Balance, ending $ 8,702
-----------
</TABLE>
F-18
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7. LEASE INVESTMENTS, NET
Lease investments by categories follow:
December 31,
-------------------------
1997 1996
-------------------------
Direct financing leases:
Minimum lease payments receivable $ 1,237 $ 400
Estimated residual value 450 111
Less unearned lease income (117) (42)
-------------------------
1,570 469
-------------------------
Operating leases:
Equipment, at cost 29,678 24,739
Less accumulated depreciation (8,361) (6,571)
-------------------------
21,317 18,168
-------------------------
Lease investments, net $ 22,887 $18,637
=========================
The minimum lease payments receivable for direct financing leases and operating
leases are due as follows for the years ending December 31:
<TABLE>
<CAPTION>
Direct
Year Financing Operating
- ---- ------------------------
<S> <C> <C>
1998 $ 610 $ 7,614
1999 389 5,669
2000 238 3,527
2001 - 1,761
2002 - 404
-----------------------
$ 1,237 $ 18,975
=======================
</TABLE>
F-19
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7. LEASE INVESTMENTS, NET (CONTINUED)
Income from lease investments for the years ended December 31, is composed of:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Rental income on operating leases $ 6,896 $ 4,730 $ 2,301
Income from lease payments on direct financing leases 46 39 52
Gain on sale of leased equipment - - 10
Residual income from discounted leases 20 - -
-------------------------------------------
Income on lease investments, gross 6,962 4,769 2,363
Less:
Depreciation on operating leases (5,790) (4,374) (2,079)
Other - - (21)
-------------------------------------------
Income from lease investments, net $ 1,172 $ 395 $ 263
===========================================
</TABLE>
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment consist of:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Land and land improvements $ 2,975 $ 1,840
Buildings and improvements 6,843 4,219
Furniture and equipment 4,582 2,453
------------------------
14,400 8,512
Accumulated depreciation (3,355) (2,096)
------------------------
Premises and equipment, net $ 11,045 $ 6,416
=========================
</TABLE>
Depreciation on premises and equipment totaled $1,300,000, $912,000 and $774,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-20
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9. DEPOSITS
The composition of deposits is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-----------------------
<S> <C> <C>
Demand deposits, noninterest bearing $ 131,064 $ 96,678
NOW and money market accounts 166,390 139,257
Savings deposits 96,266 62,981
Time certificates, $100,000 or more 143,705 119,254
Other time certificates 146,635 91,547
-----------------------
TOTAL $ 684,060 $ 509,717
========================
</TABLE>
At December 31, 1997, the scheduled maturities of time certificates are as
follows:
<TABLE>
<S> <C>
1998 $ 267,719
1999 16,891
2000 5,096
2001 351
2002 283
----------
$ 290,340
==========
</TABLE>
NOTE 10. SHORT-TERM BORROWINGS
Short-term borrowings consisted of:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
<S> <C> <C>
Securities sold under agreement to repurchase $ 12,385 $ 2,194
U.S. Treasury demand notes 5,628 7,167
------------------------
$ 18,013 $ 9,361
========================
</TABLE>
F-21
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 11. LONG-TERM BORROWINGS
At December 31, 1997, the Company has a secured revolving note payable to
LaSalle National Bank with an outstanding balance of $9,000,000. The note bears
interest at a rate equal to the adjusted LIBOR rate. The note requires quarterly
payments of interest only on the outstanding balance through June 1, 1999 at
which time the revolving feature of the note shall cease and the unpaid
principal amount shall convert to an installment note with quarterly payments
due, including interest at the adjusted LIBOR rate, through June 1, 2007.
At December 31, 1997, the Company has an unsecured revolving note payable to
LaSalle National Bank with an outstanding balance of $4,500,000. The note bears
interest at the bank's prime rate, 8.50% at December 31, 1997, and requires
payments of interest only on the outstanding balance through June 1, 1999 at
which time the revolving feature of the note shall cease and the unpaid
principal amount shall convert to an installment note with quarterly payments
due, including interest at the bank's prime rate, through June 1, 2007.
