As Filed Pursuant to Rule 424(b)(3)
Registration No. 333-59616
First Union
Shareholder Meeting
July 31, 2001
Charlotte, NC
--------------------------------------------------------------------------------
[GRAPHIC]
--------------------------------------------------------------------------------
PROXY STATEMENT/PROSPECTUS
Notice of Shareholder Meeting to
Consider the Merger of
First Union and Wachovia
Your Vote is Important
Please Vote Today
For driving directions to the First Union
shareholder meeting see the inside back cover.
[FIRST UNION LOGO]
[WACHOVIA LOGO]
Our merger. First Union and Wachovia are proposing a merger-of-equals. We
will call the combined company Wachovia and believe it will be the pre-eminent
retail banking franchise in the Southeast and East Coast, and one of the
nation's leading banking organizations in commercial banking, asset and wealth
management, brokerage and investment banking.
Facts for Wachovia shareholders: Facts for First Union
shareholders:
. In the merger, you will . In the merger, you will keep
receive 2 First Union common your First Union common
shares for each Wachovia shares.
common share you own.
. In the merger, you also will . Your rights to dividends will
have a choice to receive not be affected by the merger.
either: We expect the combined company
.a one-time cash payment of to continue First Union's
$0.48 per share, or dividend policy.
.preferred shares intended to . The current First Union
provide the equivalent of quarterly dividend is $0.24
Wachovia's current regular per common share.
quarterly dividend when added
to the combined company's
quarterly common stock
dividend.
. Your board recommends the . Your board recommends the
merger. merger.
. After the merger, Wachovia . After the merger, First Union
shareholders will own about shareholders will own about
30% of the combined company. 70% of the combined company.
. Generally, the merger will be . The merger will be tax free to
tax free to you, other than you.
with respect to any cash you
receive.
. Wachovia needs your vote to . First Union needs your vote to
complete the merger. Wachovia complete the merger. First
plans to hold a shareholders' Union plans to hold a
meeting to vote on the merger shareholders' meeting to vote
and other matters on August 3. on the merger and other
matters on July 31.
Merger consideration. The number of First Union shares that Wachovia
shareholders will receive in the merger is fixed. The dollar value of the
stock consideration Wachovia shareholders receive will change depending on
changes in the market price of First Union shares and will not be known at the
time either company's shareholders vote on the merger. For example,
Value per Wachovia
Closing First Value per Wachovia Share (preferred share
Date Union Share Price Share (cash election) election)
---- ----------------- --------------------- ----------------------
The day before
we announced
our merger..... $31.92 $64.32 $63.84 + 2 pref. shares
June 25, 2001.. 34.50 69.48 69.00 + 2 pref. shares
You should obtain current market quotations for both First Union and Wachovia
common shares, which are listed on the NYSE under the symbols "FTU" and "WB",
respectively.
SunTrust. SunTrust has made an unsolicited acquisition proposal for
Wachovia, and Wachovia's board has rejected it. SunTrust is trying to solicit
votes from Wachovia's shareholders against our merger. We recommend that you
do not give your proxy to SunTrust.
Voting. Even if you plan to attend your company's meeting, please vote as
soon as possible by completing and submitting the enclosed proxy card. Not
voting at all will have the same effect as voting against the merger.
This document and risks. Please read this document carefully, because it
contains important information about the merger and the other matters you will
be considering at the meeting. In particular, read carefully the risk factors
relating to the merger beginning on page 24.
None of the SEC, any state securities commission or the North Carolina
commissioner of insurance has approved the securities to be issued in the
merger or determined if this document is accurate or adequate. It is illegal
to tell you otherwise.
The securities to be issued in the merger are not savings or deposit
accounts and are not insured by the Federal Deposit Insurance Corporation or
any other governmental agency.
Joint proxy statement-prospectus dated June 27, 2001 and first mailed to
shareholders on or about June 29, 2001.
References to Additional Information
This document incorporates important business and financial information
about First Union and Wachovia from other documents that are not included in or
delivered with this document. This information is available to you without
charge upon your written or oral request. You can obtain documents related to
First Union and Wachovia that are incorporated by reference in this document
through the Securities and Exchange Commission website at http://www.sec.gov or
by requesting them in writing or by telephone from the appropriate company:
If you are a First Union If you are a Wachovia
shareholder: shareholder:
Morrow & Co., Inc. MacKenzie Partners, Inc.
445 Park Ave. - 5th Floor 156 Fifth Avenue
New York, NY 10022-2606 New York, NY 10010
(212) 754-8000 1-800-322-2885 (toll free in the
U.S.)
or (212) 929-5500 (collect)
or
Georgeson Shareholder
111 Commerce Road
Carlstadt, NJ 07072
1-800-223-2064 (toll free in the
U.S.)
If you would like to If you would like to
request documents, please do request documents, please do
so by July 24, 2001 to so by July 27, 2001 to
receive them before First receive them before
Union's annual meeting. Wachovia's annual meeting.
You also may obtain additional proxy cards and other information related to the
proxy solicitation by contacting the appropriate proxy solicitation firm.
You will not be charged for any of these documents that you request.
See "Where You Can Find More Information" on page 177.
[LOGO OF FIRST UNION]
FIRST UNION CORPORATION
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 31, 2001
To the Shareholders
of First Union Corporation:
We will hold the annual meeting of shareholders of First Union Corporation,
a North Carolina corporation, on July 31, 2001, at 11:00 a.m., local time, in
the Symphony Ballroom of the Adam's Mark Hotel, 555 South McDowell Street,
Charlotte, NC 28204, for the purpose of considering and voting upon the
following proposals:
. Approving the plan of merger contained in the Agreement and Plan of
Merger, dated as of April 15, 2001, and amended and restated, between
Wachovia Corporation, a North Carolina corporation, and First Union, as
more fully described in the attached joint proxy statement-prospectus.
. Electing the five nominees for director named in the attached joint
proxy statement-prospectus as directors, four nominees to serve as Class
III directors with terms expiring at the 2004 annual meeting of
shareholders and one nominee to serve as a Class I director with a term
expiring at the 2002 annual meeting of shareholders, in each case until
their successors are duly elected and qualified. If the merger is
completed, the board of directors of First Union will be reconstituted
to consist of nine directors from First Union and nine directors from
Wachovia, as described in the joint proxy statement-prospectus.
. Approving First Union's Senior Management Incentive Plan.
. Approving an amendment to First Union's 1998 Stock Incentive Plan.
. Ratifying the appointment of KPMG LLP as First Union's independent
auditors for the year 2001.
. Voting upon, if properly presented, a shareholder proposal, which the
board and management oppose, regarding political contributions.
We have fixed the close of business on June 12, 2001 as the record date for
determining those shareholders entitled to vote at the annual meeting and any
adjournments or postponements of the annual meeting. Only First Union
shareholders of record on that date are entitled to notice of, and to vote at,
the annual meeting and any adjournments or postponements of the annual meeting.
If you wish to attend the annual meeting and your shares are held in the name
of a broker, trust, bank or other nominee, you must bring a proxy or letter
from the broker, trustee or nominee with you to confirm your beneficial
ownership of the shares.
By Order of the Board of Directors,
/s/ Mark C. Treanor
Mark C. Treanor
Executive Vice President,
General Counsel and Secretary
June 27, 2001
Whether or not you plan to attend the annual meeting in person, please promptly
vote your proxy by telephone or through the Internet, as described on the
enclosed proxy card, or complete, date, sign and return the enclosed proxy card
in the enclosed envelope. The enclosed envelope requires no postage if mailed
in the United States. If you attend the annual meeting, you may vote in person
if you wish, even if you have previously returned your proxy card or voted by
telephone or through the Internet.
First Union's board of directors unanimously recommends that you vote "FOR"
approval of the plan of merger contained in the merger agreement, the
election of the nominated directors, First Union's Senior Management
Incentive Plan, the amendment to First Union's 1998 Stock Incentive
Plan, and the ratification of KPMG LLP as First Union's independent
auditors.
First Union's board of directors unanimously recommends that you vote
"AGAINST" approval of the shareholder proposal regarding political
contributions.
TABLE OF CONTENTS
Page
----
SUMMARY................................................................... 4
Annual Meetings......................................................... 4
Annual Meeting of First Union ........................................ 4
Annual Meeting of Wachovia ........................................... 4
The Merger.............................................................. 4
We Propose that First Union and Wachovia Merge ....................... 4
What You Will Receive in the Merger................................... 4
The Exchange Ratio is Fixed and the Value of the Shares to be Issued
in the Merger Will Fluctuate with Market Prices ..................... 6
The Combined Company Intends to Continue First Union's Common Stock
Dividend Policy; Effect of the DEPs and the Cash Payment............. 6
The Merger Will Be Accounted for as a Purchase and Will Generally Be
Tax-Free to Shareholders ............................................ 7
Wachovia Shareholders Have Appraisal Rights........................... 7
Our Financial Advisors Have Provided Opinions as to the Fairness of
the Exchange Ratio from a Financial Point of View.................... 7
Our Boards Recommend that You Vote "FOR" the Merger................... 8
Our Reasons for the Merger............................................ 9
We Have Agreed When and How We Can Consider Third Party Acquisition
Proposals............................................................ 11
Merger Approval Requires a Majority Vote by First Union Shareholders
and by Wachovia Shareholders......................................... 11
Directors and Officers of Each of Our Companies Will Participate in
the Management of the Combined Company............................... 12
Our Directors and Executive Officers May Have Interests in the Merger
that Differ from Your Interests...................................... 12
We Must Meet Several Conditions To Complete the Merger................ 13
We Must Obtain Regulatory Approvals to Complete the Merger ........... 14
We May Terminate the Merger Agreement................................. 14
We May Amend or Waive Merger Agreement Provisions..................... 15
We Have Granted Stock Options to Each Other........................... 15
The Rights of Shareholders of the Combined Company Will Be Similar to
the Current Rights of First Union Shareholders....................... 16
Other Annual Meeting Proposals.......................................... 17
Information About First Union and Wachovia.............................. 17
Unaudited Comparative Per Share Data.................................. 18
Unaudited Comparative Per Common Share Data of First Union and
Wachovia............................................................. 19
Selected Financial Data............................................... 20
RISK FACTORS.............................................................. 24
Because the Market Price of First Union Common Stock May Fluctuate, You
Cannot Be Sure of the Market Value of the Common Stock that Wachovia
Shareholders Will Receive in the Merger................................ 24
We May Fail to Realize the Cost Savings We Estimate For the Merger...... 24
Combining Our Two Companies May Be More Difficult, Costly or Time-
Consuming Than We Expect............................................... 24
We Will Need to Divest About $1.49 Billion of Deposits to Address
Competitive Concerns................................................... 25
Unless the Merger Is Completed, Neither of Us Can Undertake Another
Business Combination Until January 2002................................ 25
Our Directors and Executive Officers May Have Interests in the Merger
that Differ from Your Interests........................................ 25
We May Record Additional Allowance for Loan Losses After the Merger..... 26
SunTrust's Tactics May Complicate or Delay Completion of the Merger..... 26
Completion of SunTrust's Proposal Would Trigger the Option That Wachovia
Issued First Union..................................................... 26
Future Results of the Combined Companies May Materially Differ from the
Pro Forma Financial Information Presented in this Document............. 27
The DEPs Have No Trading History, There is Currently No Market for DEPs
and There May Only Be a Limited Market for DEPs After the Merger is
Completed.............................................................. 27
FIRST UNION ANNUAL MEETING................................................ 28
Matters To Be Considered................................................ 28
Proxies................................................................. 28
Solicitation of Proxies................................................. 29
1
Page
----
Record Date and Voting Rights............................................ 30
Recommendations of First Union's Board................................... 31
Voting via Telephone, Internet or Mail................................... 31
WACHOVIA ANNUAL MEETING.................................................... 33
Matters To Be Considered................................................. 33
Proxies.................................................................. 33
Solicitation of Proxies.................................................. 35
Record Date and Voting Rights............................................ 35
Recommendations of Wachovia's Board...................................... 36
FIRST UNION PROPOSAL 1 AND WACHOVIA PROPOSAL 1: THE MERGER................. 37
Background of the Merger................................................. 37
Recommendation of First Union's Board and Its Reasons for the Merger..... 45
Recommendation of Wachovia's Board and Its Reasons for the Merger........ 48
The Unsolicited Proposal from SunTrust................................... 52
Cost Savings............................................................. 56
Opinion of First Union's Financial Advisor............................... 58
Opinion of Wachovia's Financial Advisors................................. 66
THE MERGER AGREEMENT....................................................... 80
Structure................................................................ 80
Board Composition of the Combined Company................................ 80
Operations............................................................... 81
Conversion of Stock; Treatment of Options................................ 82
Exchange of Certificates; Fractional Shares.............................. 84
Effective Time........................................................... 86
Representations and Warranties........................................... 86
Conduct of Business Pending the Merger................................... 87
Acquisition Proposals by Third Parties................................... 88
Other Agreements......................................................... 89
Conditions to Completion of the Merger................................... 90
Termination of the Merger Agreement...................................... 91
Waiver and Amendment of the Merger Agreement............................. 92
Regulatory Approvals Required for the Merger............................. 92
Material Federal Income Tax Consequences................................. 94
Accounting Treatment..................................................... 97
Stock Exchange Listing................................................... 97
Expenses................................................................. 97
Dividends................................................................ 97
Interests of Certain Persons in the Merger............................... 98
Restrictions on Resales by Affiliates.................................... 101
Dissenters' Appraisal Rights............................................. 101
Stock Option Agreements.................................................. 103
PRICE RANGE OF COMMON STOCK AND DIVIDENDS.................................. 110
First Union.............................................................. 110
Wachovia................................................................. 110
Dividend Policy.......................................................... 111
INFORMATION ABOUT FIRST UNION AND WACHOVIA................................. 112
First Union.............................................................. 112
Wachovia................................................................. 112
DESCRIPTION OF FIRST UNION CAPITAL STOCK................................... 114
Common Stock............................................................. 114
Preferred Stock.......................................................... 115
Dividend Equalization Preferred Shares (DEPs)............................ 115
Shareholder Protection Rights Plan....................................... 117
COMPARISON OF SHAREHOLDER RIGHTS........................................... 119
Authorized Capital Stock................................................. 119
Size of Board of Directors............................................... 119
2
Page
----
Classes of Directors.................................................... 119
Removal of Directors.................................................... 120
Filling Vacancies on the Board of Directors............................. 120
Nomination of Director Candidates by Shareholders....................... 120
Anti-Takeover Provisions................................................ 121
Shareholder Protection Rights Plan...................................... 122
Shareholder Action without a Meeting.................................... 122
Calling Special Meetings of Shareholders................................ 122
Shareholder Proposals................................................... 123
Notice of Shareholder Meetings.......................................... 123
Indemnification......................................................... 123
Amendments to Articles of Incorporation and By-Laws..................... 124
Certain Votes of Board of Directors..................................... 125
OTHER MATTERS TO BE CONSIDERED AT THE FIRST UNION MEETING................. 126
First Union Proposal 2. A Proposal To Elect Directors................... 126
First Union Proposal 3. A Proposal To Approve First Union's Senior
Management Incentive Plan.............................................. 144
First Union Proposal 4. A Proposal To Approve an Amendment to First
Union's 1998 Stock Incentive Plan ..................................... 146
First Union Proposal 5. A Proposal To Ratify The Appointment Of
Auditors............................................................... 150
Shareholder Proposal. A Shareholder Proposal Regarding Political
Contributions.......................................................... 151
Certain Matters Relating To First Union Proxy Materials And Annual
Reports................................................................ 152
OTHER MATTERS TO BE CONSIDERED AT THE WACHOVIA MEETING.................... 153
Wachovia Proposal 2. Election Of Directors.............................. 153
Wachovia Proposal 3. Appointment Of Independent Auditors................ 170
LITIGATION RELATING TO THE PROPOSED WACHOVIA/FIRST UNION MERGER........... 171
VALIDITY OF STOCK......................................................... 174
EXPERTS................................................................... 175
SHAREHOLDER PROPOSALS FOR NEXT YEAR....................................... 175
First Union............................................................. 175
Wachovia................................................................ 175
OTHER MATTERS............................................................. 176
WHERE YOU CAN FIND MORE INFORMATION....................................... 177
FORWARD-LOOKING STATEMENTS................................................ 179
FIRST UNION AND WACHOVIA UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION.............................................................. 181
Appendix A Agreement and Plan of Merger (as amended)
(including Annexes).................................................... A-1
Appendix B Wachovia Stock Option Agreement (as amended)................. B-1
Appendix C First Union Stock Option Agreement (as amended).............. C-1
Appendix D Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
to the First Union Board of Directors.................................. D-1
Appendix E Opinion of Credit Suisse First Boston Corporation to the
Wachovia Board of Directors............................................ E-1
Appendix F Opinion of Goldman, Sachs & Co. to the Wachovia Board of
Directors.............................................................. F-1
Appendix G First Union Corporation Audit Committee Charter.............. G-1
Appendix H First Union Corporation Senior Management Incentive Plan..... H-1
Appendix I First Union Corporation 1998 Stock Incentive Plan (as
amended)............................................................... I-1
Appendix J Wachovia Corporation Amended and Restated Audit Committee
Charter................................................................ J-1
Appendix K Chapter 55. North Carolina Business Corporation Act. Article
13-Dissenters' Rights.................................................. K-1
3
SUMMARY
This brief summary highlights selected information from this document. It
may not contain all the information that is important to you. We urge you to
read carefully this entire document and the other documents to which we refer
you for a more complete understanding of the matters being considered at the
annual meetings. In addition, we incorporate by reference important business
and financial information about First Union and Wachovia into this document.
You may obtain the information incorporated by reference in this document
without charge by following the instructions in the section entitled "Where You
Can Find More Information" on page 177. Each item in this summary includes a
page reference directing you to a more complete description of that item.
ANNUAL MEETINGS
Annual Meeting of First Union (Page 28)
First Union plans to hold its annual meeting on July 31, 2001, at 11:00
a.m., local time, in the Symphony Ballroom of the Adam's Mark Hotel, 555 South
McDowell Street, Charlotte, NC 28204. At the meeting, among other things, you
will be asked to approve the plan of merger contained in the merger agreement
providing for the merger of Wachovia into First Union.
You can vote at the First Union annual meeting if you owned First Union
common stock at the close of business on June 12, 2001. As of that date, there
were 979,096,528 shares of First Union common stock outstanding and entitled to
vote. You can cast one vote for each share of First Union common stock that you
owned on that date.
Annual Meeting of Wachovia (Page 33)
Wachovia plans to hold its annual meeting on August 3, 2001, at 10:30 a.m.,
local time, in the Benton Convention Center, 301 West 5th Street, Winston-
Salem, NC 27101. At the meeting, among other things, you will be asked to
approve the plan of merger contained in the merger agreement providing for the
merger of Wachovia into First Union.
You can vote at the Wachovia annual meeting if you owned Wachovia common
stock at the close of business on June 12, 2001. As of that date, there were
203,362,336 shares of Wachovia common stock outstanding and entitled to vote.
You can cast one vote for each share of Wachovia common stock that you owned on
that date.
----------------
THE MERGER
We Propose that First Union and Wachovia Merge (Page 37)
We propose that Wachovia merge into First Union, with First Union as the
surviving corporation. The combined company will be incorporated in North
Carolina and its corporate headquarters will be in Charlotte, North Carolina.
The combined company will be called "Wachovia Corporation" and its common stock
will trade on the New York Stock Exchange, or the NYSE, under the symbol "WB".
We expect to complete the merger in the third quarter of 2001.
What You Will Receive in the Merger (Page 37)
Wachovia Shareholders. When the merger is completed, each Wachovia
shareholder will receive 2 First Union shares for each Wachovia share held. We
sometimes refer to this 2-for-1 ratio as the "exchange ratio."
Wachovia shareholders also will be entitled to elect to receive, for each
Wachovia share converted in the merger, either:
. a one-time cash payment of $0.48 or
. two shares of dividend equalization preferred stock, each of which will
be entitled to a regular quarterly dividend equal to the amount, if any,
by which the regular quarterly dividend on the combined company's common
stock is less than $0.30 per share. We estimate each preferred share has
a present value of $0.24, or $0.48 for two shares.
4
We call the preferred shares Wachovia shareholders may elect to receive
"DEPs" for dividend equalization preferred shares. Wachovia shareholders who
choose to receive DEPs will be entitled to receive an additional dividend each
quarter. The additional dividend will make up any difference between the common
stock dividend declared by the combined company and $0.30. For example, if the
common stock dividend is $0.24 the DEPs dividend will be $0.06 bringing the
total to $0.30 per quarter. Because the exchange ratio converts each Wachovia
common share into two shares of the combined company's common stock, this
dividend is intended to preserve the effect of the $0.60 per share quarterly
dividend that Wachovia shareholders currently receive. The dividend rights on
the DEPs will end when the total dividends paid on the combined company's
common stock over four consecutive quarters equals at least $1.20 (the
equivalent of what would have been paid at Wachovia's current dividend rate,
$2.40 per Wachovia share). See "Expiration of Dividend Rights" on page 116.
Alternatively, for those Wachovia shareholders who choose to receive the
$0.48 per share cash payment, that cash payment represents our estimate of the
present value of the difference, for two of the combined company's common
shares, between a $0.30 per share regular quarterly dividend and what we expect
the regular quarterly dividend will be on the combined company's common shares
until that dividend reaches $0.30. Because the exchange ratio converts each
Wachovia common share into two of the combined company's common shares, this
also is intended to preserve the effect of the $0.60 per share quarterly
dividend that Wachovia shareholders currently receive.
Based on the same calculations we used to determine the amount of the $0.48
cash payment, we estimate that two DEPs have a present value of $0.48, or $0.24
each. This $0.48 amount for two DEPs is the same amount as the fixed per share
cash payment. In deciding on the amount of the fixed cash payment and
estimating the present value of the DEPs, we assumed that the combined
company's regular quarterly dividend will be equal to slightly less than 33% of
its cash net earnings over time. However, the combined company's dividend
policy is subject to change at any time and, accordingly, the amount of
dividends actually paid may differ from the amounts we assumed. In estimating
the present value of the DEPs we also assumed a discount rate of 13%, although
this rate may be higher or lower than you may earn on any cash you receive.
You should not assume the DEPs will trade at a price that equals what we
estimate to be their present value. There is currently no market for the DEPs.
We do not know if a market for the DEPs will develop or what their trading
prices will be. First Union has agreed to use reasonable efforts to cause the
DEPs to be listed on an exchange or quoted on an interdealer quotation system,
but we do not know if a listing or quotation will be possible.