The Company also has notes payable to banks totaling $8,915,000 which accrue
interest at rates ranging from 6.20% to 8.75% and require aggregate monthly
payments of $307,500, including interest at various dates through November 2002.
Equipment included in lease investments with a December 31, 1997, depreciated
cost of $11,179,000 is pledged as collateral on these notes.
The principal payments are due as follows during the years ending December 31:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1998 $ 2,893
1999 3,020
2000 3,521
2001 2,710
2002 1,717
Thereafter 8,554
--------
$ 22,415
=========
</TABLE>
F-22
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) plan which covers all full-time
employees of Manufacturers Bank and Coal City National Bank who have completed
three months of service prior to the first day of each month. The Company's
contributions consist of a discretionary profit-sharing contribution and a
discretionary matching contribution of the amounts contributed by the
participants. The Company's contributions are determined by the Board of
Directors on an annual basis. During 1997, the Company contributed on behalf of
each participant a matching contribution equal to 50% of each participant's
contribution up to a maximum of 4% of their compensation along with a profit
sharing contribution of 4% of total compensation. Each participant may also
contribute up to fifteen percent of their compensation on a pretax basis. The
Company's contributions to the plan, for the years ended December 31, 1997, 1996
and 1995, were $441,000, $387,000 and $263,000, respectively.
Manufacturers Bank has a supplemental, nonqualified retirement plan covering
employees who hold the position of vice president or higher. Contributions to
the plan were $64,000, $50,000, and $49,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Manufacturers Bank also has a noncontributory profit sharing plan that covers
substantially all full-time employees of U.S. Bancorp, Inc., which during the
year was merged with Manufacturers Bank. The employer contribution was
determined by the Board of Directors. The expense related to the plan, for the
year ended December 31, 1997, was $150,000.
NOTE 13. INCOME TAXES
The deferred taxes at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 1,946 $ 927
Other items 229 179
---------------------
2,175 1,106
---------------------
Deferred tax liabilities:
Securities available for sale 198 195
Premises and equipment 3,400 1,736
Core deposit intangible 2,347 1,279
Other items 373 300
---------------------
6,318 3,510
---------------------
NET DEFERRED TAX (LIABILITY) $ (4,143) (2,404)
======================
</TABLE>
F-23
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 13. INCOME TAXES (CONTINUED)
The components of income tax expense for the years ended December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Current expense:
Federal $ 3,141 $ 2,100 $1,763
State 346 213 23
-------------------------------------
3,487 2,313 1,786
Deferred expense (benefit) (1,085) 263 (282)
-------------------------------------
$ 2,402 $ 2,576 $1,504
=====================================
</TABLE>
The reconciliation between the statutory federal income tax rate and the
effective tax rate on consolidated income for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate 35.0% 35.0 % 35.0%
Increase (decrease) due to:
Graduated tax rates (1.0) (1.0) (1.0)
Tax exempt income (2.4) (3.3) (7.0)
Nondeductible interest expenses 0.3 0.4 0.7
State tax on income, net of federal income tax
benefit 3.6 1.9 0.3
Nondeductible amortization 4.3 4.1 6.5
Nondeductible acquisition expense 1.1 - -
Other items, net (2.7) 0.5 (0.2)
---------------------------------------
Effective income tax rate 38.2% 37.6 % 34.3%
=======================================
</TABLE>
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES
Financial instruments with off-balance-sheet risk: The Banks are a party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of their customers. These financial
instruments include commitments to extend credit and standby letters of credit
which, to varying degrees, involve elements of credit risk in excess of the
amount recognized in the balance sheets.
The Banks' exposure to credit 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 amount of those instruments.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance-sheet instruments.
F-24
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
A summary of the Banks' exposure to off-balance-sheet risk is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
----------------------------
<S> <C> <C>
Firm commitments to extend credit $ 91,825 $ 65,076
Standby letters of credit 12,608 10,412
</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. 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
Banks evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Banks upon extension
of the credit, is based on management's credit evaluation of the party.
Collateral held varies, but may include securities, accounts receivable,
inventory, property and equipment, residential real estate and income producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Banks deem necessary.