First Union will not issue fractional common shares or fractional DEPs in
the merger. Instead, it will pay cash for fractional common shares based on the
NYSE closing price per First Union share on the trading day before the merger
is completed and it will pay cash for fractional DEPs based on $0.24 per DEP.
First Union will also pay fractional amounts of the $0.48 per share cash
payment.
If you are a Wachovia shareholder, you will need to surrender your Wachovia
common stock certificates to receive (1) new certificates for the First Union
common stock, (2) your $0.48 per share cash payment or the new certificates for
the DEPs, (3) your cash payment instead of fractional interests, and (4) any
dividends paid by the combined company in the future. Please do not surrender
your certificates until you receive written instructions from the combined
company after we have completed the merger.
Example for Wachovia Shareholders. As an example, if you hold 10.3 Wachovia
shares at the time the merger is completed, you will receive the following in
the merger:
. 20 common shares of the combined company--this represents the whole
number of combined company shares resulting from the 2-for-1 exchange
ratio
. cash equal to 0.6 times the closing First Union share price on the
trading day before the merger is completed--this represents cash instead
of the 0.6 of a combined company share resulting from the 2-for-1
exchange ratio
5
. if you elect to receive the cash payment, $4.94 cash--this represents the
sum of $4.80 for the whole Wachovia shares you hold and $0.14 for the 0.3
of a Wachovia share you hold
. if you elect to receive DEPs, 20 DEPs and $0.14 cash--this represents the
whole number of DEPs resulting from the 2-for-1 exchange and $0.14 cash
instead of the 0.6 of a DEP resulting from the exchange
First Union Shareholders. If you are a First Union shareholder, your shares
of First Union common stock will be unchanged by the merger. Despite the
proposed change of First Union's name to Wachovia Corporation, you do not need
to surrender your shares or your stock certificates.
Combined Company. After completion of the merger, former Wachovia
shareholders will own approximately 30% of the common stock of the combined
company, and First Union shareholders will own approximately 70% of the common
stock of the combined company.
The Exchange Ratio is Fixed and the Value of the Shares to be Issued in the
Merger Will Fluctuate with Market Prices (Pages 84 and 110)
First Union common shares are listed on the NYSE under the symbol "FTU" and
Wachovia common shares are listed on the NYSE under the symbol "WB." The
following table shows the closing prices for First Union and Wachovia common
stock and the implied per share value in the merger to Wachovia shareholders
for the following dates and periods:
. April 12, 2001, the last trading day before we announced the merger;
. April 16, 2001, the day we announced the merger;
. June 25, 2001, shortly before we mailed this document; and
. the high, low and average values for the period from May 25, 2001
through June 25, 2001.
Implied Implied
value value
Closing per per
First Closing Wachovia Wachovia
Union Wachovia share share
share share (DEPs (cash
price price elected) elected)
------- -------- -------- --------
April 12, 2001............................... $31.92 60.20 63.84 64.32
April 16, 2001............................... 31.20 62.05 62.40 62.88
June 25, 2001................................ 34.50 69.91 69.00 69.48
High (for period)............................ 34.55 69.91 69.10 69.58
Low (for period)............................. 31.60 65.25 63.20 63.68
Average (for period)......................... 33.01 67.87 66.02 66.50
A Wachovia shareholder electing DEPs will also receive 2 DEPs per Wachovia
common share.
The market price of First Union common stock will change before the merger,
and accordingly, the market value of the consideration that Wachovia
shareholders will receive in the merger will also change. You will not know the
market value of what Wachovia shareholders will receive when you vote on the
merger. In addition, the exchange ratio of 2 shares of First Union common stock
for 1 share of Wachovia common stock is fixed and will stay the same, even if
the market prices of each company's stock change. You should obtain current
stock price quotations for First Union common stock and Wachovia common stock.
The Combined Company Intends to Continue First Union's Common Stock Dividend
Policy; Effect of the DEPs and the Cash Payment (Page 111)
We have decided to continue First Union's dividend policy for the combined
company's common stock, but this policy is subject to change at any time and
the future dividend policy of the combined company is subject to the
determination of the board of directors of the combined company. In the first
and second quarters of 2001, First Union declared a dividend of $0.24 per First
Union share (equivalent to $0.48 per Wachovia share at the 2-for-1 exchange
ratio in the merger), whereas Wachovia declared a dividend of $0.60 per share
of Wachovia common stock.
All dividends on common and preferred shares (including DEPs) of the
combined company will be payable when, as and if declared by the board of
directors out of funds legally available for the payment of dividends by a
North Carolina corporation. Dividends on the DEPs will
6
be cumulative, which means that even if they are not paid in a particular
quarter they will continue to be owed to the DEPs holders. However, a failure
to pay dividends on the DEPs will not prevent the combined company from paying
future dividends on the common stock. See "Dividend Policy" beginning on page
111.
The Merger Will Be Accounted for as a Purchase and Will Generally Be Tax-Free
to Shareholders (Pages 94 and 97)
We intend to treat the merger as a purchase by First Union of Wachovia under
generally accepted accounting principles.
For federal income tax purposes, the merger has been structured as a
"reorganization." Therefore, generally for U.S. federal income tax purposes,
Wachovia shareholders:
. will not recognize any gain or loss upon the exchange of Wachovia shares
solely for First Union common shares and, if they so elect, DEPs;
. will recognize gain, but not loss, with respect to the $0.48 per share
cash payment if they choose to receive it; and
. will recognize gain or loss, with respect to the payment of cash in lieu
of fractional shares of First Union common stock and will recognize
ordinary income with respect to the payment of cash in lieu of
fractional DEPs.
The $0.48 per share cash payment will have different tax consequences than
dividends paid on DEPs. The merger will not have any tax consequences for
holders of First Union common stock. For a complete description of the material
federal income tax consequences of the transaction, see "Material Federal
Income Tax Consequences" on page 94.
This tax treatment may not apply to every shareholder. You should consult
your own tax advisor for a full understanding of the merger's tax consequences
to you.
First Union and Wachovia have received legal opinions from Sullivan &
Cromwell and Simpson Thacher & Bartlett, respectively, regarding the tax
consequences of the merger summarized above. The tax opinions are exhibits to
the registration statement filed with the SEC in connection with this document.
First Union and Wachovia will not be obligated to complete the merger unless
we receive additional legal opinions on the closing date that the merger will
be treated as a transaction of a type that is generally tax-free for U.S.
federal income tax purposes.
Wachovia Shareholders Have Appraisal Rights (Page 101 and Appendix K)
The merger agreement provides dissenters' rights of appraisal to Wachovia's
shareholders. To exercise these rights you must comply precisely with each of
the procedural requirements of the North Carolina Business Corporation Act, or
the BCA, the relevant sections of which are attached to this document as
Appendix K.
Our Financial Advisors Have Provided Opinions as to the Fairness of the
Exchange Ratio from a Financial Point of View (Pages 58 and 66)
Wachovia's Advisors. Credit Suisse First Boston Corporation rendered an
opinion to Wachovia's board dated as of April 15, 2001, the date the Wachovia
board approved the First Union merger, that as of that date, the exchange ratio
of 2 shares of First Union common stock for 1 share of Wachovia common stock
was fair from a financial point of view to holders of Wachovia common stock. On
May 22, 2001, the date Wachovia's board approved the amended and restated
merger agreement and reaffirmed its approval of the First Union merger, Credit
Suisse First Boston rendered an opinion that as of that date the exchange ratio
was fair from a financial point of view to holders of Wachovia common stock.
Credit Suisse First Boston confirmed its opinion dated May 22, 2001 by delivery
of a written opinion dated the date of this joint proxy statement-prospectus.
We have attached the opinion dated the date of this joint proxy statement-
prospectus as Appendix E to this document. You should read this opinion
completely to understand the procedures followed, assumptions made, matters
considered and limitations of the review undertaken by Credit Suisse First
Boston. Credit Suisse First Boston's opinion is directed to the Wachovia board
of directors and does not constitute a recommendation to any shareholder as to
any matters relating to the merger or as to the form of consideration the
shareholder should elect to
7
receive. Wachovia has agreed to pay Credit Suisse First Boston a total fee of
about $30 million, $20 million of which is contingent upon completion of a
transaction.
Goldman, Sachs & Co. has also delivered a written opinion to Wachovia's
board that, as of May 22, 2001, the date Wachovia's board approved the amended
and restated merger agreement and reaffirmed its approval of the First Union
merger, the exchange ratio was fair from a financial point of view to holders
of Wachovia common stock. This opinion was confirmed as of the date of this
joint proxy statement-prospectus. We have attached this opinion dated the date
of this joint proxy statement-prospectus as Appendix F to this document. You
should read this opinion completely to understand the procedures followed,
assumptions made, matters considered and limitations of the review of Goldman
Sachs. Goldman Sachs' opinion is directed to the Wachovia board of directors
and does not constitute a recommendation to any shareholder as to any matters
relating to the merger or as to whether to elect to receive the $0.48 cash
payment or the DEPs. Wachovia has agreed to pay Goldman Sachs a total fee of
$20 million, $15 million of which is contingent upon the completion of a
transaction.
First Union's Advisor. Merrill Lynch, Pierce, Fenner & Smith Incorporated
has delivered a written opinion to First Union's board that as of April 15,
2001, the date First Union's board approved the merger and related agreements,
the exchange ratio was fair to First Union and First Union shareholders from a
financial point of view. This opinion was subsequently confirmed as of May 21,
2001, the date First Union's board approved the amended and restated merger
agreement, and as of the date of this joint proxy statement-prospectus. The
opinion dated as of the date of this joint proxy statement-prospectus is
included as Appendix D to this document. You should read this opinion
completely to understand the procedures followed, assumptions made, matters
considered and limitations of the review undertaken by Merrill Lynch. Merrill
Lynch's opinion is directed to the First Union board of directors and does not
constitute a recommendation to any shareholder as to any matters relating to
the merger. First Union has agreed to pay a transaction fee to Merrill Lynch of
$20 million, $15 million of which is contingent upon completion of the merger.
Our Boards Recommend that You Vote "FOR" the Merger (Pages 45 and 48)
First Union Shareholders. First Union's board of directors believes that the
merger is fair to First Union and First Union shareholders and in the best
interests of First Union, and unanimously recommends that First Union
shareholders vote "FOR" approval of the plan of merger.
Wachovia Shareholders. Wachovia's board of directors believes that the
merger is fair to, and in the best interests of, Wachovia and its shareholders
and recommends that Wachovia shareholders vote "FOR" approval of the plan of
merger.
Fixed Exchange Ratio Considerations. Because the exchange ratio is fixed and
because the market price of the First Union common stock will fluctuate, the
market value of the First Union common stock First Union shareholders will
retain and the consideration that Wachovia shareholders will receive in the
merger may increase or decrease before or after the merger. For example,
between the date we announced the merger, April 16, 2001, and June 25, 2001 the
dollar value of the common stock that Wachovia shareholders will receive in the
merger, based on the closing price of First Union common stock on the NYSE,
ranged from $69.10 to $59.40 per share (which does not include the $0.48 per
share cash payment or DEPs, depending upon your choice). If you choose the
DEPs, the exchange ratio of 2 DEPs per share of Wachovia common stock is also
fixed and there is currently no market for the DEPs.
In arriving at our determinations that the merger is fair to and in the best
interests of you and First Union and Wachovia and our decision to adopt the
merger agreement and the plan of merger and recommend that you vote in favor of
the plan of merger, we each considered that:
. a combination of our two companies based in part on a fixed exchange
ratio is intended to capture the relative contribution of each company
based on fundamental financial factors and avoids relative fluctuations
between our stock prices caused by near-term volatility;
. a fixed exchange ratio is customary for mergers of this type in the
financial services industry and in other industries;
8
. an exchange ratio that does not fluctuate with the price of our common
stocks provides substantial certainty about the number of shares that
will be issued in the merger; and
. the nominal dollar value of the shares of the combined company to be
received by shareholders in the merger would fluctuate with the market
price of First Union common stock before the merger was completed and
could be materially different from the market price prevailing when we
signed the merger agreement.
Our Reasons for the Merger (Pages 45 and 48)
First Union's Board of Directors. First Union's board of directors is
proposing the merger because:
. It believes that the merger is likely to provide both immediate and
long-term increases in shareholder value, including immediate accretion
for the shareholders of both companies on a cash operating earnings per
share basis. On this basis, First Union estimates that the merger will
be 3.7% accretive to First Union shareholders in 2002, growing to 7.1%
in 2004, and 15.2% accretive to Wachovia shareholders in 2002, growing
to 19.8% in 2004. Cash operating earnings per share is the result of
adding to net income the after-tax restructuring and merger-related
charges and intangible amortization and dividing the result by the
average shares outstanding.
. It believes that Wachovia and First Union have a unique strategic fit
because of their similar geographic scope and product mix and the
combined company will have a stronger strategic position to compete
successfully and have a greater potential for growth than either company
possesses alone.
. It believes that the combined company will have increased economies of
scale in high-growth businesses, significant annual expense savings and
complementary customer bases and products. These expense savings are
described in more detail on page 56 under the heading "Cost Savings".
. It believes that Wachovia's and First Union's management share a common
business vision and commitment to their respective shareholders,
employees and other constituencies.
In considering the merger, First Union's board of directors also considered
the following potential adverse consequences of the merger:
. The possibility that the merger and the related integration process
could result in the loss of key employees, in the disruption of First
Union's on-going business or in the loss of customers.
. The possibility that the anticipated benefits of merger may not be
realized, including the expected cost savings.
. The fact that neither party could enter into another merger agreement
until January 2002 if the merger was not completed before then, which
may limit future business combinations in the immediate future.
. The impact of divestitures likely to be required.
. The potential merger-related restructuring charges.
The First Union board concluded, however, that the potential benefits of the
merger substantially outweighed the risks.
Wachovia's Board of Directors. Wachovia's board of directors is proposing
the merger because:
. It believes that the merger provides a unique opportunity for
substantial earnings accretion in the near term and potential price-
earnings multiple expansion in the future. Wachovia estimates that the
accretion to cash earnings per share resulting from the merger will be
15.2% in 2002, growing to 19.8% in 2004.
. It believes that the combined company will have greater strength and
earning power than Wachovia would on its own and the added scale
necessary to assume and solidify leadership in high growth business
lines.
9
. It believes that the deliberate pace of planned merger integration over
a three-year period will minimize integration risk.
. It believes that First Union and Wachovia, and their respective
management teams, possess similar philosophies and complementary
strengths.
. The Wachovia board has a favorable assessment of the capabilities of
First Union's management team.
In considering the merger, Wachovia's board of directors also considered the
following potential adverse consequences of the merger:
. The challenges of integrating Wachovia and First Union given First
Union's recent strategic restructuring.
. The risks of not achieving the expected cost savings and other benefits.
. The risks of diverting management's attention from other strategic
opportunities.
. The risks associated with required regulatory approvals, including the
impact of required divestitures.
. The fact that neither party could enter into another merger agreement
until January 2002 if the merger was not completed before then, which
may limit future business combinations in the immediate future.
The Wachovia board concluded, however, that the potential benefits of the
merger substantially outweighed the risks.
Cost Savings and Accounting Charges. Although we can make no assurances,
both Wachovia and First Union believe that the combined company can achieve
cost savings of approximately 8% of combined non-interest expense (or
approximately $890 million in annual expense reductions) by the end of 2004.
These cost savings are expected to be achieved partially in each year until
2004. Of the total $890 million in annual expected cost savings:
. 36% is expected from eliminating duplicative technology and operations
functions
. 24% is expected from business unit function reductions
. 16% is expected from eliminating duplicative staff unit functions
. 10% is expected from consolidating facilities
. 13% is expected from stronger purchasing power
As part of these cost savings, we expect to reduce the combined company's job
positions by about 7,000 over the three-year transition period. We believe up
to one-half of these reductions could occur through normal attrition. As part
of the cost savings we have outlined, we expect to consolidate about 325 branch
banking offices during the three-year integration period. You can find more
detail about our expected cost savings under the heading "Cost Savings" on page
56.
We also expect to recognize an estimated $1.4 billion of restructuring
charges, merger-related charges and purchase accounting adjustments. A portion
of these charges and adjustments will be recorded upon merger closing, with the
remainder expected to be recorded in each year from merger closing through
2004. You can find more detail about our expected accounting charges under
"First Union and Wachovia Unaudited Pro Forma Condensed Combined Financial
Information" on page 181.
SunTrust. On May 14, 2001, SunTrust Banks, Inc. announced an unsolicited
proposal to acquire Wachovia in a merger in which each Wachovia common share
would be converted into 1.081 shares of SunTrust common stock. SunTrust also
stated that it would increase its annual common stock dividend (when, as and if
declared by its board of directors out of funds legally available) by 39% to
$2.22 per share in order to match the current Wachovia dividend (which is $0.60
per quarter or $2.40 annually per Wachovia share). The Wachovia board, after
consulting with its senior management and its financial and legal advisors, has
determined that a merger with SunTrust would not be an effective means of
enhancing long-term shareholder value or achieving the board's strategic goals
for the company. Accordingly, the Wachovia board rejected the SunTrust
unsolicited proposal as not being in the best interests of Wachovia or its
shareholders.
10
The SunTrust proposal is conditional and is dependent upon, among other
things, the Wachovia board taking various actions that the Wachovia board
either does not have the power to take or has decided are not in the best
interests of Wachovia and its shareholders to take. Accordingly, Wachovia
shareholders are not being asked to consider and vote upon the SunTrust
proposal at the annual meeting. For a discussion of the factors considered by
the Wachovia board in connection with its rejection of the SunTrust proposal,
see "The Unsolicited Proposal from SunTrust" beginning on page 52.
Changes to the Merger. Following SunTrust's unsolicited proposal, we changed
some aspects of the merger. First, we amended the merger agreement to allow for
Wachovia shareholders to choose DEPs. While we designed the $0.48 per share
cash payment to compensate Wachovia shareholders for the reduced dividend
expected as a result of the merger, we did not believe that the approach was
understood. The DEPs were introduced to provide Wachovia shareholders with a
more direct way to preserve the benefit of Wachovia's current dividend rate. We
also agreed, at the request of Mr. L. M. Baker, Jr., Wachovia's Chairman,
President and Chief Executive Officer, to eliminate any changes in the terms of
his retirement arrangement with the combined company compared to the retirement
arrangement currently in effect for him. Mr. Baker stated that he did not want
any Wachovia shareholder to believe he supported the First Union/Wachovia
merger because of his pension arrangements.
Following SunTrust's unsolicited proposal, we also changed some aspects of
the stock options we issued each other in connection with the merger. First, we
changed the provision that said that an option's exercise price could be paid
in property and limited the consideration to cash and investment grade
securities. SunTrust had claimed that First Union could use the original
provision to harm Wachovia's business in the future. While we believe the
provision contained reasonable valuation procedures that would have protected
each other against any such harm, we agreed to modify the provision because
neither one of us has any intention of harming the other's business. Second, we
clarified that the maximum total profit on each option is $780 million. This
was our original intention, but to provide complete clarity on this issue and
to eliminate any possible confusion or ambiguity caused by SunTrust's
allegations as to the firm and comprehensive nature of the total profit as
alleged by SunTrust, we clarified this limit. Finally, if an issuer of an
option is acquired by another company, the option is changed into a new option
to buy the acquiring company's stock. As we reviewed the options to make the
two revisions we described, we concluded that the exercise price adjustment
formula in the new option, although subject to the same profit cap as the
regular option, did not accurately reflect the parties' intent as to the
potential value of the new option and resulted in an exercise price that was
too low. We therefore amended the options accordingly.
See "The Merger--Background of the Merger" beginning on page 37.
We Have Agreed When and How We Can Consider Third Party Acquisition Proposals
(Page 88)
We have agreed that we will not initiate or solicit proposals from third
parties regarding acquiring our companies or our businesses. In addition, we
have agreed that we cannot engage in negotiations or provide confidential
information to a third party regarding acquiring our companies or our
businesses. However, if one of us receives an acquisition proposal from a third
party, that party can participate in negotiations with the third party if,
among other steps, its board of directors concludes that the proposal is, or
may result in, a proposal that is superior to our merger.
Wachovia's board of directors has concluded that SunTrust's unsolicited
merger proposal does not represent a strategically desirable alternative and is
not in the best interests of Wachovia or its shareholders and, therefore, has
not authorized any negotiations with SunTrust.
Merger Approval Requires a Majority Vote by First Union Shareholders and by
Wachovia Shareholders (Pages 29 and 34)
First Union Shareholders. In order to approve the plan of merger, the
holders of a majority of First Union's common shares outstanding as of June 12,
2001 must vote in favor of the plan of
11
merger contained in the merger agreement. First Union directors and executive
officers beneficially owned about 9,143,109, or less than 1%, of the shares
entitled to vote at the First Union annual
meeting. Wachovia and its subsidiaries, directors and executive officers
beneficially owned less than 1% of the shares entitled to vote at the First
Union meeting (other than shares held by Wachovia or its subsidiaries in a
fiduciary, or custodial or agency capacity).
Wachovia Shareholders. In order to approve the plan of merger, the holders
of a majority of Wachovia's common shares outstanding as of June 12, 2001 must
vote in favor of the plan of merger contained in the merger agreement. Wachovia
directors and executive officers beneficially owned about 2,269,640 shares of
common stock, representing 1.12%, of the shares entitled to vote at the
Wachovia annual meeting. First Union and its subsidiaries, directors and
executive officers beneficially owned less than 1% of the shares entitled to
vote at the Wachovia meeting (other than shares held by First Union or its
subsidiaries in a fiduciary, or custodial or agency capacity).
Directors and Officers of Each of Our Companies Will Participate in the
Management of the Combined Company (Page 80)
The board of directors of the combined company will have 18 members. First
Union will choose 9 members from its board and Wachovia will choose 9 members
from its board to sit on the board of directors of the combined company. These
directors will be split as evenly as possible among the three classes of
directors, and will serve as directors until their respective successors are
duly elected and qualified. The combined company's articles of incorporation
and by-laws will be amended to provide nominating and other procedures to
ensure that the 50/50 split between former First Union and former Wachovia
directors is maintained through the annual shareholders meeting in 2004.
Mr. L. M. Baker, Jr., will be a member of the combined company's board of
directors and will serve as its Chairman until 2004, unless he retires or
resigns before then or as otherwise determined according to the combined
company's articles of incorporation and by-laws. The current Chairman,
President and Chief Executive Officer of First Union, Mr. G. Kennedy Thompson,
will be a member of its board of directors, as well as the combined company's
President and Chief Executive Officer, and will succeed Mr. Baker as Chairman
at the annual shareholders' meeting held in 2004, unless he retires or resigns
before then or as otherwise determined according to the combined company's
articles of incorporation and by-laws.