Concentrations of credit risk: The majority of the loans, commitments to extend
credit, and standby letters of credit have been granted to customers in the
Banks' market area. Investments in securities issued by state and political
subdivisions (see Note 5) also involve governmental entities within the Banks'
market area. The concentrations of credit by type of loan are set forth in Note
6. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit were granted
primarily to commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
consolidated financial statements.
F-25
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY RESTRICTIONS
The Company's primary source of cash is dividends from the Banks.
The Banks are subject to certain restrictions on the amount of dividends that
they may declare without prior regulatory approval. The dividends declared
cannot be in excess of the amount which would cause the Banks to fall below the
minimum required for capital adequacy purposes. The Banks also have an internal
policy that dividends declared will not be in excess of the amounts which would
cause the Banks to fall below the minimum required to be categorized as well
capitalized.
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and additional discretionary -
actions by regulators that, if undertaken, could have a direct material effect
on the Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company's and Banks'
assets, liabilities, and certain off-balance-sheet items are calculated under
regulatory accounting practices. The Company's and Banks' 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 the Company and Banks 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 1 capital (as defined) to
average assets (as defined). Management believes the Company and Banks meet all
capital adequacy requirements to which they are subject as of March 31, 1998 and
December 31, 1997.
As of March 31, 1998 and December 31, 1997, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Banks must maintain the total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the well
capitalized column table below. There are no conditions or events since that
notification that management believes have changed the Banks' categories.
F-26
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 15. REGULATORY RESTRICTIONS (CONTINUED)
The required and actual amounts and ratios for the Company, Manufacturers
National Corporation, Manufacturers Bank and Peterson Bank are presented below.
Information for Coal City National Bank is not presented as it is not considered
a significant subsidiary.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Action
Actual Purposes(a) Provisions(a)
-----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998 (unaudited)
Total capital (to risk-weighted assets):
Consolidated $ 54,861 9.58% $ 45,831 8.00% N/A N/A
Manufacturers Bank 60,523 10.55 45,881 8.00 $ 57,352 10.00%
Tier 1 capital (to risk-weighted assets):
Consolidated 42,379 7.40 22,916 4.00 N/A N/A
Manufacturers Bank 53,400 9.31 22,941 4.00 34,411 6.00
Tier 1 capital (to average assets):
Consolidated 42,379 5.44 31,186 4.00 N/A N/A
Bank 53,400 7.05 30,295 4.00 37,869 5.00
As of December 31, 1997
Total capital (to risk-weighted assets):
Consolidated 57,176 10.00 45,727 8.00 N/A N/A
Manufacturers National Corporation 54,257 9.95 43,615 8.00 N/A N/A
Manufacturers Bank 61,179 11.22 43,608 8.00 54,510 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 40,522 7.09 22,864 4.00 N/A N/A
Manufacturers National Corporation 47,491 8.71 21,807 4.00 N/A N/A
Manufacturers Bank 54,414 9.98 21,804 4.00 32,706 6.00
Tier 1 capital (to average assets):
Consolidated 40,522 5.15 31,477 4.00 N/A N/A
Manufacturers National Corporation 47,491 6.53 29,113 4.00 N/A N/A
Manufacturers Bank 54,414 7.48 29,109 4.00 36,387 5.00
As of December 31, 1996
Total capital (to risk-weighted assets):
Consolidated 43,595 10.14 34,385 8.00 N/A N/A
Manufacturers National Corporation 42,113 10.68 31,556 8.00 N/A N/A
Manufacturers Bank 26,670 10.05 21,239 8.00 26,548 10.00
Peterson Bank 15,142 11.57 10,466 8.00 13,082 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 34,404 8.00 17,193 4.00 N/A N/A
Manufacturers National Corporation 37,758 9.57 15,778 4.00 N/A N/A
Manufacturers Bank 23,792 8.96 10,619 4.00 15,929 6.00
Peterson Bank 13,665 10.45 5,233 4.00 7,849 6.00
Tier 1 capital (to average assets):
Consolidated 34,404 6.16 22,337 4.00 N/A N/A
Manufacturers National Corporation 37,758 7.48 20,197 4.00 N/A N/A
Manufacturers Bank 23,792 7.31 13,015 4.00 16,268 5.00
Peterson Bank 13,665 7.27 7,518 4.00 9,397 5.00
</TABLE>
(a) The amount and ratios provided are minimums under the regulations.