Our Directors and Executive Officers May Have Interests in the Merger that
Differ from Your Interests (Page 98)
Some of our directors and executive officers have interests in the merger
other than their interests as shareholders. The members of our boards of
directors knew about these additional interests and considered them when they
adopted the merger agreement and the plan of merger. We estimate that the value
of the incremental payments and benefits executive officers and directors of
First Union will receive as a result of the merger is $11.2 million, and the
value of the incremental payments and benefits the executive officers and
directors of Wachovia could receive is $70 million.
The following provides more detail about the payments, benefits and other
interests we have described.
Mr. Baker's Employment Agreement. In connection with the merger, First Union
entered into a new employment agreement with Mr. Baker, for his position as
Chairman of the combined company. Mr. Baker's employment agreement with the
combined company is for three years following the merger. He is to be paid an
annual salary of at least $1 million (consistent with his current salary) and
is eligible for an annual incentive payment, but in no event may his salary or
annual bonus be less than the combined company's Chief Executive Officer.
Following the merger, the combined company will honor Mr. Baker's current
Supplemental Retirement Agreement, which will entitle Mr. Baker to receive an
annual retirement benefit in addition to his normal pension benefit upon his
retirement. Mr. Baker will also receive other payments upon
12
termination of employment described under "Interests of Certain Persons in the
Merger" beginning on page 98. See also "Wachovia Supplemental Retirement
Agreements" beginning on page 100.
Wachovia Employment Agreements. Employment agreements between Wachovia and
9 of its other executive officers provide those officers with severance
benefits if their employment with the combined company terminates within 3
years following the merger. We currently estimate that payments and benefits of
up to $31 million in the aggregate could be triggered if all such employees
were terminated within the time frames covered under the agreements, which we
do not expect to occur.
Wachovia Supplemental Agreements. Also, once Wachovia shareholders approve
the merger, benefits under supplemental retirement agreements with 9 executive
officers will become fully vested and, assuming the executive's employment
terminates following the merger, will be adjusted to reflect any continuation
benefits under the executive's employment agreement. We currently estimate that
as of the date of the merger, the present value of the aggregate payments and
benefits that could be triggered under these agreements is $30 million if all
such executives' employment terminates immediately upon the merger, which we do
not expect to occur. In addition, non-employee directors may elect to obtain a
lump sum settlement of the phantom stock units credited to their account.
First Union Employment Agreements. Employment and severance agreements
between First Union and 14 of its officers provide the officers with severance
benefits if their employment is terminated in a specified fashion. Currently 3
such executives have not been identified as having positions with the combined
company following the merger. We currently estimate that payments and benefits
of up to $11.2 million in the aggregate could be payable to those executives.
Directors of the Combined Company. 9 of the current directors of First Union
and 9 of the current directors of Wachovia will become directors of the
combined company following the merger and will continue to receive customary
fees from the combined company for being a director. Other than Mr. Baker and
Mr. Thompson, these directors have not yet been identified. Also, following the
merger, the combined company will indemnify, and provide directors' and
officers' insurance for, the officers and directors of Wachovia for events
occurring before the merger, including events that are related to the merger.
We Must Meet Several Conditions To Complete the Merger (Page 90)
Our obligations to complete the merger depend on a number of conditions
being met. These include:
. approval of the plan of merger by both First Union and Wachovia
shareholders;
. the representations and warranties of the other party to the merger
agreement being true and correct, except as would not have or would not
reasonably be expected to have a material adverse effect; and the other
party to the merger agreement must have performed in all material
respects all its obligations under the merger agreement;
. listing the shares of First Union common stock to be issued in the
merger on the NYSE;
. receiving the approval of necessary federal and state regulatory
authorities;
. absence of any government action or other legal restraint or prohibition
that would prohibit the merger or make it illegal; and
. receiving legal opinions that, for U.S. federal income tax purposes, the
merger will be treated as a reorganization and no gain or loss will be
recognized by Wachovia shareholders who receive First Union common
shares in exchange for all of their Wachovia common stock, except with
respect to consideration received other than First Union stock,
including the $0.48 per share cash payment for those shareholders who
elect to receive it and any cash for fractional interests. These
opinions will be subject to various limitations. Receipt of opinions
with respect to the tax consequences of the exchange of Wachovia shares
for DEPs is not a condition of completing the merger.
13
Where the law permits, either of us could choose to waive a condition to our
obligation to complete the merger even when that condition has not been
satisfied. We cannot be certain when, or if, the conditions to the merger will
be satisfied or waived, or that the merger will be completed. Although the
merger agreement allows us to waive the tax opinion condition, we do not
currently anticipate doing so. If either of us does waive this condition, we
will inform you of this fact and ask you to vote on the merger taking this into
consideration.
We Must Obtain Regulatory Approvals to Complete the Merger (Page 92)
We cannot complete the merger unless it is approved by the Board of
Governors of the Federal Reserve System. Once the Federal Reserve Board
approves the merger, we will have to wait from 15 to 30 days before we can
complete it. During that time, the U.S. Department of Justice, or DOJ, can
challenge the merger. The merger is also subject to receiving the approval of
other regulatory authorities.
We have filed the required application and notices with the Federal Reserve
Board. We are in the process of filing all of the required applications and
notices with other regulatory authorities. In addition, the merger is subject
to review by antitrust authorities under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, or HSR Act, and we have received clearance pursuant
to the HSR Act to complete the merger.
As of the date of this document, we have not yet received the required
approvals. Although we do not know of any reason why we would not be able to
obtain the necessary approvals in a timely manner, we cannot be certain when or
if we will get them. We expect that we will need to sell branches with
approximately $1.49 billion in deposits, along with related loans, to third
parties in order to comply with antitrust requirements, but we have taken this
into account in planning for the merger, and we do not believe that it will
have a material negative effect on the combined company.
We May Terminate the Merger Agreement (Page 91)
We can mutually agree at any time to terminate the merger agreement without
completing the merger, even if our shareholders have approved the plan of
merger. Also, either of us can decide, without the consent of the other, to
terminate the merger agreement:
. if there is a final denial of a required regulatory approval;
. if there is a continuing breach of the merger agreement by the other
party, after 60 days' written notice to the breaching party, as long as
that breach would allow the non-breaching party not to complete the
merger;
. if the other party's board of directors fails to recommend and support
approval of the plan of merger to its shareholders, or withdraws or
materially and adversely modifies its recommendation; or the other
party's board recommends a third party acquisition proposal;
. if the other party commences, or the other party's board authorizes
commencement of, negotiations with a third party about a third party
acquisition proposal and those negotiations continue for 5 business
days; or
. if the merger is not completed on or before January 16, 2002.
The SunTrust proposal is a third party acquisition proposal for purposes of
the third and fourth bullet points above.
The failure of either Wachovia or First Union to obtain the shareholder vote
required for the merger will not by itself give either company the right to
terminate the merger agreement. As long as no other termination event occurred,
both companies would remain obligated to continue to use their reasonable best
efforts to complete the merger until January 16, 2002, which, depending on the
timing of the failed meeting, could include calling additional shareholder
meetings. In addition, during this period neither company could undertake any
other material acquisitions or mergers.
14
The boards of directors of both companies considered, and believed it was
appropriate to make, this commitment for the limited period of time involved,
especially in light of the nature of the transaction as a merger-of-equals
based on long-term strategic considerations, the relatively short term of this
commitment and the relatively lengthy regulatory and integration processes
involved in transactions like these. Moreover, a similar provision has been
used in 4 out of the 8 banking mergers involving consideration over $10 billion
(not including the proposed First Union/Wachovia merger) since 1998.
Whether or not the merger is completed, we will each pay our own fees and
expenses, except that we will evenly divide the costs and expenses that we
incur in preparing, printing and mailing this document and filing fees paid in
connection with the registration statement and all applications for government
approvals, except fees paid to counsel, financial advisors and accountants.
We May Amend or Waive Merger Agreement Provisions (Page 92)
We may jointly amend the merger agreement, and each of us may waive our
right to require the other party to follow particular provisions of the merger
agreement. However, we may not amend the merger agreement after our
shareholders approve the plan of merger if the amendment would legally require
the plan of merger to be resubmitted to Wachovia shareholders or First Union
shareholders or would violate North Carolina law.
We may also agree to change the structure of the merger, as long as any
change does not change the amount or type of stock or other payment to be
received by Wachovia shareholders and the holders of options to purchase
Wachovia common stock, does not adversely affect the timing of completion of
the merger, does not affect the ability to receive the legal opinions relating
to the tax-free nature of the merger and does not adversely affect the
interests of our shareholders.
We Have Granted Stock Options to Each Other (Page 103 and Appendices B and C)
We each entered into a stock option agreement that grants the other an
option to purchase up to 19.9% of the outstanding shares of our common stock,
or the stock of any company that acquires either of us, under the circumstances
and for the payments described in the option agreements.
We granted the options to each other in order to increase the likelihood
that we would complete the merger. The options could discourage other companies
from proposing a competing combination with either of us before we complete the
merger.
Neither of us can exercise our option unless either:
. a third party acquires 25% or more of the common stock of the option
issuer or
. the option issuer agrees to, or recommends to its shareholders, a
business combination or acquisition transaction (other than the proposed
merger) with another party that would result in the acquisition of more
than 25% of the stock or business of the option issuer or a significant
subsidiary.
We do not know of any event that has occurred as of the date of this
document that would allow either of us to exercise our option.
As of the date of this document, SunTrust's proposal to acquire Wachovia has
not triggered exercisability of the option that First Union holds on Wachovia
common stock, although the occurrence in the future of either of the events
listed in the 2 bullets above would cause the option to become exercisable.
SunTrust has filed suit to challenge the Wachovia option; First Union and
Wachovia have filed suit seeking an order upholding the option. First Union and
Wachovia believe that the options are valid under North Carolina law.
After completion of a business combination or acquisition transaction
between the option issuer and a third party involving 25% or more of the stock
or business of the option issuer or a significant subsidiary, the option issuer
may be required to repurchase the option and any shares purchased
15
under it at a formula price, or the option holder may choose to surrender the
option for a minimum cash payment of $375 million. The holder of the option may
realize a maximum total profit under the terms of the option of $780 million.
The options generally expire if the merger agreement terminates. However, an
option will continue for 18 months after the merger agreement terminates if,
before the merger agreement terminates (subject to extension for up to 6 months
if the regulatory or legal impediments prevent exercise during that period),
the option issuer agrees to an acquisition transaction with a third-party or a
third-party takes other specified steps toward an acquisition of the issuer. On
May 30, 2001, SunTrust filed an application with the Federal Reserve Board for
approval to complete its unsolicited merger proposal with Wachovia. This event
has triggered the 18-month continuation of First Union's option on Wachovia
common stock. As a result, this option will not terminate until 18 months after
the merger agreement terminates, subject to extension for up to 6 months as
described above. If, for example, the merger agreement terminates on January
16, 2002, the option would expire on July 16, 2003 (subject to the possible
six-month extension until January 16, 2004).
If either company were able to, and did, exercise its option, it would own
about 17% of the other's common shares, after giving effect to the newly issued
shares, and have the ability to vote those shares in the future. Because North
Carolina law generally requires a majority vote for merger proposals, the
holder would not be able to force a merger or block future business combination
transactions, based solely on the shares received upon exercise of the option.
Similarly, neither of us believes the maximum payment of $780 million would
prohibit us from engaging in a future business combination transaction.
SunTrust has publicly indicated that it does not "currently intend" to continue
its hostile proposal if First Union refuses to cancel its option to purchase
Wachovia shares in exchange for a cash payment equal to its "in the money"
value, or if First Union is able to, and does, exercise the option and acquires
Wachovia shares. However, SunTrust has said that it reserves the right to
change its mind.
The Rights of Shareholders of the Combined Company Will Be Similar to the
Current Rights of First Union Shareholders (Page 119)
The rights of First Union shareholders are governed by North Carolina law
and by First Union's articles of incorporation and by-laws. The rights of
Wachovia shareholders are also governed by North Carolina law, but are subject
to Wachovia's articles of incorporation and by-laws. Upon completing the
merger, the rights of both shareholder groups will be governed by North
Carolina law and First Union's articles of incorporation and by-laws, except
that:
. the name of the combined company will be "Wachovia Corporation";
. 500,000,000 no-par DEPs, as they are described in this document, will be
authorized to be issued to Wachovia shareholders;
. the number of authorized shares of the combined company's common stock
will be increased from 2 billion to 3 billion; and
. the combined company's articles of incorporation and by-laws will
contain provisions related to management succession and procedures and
qualifications for the nomination of directors by the board intended to
effect the 50/50 split between former First Union and former Wachovia
board members contemplated by the merger agreement. These provisions
will expire immediately after the combined company's 2004 annual
shareholders' meeting.
16
OTHER ANNUAL MEETING PROPOSALS (PAGES 126 and 153)
First Union Shareholders. In addition to the plan of merger, First Union
shareholders will be asked to consider other proposals at First Union's annual
meeting. These proposals are described in this document under "Other Matters to
be Considered at the First Union Meeting" beginning on page 126. These
proposals include:
. electing 5 nominees to First Union's board of directors;
. approving First Union's Senior Management Incentive Plan;
. approving an amendment to First Union's 1998 Stock Incentive Plan;
. ratifying the appointment of KPMG LLP as First Union's independent
auditors for the year 2001; and
. if properly presented, a shareholder proposal regarding political
contributions, which management and the board oppose.
First Union's board of directors recommends voting "FOR" electing the five
nominees, approving the Senior Management Incentive Plan, approving the
amendment to the 1998 Stock Incentive Plan, and ratifying the appointment of
KPMG LLP. The First Union board of directors recommends voting "AGAINST" the
shareholder proposal regarding political contributions.
Wachovia Shareholders. In addition to the plan of merger, Wachovia
shareholders will be asked to consider other proposals at Wachovia's annual
meeting. These proposals are described in this document under "Other Matters to
be Considered at the Wachovia Meeting" beginning on page 153. These proposals
include:
. electing 5 nominees to Wachovia's board of directors; and
. ratifying the appointment of Ernst & Young LLP as Wachovia's independent
auditors for the year 2001.
Wachovia's board of directors recommends voting "FOR" electing the five
nominees and ratifying the appointment of Ernst & Young LLP.
----------------
INFORMATION ABOUT FIRST UNION AND WACHOVIA (PAGE 112)
First Union Corporation
One First Union Center
Charlotte, NC 28288
(704) 374-6565
First Union is a financial holding company organized under the laws of North
Carolina and registered under the federal Bank Holding Company Act. First Union
has nearly 2,200 full-service financial centers and more than 3,800 ATM
locations. First Union offers a comprehensive line of consumer and commercial
banking products and services, personal and commercial trust, investment
advisory, insurance, securities brokerage, investment banking, mortgage, credit
card, cash management, international banking and other financial services.
At March 31, 2001, First Union had consolidated total assets of $253
billion, consolidated total deposits of $144 billion and consolidated
stockholders' equity of $16 billion. Based on total assets at March 31, 2001,
First Union was the 6th largest bank holding company in the United States.
Wachovia Corporation
100 North Main 191 Peachtree St., N.E.
Street Atlanta, GA 30303
Winston-Salem, NC (404) 332-6661
27150
(336) 732-2549
Wachovia is an interstate financial holding company with dual headquarters
in Atlanta, Georgia, and Winston-Salem, North Carolina, serving regional,
national and international markets. Wachovia had total assets of $76 billion
and deposits of $46 billion as of March 31, 2001 and is ranked 14th and 15th,
respectively, among U.S. banking companies in those categories. Wachovia's
principal banking subsidiary is Wachovia Bank, N.A., which has 668 branches and
1,356 ATMs in Florida, Georgia, North Carolina, South Carolina and Virginia.
Wachovia serves 3.8 million consumers and 180,000 small business customers in
the five states. Wachovia's corporate bank has more than 28,000 business
relationships and global activities in 40 countries.
17
Unaudited Comparative Per Share Data
The following table shows historical information about our companies'
respective earnings per share, dividends per share and book value per share,
and similar information reflecting the merger, which we refer to as "pro forma"
information, at or for the three months ended March 31, 2001 and at or for the
year ended December 31, 2000. In presenting the comparative pro forma
information for the periods shown we assumed that we had been combined
throughout those periods.
We assumed that the merger will be accounted for under an accounting method
known as "purchase accounting." Under the purchase method of accounting, the
assets and liabilities of the company not surviving a merger are, as of the
completion date of the merger, recorded at their respective fair values and
added to those of the surviving company. Financial statements of the surviving
company issued after consummation of the merger reflect such values and are not
restated retroactively to reflect the historical financial position or results
of operations of the company not surviving.
The information listed as "equivalent pro forma" for Wachovia was obtained
by multiplying the pro forma amounts by the 2-for-1 exchange ratio. We present
this information to reflect the fact that Wachovia shareholders will receive
two shares of common stock of the combined company for each share of their
Wachovia common stock exchanged in the merger.
We expect that we will record approximately $1.4 billion of restructuring
charges, merger-related charges and purchase accounting adjustments as a result
of combining our companies. A portion of these charges and adjustments will be
recorded upon merger closing as either purchase accounting adjustments or in
the combined results of operations, with the remainder expected to be recorded
in the combined results of operations in each year from 2002 through 2004. We
also anticipate that the merger will provide the combined company with
financial benefits that include reduced operating expenses. The pro forma
information throughout this document, while helpful in illustrating the
financial characteristics of the combined company under one set of assumptions,
does not necessarily reflect what the historical results of the combined
company would have been had our companies been actually combined during the
periods presented.
The final allocation of the purchase price will be determined after the
merger is completed and after completion of thorough analyses to determine the
fair values of Wachovia's tangible and identifiable intangible assets and
liabilities as of the date the merger is completed. In addition, estimates
related to restructuring and merger-related charges are subject to final
decisions related to combining the companies. Any change in the fair value of
the net assets of Wachovia will change the amount of the purchase price
allocable to goodwill. Additionally, changes to Wachovia's stockholders' equity
including net income from April 1, 2001, through the date the merger is
completed, will also change the amount of goodwill recorded. In addition, the
final adjustments may be materially different from the unaudited pro forma
adjustments presented herein.
18
The information in the following table is based on, and should be read
together with, the historical financial information that we have presented in
our prior filings with the SEC, which are incorporated into this document by
reference, and with the more detailed pro forma financial information we
provide in this document, which you can find beginning at page 181. See "Where
You Can Find More Information" on page 177 for a description of where you can
find our prior filings.
Unaudited Comparative Per Common Share Data of First Union and Wachovia
Three Months
Ended Year Ended
March 31, December 31,
2001 2000
------------ ------------
First Union
Basic earnings per common share:
Income before change in accounting principle
Historical.......................................... $ 0.60 0.12
Pro forma........................................... 0.48 0.26
Diluted earnings per common share:
Income before change in accounting principle
Historical.......................................... 0.59 0.12
Pro forma........................................... 0.47 0.26
Dividends declared on common stock:
Historical.......................................... 0.24(a) 1.92
Pro forma........................................... 0.24(a) 1.92
Book value per common share:
Historical.......................................... 16.39 15.66
Pro forma........................................... 20.98 20.68
Wachovia
Basic earnings per common share:
Historical.......................................... $ 1.17 4.10
Equivalent pro forma................................ 0.96 0.52
Diluted earnings per common share:
Historical.......................................... 1.17 4.07
Equivalent pro forma................................ 0.94 0.52
Dividends declared on common stock:
Historical.......................................... 0.60 2.28
Equivalent pro forma................................ 0.48 3.84
Book value per common share:
Historical.......................................... 32.64 30.89
Equivalent pro forma................................ 41.96 41.36
--------
(a) The current annualized dividend rate for First Union for 2001 is $0.96.
19
Selected Financial Data
The following tables show summarized historical financial data for each of
the companies and also show similar pro forma information reflecting the
merger. The historical financial data show the financial results actually
achieved by First Union and Wachovia for the periods indicated. The pro forma
information reflects the pro forma effect of accounting for the merger under
the purchase method of accounting. The pro forma income statement data for the
three months ended March 31, 2001 assumes a merger completion date of
January 1, 2001. The pro forma income statement data for the year ended
December 31, 2000 assumes a merger completion date of January 1, 2000. The pro
forma balance sheet data assumes a merger completion date of March 31, 2001.
We expect that we will record approximately $1.4 billion of restructuring
charges, merger-related charges and purchase accounting adjustments as a result
of combining our companies. A portion of these charges and adjustments will be
recorded upon completion of the merger, with the remainder expected to be
recorded in each year from 2002 through 2004. The pro forma financial
information includes estimated adjustments to record certain assets and
liabilities of Wachovia at their respective fair values. The pro forma
adjustments included herein are subject to updates as additional information
becomes available and as additional analyses are performed. Certain other
assets and liabilities of Wachovia, principally loans and borrowings, will also
be subject to adjustment to their respective fair values. Pending more detailed
analyses, no pro forma adjustments are included herein for these assets and
liabilities. We also anticipate that the merger will provide the combined
company with financial benefits that include reduced operating expenses. The
pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
reflect these charges, expenses or benefits and, accordingly, does not attempt
to predict or suggest future results. It also does not necessarily reflect what
the historical results of the new company would have been had our companies
been combined during the periods presented. See "Cost Savings" on page 56.
The information in the following tables is based on historical financial
information and related notes that we have presented in our prior filings with
the SEC. You should read all of the summary financial information we provide in
the following tables together with this historical financial information and
related notes and together with the more detailed pro forma financial
information and related notes we provide in this document, which you can find
beginning at page 181. The historical financial information is also
incorporated into this document by reference. See "Where You Can Find More
Information" on page 177 for a description of where you can find this
historical information and "First Union and Wachovia Unaudited Pro Forma
Condensed Combined Financial Information" on page 181.