N/A - Not applicable.
F-27
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK
Fair values of financial instruments are management's estimate of the values at
which the instruments could be exchanged in a transaction between willing
parties. These estimates are subjective and may vary significantly from amounts
that would be realized in actual transactions. In addition, other significant
assets are not considered financial assets including deferred tax assets,
premises and equipment and intangibles. Further, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on the fair value estimates and have not been considered in any of the
estimates.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for cash and due from banks and federal funds sold
approximate their fair values.
Securities held to maturity and available for sale: Fair values for
securities are based on quoted market prices, where available. If quoted
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Stock in Federal Home Loan Bank: No ready market exists for the stock, and
it has no quoted market value. The stock is redeemable at par, therefore,
fair value equals cost.
Loans receivable: Most commercial loans, and some real estate mortgage
loans, are made on a variable rate basis. For those variable-rate loans
that reprice frequently, and with no significant change in credit risk,
fair values are based on carrying values. The fair values for fixed rate
and all other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms
to borrowers with similar credit quality.
Deposit liabilities: The fair values disclosed for deposits with no defined
maturities are equal to their carrying amounts, which represent the amount
payable on demand. The carrying amounts for variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair value at
the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Long-Term Borrowings: The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
F-28
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
Corporation obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures: The fair
values of these preferred securities are estimated using discounted cash
flow analyses, based on the Company's current incremental borrowing rates
for similar types of securities.
Accrued interest payable and receivable: The carrying amounts of accrued
interest approximate their fair values.
Off-balance-sheet instruments: Fair values for the Company's
off-balance-sheet lending commitments (guarantees, letters of credit and
commitments to extend credit) are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The estimated fair value of financial instruments is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996
--------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 36,302 $ 36,302 $ 31,465 $ 31,465
Securities available for sale 136,685 136,685 100,470 100,470
Securities held to maturity 5,242 5,679 9,511 9,995
Stock in Federal Home
Loan Bank 615 615 - -
Federal funds sold 37,400 37,400 20,800 20,800
Loans 519,399 523,624 383,610 385,435
Accrued interest receivable 5,571 5,571 3,905 3,905
Financial Liabilities
Deposits 684,060 683,586 509,717 509,751
Short-term borrowings 18,013 18,013 9,361 9,361
Long-term borrowings 22,415 22,415 16,038 16,038
Corporation obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures 10,000 10,000 - -
Accrued interest payable 2,106 2,106 1,669 1,669
Off-balance-sheet instruments, loan
commitments and standby
letters of credit - - - -
</TABLE>
F-29
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE INFORMATION AND INTEREST RATE RISK (CONTINUED)
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are more likely to prepay in a falling rate
environment and less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
NOTE 17. MINORITY INTEREST PURCHASE OBLIGATION
In the agreement to originally acquire 80.1% of Manufacturers National
Corporation, the Company also granted put options to the tendering stockholders
on all shares tendered but not purchased by the Company on October 31, 1992. The
put options may be exercised by the selling stockholders at any time after
October 31, 1993. Through October 31, 1997, the option price increased annually
and the exercise price for the remaining option term is $11.66 per share. The
number of shares of Manufacturers National Corporation common stock subject to
the put option total 209,221. Put options expire if not exercised by October 31,
1998.
NOTE 18. STOCK OPTION PLAN
During 1995, the Company reserved 5,000 shares of common stock for issuance to
key employees of the Company or any of its subsidiaries under a stock option
plan approved by the Board of Directors and stockholders. Options granted may be
either options which are intended to be incentive stock options ("incentive
stock option") or options which are not intended to be incentive stock options
("non-statutory options"). Options granted under the Plan will expire not more
than ten years from the date of the grant, and in the case of incentive stock
options, the purchase price per share to be specified in each option will be not
less than the fair market value of a share of the Company's common stock on the
date the option is granted. Other pertinent information related to the plan is
as follows:
F-30
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1997 1996
---------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 490 $ 866 - $ -
Granted 479 930 490 866
Exercised - - - -
Forfeited - - - -
---------------------------------------------------------
Outstanding at end of year 969 $ 892 490 $ 866
=========================================================
Exercisable at end of year 75 $ 891 25 $ 871
=========================================================
Weighted average fair value per
option of options granted
during the year $ 393.82 $ 348.18
============ ===========
</TABLE>
Subsequent to December 31, 1997, an additional 507 shares under option were
granted at an exercise price of $1,020.