20
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF FIRST UNION
Three Mon
Ended March 31, Years Ended December 31,
-------------------- -----------------------------------------
(In millions, except per share
data) 2001 2000 2000 1999 1998 1997 1996
------------------------------ -------- ------- ------- ------- ------- ------- -------
CONSOLIDATED SUMMARIES OF
INCOME
Interest income................ $ 4,025 4,313 17,534 15,151 14,988 14,362 13,758
Interest expense............... 2,323 2,347 10,097 7,699 7,711 6,568 6,151
-------- ------- ------- ------- ------- ------- -------
Net interest income............ 1,702 1,966 7,437 7,452 7,277 7,794 7,607
Provision for loan losses...... 219 192 1,736 692 691 1,103 678
-------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses..... 1,483 1,774 5,701 6,760 6,586 6,691 6,929
Securities transactions--
portfolio..................... (16) (16) (1,134) (63) 357 55 100
Fee and other income........... 1,590 1,858 7,846 6,996 6,078 4,267 3,435
Restructuring and merger-
related charges............... 2 (5) 2,190 404 1,212 284 421
Noninterest expense............ 2,207 2,387 9,520 8,458 7,844 6,936 6,509
-------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of a change
in accounting principle ...... 848 1,234 703 4,831 3,965 3,793 3,534
Income taxes................... 264 394 565 1,608 1,074 1,084 1,261
-------- ------- ------- ------- ------- ------- -------
Income before cumulative effect
of a change in accounting
principle..................... 584 840 138 3,223 2,891 2,709 2,273
Cumulative effect of a change
in the accounting for
beneficial interests, net of
tax........................... -- -- (46) -- -- -- --
-------- ------- ------- ------- ------- ------- -------
Net income..................... $ 584 840 92 3,223 2,891 2,709 2,273
======== ======= ======= ======= ======= ======= =======
PER COMMON SHARE DATA
Basic
Income before change in
accounting principle......... $ 0.60 0.86 0.12 3.35 2.98 2.84 2.33
Net income.................... 0.60 0.86 0.07 3.35 2.98 2.84 2.33
Diluted
Income before change in
accounting principle......... 0.59 0.85 0.12 3.33 2.95 2.80 2.30
Net income.................... 0.59 0.85 0.07 3.33 2.95 2.80 2.30
Cash dividends................. 0.24 0.48 1.92 1.88 1.58 1.22 1.10
Book value..................... 16.39 17.16 15.66 16.91 17.20 15.82 14.77
CASH DIVIDENDS PAID ON COMMON
STOCK......................... 235 478 1,888 1,817 1,524 1,141 1,031
CONSOLIDATED PERIOD-END BALANCE
SHEET ITEMS
Assets......................... 252,949 253,648 254,170 253,024 237,087 205,609 197,259
Loans, net of unearned income.. 122,853 135,803 123,760 133,177 134,149 131,687 134,647
Deposits....................... 140,795 139,890 142,668 141,047 142,467 137,077 136,429
Long-term debt................. 36,092 33,043 35,809 31,975 22,949 13,487 11,604
Stockholders' equity........... $ 16,081 16,884 15,347 16,709 16,897 15,143 14,546
Common shares outstanding (In
thousands).................... 981,268 984,148 979,963 988,315 982,223 960,984 988,594
CONSOLIDATED AVERAGE BALANCE
SHEET ITEMS
Assets......................... $245,469 248,290 247,492 230,319 222,213 195,980 189,214
Loans, net of unearned income.. 119,850 131,481 126,888 129,791 132,060 134,517 129,120
Deposits....................... 137,282 140,421 140,766 135,112 136,330 132,847 131,276
Long-term debt................. 36,631 32,564 34,279 28,738 16,268 12,596 10,443
Stockholders' equity........... $ 15,846 16,583 15,541 15,932 15,878 14,327 13,834
Common shares outstanding (In
thousands)
Basic......................... 967,671 972,174 970,608 959,390 969,131 955,241 973,712
Diluted....................... 975,847 984,095 974,172 966,863 980,112 966,792 982,755
CONSOLIDATED PERCENTAGES
Average assets to average
stockholders' equity.......... 15.49x 14.97 15.93 14.46 13.99 13.68 13.68
Return on average assets....... 0.97%(a) 1.36(a) 0.04 1.40 1.30 1.38 1.20
Return on average stockholders'
equity........................ 14.95(a) 20.38(a) 0.59 20.23 18.21 18.91 16.43
Average stockholders' equity to
average assets................ 6.46 6.68 6.28 6.92 7.15 7.31 7.31
Stockholders' equity to
assets........................ 6.36 6.66 6.04 6.60 7.13 7.36 7.37
Allowance for loan losses to
Loans, net.................... 1.43 1.30 1.39 1.32 1.36 1.40 1.64
Nonperforming assets.......... 132 139 135 165 216 186 211
Net charge-offs to average
loans, net.................... 0.53(a) 0.57(a) 0.59 0.53 0.48 0.65 0.64
Nonperforming assets to loans,
net, foreclosed properties and
loans in other assets as
held for sale................. 1.30 0.92 1.22 0.78 0.63 0.75 0.78
Capital ratios
Tier 1 capital................ 7.18 6.94 7.02 7.08 6.81 8.36 7.86
Total capital................. 11.33 10.67 11.19 10.87 10.99 12.95 12.53
Leverage...................... 5.88 5.94 5.92 5.97 5.91 7.03 6.70
Net interest margin............ 3.42%(a) 3.69(a) 3.55 3.79 3.81 4.53 4.55
--------
(a) Annualized.
21
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF WACHOVIA
Three Months
Ended March 31, Years Ended December 31,
-------------------- ----------------------------------------
(In millions, except per
share data) 2001 2000 2000 1999 1998 1997 1996
------------------------ -------- ------- -------- ------- ------- ------- -------
CONSOLIDATED SUMMARIES
OF INCOME
Interest income......... $ 1,350 1,246 5,345 4,667 4,665 4,262 4,010
Interest expense........ 720 626 2,830 2,197 2,314 2,169 2,086
-------- ------- -------- ------- ------- ------- -------
Net interest income..... 630 620 2,515 2,470 2,351 2,093 1,924
Provision for loan
losses................. 122 74 588 298 299 265 194
-------- ------- -------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 508 546 1,927 2,172 2,052 1,828 1,730
Securities
transactions--
portfolio.............. 9 -- -- 11 20 1 5
Fee and other income.... 492 471 1,931 1,610 1,228 1,006 874
Restructuring and
merger-related
charges................ 13 8 136 19 85 220 --
Noninterest expense..... 619 630 2,447 2,232 1,911 1,746 1,509
-------- ------- -------- ------- ------- ------- -------
Income before income
taxes.................. 377 379 1,275 1,542 1,304 869 1,100
Income taxes............ 135 134 443 531 430 276 343
-------- ------- -------- ------- ------- ------- -------
Net income.............. $ 242 245 832 1,011 874 593 757
======== ======= ======== ======= ======= ======= =======
PER SHARE DATA
Basic................... $ 1.17 1.21 4.10 4.99 4.26 2.99 3.70
Diluted................. 1.17 1.20 4.07 4.90 4.18 2.94 3.65
Cash dividends.......... 0.60 0.54 2.28 2.06 1.86 1.68 1.52
Book value.............. 32.64 28.88 30.89 28.04 26.30 25.13 22.90
CASH DIVIDENDS PAID ON
COMMON STOCK........... 122 110 463 418 382 327 306
CONSOLIDATED PERIOD-END
BALANCE SHEET ITEMS
Assets.................. 75,606 68,817 74,032 67,353 64,123 65,397 57,229
Loans, net of unearned
income................. 56,703 51,125 55,002 49,621 45,719 44,194 38,007
Deposits................ 45,617 43,716 44,412 41,786 40,995 42,654 35,322
Long-term debt.......... 10,712 8,738 10,808 7,814 7,597 5,934 7,025
Stockholders' equity.... $ 6,865 5,846 6,285 5,658 5,338 5,174 4,608
Common shares
outstanding (In
thousands)............. 210,335 202,456 203,424 201,812 202,986 205,927 201,253
CONSOLIDATED AVERAGE
BALANCE SHEET ITEMS
Assets.................. $ 73,800 67,755 69,699 65,420 63,949 57,607 55,584
Loans, net of unearned
income................. 55,659 50,550 52,436 47,223 44,401 39,716 36,739
Deposits................ 43,991 43,192 43,612 40,580 39,814 36,516 34,100
Long-term debt.......... 10,721 8,081 9,144 8,134 6,279 6,122 6,693
Stockholders' equity.... $ 6,439 5,688 5,886 5,430 5,168 4,533 4,458
Common shares
outstanding (In
thousands)
Basic.................. 206,061 202,464 202,989 202,795 205,058 198,290 204,889
Diluted................ 207,569 204,213 204,450 206,192 209,153 201,901 207,432
CONSOLIDATED PERCENTAGES
Average assets to
average stockholders'
equity................. 11.46x 11.91 11.84 12.05 12.37 12.71 12.47
Return on average
assets................. 1.31%(a) 1.44(a) 1.19 1.55 1.37 1.03 1.36
Return on average
stockholders' equity... 15.04(a) 17.21(a) 14.14 18.62 16.92 13.08 16.99
Average stockholders'
equity to average
assets................. 8.72 8.39 8.44 8.30 8.08 7.87 8.02
Stockholders' equity to
assets................. 9.08 8.50 8.49 8.40 8.32 7.91 8.05
Allowance for loan
losses to
Loans, net............. 1.50 1.17 1.50 1.12 1.20 1.23 1.37
Nonperforming assets... 195 242 158 248 302 421 395
Net charge-offs to
average loans, net..... 0.85(a) 0.58(a) 0.70 0.62 0.67 0.67 0.53
Nonperforming assets to
loans, net, foreclosed
properties and loans in
other assets as held
for sale............... 0.77 0.48 0.95 0.45 0.40 0.29 0.35
Capital ratios
Tier 1 capital......... 7.80 7.44 7.55 7.52 7.99 8.43 8.93
Total capital.......... 11.80 11.23 11.56 10.98 11.34 11.11 12.32
Leverage............... 8.93 8.81 8.73 8.77 8.67 9.24 8.52
Net interest margin..... 3.93%(a) 4.20(a) 4.11 4.32 4.24 4.14 3.98
--------
(a) Annualized.
22
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF
FIRST UNION AND WACHOVIA (a)
Three Months Ended Year Ended
March 31, December 31,
(In millions, except per share data) 2001 2000
------------------------------------ ------------------ ------------
CONSOLIDATED SUMMARIES OF INCOME
Interest income................................ $ 5,375 22,879
Interest expense............................... 3,043 12,927
---------- ------
Net interest income............................ 2,332 9,952
Provision for loan losses...................... 341 2,324
---------- ------
Net interest income after provision for loan
losses........................................ 1,991 7,628
Securities transactions--portfolio............. (7) (1,134)
Fee and other income........................... 2,082 9,777
Restructuring and merger-related charges....... 15 2,326
Noninterest expense............................ 3,013 12,716
---------- ------
Income before income taxes and cumulative
effect of a change in accounting principle.... 1,038 1,229
Income taxes................................... 359 848
---------- ------
Income before cumulative effect of a change in
accounting principle.......................... $ 679 381
========== ======
PER COMMON SHARE DATA
Income before change in accounting principle
Basic......................................... $ 0.48 0.26
Diluted....................................... 0.47 0.26
Dividends...................................... 0.24 1.92
Book value..................................... 20.98 20.68
CONSOLIDATED PERIOD-END BALANCE SHEET ITEMS
Assets......................................... 334,470 --
Loans, net of unearned income.................. 179,556 --
Deposits....................................... 184,912 --
Long-term debt................................. 46,804 --
Stockholders' equity........................... $ 29,338 --
Common shares outstanding (In thousands)....... 1,401,938 --
CONSOLIDATED PERCENTAGES
Return on average assets....................... 0.85%(b) 0.12
Return on average stockholders' equity......... 9.60(b) 1.37
Allowance for loan losses to
Loans, net.................................... 1.45 1.42
Nonperforming assets.......................... 147 141
Net charge-offs to average loans, net.......... 0.63(b) 0.62
Nonperforming assets to loans, net, foreclosed
properties and loans in other assets as held
for sale...................................... 1.14% 1.14
--------
(a) See "First Union and Wachovia Unaudited Pro Forma Condensed Combined
Financial Information" on page 181.
(b) Annualized.
23
RISK FACTORS
In addition to the other information contained in or incorporated by
reference into this joint proxy statement-prospectus, including the matters
addressed under the heading "Forward-Looking Statements" beginning on page 179,
you should carefully consider the following risk factors in deciding how to
vote on the merger.
Because the Market Price of First Union Common Stock May Fluctuate, You Cannot
Be Sure of the Market Value of the Common Stock that Wachovia Shareholders Will
Receive in the Merger.
Upon completion of the merger, each share of Wachovia common stock will be
converted into 2 shares of First Union common stock and the option to receive
either a one-time cash payment of $0.48 or 2 DEPs. The exchange ratio will not
be adjusted for changes in the market price of either First Union common stock
or Wachovia common stock. Any change in the price of First Union common stock
prior to the merger will affect the market value that Wachovia common
shareholders will receive on the date of the merger. Stock price changes may
result from a variety of factors, including general market and economic
conditions, changes in our businesses, operations and prospects and regulatory
considerations. Many of these factors are beyond our control. Neither of us is
permitted to terminate the merger agreement or resolicit the vote of our
shareholders solely because of changes in the market price of either of our
common stocks.
The prices of First Union common stock and Wachovia common stock at the
closing of the merger may vary from their respective prices on the date the
merger agreement was executed, on the date of this joint proxy statement-
prospectus and on the date of the meetings. As a result, the value represented
by the exchange ratio will also vary. For example, based on the range of
closing prices of First Union common stock during the period from April 12,
2001, the last trading day before public announcement of the merger, through
June 25, 2001, the exchange ratio represented a value based on the First Union
common stock ranging from a high of $69.10 to a low of $59.40 for each share of
Wachovia common stock (excluding the $0.48 cash payment). Because the date the
merger is completed may be later than the dates of the meetings, at the time of
your shareholders' meeting, you will not necessarily know the market value of
the combined company's common stock that you will hold upon completion of the
merger.
We May Fail to Realize the Cost Savings We Estimate For the Merger.
The success of the merger will depend, in part, on our ability to realize
the estimated cost savings from combining the businesses of First Union and
Wachovia. Our managements originally estimated that approximately $890 million
of annual pre-tax cost savings would be realized from the merger by December
31, 2004. While we continue to be comfortable with these estimates as of the
date of this document, it is possible that our estimates of the potential cost
savings could turn out to be incorrect. For example, our combined purchasing
power may not be as strong as we expect, and therefore our cost savings could
be reduced. In addition, unanticipated growth in the combined company's
business may require that some facilities or support functions that we
currently expect to combine or reduce may be necessary for us to continue
operations. Additional information about our cost savings estimates can be
found on page 56 under "Cost Savings". Our cost savings estimates also depend
on our ability to combine the businesses of First Union and Wachovia in a
manner that permits those costs savings to be realized. If our estimates turn
out to be incorrect or we are not able to combine successfully our two
companies, the anticipated cost savings may not be realized fully or at all, or
may take longer to realize than expected.
Combining Our Two Companies May Be More Difficult, Costly or Time-Consuming
Than We Expect.
First Union and Wachovia have operated, and, until the completion of the
merger, will continue to operate, independently. It is possible that the
integration process could result in the loss of key employees, the disruption
of each company's ongoing business or inconsistencies in standards, controls,
procedures and policies that adversely affect our ability to maintain
relationships with clients and employees or to achieve the
24
anticipated benefits of the merger. As with any merger of banking institutions,
there also may be disruptions that cause us to lose customers or cause
customers to take their deposits out of our banks. In addition, competitors may
view SunTrust's hostile bid as an opportunity to draw customers from each of us
and from SunTrust.
For example, First Union's 1998 acquisition of CoreStates Financial Corp
involved a number of the integration problems listed above. Because this
transaction occurred at the same time First Union was implementing a new
business model and involved an accelerated implementation of cost savings,
unanticipated levels of customer attrition were experienced.
We Will Need to Divest About $1.49 Billion of Deposits to Address Competitive
Concerns.
Because of First Union's and Wachovia's strong presence in some markets, we
believe we will need to make divestitures of branches with deposits of
approximately $1.49 billion, and related loans, in order to avoid a
determination by the Federal Reserve Board or the DOJ that the merger would
have a significantly adverse effect on competition in those markets. First
Union and Wachovia are attempting to receive clearance for these divestitures
as soon as possible. Although we believe that the divestitures and potential
customer run-off will not have a material negative effect on the business of
the combined company, we cannot be sure.
Unless the Merger Is Completed, Neither of Us Can Undertake Another Business
Combination Until January 2002.
The failure of either Wachovia or First Union to obtain the shareholder vote
required for the merger will not by itself give either company the right to
terminate the merger agreement. As long as no other termination event has
occurred, both companies would remain obligated to continue to use their
reasonable best efforts to complete the merger until January 16, 2002, which,
depending on the timing of the failed meeting, could include calling additional
shareholder meetings.
During this period neither company could undertake any other material
mergers or business combination transactions without the consent of the other.
This prohibition could have the effect of delaying alternative strategic
business combinations for a limited period. In addition, the option that
Wachovia granted First Union would survive for 18 months after the termination
of the merger (subject to a 6-month extension in limited circumstances) because
SunTrust has filed an application with the Federal Reserve Board to acquire
Wachovia. See "Completion of SunTrust's Proposal Would Trigger the Option That
Wachovia Issued First Union" on page 26.
Our Directors and Executive Officers May Have Interests in the Merger that
Differ from Your Interests.
Some of our directors and executive officers have interests in the merger
other than their interests as shareholders. We estimate that the value of the
incremental payments and benefits executive officers and directors of First
Union will receive as a result of our proposed merger is $11.2 million. We
estimate that the value of the incremental payments and benefits executive
officers and directors of Wachovia could receive is $70 million, but the
payment and value of such amount depends on whether the executive officers'
employment with the combined company terminates after the merger and the time
of such termination. We have calculated such payments and benefits assuming
that all Wachovia executive officers terminate employment immediately after the
merger, but we currently expect several will remain in the employment of the
combined company, so that the amount of such payments and benefits may be
substantially lower.
These payments and benefits may cause some of our directors and executive
officers to view the merger proposal differently than you may view it.
25
We May Record Additional Allowance for Loan Losses After the Merger.
The determination of the appropriate level of the allowance for loan losses
is a subjective process that involves both quantitative and qualitative
factors. Based on our preliminary analysis performed during due diligence, we
have determined that there are certain differences in the methodologies
employed by the two companies. We have preliminarily selected First Union's
methodology for the combined company.
The combined loan portfolio will have certain risk attributes that are
different than the risk attributes of each company on a stand-alone basis such
as an increased level of borrower and industry concentration. The combined
effect of the risk attributes and of the utilization of a common methodology
may result in an increase in the allowance for loan losses of the combined
company.
After completion of the merger, we will complete our analysis of the two
companies' allowance for loan losses methodologies, finalize the selection of a
methodology for the combined company and further analyze the attributes of the
combined portfolio. Based on the preliminary analysis, we expect to record an
additional provision for loan losses in the results of operations of the
combined company following completion of the merger. The actual increase to the
allowance for loan losses will be determined and recorded immediately following
the date the merger is completed. It will be based on a comprehensive analysis
of the combined portfolio taking into account credit conditions existing at
that time. We do not believe that the increase in the allowance for loan losses
will exceed $450 million.
SunTrust's Tactics May Complicate or Delay Completion of the Merger.
SunTrust has begun an aggressive campaign to stop the merger. This campaign
includes lawsuits, as well as tactics that we have alleged in litigation
interfere with our contractual rights and include false and misleading
statements. In addition, there have been lawsuits related to the merger by
persons other than SunTrust. See "Litigation Relating to the Proposed
Wachovia/First Union Merger" on page 171.
The boards of directors of both Wachovia and First Union remain committed to
the merger and to limiting outside interference. However, we cannot promise
that SunTrust's lawsuits and other aggressive tactics, or any of the other
lawsuits related to SunTrust's hostile offer or the merger, will not complicate
or delay completion of the merger.
Completion of SunTrust's Proposal Would Trigger the Option That Wachovia Issued
First Union.
Wachovia and First Union issued each other options in the merger. Generally,
these options would expire if our merger were not completed and our merger
agreement terminated. Because of SunTrust's actions, however, the option
granted by Wachovia to First Union will continue for 18 months after
termination of the merger agreement subject to extension in limited
circumstances.
For example, if the merger agreement terminates on January 16, 2002, the
option would expire on July 16, 2003 (subject to the possible six-month
extension until January 16, 2004). This option will become exercisable if,
during this 18-month period:
. SunTrust or any other third party acquires 25% or more of Wachovia's
common shares or
. Wachovia agrees or recommends to its shareholders a business combination
or acquisition transaction with SunTrust or any other party that would
result in the acquisition of more than 25% of the voting stock, business,
assets or deposits of Wachovia or one of its significant subsidiaries.
If First Union exercised this option, it would own about 17% of Wachovia's
common shares and have the ability to vote those shares in the future. Many
public corporations have large shareholders, and First Union would not be able
to force a merger or block future business combinations based solely on the
shares received upon exercise of the option. However, First Union would become
the largest shareholder of Wachovia and would have the rights attendant to its
share ownership. SunTrust has publicly indicated that it does not "currently
intend" to continue its hostile proposal if First Union refuses to cancel its
option to purchase Wachovia shares in exchange for a cash payment equal to its
"in the money" value, or if First Union is able to, and does, exercise the
option and acquires Wachovia shares. However, SunTrust has said that it
reserves the right to change its mind.
26
Future Results of the Combined Companies May Materially Differ from the Pro
Forma Financial Information Presented in this Document.
Future results of the combined company may be materially different from
those shown in the pro forma financial statements that only show a combination
of our historical results. We have estimated that the combined company will
record approximately $1.4 billion of restructuring charges, merger-related
charges and purchase accounting adjustments. The charges may be higher or lower
than we have estimated, depending upon how costly or difficult it is to
integrate our two companies. Furthermore, these charges may decrease capital of
the combined company that could be used for profitable, income-earning
investments in the future. The charges and adjustments we estimate are
described in the section entitled "First Union and Wachovia Unaudited Pro Forma
Condensed Combined Financial Information" beginning on page 181. Approximately
$112 million of estimated restructuring charges and $697 million of purchase
accounting adjustments will be recorded upon completion of the merger, $78
million of estimated merger-related charges will be recorded in 2001 after
completion of the merger, and the remaining $557 million is expected to be
recorded in 2002 through 2004.
The DEPs Have No Trading History, There is Currently No Market for DEPs and
There May Only Be a Limited Market for DEPs After the Merger is Completed.
There is currently no trading market for the DEPs, and we do not believe
that a "when-issued" trading market will develop before we complete the merger.
We do not know whether the DEPs will be actively traded or at what prices they
will trade. Although we have agreed to use reasonable efforts to have the DEPs
listed on a securities, futures or options exchange or quoted on a dealer
quotation system, we cannot be sure that the DEPs will qualify for listing,
trading, or quotation on any exchange or dealer quotation system. If we do list
the DEPs on an exchange, it may not be a national exchange, or there may not be
an orderly or developed market for the shares. Therefore, it may be more
difficult to dispose of your DEPs if you decide to do so. In addition, prices
for the DEPs will be determined in the marketplace and may be influenced by
many factors, including the depth and liquidity of the market for DEPs, our
financial condition and results of operations, investors' perceptions about us,
our dividends and our industry, and changes in economic and market conditions
generally and in the banking and financial services industry in particular.
27
FIRST UNION ANNUAL MEETING
This section contains information from First Union for First Union
shareholders about the annual shareholder meeting First Union has called to
consider and approve the plan of merger contained in the merger agreement, to
elect directors and to consider other matters discussed in this document. We
are mailing this joint proxy statement-prospectus to you, as a First Union
shareholder, on or about June 29, 2001. Together with this joint proxy
statement-prospectus, we are also sending to you a notice of the First Union
annual meeting, a form of proxy that our board of directors is soliciting for
use at the annual meeting and at any adjournments or postponements of the
meeting and, if not previously sent to you, our 2000 Annual Report to
Shareholders. The annual meeting will be held on July 31, 2001 at 11:00 a.m.,
local time at the Symphony Ballroom of the Adam's Mark Hotel, 555 South
McDowell Street, Charlotte, NC 28204.
Matters To Be Considered
The matters to be considered at the First Union annual meeting are:
. to approve the plan of merger (First Union Proposal 1);
. to elect five nominees to the First Union board of directors (First
Union Proposal 2);
. to approve First Union's Senior Management Incentive Plan (First Union
Proposal 3);
. to approve an amendment to First Union's 1998 Stock Incentive Plan
(First Union Proposal 4);
. to ratify the appointment of KPMG LLP as First Union's independent
auditors for the year 2001 (First Union Proposal 5); and
. if properly presented, a shareholder proposal, which the board and
management oppose, regarding political contributions (Shareholder
Proposal).
You may also be asked to vote on a proposal to adjourn or postpone the
annual meeting. First Union could use any adjournment or postponement of the
annual meeting for the purpose, among others, of allowing more time to solicit
votes to approve the plan of merger.
Proxies
You should complete and return the proxy card accompanying this document to
ensure that your vote is counted at the annual meeting, regardless of whether
you plan to attend the annual meeting. If you are a registered shareholder
(that is, you hold stock certificates registered in your own name), you may
also vote by telephone or through the Internet, by following the instructions
described on your proxy card. If your shares are held in nominee or "street
name" you will receive separate voting instructions from your broker or nominee
with your proxy materials. Although most brokers and nominees offer telephone
and Internet voting, availability and specific processes will depend on their
voting arrangements. You can revoke the proxy at any time before the vote is
taken at the annual meeting by submitting to First Union's corporate secretary
written notice of revocation or a properly executed proxy of a later date, or
by attending the annual meeting and voting in person. Written notices of
revocation and other communications about revoking First Union proxies should
be addressed to:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Attention: Corporate Secretary
All shares of First Union common stock represented by valid proxies we
receive through this solicitation, and not revoked before they are exercised,
will be voted in the manner specified on the proxies. If you make no
specification on your proxy card, your proxy will be voted:
. "FOR" approving of the plan of merger presented in First Union Proposal
1;
28
. "FOR" electing all nominees for director presented in First Union
Proposal 2;
. "FOR" approving First Union's Senior Management Incentive Plan presented
in First Union Proposal 3;
. "FOR" approving the amendment to First Union's 1998 Stock Incentive Plan
presented in First Union Proposal 4;
. "FOR" ratifying KPMG LLP as First Union's auditors for the year 2001
presented in First Union Proposal 5; and
. "AGAINST" adopting the Shareholder Proposal.
First Union's board is presently unaware of any other matters that may be
presented for action at the annual meeting. If other matters do properly come
before the annual meeting, however, First Union intends that shares represented
by proxies in the form accompanying this joint proxy statement-prospectus will
be voted by and at the discretion of the persons named as proxies on the proxy
card. However, proxies that indicate a vote against approval of the plan of
merger will not be voted in favor of any adjournment of the annual meeting to
solicit additional proxies to approve the plan of merger.
The proposals require different percentages of votes in order to approve
them:
. Approving the plan of merger presented in First Union Proposal 1
requires the affirmative vote of a majority of the outstanding shares of
First Union common stock entitled to vote at the meeting;
. Electing the nominees for director presented in First Union Proposal 2
requires a plurality of the votes cast at the meeting; and
. Approving each of First Union Proposals 3, 4 and 5, and the Shareholder
Proposal requires the affirmative vote of a majority of the votes cast
at the First Union meeting.
Because approval of the plan of merger requires the affirmative vote of the
holders of a majority of the outstanding shares of First Union common stock
entitled to vote at the annual meeting, abstentions and broker non-votes will
have the same effect as votes against approval of the plan of merger.
Therefore, First Union's board urges you to complete, date and sign the
accompanying proxy and return it promptly in the enclosed, postage-paid
envelope or, alternatively, to submit your proxy via the telephone or Internet
procedures described under "Voting via Telephone, Internet or Mail" beginning
on page 31.
Solicitation of Proxies
First Union will bear the entire cost of soliciting proxies from its
shareholders, except that First Union and Wachovia have agreed to each pay one-
half of the costs and expenses of printing and mailing this joint proxy
statement-prospectus and all filing and other fees relating to the merger paid
to the SEC. In addition to soliciting proxies by mail, First Union will request
banks, brokers and other record holders to send proxies and proxy material to
the beneficial owners of First Union common stock and secure their voting
instructions, if necessary. First Union will reimburse those banks, brokers and
record holders for their reasonable fees and expenses in taking those actions.
First Union has also made arrangements with Morrow & Co., Inc. to assist in
soliciting proxies for the merger and the annual meeting and in communicating
with shareholders and has agreed to pay Morrow $50,000 plus expenses for their
services. If necessary, First Union may also use several of its regular
employees, who will not be specially compensated, to solicit proxies from its
shareholders, either personally or by telephone, the Internet, telegram, fax,
letter or special delivery letter. In addition, some of the firms and persons
listed in the exhibit to the registration statement to which this document is a
part may be deemed to be "participants" in the proxy solicitation of First
Union shareholders.
29
Record Date and Voting Rights
In accordance with North Carolina law, First Union's by-laws and the rules
of the NYSE, First Union has fixed June 12, 2001 as the record date for
determining the First Union shareholders entitled to notice of and to vote at
the annual meeting. You are only entitled to notice of, and to vote at, the
annual meeting if you were a record holder of shares of First Union common
stock at the close of business on the record date. At that time, there were
979,096,528 shares of First Union common stock outstanding, held by
approximately 149,752 holders of record. The presence in person or by proxy of
a majority of common shares outstanding on the record date will constitute a
quorum for purposes of conducting business at the meeting. On each matter
properly submitted to First Union's shareholders, you are entitled to one vote
for each outstanding share of First Union common stock you held as of the close
of business on the record date.
If you have any shares in First Union's Dividend Reinvestment and Stock
Purchase Plan, the enclosed proxy represents the number of shares you have in
that plan on the record date for First Union's meeting, as well as the number
of shares directly registered in your name on the record date.
Shares of First Union common stock present in person at the annual meeting
but not voting, and shares of First Union common stock for which First Union
has received proxies indicating that their holders have abstained, will be
counted as present at the annual meeting for purposes of determining whether
there is a quorum for transacting business at the annual meeting. Brokers that
hold shares of First Union common stock in nominee or "street" name for
customers who are the beneficial owners of those shares may not give a proxy to
vote those shares on the plan of merger, or the Shareholder Proposal, without
specific instructions from those customers. However, shares represented by
proxies returned by a broker holding these shares in "street" name will be
counted for purposes of determining whether a quorum exists, even if those
shares are not voted by their beneficial owners in matters where the broker
cannot vote the shares in its discretion (so-called "broker non-votes").
As of the record date:
. First Union's directors and executive officers beneficially owned
approximately 9,143,109 shares of First Union common stock, representing
less than 1% of the shares entitled to vote at the annual meeting. First
Union currently expects that its directors and executive officers will
vote the shares of First Union common stock they beneficially own "FOR"
approval of the plan of merger;
. subsidiaries of First Union, as fiduciaries, custodians or agents, held
approximately 108,544,501 shares of First Union common stock,
representing approximately 11.1% of the shares entitled to vote at the
annual meeting, and maintained sole or shared voting power over
approximately 19,888,312 of these shares; and
. Wachovia and its directors and executive officers beneficially owned
less than 1% of the shares entitled to vote at the annual meeting (other
than shares held as fiduciary, custodian or agent as described below);
. the subsidiaries of Wachovia, as fiduciaries, custodians or agents, held
less than 1% of the shares entitled to vote at the annual meeting.
As to all shares of First Union common stock held by Wachovia or any of its
subsidiaries in a fiduciary capacity, Wachovia will not vote or exercise its
power to vote those shares. Where Wachovia serves as a co-trustee or co-
fiduciary, it will cede all voting decisions and rights to its co-trustee or
co-fiduciary. Where Wachovia is the sole trustee or fiduciary, Wachovia has
engaged U.S. Trust Company, N.A. to act as an independent third party, with the
powers to engage its own financial and legal advisors, to determine in its sole
discretion the voting of those shares in the best interest of the beneficial
shareholders. U.S. Trust will exercise its independent judgment and cast these
votes accordingly in exercising fiduciary powers for the benefit of the
beneficial holders of those shares.
You can find additional information about beneficial ownership of First
Union common stock by First Union's directors and executive officers in the
section of this document called "Other Matters to be Considered at the First
Union Meeting" beginning on page 126.
30
First Union is not aware of any shareholder who was the beneficial owner of
more than 5% of the outstanding shares of First Union common stock on the
record date, except for Capital Research and Management Company, 333 South Hope
Street, Los Angeles, CA 90071, an investment adviser which, based on a Schedule
13G filed with the SEC, was the holder of 49,058,370 shares of First Union
common stock as of December 31, 2000, or approximately 5.01% of the outstanding
shares of common stock on the record date. Capital Research indicated that it
holds such shares for accounts under Capital Research's discretionary
management and not for its own account. Capital Research also indicated that it
does not have sole or shared voting power with respect to the shares and has
sole dispositive power over them.
Recommendations of First Union's Board
The First Union board has unanimously adopted the plan of merger. The First
Union board believes that the plan of merger contained in the merger agreement
and the transactions it contemplates are fair to First Union and First Union
shareholders, and are in the best interests of First Union, and unanimously
recommends that First Union shareholders vote "FOR" approval of the plan of
merger.
The First Union board also recommends that you vote:
. "FOR" electing all nominees for director presented in First Union
Proposal 2;
. "FOR" approving First Union's Senior Management Incentive Plan presented
in First Union Proposal 3;
. "FOR" approving the amendment to First Union's 1998 Stock Incentive Plan
presented in First Union Proposal 4;
. "FOR" ratifying KPMG LLP as First Union's auditors for the year 2001
presented in First Union Proposal 5; and
. "AGAINST" adopting the Shareholder Proposal.
See "Recommendation of First Union's Board and Its Reasons for the Merger"
beginning on page 45 for a more detailed discussion of the First Union board's
recommendation with regard to the plan of merger.
Voting via Telephone, Internet or Mail
First Union offers registered shareholders three ways for you to vote your
proxy:
. Option 1--Vote By Telephone:
Call toll free 1-800-214-7371 before 11:59 p.m., Eastern Daylight Time,
Monday, July 30, 2001 and follow the instructions on the enclosed proxy card.
. Option 2--Vote On the Internet:
Access the proxy form at www.proxyvoting.com/ftu before 11:59 p.m., Eastern
Daylight Time, Monday, July 30, 2001. Follow the instructions for Internet
voting found on that website and on the enclosed proxy card. If you vote via
the Internet, please be advised that there may be costs involved, including
possibly access charges from Internet access providers and telephone companies.
You will have to bear these costs.
If your shares are registered in the name of a brokerage, bank or other
nominee, you may not be able to use telephone and Internet voting procedures.
Please refer to the voting materials you receive from, or otherwise contact,
your broker, bank or other nominee to determine your options.
31
. Option 3--Mail Your Proxy Card:
If you do not wish to vote by telephone or the Internet, please complete,
sign, date and return the enclosed proxy card as described under "Proxies"
above on page 28.
The voting procedures used by First Union's transfer agent, First Union
National Bank, are designed to authenticate properly shareholders' identities
and to record accurately and count their proxies.
32
WACHOVIA ANNUAL MEETING
This section contains information from Wachovia for Wachovia shareholders
about the annual shareholder meeting Wachovia has called to consider and
approve the plan of merger contained in the merger agreement, to elect
directors and to consider the other matters discussed in this document. We are
mailing this joint proxy statement-prospectus to you, as a Wachovia
shareholder, on or about June 29, 2001. Together with this joint proxy
statement-prospectus, we are also sending to you a notice of the Wachovia
annual meeting, a form of proxy that our board is soliciting for use at the
annual meeting and at any adjournments or postponements of the meeting and, if
not previously sent to you, our 2000 Summary Annual Report to Shareholders. The
annual meeting will be held on August 3, 2001 at 10:30 a.m., local time at
Benton Convention Center, 301 West 5th Street, Winston-Salem, NC 27101.
Matters To Be Considered
The matters to be considered at the Wachovia annual meeting are:
. to approve the plan of merger (Wachovia Proposal 1);
. to elect five nominees to the Wachovia board of directors (Wachovia
Proposal 2); and
. to ratify the appointment of Ernst & Young LLP as Wachovia's independent
auditors for the year 2001 (Wachovia Proposal 3).
You may also be asked to vote upon a proposal to adjourn or postpone the
annual meeting. Wachovia could use any adjournment or postponement of the
meeting for the purpose, among others, of allowing more time to solicit votes
to approve the plan of merger.
The SunTrust proposal is highly conditional and subject to a number of
material conditions, including SunTrust's completing further due diligence on
Wachovia to its sole satisfaction; First Union's and Wachovia terminating the
merger agreement; termination of the stock option agreement granted to First
Union in exchange for a cash payment of its "in the money" value and Wachovia's
entering into a new merger agreement with SunTrust. Wachovia's board does not
have the contractual power to terminate the merger agreement or the stock
option unilaterally. For a discussion of events that could result in
termination of the merger agreement, see "The Merger Agreement--Termination of
the Merger Agreement." Currently, no event has occurred that would permit
either First Union or Wachovia to terminate the merger agreement. First Union
is not required under the terms of its stock option agreement to surrender its
option in exchange for a cash payment. For a discussion of how the stock
options may be exercised or repurchased, see "The Merger Agreement--Stock
Option Agreements." Finally, the Wachovia board has rejected SunTrust's
unsolicited proposal because it believes that the proposal is not in the best
interests of Wachovia and its shareholders. Accordingly, the Wachovia board
concluded that SunTrust's proposal was subject to material conditions that
either were not in the board's power to satisfy or that the board had
determined were not in the best interests of Wachovia's shareholders to
satisfy. For additional information concerning the Wachovia board's
consideration of the SunTrust proposal, see "The Unsolicited Proposal from
SunTrust" beginning on page 52. As a result there is no SunTrust proposal on
which Wachovia's shareholders could take any action at this time, and
accordingly, Wachovia shareholders are not being asked to vote on the SunTrust
proposal at the annual meeting.
Proxies
You should complete and return the proxy card accompanying this document to
ensure that your vote is counted at the annual meeting, regardless of whether
you plan to attend the annual meeting. If your shares are held in nominee or
"street name" you will receive separate voting instructions from your broker or
nominee
33
with your proxy materials. If your shares are held in a Wachovia employee
benefit plan that entitles you to direct how the shares allocated to your
account are to be voted, you will receive separate voting instructions from the
plan's trustee, or, if appointed in the circumstances described below under "--
Record Date and Voting Rights", from U.S. Trust Company, N.A. Your shares in
such plans that entitle you to direct how the shares are to be voted may be
voted even if you do not instruct the trustee how to vote, as will be explained
in a notice to you. You can revoke your proxy at any time before the vote is
taken at the annual meeting by submitting to Wachovia's corporate secretary
written notice of revocation or a properly submitted proxy of a later date, or
by attending the annual meeting and voting in person. Attendance at the annual
meeting will not in and of itself constitute revocation of a proxy. Written
notices of revocation and other communications about revoking Wachovia proxies
should be addressed to:
Wachovia Corporation
P.O. Box 3099
Winston-Salem, North Carolina 27150
Attention: Corporate Secretary
All shares of Wachovia common stock represented by valid proxies we receive
through this solicitation, and not revoked before they are exercised, will be
voted in the manner specified on the proxies. If you make no specification on
your proxy card, your proxy will be voted:
. "FOR" approving the plan of merger presented in Wachovia Proposal 1;
. "FOR" electing all nominees for director presented in Wachovia Proposal
2; and
. "FOR" ratifying Ernst & Young LLP as Wachovia's independent auditors for
the year 2001 presented in Wachovia Proposal 3.
Except as noted under "Litigation Relating to the Proposed Wachovia/First
Union Merger," Wachovia's board is presently unaware of any other matters that
may be presented for action at the annual meeting. If other matters do properly
come before the annual meeting, however, Wachovia intends that shares
represented by proxies in the form accompanying this joint proxy statement-
prospectus will be voted by and at the discretion of the persons named as
proxies on the proxy card. However, proxies that indicate a vote against
approval of the plan of merger will not be voted in favor of any adjournment of
the annual meeting to solicit additional proxies to approve the plan of merger.
The proposals require different percentages of votes in order to approve
them:
. Approving the plan of merger presented in Wachovia Proposal 1 requires
the affirmative vote of a majority of the outstanding shares of Wachovia
common stock entitled to vote at the meeting;
. Electing the nominees for director presented in Wachovia Proposal 2
requires a plurality of the votes cast at the meeting; and
. Approving Wachovia Proposal 3, ratification of the appointment of
Wachovia's independent auditors, requires the affirmative vote of a
majority of the votes cast at the Wachovia meeting.
Because approval of the plan of merger requires the affirmative vote of the
holders of a majority of the outstanding shares of Wachovia common stock
entitled to vote at the annual meeting, abstentions and broker non-votes will
have the same effect as votes against approval of the plan of merger.
Therefore, Wachovia's board urges you to complete, date and sign the
accompanying proxy and return it promptly in the enclosed, postage-paid
envelope.
The voting procedures are designed to authenticate properly shareholders'
identities and to record accurately and count their proxies.
You should not send in any stock certificates with your proxy card. The
exchange agent will mail a transmittal letter with instructions for the
surrender of stock certificates to Wachovia shareholders as soon as practicable
after the completion of merger.
34
Solicitation of Proxies
Wachovia will bear the entire cost of soliciting proxies from its
shareholders, except that Wachovia and First Union have agreed to each pay one-
half of the costs and expenses of printing and mailing this joint proxy
statement-prospectus and all filing and other fees relating to the merger paid
to the SEC. In addition to soliciting proxies by mail, Wachovia will request
banks, brokers and other record holders to send proxies and proxy material to
the beneficial owners of Wachovia common stock and secure their voting
instructions, if necessary. Wachovia will reimburse those banks, brokers and
record holders for their reasonable fees and expenses in taking those actions.
Wachovia has also made arrangements with MacKenzie Partners, Inc. and Georgeson
Shareholder to help in soliciting proxies for the proposed merger and the
annual meeting and in communicating with shareholders. Wachovia has agreed to
pay MacKenzie and Georgeson approximately $1.4 million in the aggregate plus
expenses for their services. If necessary, Wachovia may also use several of its
regular employees, who will not be specially compensated, to solicit proxies
from its shareholders, either personally or by telephone, the Internet,
telegram, fax, letter or special delivery letter. In addition, some of the
firms and persons listed in the exhibit to the registration statement to which
this document is a part may be deemed to be "participants" in the proxy
solicitation of Wachovia shareholders.
Record Date and Voting Rights
In accordance with North Carolina law, Wachovia's by-laws and the rules of
the NYSE, Wachovia has fixed June 12, 2001 as the record date for determining
the Wachovia shareholders entitled to notice of and to vote at the annual
meeting. You are only entitled to notice of, and to vote at, the annual meeting
if you were a record holder of shares of Wachovia common stock at the close of
business on the record date. At that time, there were 203,362,336 shares of
Wachovia common stock outstanding, held by approximately 50,304 holders of
record. The presence in person or by proxy of a majority of common shares
outstanding on the record date will constitute a quorum for purposes of
conducting business at the meeting. On each matter properly submitted to
Wachovia's shareholders, you are entitled to one vote for each outstanding
share of Wachovia common stock you held as of the close of business on the
record date.
If you have any shares in Wachovia's Dividend Reinvestment and Common Stock
Purchase Plan, the enclosed proxy represents the number of shares you have in
that plan on the record date for Wachovia's meeting, as well as the number of
shares directly registered in your name on the record date.
Shares of Wachovia common stock present in person at the annual meeting but
not voting, and shares of Wachovia common stock for which Wachovia has received
proxies indicating that their holders have abstained, will be counted as
present at the annual meeting for purposes of determining whether there is a
quorum for transacting business at the annual meeting. Brokers that hold shares
of Wachovia common stock in nominee or "street" name for customers who are the
beneficial owners of those shares may not give a proxy to vote those shares on
the plan of merger without specific instructions from those customers. However,
shares represented by proxies returned by a broker holding these shares in
"street" name will be counted for purposes of determining whether a quorum
exists, even if those shares are not voted by their beneficial owners in
matters where the broker cannot vote the shares in its discretion (so-called
"broker non-votes").
As of the record date:
. Wachovia's directors and executive officers beneficially owned
approximately 2,269,640 shares of Wachovia common stock, representing
approximately 1.12% of the shares entitled to vote at the annual
meeting. With the possible exception of one dissenting director,
Wachovia expects that its directors and executive officers will vote the
shares of Wachovia common stock they beneficially own "FOR" approval of
the plan of merger;
. the banking, trust and investment management subsidiaries of Wachovia,
as fiduciaries, custodians or agents, held approximately 13,342,837
shares of Wachovia common stock, representing approximately 6.56% of the
shares entitled to vote at the annual meeting, and maintained sole or
shared voting power over approximately 10,456,006 of these shares;
35
. First Union and its directors and executive officers beneficially owned
less than 1% of the shares entitled to vote at the annual meeting (other
than shares held as fiduciary, custodian or agent as described below);
and
. the banking, trust, investment management and brokerage subsidiaries of
First Union, as fiduciaries, custodians or agents, held a total of
approximately 8,025,404 shares of Wachovia common stock, representing
approximately 3.9% of the shares entitled to vote at the annual meeting,
and maintained sole or shared voting power over approximately 547,816 of
these shares.