Options Summary: The following table presents certain information with respect
to stock options granted.
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------------------
Weighted Average Weighted Average
Number Remaining Exercise
Range of Exercise Prices Outstanding Contractual Life Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$865-$871 490 8.0 $ 866
$930 479 9.0 930
</TABLE>
F-31
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 18. STOCK OPTION PLAN (CONTINUED)
As permitted under generally accepted accounting principles, grants under the
plan are accounted for following the provisions of APB Opinion No. 25 and its
related interpretations. Accordingly, no compensation cost has been recognized
for grants made to date. Had compensation cost been determined based on the fair
value method prescribed in FASB Statement No. 123, reported net income and
earnings per common share would have been reduced to the pro forma amounts shown
below:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
Net income
<S> <C> <C> <C>
As reported $ 3,449 $ 3,637 $ 2,437
Pro forma 3,373 3,594 2,437
Basic earnings per common share
As reported $ 63.83 $ 73.28 $ 43.27
Pro forma 62.30 72.42 43.27
</TABLE>
In determining the pro forma amounts above, the value of each grant is estimated
at the grant date using the binomial method, which is one of the methods
prescribed in Statement No. 123, with the following weighted-average
assumptions: dividend rate of 0%, risk-free interest rate of 6%, expected life
of 10 years and expected price volatility of 25%.
NOTE 19. ISSUANCE OF PREFERRED TRUST SECURITIES
In 1997, the Company established Coal City Capital Trust 1997-A, a Delaware
Business Trust (Trust) and purchased a $309,300 interest in common trust
securities of the Trust. The Trust then issued to Coal City Investors (CCI), an
Illinois general partnership comprised of the eight directors of the Company
$10.0 million in Corporation Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures
along with an option to purchase 5,000 shares of the Company common stock at
$1,000 per share. This option expired on July 7, 1997. In addition, a detachable
warrant was issued to CCI allowing the warrant holders to purchase up to $10.0
million of the Company's common stock at an exercise price ranging from $1,600
to $3,218 per share over the next ten years.
The debentures require quarterly payments of interest only at a rate of 9.25%
per annum. The principal portion of the debenture is due February 2027, but may
be repaid on or after February 2004. The Company shall have the right at any
time during the term to extend the interest payment period for up to 20
consecutive quarters, at the end of which period the Company shall pay all
interest then accrued and unpaid together with interest thereon.
F-32
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 20. PREFERRED STOCK
During 1997, as part of the transaction to acquire U.S. Bancorp, Inc., the
Company issued 68 shares of Class B preferred stock. The Class B preferred stock
is not cumulative as to dividends which are payable semiannually at a rate of
8.5%. At the option of the Company, the preferred shares are redeemable at par
value plus any unpaid accrued dividends.
The Class B preferred shares have a majority voting right provision which allows
the holder to vote only upon certain events deemed adverse to the holder of the
preferred stock, such as the failure of the Company to pay the required cash
dividends, or when certain business combinations are being considered.
NOTE 21. SUBSEQUENT EVENT, SALE OF COAL CITY NATIONAL BANK
On January 28, 1998, the Company sold all of the issued and outstanding shares
of Coal City National Bank common stock for cash of $7,800,000. The net assets
of Coal City National Bank at December 31, 1997 were approximately $3,662,000.