As to all shares of Wachovia common stock held by Wachovia or any of its
subsidiaries in a fiduciary capacity, Wachovia will not vote or exercise its
power to vote those shares. Where Wachovia serves as a co-trustee or co-
fiduciary, it will cede all voting decisions and rights to its co-trustee or
co-fiduciary. Where Wachovia is the sole trustee or fiduciary, Wachovia has
engaged U.S. Trust Company, N.A. to act as an independent third party, with the
powers to engage its own financial and legal advisors, to determine in its sole
discretion the voting of those shares in the best interest of the beneficial
shareholders. U.S. Trust will exercise its independent judgment and cast these
votes accordingly in exercising fiduciary powers for the benefit of the
beneficial holders of those shares.
You can find additional information about beneficial ownership of Wachovia
common stock by persons and entities, if any, owning more than 5% of Wachovia
common stock, and more detailed information about beneficial ownership of
Wachovia common stock by Wachovia's directors and executive officers, in the
section of this document called "Other Matters to be Considered at the Wachovia
Meeting" beginning on page 153.
Wachovia is not aware of any shareholder who was the beneficial owner of
more than 5% of the outstanding shares of Wachovia common stock on the record
date, except for:
. Wachovia, Wachovia Bank, National Association, and Wachovia Securities,
Inc., 100 North Main Street, Winston-Salem, NC 27101, which were
collectively the holders of 13,342,837 shares of Wachovia common stock or
approximately 6.56% of the outstanding shares of common stock on the
record date. Wachovia Bank, National Association and Wachovia Securities,
Inc. are each wholly owned subsidiaries of Wachovia. All of the shares of
Wachovia's common stock held by these three companies are held in
fiduciary or representative capacities for the benefit of other persons.
As of the record date, these three companies had, in the aggregate, sole
voting power for 3,567,626 shares, shared voting power for 6,888,380
shares, sole dispositive power for 4,347,754 shares and shared
dispositive power for 7,767,897 shares.
. Wellington Management Company, LLP, 75 State Street Boston, MA 02109, an
investment adviser, which, based on Wellington's Schedule 13G dated
February 14, 2001, was the holder of 12,604,294 shares of Wachovia common
stock or approximately 6.2% of the outstanding shares of common stock on
the record date. Wellington Management Company indicated that it holds
shares on behalf of its investment advisory clients. As set forth in the
Schedule 13G, Wellington has shared voting power for 4,698,206 shares and
shared dispositive power for 12,604,294 shares.
Recommendations of Wachovia's Board
The Wachovia board has adopted the plan of merger. The Wachovia board
believes that the plan of merger contained in the merger agreement and the
transactions it contemplates are fair to, and in the best interests of,
Wachovia and Wachovia shareholders, and recommends that Wachovia shareholders
vote "FOR" approval of the plan of merger.
The Wachovia board also recommends that you vote "FOR" electing all nominees
for director presented in Wachovia Proposal 2 and "FOR" ratifying Ernst & Young
LLP as Wachovia's independent auditors presented in Wachovia Proposal 3.
See "Recommendation of Wachovia's Board and Its Reasons for the Merger"
beginning on page 48 for a more detailed discussion of the Wachovia board's
recommendation with regard to the plan of merger.
36
FIRST UNION PROPOSAL 1 AND WACHOVIA PROPOSAL 1:
THE MERGER
This discussion of the material terms and provisions of the merger agreement
and the stock option agreements we have entered into is qualified in its
entirety by reference to the merger agreement and the stock option agreements,
which are incorporated by reference into this description. The amended merger
agreement is attached to this joint proxy statement-prospectus as Appendix A.
The amended stock option agreements are attached as Appendices B and C. We
encourage you to read and review those documents as well as the discussion in
this document.
First Union's and Wachovia's boards of directors have both adopted the
merger agreement and the plan of merger and the stock option agreements. The
merger agreement provides for combining our companies through the merger of
Wachovia into First Union, with First Union as the surviving corporation.
Wachovia shareholders will receive 2 shares of First Union common stock for
each share of Wachovia common stock. We call this 2-for-1 ratio the "exchange
ratio" in this document. In addition, Wachovia shareholders will be entitled to
receive either a one-time cash payment of $0.48 per share of Wachovia common
stock or 2 shares of a new class of preferred stock of the combined company
that are intended to preserve the current quarterly dividend rate being paid by
Wachovia to its shareholders. We call these new preferred shares "Dividend
Equalization Preferred" shares or "DEPs".
Shares of First Union common stock issued and outstanding at completion of
the merger will remain outstanding and those stock certificates will be
unaffected by the merger.
Although the common stock to be issued to Wachovia shareholders in the
merger and the common stock to remain outstanding with First Union shareholders
following the merger is often referred to in this document as First Union
common stock, the combined company will be named "Wachovia Corporation" and its
common stock will trade on the NYSE under the Wachovia Corporation name with
the symbol "WB" following the merger.
First Union's articles of incorporation, amended to reflect the name change,
the increase in the authorized number of shares of First Union common stock
from 2 billion to 3 billion, the authorization of the issuance of up to 500
million DEPs to be issued to Wachovia shareholders and the director and officer
provisions related to the merger, will be the articles of incorporation of the
combined company after consummation of the merger. First Union's by-laws,
amended to reflect the director and officer provisions related to the merger,
will be the by-laws of the combined company.
Background of the Merger
During the past 15 years, there has been substantial consolidation in the
banking industry and, more generally, in the financial services industry. Both
First Union and Wachovia have participated in that consolidation process.
During this period, each of First Union and Wachovia has held conversations on
a number of occasions with other potential merger partners, including, in
Wachovia's case, SunTrust.
On a number of occasions prior to December 2000, SunTrust and Wachovia
explored the possibility of entering into a business combination. These
discussions spanned the tenure of two of Wachovia's and three of SunTrust's
CEOs. However, in each instance, discussions terminated because the parties
were unable to arrive at an agreement on a strategic and operational plan that
was mutually acceptable. In the fall of 1997, SunTrust and Wachovia conducted
due diligence on each other in an effort to ascertain long-term benefits to
their shareholders of a merger. The parties were unable to resolve their
strategic and operational differences, among other issues, and determined not
to proceed with further merger discussions at that time.
37
Beginning in September and continuing in the fall of 2000, L.M. Baker, Jr.,
Wachovia's Chairman, President and Chief Executive Officer, and G. Kennedy
Thompson, First Union's Chairman, President and Chief Executive Officer, held
several preliminary meetings and conversations to discuss generally the concept
and structure of a possible combination of Wachovia and First Union. These
discussions were initiated by both Messrs. Baker and Thompson as an outgrowth
of general discussions between them about the financial services industry.
Messrs. Baker and Thompson agreed that in order to maximize the financial and
strategic opportunities of a possible transaction between the companies, any
such transaction would need to be based on a merger-of-equals approach.
In connection with these conversations, on September 25, 2000, Robert S.
McCoy, Vice Chairman and Chief Financial Officer of Wachovia, and Leonard
Robinett, Senior Vice President of Wachovia in charge of corporate development,
met with Robert Atwood, then the Executive Vice President and Chief Financial
Officer of First Union, and Thomas Wurtz, First Union's Senior Vice President
and Treasurer, to discuss the first steps to be taken by the parties in the
event Messrs. Baker and Thompson determined that further discussions between
Wachovia and First Union should be pursued. The attendees of that meeting also
discussed generally the financial implications of a merger-of-equals
transaction, but did not discuss any structural or other terms of such a
transaction. At the end of this meeting, the parties agreed, subject to further
instructions from Messrs. Baker and Thompson, to continue their discussions at
a later date. On October 14, 2000, Messrs. McCoy, Robinett, Atwood and Wurtz
met again and engaged in further discussions regarding steps that would be
involved in pursuing a merger-of-equals transaction, including the methodology
for determining an exchange ratio for such a transaction and a general timeline
for conducting due diligence. No specific exchange ratios or other terms were
discussed at that meeting.
While the discussions among Messrs. Baker and Thompson and their respective
finance executives were productive, at the time of these discussions, First
Union and Wachovia were each independently pursuing major initiatives designed
to improve productivity and efficiency and to deploy capital more effectively
to higher growth businesses in order to enhance shareholder value. Messrs.
Thompson and Baker determined that continued pursuit of those initiatives was
their highest priority and accordingly they determined not to proceed further
with substantive discussions at that time.
On October 19, Mr. Baker received a telephone call from L. Phillip Humann,
Chairman, President and Chief Executive Officer of SunTrust. Mr. Humann
requested that Mr. Baker meet with him to once again discuss the possibility of
a merger between SunTrust and Wachovia. Although Mr. Baker and Mr. Thompson
mutually suspended discussions in light of their respective other business
priorities, Mr. Baker recognized the possibility that a merger with SunTrust
could provide another alternative means to achieve one of Wachovia's important
strategic goals--that of building a major presence in an affluent regional
footprint. In light of this, and in light of the highly preliminary nature of
the discussions with First Union to date, Mr. Baker determined that an
exploratory discussion with Mr. Humann regarding a possible SunTrust/Wachovia
transaction could be worthwhile. Accordingly, Mr. Baker agreed to meet with Mr.
Humann on November 6, 2000.
On December 1, 2000, Messrs. Baker and Humann met again to discuss the
structure of a possible merger and a process for proceeding to negotiate a
transaction. The transaction contemplated at that point was a merger-of-equals
transaction in which the combined company would retain the Wachovia name and
Mr. Baker would act as Chief Executive Officer of that company for two years.
On December 2, 2000, Donald Truslow, Senior Executive Vice President and Chief
Risk Officer of Wachovia, and Mr. Robinett met with John Speigel, SunTrust's
Executive Vice President and Chief Financial Officer, to formulate a schedule
for the parties' due diligence reviews and a general timeline for the
contemplated transaction, to discuss the engagement of financial advisors and
to outline substantive business issues to be discussed at future meetings.
On December 9, 2000, Wachovia and SunTrust signed a confidentiality
agreement. In addition, on that date various senior executives of Wachovia and
SunTrust, including Messrs. McCoy, Truslow and Speigel and Mr. Theodore
Hoepner, Vice Chairman of SunTrust, together with representatives from
Wachovia's financial advisor, Credit Suisse First Boston, and SunTrust's
financial advisor, Morgan Stanley, met to discuss credit and
38
financial due diligence issues, to engage in preliminary discussions relating
to material terms of the transaction, including the basis for arriving at an
exchange ratio, and to further discuss a potential timeline for arriving at a
definitive agreement.
Following that meeting, initial telephone and face-to-face meetings were
held between the major business heads of Wachovia and SunTrust, including
managers in charge of credit risk, retail banking, commercial banking, asset
and wealth management and human resources. The purpose of these meetings was to
discuss the current operating methods of Wachovia and SunTrust, and to begin to
formulate strategic and operational plans for the combined institution. High
level due diligence issues affecting the relevant businesses were also
discussed at these meetings in preparation for more in-depth due diligence
sessions scheduled to be conducted by larger due diligence teams being
organized by the parties. Also during this period, Wachovia and SunTrust, with
the assistance of their legal advisors, began to negotiate the terms of a
merger agreement and reciprocal stock option agreements.
During this period SunTrust's and Wachovia's managements reached a general
consensus on structural terms of the proposed SunTrust/Wachovia transaction,
including that the merger would be structured as a merger of equals, in which
SunTrust would be the surviving corporation and would change its name to
Wachovia and in which each Wachovia share would be converted into 1.03 SunTrust
shares. The parties further tentatively agreed that the combined company's
headquarters would be in Atlanta, Georgia, that Mr. Baker would serve as Chief
Executive Officer through 2002 and Chairman through 2003 and that the parties
would have equal representation on the board of directors of the surviving
corporation. All of the terms tentatively agreed remained subject to the
results of the parties' ongoing due diligence efforts and business discussions,
as well as the continued negotiation of the definitive transaction agreements
and approval by their respective boards of directors. Also during this period,
Mr. Baker consulted with the other members of the board's executive committee,
each of whom is an independent director, and reported to them on the progress
of the discussions with SunTrust. A meeting of the executive committee was held
on December 13, at which Mr. Baker and other members of Wachovia's executive
management made presentations regarding these merger discussions. Those
presentations included a description of the structural terms described above; a
presentation as to the expected financial impact of those terms on the combined
corporation; and a description of due diligence efforts to date, including a
comparison of the different operating models of SunTrust and Wachovia.
While meetings and discussions continued during the next several days,
during the course of those meetings and discussions, Wachovia's management
became increasingly concerned about emerging negative trends in SunTrust's core
earnings, as well as the resulting company's limited potential for future
growth. Those discussions also revealed significant differences in the
companies' strategic priorities, including SunTrust's relatively greater
emphasis on traditional retail branch banking compared to Wachovia's increasing
emphasis on the provision of a broad range of financial services to its retail
customer base. In addition, Wachovia's senior management encountered persistent
disagreements with their counterparts at SunTrust regarding the parties'
management philosophy and operational methods. Emblematic of these differences
was a serious disagreement concerning the appropriate operating model for the
wealth management business, a key strategic growth business for Wachovia. In
particular, Wachovia's management felt strongly that in order to achieve
maximum growth in dynamic business lines such as wealth management, the
company's management and operating structures must be organized around the
particular products and services being offered by those business lines.
Wachovia's management believed SunTrust's traditional geographical management
approach posed the risk that this growth would be retarded. These numerous
factors, as well as the other factors described under "The Unsolicited Proposal
from SunTrust--Reasons for Rejecting the Unsolicited SunTrust Proposal" below,
culminated in the decision by Wachovia's executive management on December 14,
2000 to cancel additional due diligence sessions and terminate discussions with
SunTrust at that time. In a telephone call with Wachovia's directors following
that termination, Mr. Baker and other members of Wachovia's executive
management briefed the directors on the results of these discussions with
SunTrust (including the major structural transaction terms that had been under
discussion) and the reasons for the termination of those discussions.
39
In January 2001, Wachovia's board met and reviewed Wachovia's strategic plan
and progress to date in implementing that plan. During these discussions Mr.
Baker again reviewed with the directors the discussions that had taken place in
December 2000 and reiterated management's views on the factors that had led to
the termination of those discussions, including the fundamental disagreements
on key organizational issues such as Wachovia's line of business organizational
structure versus SunTrust's geographically organized model.
During late 2000 and early 2001, Messrs. Baker and Thompson had further
discussions regarding the concept and structure of a possible merger between
First Union and Wachovia. Some of these discussions--which included meetings
between Messrs. Baker and Thompson on November 12, 2000 and January 12, and
several telephone conversations in December and January--were initiated by Mr.
Thompson and others by Mr. Baker. All of these discussions focused on growth
strategies for the combined business rather than the terms of a specific
transaction. On several occasions during March 2001, Messrs. Baker and Thompson
held meetings and conversations to discuss a possible business combination.
Although certain structural terms were discussed, including board and
management composition, name and headquarters, there was no substantive
discussion of an exchange ratio. Furthermore, Messrs. Baker and Thompson agreed
that the companies should not pursue further discussions regarding a possible
business combination unless there was substantial compatibility among the
senior executives of both companies with respect to strategic vision and
management philosophies. In order to attempt to determine whether that
compatibility existed, five senior executives of each company attended a
meeting on April 3, 2001. Following that meeting, those executives of each
company independently determined that the meeting was very positive and that
the two companies had compatible and complementary strategic visions and
management philosophies. Consequently, Messrs. Baker and Thompson concluded
that exploratory discussions of a strategic transaction should be continued
with a preliminary review of the respective loan portfolios, loan loss
reserving practices, non-performing assets, credit review processes and other
matters materially impacting the credit risk characteristics of First Union and
Wachovia to be addressed as an initial matter, and with satisfactory
preliminary findings regarding those issues to be a condition to the
continuation of discussions and the conduct of more extensive due diligence.
Credit due diligence was commenced first because, in the judgment of both First
Union and Wachovia, it has been the most frequent source of problems in the
banking industry, and before commencing full due diligence, both parties felt
it was desirable to determine whether there were any material credit-related
concerns.
On April 8, preliminary credit due diligence began. Upon receipt of
favorable reports from their respective credit officers to the effect that
despite their different business mix, Wachovia and First Union shared a
compatible approach to credit risk management, on April 9, 2001,
Messrs. Thompson and Baker authorized senior management and the heads of their
major business lines to engage in more extensive due diligence and authorized
their legal counsel and financial advisors to begin to negotiate the specific
terms of a merger-of-equals transaction between the parties. On April 9, First
Union and Wachovia signed a reciprocal confidentiality agreement and on April
10, the companies commenced extensive due diligence reviews of each other's
operations. Representatives of First Union and Wachovia's financial advisors
and legal counsel also began meetings and discussions on April 10.
Negotiations of the specific terms of the transactions, including the
exchange ratio, and the merger agreement, stock option agreements and other
documents, occurred throughout the period from April 10 through April 15.
On April 12, First Union's board of directors met to begin its formal
consideration of a possible transaction. At that meeting, senior management
reviewed with the board the history and progress of the discussions and
negotiations with Wachovia, as well as the business, strategic and financial
issues involved in a merger with Wachovia. The board also was briefed by senior
management on the results of First Union's due diligence investigations to
date. Merrill Lynch, Pierce, Fenner & Smith Incorporated, First Union's
financial advisor, presented financial information to the board regarding the
potential transaction, based on the then-proposed exchange ratio of 1.9 shares
of First Union common stock for each share of Wachovia common stock and
responded to questions from directors and management. Also at this meeting,
First Union's Executive Vice President and General Counsel, Mark Treanor, Esq.,
and lawyers from the firms of Sullivan & Cromwell and
40
Robinson, Bradshaw & Hinson reviewed the then-proposed terms of the First
Union/Wachovia merger and related transactions, advised the board of the legal
standards applicable to a decision whether to enter into the transaction and
addressed a number of questions raised by directors. Following a discussion,
the board indicated preliminary support for a merger and decided to reconvene
on April 15 to take definitive action with respect to the final terms of a
proposed merger transaction between First Union and Wachovia to be developed
through continuing negotiations.
The Wachovia board held a meeting on April 13 to begin deliberating the
proposed business combination. Messrs. Baker and McCoy discussed the structure
and terms of the merger as proposed to date, as well as the status of
negotiations, the strategic reasons, potential benefits, possible risks and
other matters relating to the proposed merger. A review of due diligence
matters regarding First Union was presented to the board, which included
presentations by Messrs. McCoy, Robinett and Truslow, as well as the heads of
Wachovia's technology, retail banking, corporate banking, asset management,
legal and human resources areas. The individuals presenting the due diligence
matters also responded to questions from the board. Wachovia's financial
advisor, Credit Suisse First Boston, discussed with the board its financial
analyses relating to the proposed First Union merger. Wachovia's Senior
Executive Vice President and General Counsel, Kenneth McAllister, Esq. and
lawyers from the firm of Simpson Thacher & Bartlett, discussed with the
Wachovia board its fiduciary duties and the terms of the proposed merger
agreement as well as various proposed related agreements. Wachovia's legal and
financial advisors also responded to questions from directors. At the
conclusion of this meeting, Wachovia's board authorized its senior management
to continue negotiating the terms of the definitive merger agreement and
related agreements, including reciprocal stock option agreements or similar
deal protection measures proposed by First Union, for presentation to the board
for further consideration on April 15, 2001.
On April 14 and 15, the parties and their legal and financial advisors
continued negotiating the terms of the merger agreement and related agreements,
including the exchange ratio and various deal protection measures proposed by
First Union. During this period Messrs. Thompson and Baker responded to
questions and comments from individual members of their respective boards and
advised them on the status and progress of discussions between the
representatives of the two companies. As a result of a request from Wachovia,
First Union's management agreed to recommend to its board an increase in the
exchange ratio from 1.9 to 2 shares of First Union common stock for each share
of Wachovia common stock, and the payment by Wachovia of a special dividend of
$0.48 per share as part of the merger to Wachovia shareholders of record
immediately before completion of the merger. In connection with these
negotiations, First Union advised Wachovia that it would continue to insist on
measures designed to protect the benefit of the transaction as a condition to
its offer, and that as a condition to its willingness to increase the exchange
ratio from 1.9 to 2 and payment of the special dividend to Wachovia's
shareholders, it would require Wachovia to enter into reciprocal stock options
to purchase up to 19.9% of the outstanding common stock of the other party in
specified circumstances, as described in this joint proxy statement-prospectus.
The terms of these stock options were negotiated extensively, based on First
Union's insistence that deal protection measures with a deterrent effect on
potential third party offers comparable to those in other large bank mergers,
were a condition to its willingness to undertake any transaction.
Also on April 14, Mr. Baker and Mr. McCoy each received calls from their
counterparts at SunTrust, Messrs. Humann and Spiegel, reporting that SunTrust
had become aware of rumors that Wachovia was considering a merger with First
Union. Messrs. Baker and McCoy were prohibited by the terms of the
confidentiality agreement between First Union and Wachovia from discussing,
among other things, the existence of the First Union merger discussions to
SunTrust and accordingly did not confirm the rumors. While each of these
telephone calls was extremely brief, Messrs. Humann and Spiegel each indicated
that SunTrust remained interested in discussing a potential business
combination with Wachovia. Neither Mr. Humann nor Mr. Spiegel gave proposed
terms for such a transaction.
At First Union's board meeting on April 15, the board received a description
of the final proposed terms of the merger agreement and related agreements,
including the final proposed exchange ratio of 2 shares of First Union common
stock for each share of Wachovia common stock and the special cash dividend of
$0.48 per
41
share of Wachovia common stock, and additional presentations from management,
Merrill Lynch and Sullivan & Cromwell regarding due diligence findings and the
financial, business, strategic, and legal issues related to the merger. At the
meeting, Merrill Lynch also rendered its oral opinion, confirmed later by a
written opinion, that, as of the date of the opinion and based on and subject
to the matters described in the opinion, the exchange ratio of 2 shares of
First Union common stock for each Wachovia share was fair from a financial
point of view to First Union and its shareholders. After deliberation, the
board concluded that the merger was in the best interests of First Union, and
fair to First Union and its shareholders and unanimously adopted the merger
agreement and the plan of merger, the stock option agreements, Mr. Baker's
employment agreement and the amendments to First Union's articles of
incorporation and by-laws and resolved to recommend that its shareholders vote
to approve the plan of merger contained in the merger agreement.
At Wachovia's board of directors meeting on April 15, Mr. Baker reported on
the progress of discussions and negotiations with First Union over the
structure and terms of the merger since the previous meeting. Members of senior
management also updated their previous reports to the board on the results of
the due diligence investigation of First Union.
At Wachovia's April 15, 2001 board meeting, Mr. Baker also informed the
Wachovia board that he and Mr. McCoy had received telephone calls from their
counterparts at SunTrust indicating SunTrust's continued interest in
discussions regarding a potential business combination with Wachovia. Messrs.
Baker and McCoy noted that, as discussed previously, including at the board's
April 13th meeting, the Wachovia board and management had previously evaluated
a possible business combination with SunTrust and management had reported its
views that, based on differences in operational and business strategies, among
other considerations, including those discussed below under "The Unsolicited
Proposal From SunTrust", such a combination would not maximize Wachovia's
ability to meet the Wachovia board's strategic goals or maximize long-term
value for Wachovia's shareholders. The board concurred in this assessment and
in the conclusion that pursuit of discussions with SunTrust would not be in the
best interests of Wachovia or its shareholders. Credit Suisse First Boston
reviewed with the board its financial analyses of the exchange ratio provided
in the First Union/Wachovia merger and rendered its oral opinion, confirmed
later by a written opinion, that, as of the date of the opinion and based on
and subject to the matters described in the opinion, the exchange ratio of 2
shares of First Union common stock for each share of Wachovia common stock was
fair from a financial point of view to the holders of Wachovia common stock.
Wachovia's legal advisors, Simpson Thacher & Bartlett and Mr. McAllister,
reviewed with the board the final proposed terms of the merger, including the
proposed terms of the merger agreement and reciprocal stock option agreements.
Wachovia's legal advisors and Credit Suisse First Boston, along with members of
Wachovia's senior management, responded to questions from the board. Following
deliberations, Wachovia's board, by a unanimous vote of the directors present,
approved the merger agreement and the stock option agreements and the
transactions contemplated by those agreements, including the merger, and by the
same unanimous vote resolved to recommend that its shareholders vote to approve
the plan of merger contained in the merger agreement. The one Wachovia director
who was absent from this meeting later indicated his concurrence with the
board's actions and, at the May 22 meeting discussed below, voted to reaffirm
the First Union merger agreement.
First Union and Wachovia executed the merger agreement and stock option
agreements in the evening of April 15 following completion of the meetings of
the boards of directors. Early the following morning, First Union and Wachovia
issued a joint press release announcing the proposed First Union/Wachovia
merger.
On May 14, 2001, SunTrust publicly announced its unsolicited proposal to
acquire Wachovia, as described below under "The Unsolicited Proposal From
SunTrust". At the same time, SunTrust sent a letter to the Wachovia board
concerning its proposal and announced that it would be soliciting proxies in
opposition to the merger between First Union and Wachovia.
Upon hearing of this announcement, First Union immediately and publicly
reaffirmed its commitment to the merger with Wachovia. That same day, Wachovia
announced that its board of directors would meet shortly thereafter to consider
the SunTrust proposal. In light of the aggressiveness of SunTrust's actions on
May 14, including its immediate public disclosure of its proposal before making
any attempt to engage in a private dialogue with Wachovia's board of directors,
what Wachovia believed was its mischaracterization of the nature
42
of the discussions and disagreements between SunTrust and Wachovia in December,
and its threat of legal action to disrupt the proposed merger with First Union,
Wachovia elected to engage Goldman, Sachs & Co. and Wachtell, Lipton, Rosen &
Katz as additional financial and legal advisors, respectively, to provide
support as necessary in connection with evaluating and responding to the
unsolicited SunTrust proposal.
During the period from May 17 through May 22, First Union's legal and
financial advisors had discussions with Wachovia's legal and financial advisors
to address the possibility of providing Wachovia shareholders with an
alternative to the special dividend originally contemplated in the merger
agreement that would be designed to maintain the quarterly dividend that they
were currently receiving from Wachovia. On May 21, 2001, First Union's board
met to discuss the SunTrust hostile proposal and matters related to it. At that
meeting, First Union's board approved, and First Union subsequently proposed to
Wachovia, an amendment to the merger agreement that would provide Wachovia
shareholders with an option to receive, in addition to the First Union common
stock: (1) a one-time cash payment of $0.48 per share of Wachovia common stock
as had been previously agreed or (2) two DEPs for each share of Wachovia common
stock. See "The Merger Agreement--Conversion of Stock; Treatment of Options"
beginning on page 82 and "Description of First Union Capital Stock--Dividend
Equalization Preferred Shares" beginning on page 115. Also at that First Union
board meeting, Merrill Lynch confirmed its April 15, 2001 opinion that the
exchange ratio was fair, from a financial point of view, to First Union and to
First Union's shareholders.
On May 22, 2001, the Wachovia board met with its advisors to discuss and
consider SunTrust's unsolicited proposal and the proposed change to the merger
agreement. Credit Suisse First Boston and Goldman Sachs each reviewed with the
board their respective financial analyses of the exchange ratio provided in the
merger agreement and in the proposed amendment to the merger agreement
described above. After responding to questions from the board, Credit Suisse
First Boston and Goldman Sachs each rendered its oral opinion, each confirmed
later by a written opinion, that, as of the date of each opinion and based on
and subject to the matters described in each opinion and such other matters as
the applicable financial advisor considered relevant, the exchange ratio of 2
shares of First Union common stock for each share of Wachovia common stock was
fair from a financial point of view to the holders of Wachovia common stock.
Wachovia's legal advisors, including lawyers from the firms of Simpson Thacher
& Bartlett and Wachtell, Lipton, as well as its North Carolina counsel, the law
firm of Bell, Davis & Pitt, P.A., and Wachovia's General Counsel, Mr.
McAllister, reviewed with the Wachovia board its fiduciary duties with respect
to the unsolicited SunTrust proposal and the contractual provisions in the
merger agreement and stock option agreement relevant to its consideration of
that proposal and responded to questions from the board. After extensive
discussion, the Wachovia board, by a vote of 14-1, reaffirmed its earlier
determination that the proposed merger with First Union represents the best
strategic alternative for maximizing long-term shareholder value and determined
that the unsolicited proposal from SunTrust did not represent an effective
means to achieve that goal. Accordingly, the Wachovia board determined to
reject the SunTrust proposal as not being in the best interests of Wachovia and
its shareholders. See "The Unsolicited Proposal from SunTrust." In addition,
the Wachovia board approved the amendment to the merger agreement.
After the conclusion of the May 22nd Wachovia board meeting, Mr. Baker, on
behalf of Wachovia's board, sent a letter to SunTrust's board informing them
that the Wachovia board had reaffirmed its determination to merge with First
Union and requesting that SunTrust respect the Wachovia board's decision. In
the letter, Mr. Baker expressed the Wachovia board's concern that the continued
pursuit of a hostile takeover of Wachovia would be expensive, time-consuming
and disruptive to both SunTrust and Wachovia and their respective customers and
employees.
First Union sued SunTrust in North Carolina state court for an order
upholding the validity of the stock option agreements, among other things. On
May 23, 2001, SunTrust filed a lawsuit in Georgia state court alleging that the
stock option agreements between First Union and Wachovia contained certain
excessive provisions, particularly in relation to the cap on the total profit
that may be obtained upon exercise of the option. On that same day, Wachovia
joined in the lawsuit brought by First Union. See "Litigation Relating to the
Proposed Wachovia/First Union Merger" beginning on page 171.
On May 29, 2001, after discussions with their legal advisors, First Union
and Wachovia agreed to modify several provisions of the stock option
agreements. First, we agreed to amend the option agreements to provide
43
that the exercise price may be paid only with cash or readily marketable debt
securities or preferred stock issued by the option holder having a fair market
value equal to the exercise price, as determined by agreement of each party's
investment banker. SunTrust had claimed that First Union could use the original
provision, which permitted the option to be exercised with other forms of
property, to harm Wachovia's business in the future. While we believe the
provision contained reasonable valuation procedures that would have protected
each other against any such harm, we agreed to modify the provision because
neither one of us has any intention of harming the other's business. Second, we
clarified that the maximum total profit on each option is $780 million. This
was our original intention, but to provide complete clarity on this issue and
to eliminate any possible confusion or ambiguity caused by SunTrust's
allegations as to the firm and comprehensive nature of the total profit as
alleged by SunTrust, we clarified this limit. Finally, as further described
below under "- Stock Option Agreements -- Substitute Option", if an issuer
of an option is acquired by another company, the option is changed into a new
option to buy the acquiring company's stock. As we reviewed the options to make
the two revisions we described, we concluded that the exercise price adjustment
formula in the new option, although subject to the same profit cap as the
regular option, did not accurately reflect the parties' intent as to the
potential value of the new option as we describe in "Stock Option Agreements --
Substitute Option" beginning on page 107. Instead, the formula resulted in an
exercise price that was too low. We therefore amended the options accordingly.
On June 4, 2001, SunTrust proposed an amendment to Wachovia's by-laws that
would permit holders of 10% or more of Wachovia's outstanding shares to require
Wachovia to call a special shareholder meeting. SunTrust stated that, if
Wachovia shareholders approve the by-law amendment and do not approve the
merger with First Union at Wachovia's shareholders' meeting on August 3, 2001,
and subsequently the Wachovia board does not enter into merger discussions with
SunTrust, SunTrust would seek to call a special meeting to increase the size of
Wachovia's board and elect directors who we expect would pursue a merger with
SunTrust. As with all directors of North Carolina corporations, any directors
nominated by SunTrust and elected at the special meeting would be subject to
fiduciary duties to all shareholders of the corporation.
This approach, if successful, would have made meaningless the provisions in
Wachovia's articles of incorporation establishing a classified board. Wachovia
believes that SunTrust's attempt to acquire control of Wachovia's board in one
shareholders' meeting is inconsistent with Wachovia's classified board of
directors, which is expressly permitted under North Carolina law. SunTrust's
tactic is one often used by corporate raiders and is called "board-packing".
SunTrust has long protected itself against board-packing by requiring a very
substantial 75% vote of its outstanding shares to increase the size of its
board, instead of the much lower vote required by state law. SunTrust also
requires the holders of 25% of its shares to call a special meeting, rather
than the 10% it proposed for Wachovia.
Wachovia also believes that the purpose of SunTrust's by-law proposal--to
enable it to call a special meeting in as little as 30 days and at which it
would try to take control of Wachovia--would deprive Wachovia's board of any
opportunity to deliberately and thoughtfully evaluate Wachovia's available
strategic alternatives in the event that the First Union merger is not
approved. Wachovia accordingly concluded that the principal effect of
SunTrust's proposal would be to deprive the Wachovia board--13 out of 15 of
whom are independent directors--of its ability to make an informed judgment
about the strategic alternatives that would be in the best interests of all
Wachovia shareholders rather than just SunTrust.
Both Wachovia and First Union believed that SunTrust's proposal raised legal
issues regarding, among other things, its timeliness, making it unclear as to
whether SunTrust's actions would have been successful. However, First Union
decided to seek a legislative amendment in order to eliminate any question, and
Wachovia actively supported the amendment. First Union and Wachovia advocated
with the North Carolina legislature an amendment to the North Carolina Business
Corporation Act that requires provisions relating to special meetings called by
shareholders to be in a corporation's articles of incorporation and not the by-
laws. Amendments to a corporation's articles of incorporation cannot be adopted
by the shareholders without the board's prior approval. While the amendment was
under consideration, representatives of First Union and Wachovia discussed with
legislators the proposed amendment and their view of the benefits to all
shareholders of North Carolina public corporations of its adoption. The
amendment was overwhelmingly approved by the
44
North Carolina legislature and was signed into law on June 14. After passage of
the amendment, the North Carolina House Majority Leader was quoted as saying
that "This was a pretty obscure provision that apparently SunTrust was trying
to take advantage of to disrupt the process. They have found a weapon that they
are attempting to use, which I don't think is fair." On June 15, Wachovia
informed SunTrust that its proposed by-law amendment would be invalid. Since
then, we believe SunTrust has withdrawn its proposal, and it will not be voted
on at Wachovia's annual meeting.
On June 22, 2001, Philip Humann, the CEO of SunTrust, wrote a letter to
Wachovia's board of directors asking them to consider an amendment to
Wachovia's articles of incorporation to permit holders of 10% or more of the
outstanding Wachovia shares to call a meeting. As of the date of this document,
the Wachovia board has not yet had an opportunity to consider Mr. Humann's
request but Wachovia expects the board will do so. However, Wachovia does not
expect that the proposal will be addressed at Wachovia's upcoming shareholders
meeting.
Recommendation of First Union's Board and Its Reasons for the Merger
After careful consideration, First Union's board determined that the plan of
merger contained in the merger agreement is fair to First Union and its
shareholders, and is in the best interests of First Union. Accordingly, First
Union's board unanimously adopted the merger agreement and the plan of merger
contained in the merger agreement and unanimously recommends that First Union's
shareholders vote "FOR" approval of the plan of merger contained in the merger
agreement.
In reaching its decision to recommend this merger to First Union
shareholders, First Union's board concluded that Wachovia and First Union have
a unique strategic fit and that the merger provides a unique opportunity for
enhanced financial performance and shareholder value. Wachovia and First Union
bring similar philosophies and approaches, as well as complementary strengths,
to the combined company. First Union's board believes that the merger will
solidify First Union's position as a major provider of a broad array of
financial services.
First Union's board determined the merger would place the combined company
in an improved competitive position in the financial markets because it
believes the merger combines two financially sound institutions with
complementary businesses and business strategies, thereby creating a stronger
combined institution with greater size, flexibility, breadth of services,
efficiency, capital resources, profitability and potential for growth than
either company possesses alone. First Union's board believes that each
institution currently is well-managed, that each institution will contribute
complementary business strengths resulting in a well-diversified combined
institution, with strong capitalization and diversification that will allow the
combined institution to take advantage of future opportunities for growth.
First Union's board determined that the merger would create a unique
opportunity for enhancing shareholder value after considering, among other
things, the opportunities for expense reduction, the generation of additional
capital and the plans for integration. In concluding that the merger is in the
best interests of First Union and fair to First Union and its shareholders,
First Union's board considered, among other things, the following factors that
supported the decision to approve the merger:
. First Union's and Wachovia's strategic business, operations, financial
condition, asset quality, earnings and prospects. In reviewing these
factors, First Union's board concluded that Wachovia's business and
operations complement and enhance those of First Union, that Wachovia's
financial condition and asset quality should result in the combined
company having capital and reserve ratios in the top half of the
country's 20 largest banks, and that Wachovia's earnings and prospects
should result in the combined company having superior earnings and
prospects to First Union's earnings and prospects on a standalone basis.
In particular, First Union's board considered the following:
. The strong demographic conditions of markets in which Wachovia conducts
its operations.
. The combined company's position as the largest banking organization in
the East and Southeast United States in terms of deposits ($187
billion), branches (2,887) and assets under management ($222 billion).
45
. The combined company's position as one of the largest banking
organizations in the country in terms of deposits, assets ($324
billion), assets under management, branches, mutual fund assets ($96
billion), on-line banking customers (2.9 million), registered
representatives (8,350), ATMs (5,128), full service brokerage offices
(600) and Private Client (133) offices.
. The consistency of the merger with First Union's business strategy,
including achieving strong earnings growth, improving customer
attraction and retention, focusing on expense control, and gradually
shifting First Union's business to higher growth, lower capital
businesses. The board's analysis concluded that First Union and Wachovia
are a highly complementary fit because of:
. Wachovia's high-performance strategy, including its expertise in exiting
markets that do not contribute to this strategy, which is consistent
with First Union's recent market-share focused restructuring.
. Wachovia's responsiveness to customer needs and demands, and Wachovia's
skill at anticipating those demands, which results in strong customer
relationships.
. Wachovia's geographic coverage, which would enhance First Union's
already strong presence in the Southeast.
. Wachovia's focus on growing its wealth management business unit,
including its innovative Private Financial Advisor teams segment, which
would complement First Union's focus on growing its asset management
operation.
. The complementary nature of the markets served and products offered by
Wachovia and First Union and the expectation that the merger would
provide economies of scale, expanded product offerings, expanded
opportunities for cross-selling, cost savings opportunities and
enhanced opportunities for growth.
. The generally tax-free nature of the transaction.
. The accounting for the transaction on a purchase accounting basis and
the changes to GAAP that are expected to take effect at the end of 2001,
as a result of which all new and existing goodwill will cease being
amortized and instead be reviewed for impairment when an event or events
occur indicating that goodwill might be impaired.
. First Union's board's belief that the merger is likely to provide both
immediate and long-term increases to shareholder value. In particular,
First Union's board believes that:
. Based on what First Union's board believes are conservative
assumptions, the merger will be immediately accretive on a cash
operating earnings per share basis, and is expected to produce an
internal rate of return of over 20% for both First Union and Wachovia
shareholders. These assumptions include annual cost savings of
approximately 8% of combined non-interest expense, or $890 million
beginning in 2004 with lower amounts of current cost savings to be
realized between 2001 and 2004, give no credit for revenue enhancements
or reinvestment of free capital and exclude restructuring and merger-
related charges and purchase accounting adjustments of approximately
$1.4 billion.
. The cash operating earnings per share of the combined company will grow
at a faster rate than that of First Union on a standalone basis.
. Approximately $2.5 billion per annum of free capital will be available
for reinvestment.
. First Union's board's belief that First Union and Wachovia management
share a common vision of commitment to their respective shareholders,
employees, suppliers, creditors and customers.
. Merrill Lynch's financial analyses and presentation to the board, and
the opinion of Merrill Lynch to the board as to the fairness, from a
financial point of view, of the exchange ratio to First Union and its
shareholders, as discussed in "Opinion of First Union's Financial
Advisor" below beginning on page 58.
46
. First Union's board's belief that the $0.48 per share cash payment or
two DEPs per Wachovia share were economically the same to First Union.
. The review by First Union's board with its legal and financial advisors,
including Sullivan & Cromwell, Robinson, Bradshaw & Hinson and Merrill
Lynch, of the provisions of the merger agreement and the stock option
agreements. Some of the features of those agreements that the board
considered are:
+ The proposed arrangements with members of management of First Union and
Wachovia, including that both of First Union's and Wachovia's Chief
Executive Officers would be retained in key leadership positions, and
that the board composition would be split evenly between the former
directors of each of the companies.
+ The structure of the merger as a merger-of-equals whereby each of First
Union and Wachovia will have substantial input with respect to the
control and future plans of the combined company, and which would
enable the combined company to leverage each of First Union's and
Wachovia's best practices, products and people.
+ The provisions of the merger agreement and the stock option agreements
designed to enhance the probability that the deal will be consummated.
. First Union's board's review of the reports of management and outside
advisors concerning the due diligence examination of operations,
financial condition and prospects of Wachovia.
. First Union's expectation, after consulting with legal counsel, that the
required regulatory approvals could be obtained.
First Union's board also considered the following factors that potentially
created risks if the board decided to approve the merger:
. The possibility that the merger and the related integration process
could result in the loss of key employees, in the disruption of First
Union's on-going business or in the loss of customers.
. The possibility that the anticipated benefits of merger may not be
realized, including the expected cost savings.
. The anticipated effect of the merger on employee compensation, benefits
and incentives under various employment-related agreements, plans and
programs.
. The fact that neither party could enter into another merger agreement
until January 2002 if the merger was not completed before then, which
may limit business combinations during this period.
. The impact of the stock options the parties granted each other on future
business combination if the merger was not completed.
. The impact of divestitures of assets and deposit liabilities that
regulatory authorities are likely to require in connection with the
merger.
. The potential merger-related restructuring charges.
First Union's board concluded that the anticipated benefits of combining
with Wachovia were likely to substantially outweigh the preceding risks.
Although each member of First Union's board individually considered these
and other factors, the board did not collectively assign any specific or
relative weights to the factors considered and did not make any determination
with respect to any individual factor. The board collectively made its
determination with respect to the merger based on the conclusion reached by its
members, in light of the factors that each of them considered appropriate, that
the merger is in the best interests of First Union.
47
First Union's board of directors realized there can be no assurance about
future results, including results expected or considered in the factors listed
above, such as assumptions regarding anticipated cost savings and earnings
accretion. However, the board concluded the potential positive factors
outweighed the potential risks of consummating the merger.
It should be noted that this explanation of the First Union board's
reasoning and all other information presented in this section is forward-
looking in nature and, therefore, should be read in light of the factors
discussed under the heading "Forward-Looking Statements" on page 179.
Recommendation of Wachovia's Board and Its Reasons for the Merger
After careful consideration, at its meeting on April 15, 2001, Wachovia's
board determined that the plan of merger contained in the merger agreement is
fair to, and in the best interests of, Wachovia and its shareholders.
Accordingly, Wachovia's board, by a unanimous vote of the directors present,
adopted the merger agreement and the plan of merger contained in the merger
agreement and by the same unanimous vote recommended that Wachovia's
shareholders vote "FOR" approval of the plan of merger contained in the merger
agreement. The one Wachovia director who was absent from this meeting later
indicated his concurrence with the board's actions and, at the May 22 meeting
discussed below, voted to reaffirm the First Union merger agreement. On May 22,
2001, the Wachovia board, after considering the unsolicited SunTrust proposal,
reaffirmed by a vote of 14-1 its approval and recommendation of the First Union
merger and rejected the unsolicited SunTrust proposal. See "The Unsolicited
Proposal from SunTrust" beginning on page 52.
Accordingly, the Wachovia board recommends that you vote "FOR" approval of
the plan of merger between Wachovia and First Union at the Wachovia annual
shareholders' meeting.
The Wachovia board has determined that the merger with First Union
represents the best strategic alternative for maximizing long-term shareholder
value, and that the unsolicited proposal from SunTrust does not represent an
effective means to achieve that goal. Wachovia shareholders are not being asked
to consider or vote upon the SunTrust proposal. For a discussion of the factors
considered by the Wachovia board in connection with its consideration of the
SunTrust proposal, see "The Unsolicited Proposal from SunTrust," beginning on
page 52. SunTrust is soliciting proxies to vote against Wachovia's merger-of-
equals with First Union. The Wachovia board recommends that you do not give
SunTrust your proxy.
Reasons for the Merger
Wachovia's board of directors believes that the merger with First Union will
create a premier financial services company with the resources to offer
superior corporate and retail banking services, asset and wealth management
services and capital markets and securities brokerage services and products.
The board expects that as a result of the merger, the combined company will be
the largest financial holding company in the Southeast United States, measured
in deposits, and the fourth largest financial holding company nationwide,
measured in total assets.
Wachovia's board believes that the combined company will have greater
financial strength and earning power than Wachovia would have on its own and
the added scale necessary to assume and solidify leadership positions in its
high growth business lines. In addition, the board concluded that because First
Union and Wachovia participate in many of the same geographic markets and have
a similar strategic focus, the merger presents significant opportunities for
operational efficiencies and cost savings.
Financial Benefits to Wachovia and its Shareholders. Wachovia's board
believes that the merger will be immediately accretive to Wachovia's
shareholders and will increase substantially free capital available for
reinvestment. Wachovia estimates that Wachovia shareholders could experience
cash earnings per share growth of 15.2%, 17.4% and 19.8% and GAAP earnings per
share growth of 9.1%, 12.8% and 16.6% in 2002, 2003 and 2004, respectively
(assuming the effectiveness of certain changes to GAAP, expected to take effect
at the
48
end of 2001, wherein all new and existing goodwill will cease being amortized
and instead be reviewed for impairment when an event or events occur indicating
that goodwill might be impaired). In addition, the Wachovia board expects the
merger to produce significant cost savings from combining the two companies.
Wachovia estimates that the combined company could achieve cost savings of
approximately 8% of combined non-interest expense (or approximately $890
million in annual expense reductions) beginning at the end of 2004 with lower
amounts of annual cost savings to be realized between 2001 and 2004. The
Wachovia board expects that a portion of these cost savings can be achieved
through bank branch consolidation--approximately 49% of Wachovia's branches are
within one-mile of a First Union branch. The board also expects that
approximately 7,000 employment positions of the combined company could be
affected over the course of the three-year planned integration period, nearly
one-half of which could be absorbed through normal attrition.
Strategic Considerations. During the past several years, the financial
services industry has undergone significant consolidation and change. As a
result, many of Wachovia's principal competitors have increased their financial
resources, expanded in the geographical markets in which they participate and
diversified their financial services offerings beyond traditional banking
products. The Wachovia board believes that in order to compete in the current
and future financial services environment, Wachovia must have a strong capital
base and be able to offer a full array of financial services. The Wachovia
board believes that merging with First Union will not only permit Wachovia to
grow in size and geographic scale, but will also provide Wachovia with a number
of related benefits, including the following:
. Increased Scale and Geographic Reach. The combined company would be one
of the largest banking organizations in the nation, with approximately
$324 billion in total assets and $187 billion in total deposits on a pro
forma basis. The combined company would have significantly greater scale
and geographic reach, with approximately 2,900 banking branches and
5,100 ATMs throughout the Southeast and Middle Atlantic region and with
a combined customer base of approximately 19 million. Also, the combined
company would have first, second or third place market share rankings in
eight states on the East coast.
. Stronger Presence in Strategic Growth Businesses. The Wachovia board
believes that the brokerage, securities, private banking and asset
management businesses are business lines with potential for high growth
and Wachovia's participation in these businesses should be a continued
part of Wachovia's business strategy. On a pro forma basis, the combined
company would have a significantly larger presence in the brokerage and
securities business, with approximately 600 brokerage offices; in the
private banking business, with approximately 133 private banking
offices; and in the asset management business, with approximately $96
billion in mutual fund assets and approximately $222 billion in assets
under management.
. Increased Cross-Selling Opportunities. The Wachovia board believes that
the combined company will be able to sell Wachovia's corporate and
investment banking services to the combined institution's larger client
base. Wachovia can also exploit cross-selling opportunities by selling
its asset management products to First Union's affluent customers in the
Northeast and Middle Atlantic regions. In doing so, the combined company
will be able to utilize First Union's commercial banking distribution
network, which is more developed than Wachovia's.
Low Risk to Achieve Strategic Benefits. While integrating two financial
institutions poses inherent challenges, the Wachovia board believes that the
strategic benefits to be derived from the First Union merger present a
relatively low level of risk given the potential rewards. The Wachovia board
expects that the combined company will be required to divest approximately
$1.49 billion in deposits to satisfy regulatory requirements, but it does not
expect such divestitures to adversely affect the combined company in a material
way. The Wachovia board also noted First Union's experience in conducting
complex merger integrations. The Wachovia board noted that First Union's
CoreStates acquisition failed to meet First Union and market earnings
expectations in 1999, due primarily to its high cost and integration-related
problems, such as unanticipated customer attrition. The Wachovia board also
noted that, as a result of deterioration in the sub-prime consumer
49
home equity lending business nationwide, First Union ceased those lending
operations at The Money Store (resulting in a publicly disclosed $1.8 billion
before-tax charge to earnings for goodwill impairment in 2000). After
considering these situations and the manner in which First Union responded to
them, the Wachovia board concluded that First Union's senior management had
taken prudent steps to address operational problems, including those arising
from past merger integrations, and to foster long-term growth. Also, given
Wachovia's and First Union's plan to integrate the companies over a three-year
period, the Wachovia board expects that customer attrition and disruptions to
its communities and employees will be minimized.
Management in the Combined Institution. In evaluating the merits of a
potential merger partner and the benefits of a potential merger, the Wachovia
board believes that it is important to consider the participation of Wachovia's
directors and officers in the combined institution. This continued
representation by Wachovia in the new company enhances the likelihood that the
strategic benefits that Wachovia expects to achieve as a result of the merger
will be realized and that the benefits and talents that Wachovia brings to the
combined institution will be appropriately valued and effectively utilized. The
merger is structured as a merger-of-equals whereby each company will have
substantial input with respect to the control and future plans of the combined
institution. One half of the combined company's board of directors will consist
of current members of Wachovia's board, as discussed under "The Merger
Agreement--Board Composition of the Combined Company." In addition, the
combined company will have members of Wachovia's current senior management,
including its Chief Executive Officer, in key leadership positions.
Consideration to Wachovia's Shareholders. The Wachovia board also considered
the exchange ratio and additional consideration to be received by Wachovia's
shareholders. The board determined that a fixed exchange ratio was appropriate
in a strategic transaction of this type and provides Wachovia shareholders with
a fair allocation of the equity in the combined company based on Wachovia's
relative contribution to the pro forma earnings and businesses of the combined
company. In connection with its initial approval of the merger agreement, the
Wachovia board noted that the special dividend to be paid to Wachovia's
shareholders in connection with the merger would provide a cash payment
equivalent to the incremental excess of Wachovia's current dividend rate over
that of First Union through 2002. In approving the amended merger agreement,
the Wachovia board noted that the ability to elect DEPs would provide
Wachovia's shareholders with a means to continue to receive quarterly dividends
equal to Wachovia's current dividend rate following the merger. The board also
considered that, even though the transaction was a merger-of-equals, in which
the exchange ratio may be based simply on the market values of the respective
parties' shares at the time of announcement, Wachovia's shareholders would
receive a 6% premium over the closing price of Wachovia's shares on the day on
which it approved the merger.
Other Factors Considered by the Wachovia Board for the Merger. In reaching
its decision to adopt the plan of merger contained in the merger agreement and
the stock option agreements and to recommend that the Wachovia shareholders
approve the plan of merger, Wachovia's board consulted with its senior
management and its financial and legal advisors and considered the following
additional material factors:
. Comparisons of the historical condition and results of operations and
prospects of First Union and Wachovia, which the board considered in its
assessment of the relative financial values of First Union, Wachovia and
the combined company;
. Results of the due diligence investigations of First Union's business and
operations, as presented by Wachovia's senior management;
. The structure and terms of the merger, including:
+ The structure of the merger as a merger-of-equals whereby each company
will have substantial input with respect to the control and future
plans of the combined company, including the provisions in the combined
company's charter and by-laws designed to ensure, among other things,
the maintenance of a 50/50 split between former First Union directors
and former Wachovia directors through the 2004 annual shareholders
meeting of the combined company and the board's determination that this
level of participation will enhance the likelihood that Wachovia will
achieve its anticipated strategic benefits from merging with First
Union;
50
. The likelihood of the merger receiving treatment as a tax-free
reorganization for U.S. federal income tax purposes and the board's
conclusion that this treatment would be beneficial for a large number
of its shareholders;
. The terms and conditions of the merger agreement and stock option
agreements including their completely reciprocal nature, and the
board's determination that these terms and conditions were appropriate
in a strategic transaction of this type;
. In evaluating the stock option agreements, the Wachovia board
considered in particular the fact that stock option agreements are used
in almost all U.S. financial institution mergers and that, unlike many
stock option agreements in these types of transactions which do not cap
the total profit the option holder may receive under the option, the
total profit under the stock option agreements between First Union and
Wachovia is capped at $780 million. In particular, the Wachovia board
concluded that the provisions of the stock option agreements, including
the $780 million cap, would not preclude a third party from submitting
and pursuing an alternative transaction with Wachovia. The Wachovia
board further concluded that agreeing to such provisions was a
reasonable business decision in light of First Union's insistence on
these provisions as a condition to its willingness to increase the
exchange ratio and adopt a special dividend for Wachovia's
shareholders;
. The fixed exchange ratio of 2 First Union shares for each Wachovia
share, and the Wachovia board's determination that such a fixed
exchange ratio was appropriate in a strategic transaction of this type;
. Provisions enabling Wachovia shareholders to retain the benefit of
Wachovia's current dividend rate following the merger either through
(1) a one-time cash payment of $0.48 per share of Wachovia common stock
or (2) two DEPs and the board's determination that this benefit would
be important to a large number of its shareholders;
. The interests that certain executive officers and directors of Wachovia
may have with respect to the merger in addition to their interests as
shareholders of Wachovia generally, as discussed under "Interests of
Certain Persons in the Merger" below beginning on page 98;
. The anticipated effect of the merger on employee compensation, benefits
and incentives under various employment-related agreements, plans and
programs;
. The financial presentations of Credit Suisse First Boston and its
opinion, as of April 15, 2001, the date on which the Wachovia board
approved the merger agreement, and confirmed on May 22, 2001, the date on
which the Wachovia board approved the amendment to the merger agreement,
to the effect that, as of such dates, and based on and subject to the
matters described in their opinions, the exchange ratio was fair from a
financial point of view to the holders of Wachovia common stock, as
discussed under "Opinion of Wachovia's Financial Advisors" below on page
66;
. The May 22, 2001 financial presentation of Goldman, Sachs & Co. and its
opinion to the effect that, as of the date of the opinion and based on
and subject to the matters described in the opinion, the exchange ratio
was fair from a financial point of view to the holders of Wachovia common
stock, as discussed under "Opinion of Wachovia's Financial Advisors"
below on page 66;
. Alternatives to the merger, including pursuing an acquisition of, or a
business combination or joint venture with, an entity other than First
Union, and the Wachovia board's conclusion that the merger with First
Union is more feasible and is expected to yield greater benefits than the
likely alternative transactions and will yield greater value to
Wachovia's shareholders than not pursuing a business combination
transaction; and
. Current conditions, developments and trends in the banking industry,
general economy and capital markets and the board's analysis of their
potential impacts on First Union, Wachovia and the combined company.
51
Wachovia's board of directors also considered the potential adverse
consequences of the merger, including the following:
. the challenges of integrating two large financial services companies
and the related risks given First Union's recent implementation of its
internal restructuring program;
. the risk of not achieving the expected revenue synergies, cost savings
and other benefits;
. the risk of diverting management's attention and resources from other
strategic opportunities and operational matters to focus on combining
the companies;
. the risks associated with possible delays in obtaining necessary
approvals and the terms of such approvals; and
. the fact that neither party could enter into another merger agreement
until January 2002 if the merger was not completed before then, which
may limit business combinations during that period.
The Wachovia board did not find it useful, and did not attempt, to quantify,
rank or otherwise assign relative weights to these factors. In addition, except
as noted above, the Wachovia board did not undertake to make any specific
determination as to whether any particular factor or any aspect of any
particular factor was favorable or unfavorable to the Wachovia board's ultimate
determination. Rather, the Wachovia board conducted an overall analysis of the
factors described above, including thorough discussions with, and questioning
of, Wachovia's senior management and its financial and legal advisors. In
considering the factors described above, individual members of Wachovia's board
may have given different weight to different factors.
In light of the Wachovia board's conclusion that SunTrust did not represent
a strategically effective merger partner and its concurrence in Wachovia
management's decision not to pursue the merger transaction with SunTrust
previously considered, Wachovia did not request Credit Suisse First Boston to
render an opinion with respect to the fairness from a financial point of view
of the exchange ratio proposed by SunTrust in the December discussions.
Wachovia's board of directors realizes that there can be no assurance about
future results, including results expected or considered in the factors listed
above, such as assumptions regarding potential revenue enhancements,
anticipated cost savings and earnings accretion. However, the board concluded
that the potential positive factors outweighed the potential risks of
consummating the merger.
It should be noted that this explanation of the Wachovia board's reasoning
and all other information presented in this section is forward-looking in
nature and, therefore, should be read in light of the factors discussed under
the heading "Forward-Looking Statements" on page 179.
The Unsolicited Proposal from SunTrust
As noted above, on May 14, 2001, SunTrust announced its unsolicited proposal
to acquire Wachovia. Although the terms of SunTrust's proposal are general and
conditional in nature, the proposal provides for an acquisition of Wachovia
through a merger of Wachovia into SunTrust in which each Wachovia share would
be converted into 1.081 shares of SunTrust common stock. In connection with its
proposal, SunTrust has stated that it will increase its annual common stock
dividend by 39% to $2.22 per share. As with all dividends, payment would be
made only when, as and if declared by SunTrust's board out of funds legally
available. The SunTrust proposal provides that the acquisition will be
accounted for as a purchase for financial accounting purposes. The proposal
provides that SunTrust will retain its name and Atlanta headquarters after the
acquisition. Based on the closing market prices on May 14, 2001, the implied
value per share of Wachovia common stock under the SunTrust proposal was
$64.86, representing a premium of about 0.2% over the market price of Wachovia
common stock and a premium of about 6.0% over the then-implied value of the
First Union exchange ratio (without giving effect to the per-share cash payment
or the DEPs). The implied differential value of the SunTrust offer (on some
days a premium and on other days a discount) from the implied value of the
First Union offer has varied from day-to-day and will continue to vary. As of
June 25, 2001, the implied value per share of Wachovia common stock under the
SunTrust proposal was $70.89, representing a premium of about 1.4% to the
market price of Wachovia common stock and a premium of about 2.7% over the
52
then implied value of the First Union exchange ratio (without giving effect to
the per-share cash payment or the DEPs). The implied premium of the SunTrust
proposal over the First Union proposal has declined approximately 48.92% from
May 14, 2001 to June 25, 2001.
Reasons for Rejecting the Unsolicited SunTrust Proposal
In arriving at its determination to reject the SunTrust proposal, the
Wachovia board consulted with its senior management and its financial and legal
advisors, Credit Suisse First Boston, Goldman Sachs & Co., Simpson Thacher &
Bartlett, Wachtell, Lipton, Rosen & Katz, and Bell, Davis & Pitt, as well as
its General Counsel, Kenneth McAllister, Esq. Wachovia's board took into
account the extensive knowledge of SunTrust possessed by it and Wachovia's
senior management and acquired over the course of numerous discussions between
SunTrust and Wachovia in considering the possibility of a merger and the due
diligence investigations undertaken in the fall of 1997 and in December 2000 in
connection with such considerations. The board also considered the following
material factors:
. The Wachovia board's view of the relative weakness of SunTrust as a
merger partner versus First Union. In particular, the board considered:
. Emerging trends causing the Wachovia board to doubt SunTrust's ability
to maintain its historic financial performance into the future,
including
-- a recent stagnation of core earnings growth as seen in the first
quarter of 2001, in which, excluding securities gains, SunTrust's
earnings per share would have been $1.02 per share, representing a
3.8% decline from the comparable period in 2000 and a 9% decline
from the previous quarter;
-- increasing dependence on share buybacks and one-time gains to
generate earnings per share growth; for example, SunTrust recognized
approximately $57 million in one time gains in the first quarter of
2001, increasing its reported earnings per share from $1.02 to $1.14
for that period; and SunTrust recognized a pre-tax gain on the sale
of its credit card business of approximately $327 million and a pre-
tax loss of approximately $115 million associated with the
repositioning of its securities investment portfolio in the fourth
quarter of 1999, increasing its reported earnings per share from
$0.99 to $1.35 for that period;
-- the increase in SunTrust's net charge-offs in recent quarters, which
were approximately $19.6 million, $27.2 million, $30.5 million,
$53.4 million and $66.3 million, in the first, second, third and
fourth quarters of 2000 and the first quarter of 2001, respectively;
and
-- the increase in SunTrust's non-performing assets in recent quarters,
which nonperforming assets were approximately $311.9 million, $305.7
million, $404.5 million, $428.3 million and $369.3 million, in the
first, second, third and fourth quarters of 2000 and the first
quarter of 2001, respectively;
. The substantially weaker annual growth rates exhibited by SunTrust as
compared to First Union in several businesses identified by Wachovia's
senior management as strategic high growth businesses, including trust
and asset management; in spite of generally strong markets during the
past two years, during the first quarter of 2001, SunTrust's trust and
asset management revenues declined by 1.2% on a compound annual basis
since the first quarter of 1999, a decline that has continued in the
first quarter of 2001 and in contrast, First Union's trust and asset
management business has shown a compound annual growth rate of 28%
since the first quarter of 1999;
. SunTrust's significant investment in the stock of The Coca-Cola Company
and the Wachovia board's belief that such investment involves a level
of risk and volatility not present for most financial institutions
(including both First Union and Wachovia);
53
+ First Union common stock's record of outperforming SunTrust's stock
throughout 2001; for example, since January 1, 2001, the market closing
price of each of First Union common stock and SunTrust common stock
increased by 15% and 2%, respectively, as of April 12, 2001, the last
trading day prior to announcement of the First Union/Wachovia merger;
and the market price of First Union common stock increased by 18.5% and
that of SunTrust's common stock decreased by 2.1% from January 1, 2001
to June 13, 2001; and
+ A decrease in SunTrust's regulatory capital ratios and in its ratio of
tangible common equity to tangible assets from historical levels, due
in part to share repurchases, and the Wachovia board's concern that the
proposed 47% pro forma dividend payout ratio following the Wachovia
acquisition would further limit SunTrust's capital flexibility;
-- the regulatory capital ratios that the board considered for these
purposes were those mandated by the federal bank regulators for all
banking organizations, which are calculated by dividing an
organizations's capital (consisting principally of common stock,
preferred stock and other capital securities approved by regulators)
by its total assets, which for this purpose are considered on both a
"risk weighted" basis, in which assets are allocated into one of
four different weighting categories based on riskiness, and on an
unadjusted basis;
-- the ratio of tangible common equity to tangible assets is calculated
by dividing an organization's tangible common equity (common equity
less intangible assets) by its tangible assets (total assets less
intangible assets), and which ratio is not mandated by the federal
bank regulators;
. The Wachovia board's expectation that Wachovia will derive greater market
strength from the size and geographic diversity and density of a combined
First Union/Wachovia footprint than from a combination with SunTrust;
. The Wachovia board's expectation of greater cross-selling opportunities
to be derived from a combined First Union/Wachovia than from a
combination with SunTrust;
. The Wachovia board's belief that a combined First Union/Wachovia would
have a more extensive distribution network and more diversified client
base than would a combination with SunTrust;
. The Wachovia board's expectation that a combined First Union/Wachovia
would have a more balanced franchise with a significant presence in
businesses that the Wachovia board believes have high-growth prospects,
as opposed to a combination with SunTrust which would be more dependent
on relatively lower-growth traditional retail banking businesses;
. First Union's significantly larger presence in capital management,
ranking 5th among bank holding companies in terms of mutual fund assets
under management, compared to SunTrust, which ranks 14th among bank
holding companies, and asset management, in which First Union has four
times the amount of assets under management and three times the number of
mutual funds than does SunTrust;
. The Wachovia board's belief that a combined First Union/Wachovia retail
platform would have several advantages over the retail banking business
that would be formed under the SunTrust proposal, including:
+ A larger deposit base of $150 billion for First Union/Wachovia,
compared to $92 billion for a combination with SunTrust;
+ A combined First Union/Wachovia would have a larger presence than a
combined SunTrust/Wachovia in affluent markets resulting from First
Union's significant presence in the affluent Northeastern and Middle
Atlantic regions; and
+ A higher average branch size post-integration for First Union/Wachovia
compared to a combination with SunTrust, which the Wachovia board
believes will result in greater opportunities to enhance branch-level
efficiencies;
54
. The Wachovia board's belief that the greater level of geographic overlap
between First Union and Wachovia increases the potential for cost savings
through branch consolidation and reduces the risk of customer
dissatisfaction and attrition from those consolidations;
. The Wachovia board's belief that the integration risk associated with
SunTrust's proposal is greater than that posed by the First
Union/Wachovia merger, due to, among other factors:
+First Union's substantially greater experience in completing large scale
merger integrations, with 17 transactions completed with a deal value
greater that $100 million in the past 10 years compared to only one such
transaction completed by SunTrust in the same period;
+The fact that Wachovia is three times larger, based on total assets,
than Crestar Financial Corporation, SunTrust's largest acquisition to
date;
+The Wachovia board's belief that SunTrust will be unable to achieve the
increased cost savings projected in connection with its proposal without
undertaking measures that could limit future growth or negatively impact
customer service; and
+The Wachovia board's belief that hostile transactions such as the one
proposed by SunTrust present dramatically higher integration risks than
friendly transactions because they are less likely to foster cooperation
and fully utilize the best talents of both organizations;
. The Wachovia board's belief that the premium implied by the SunTrust
acquisition proposal is substantially below the premium shareholders
generally receive in a bank merger structured as an acquisition, as
distinguished from transactions structured as mergers-of-equals, such as
the First Union/Wachovia merger;
. The Wachovia board's belief that a merger with SunTrust will be
substantially less accretive to Wachovia shareholders compared to a
merger with First Union, with projected accretion to GAAP earnings per
share (assuming the effectiveness of proposed changes to GAAP) for the
First Union merger increasing from 9.1% in 2002 to 16.6% in 2004,
compared to (8.8)% and 2.9% for SunTrust, respectively, even based on its
aggressive cost savings estimates and with projected accretion to cash
earnings per share for the First Union merger increasing from 15.2% in
2002 to 19.8% in 2004, compared to 1.9% and 9.3% for SunTrust,
respectively, again based on what Wachovia believes to be SunTrust's
aggressive cost savings estimates;
. The election offered to Wachovia shareholders to receive in connection
with the First Union/Wachovia merger either (1) a one-time cash payment
of $0.48 per share of Wachovia common stock or (2) two DEPs per share of
Wachovia common stock, which DEPs will entitle the holder to dividend
payments equal to the difference between Wachovia's current dividend and
the common stock dividend of the combined First Union/Wachovia, until
after such time as at least $1.20 per combined company common share has
been paid as a dividend over a one-year period; in contrast, the Wachovia
board noted that the SunTrust dividend could be changed at any time by
its board; and
. The fact that the SunTrust proposal is conditional, with numerous
conditions that may not be satisfied, including:
+further due diligence to be conducted by SunTrust;
+termination of the merger agreement between