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of Coal City Corporation (parent company
only) are presented below:
Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 331 $ 139
Investments in subsidiaries 68,353 47,136
Note receivable, subsidiary 7,500 -
Other assets 238 45
-----------------------------
TOTAL ASSETS $ 76,422 $ 47,320
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term borrowing $ 23,809 $ 7,750
Liabilities, other 87 444
Stockholders' Equity 52,526 39,126
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,422 $ 47,320
=============================
</TABLE>
F-33
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $ 2,283 $ 1,491 $ 3,282
Interest and other income 370 6 -
Interest and other expense (1,804) (741) (1,052)
--------------------------------------------
INCOME BEFORE INCOME TAX CREDITS AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES 849 756 2,230
Income tax credits (596) (214) (324)
--------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARIES 1,445 970 2,554
Equity (deficit) in undistributed net income of subsidiaries 2,004 2,667 (117)
--------------------------------------------
NET INCOME $ 3,449 $ 3,637 $ 2,437
============================================
</TABLE>
F-34
<PAGE>
COAL CITY CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED
(TABLE AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 22. CONDENSED PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 3,449 $ 3,637 $ 2,437
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization (110) - 4
Equity (deficit) in undistributed net income of subsidiaries (2,004) (2,444) 117
Change in other assets and other liabilities (490) (295) 737
------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 845 898 3,295
------------------------------------------
Cash Flows From Investing Activities
Purchase of subsidiary preferred stock (19,000) - (18,400)
Purchase of interest in grantor trust (309) - -
Cash received from subsidiary for
preferred stock redemption 2,000 - 7,000
Purchase of minority interests (2,649) (64) (33)
Purchase of interest in Peterson Bank - - (387)
Sale of interest in Peterson Bank 901 - -
Issuance of note receivable from subsidiary (7,500) - -
Net (increase) decrease in securities purchased under
agreement to resell - 1,504 (1,504)
------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (26,557) 1,440 (13,324)
------------------------------------------
Cash Flows From Financing Activities
Purchase and retirement of common stock (194) (872) (123)
Issuance of common stock 115 311 706
Issuance of preferred stock 10,200 - 3,500
Redemption of preferred stock - - (3,500)
Dividends paid (276) - (267)
Proceeds from long-term borrowings 23,809 - 17,500
Principal paid on long-term borrowings (7,750) (2,000) (7,750)
------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 25,904 (2,561) 10,066
------------------------------------------
NET INCREASE (DECREASE) IN CASH 192 (223) 37
Cash:
Beginning 139 362 325
------------------------------------------
Ending $ 331 $ 139 $ 362
==========================================
</TABLE>
F-35
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS OFFERING MEMORANDUM IN CONNECTION WITH THE
OFFER MADE BY THIS OFFERING MEMORANDUM AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
CORPORATION, THE TRUST OR THE INITIAL PURCHASER. NEITHER THE DELIVERY OF THIS
OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
CORPORATION OR THE TRUST SINCE THE DATE HEREOF. THIS OFFERING MEMORANDUM DOES
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Available Information ........................ 7
Forward-Looking Statements ................... 7
Summary ...................................... 8
Selected Consolidated Financial and
Other Date ................................ 12
Risk Factors ................................. 14
Coal City Corporation ........................ 21
Recent Developments .......................... 22
Use of Proceeds .............................. 23
Ratio of Earnings to Combined Fixed
Charges ................................... 24
Accounting Treatment ......................... 24
Capitalization ............................... 25
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................ 26
Business ..................................... 42
Management ................................... 53
Supervision and Regulation ................... 54
Coal City Capital Trust I .................... 59
Description of Capital Securities ............ 60
Description of Junior Subordinated De-
bentures .................................. 72
Description of Guarantee ..................... 80
Relationship Among the Capital Secu-
rities, the Junior Subordinated De-
bentures and the Guarantee ................ 82
Consequences ................................. 83
ERISA Considerations ......................... 87
Plan of Distribution ......................... 87
Notice to Investors .......................... 89
Legal Matters ................................ 92
Independent Accountants ...................... 92
Transferee Letter of Representation .......... A-1
Index to Financial Statements ................ F-1
</TABLE>
================================================================================
================================================================================
$25,000,000
COAL CITY CAPITAL TRUST I
FLOATING RATE CAPITAL SECURITIES
FULLY AND UNCONDITIONALLY
GUARANTEED, TO THE EXTENT
DESCRIBED HEREIN, BY
COAL CITY CORPORATION
-----------------------------------
OFFERING MEMORANDUM
-----------------------------------
SANDLER O'NEILL &
PARTNERS, L.P.
JULY 21, 1998
================================================================================
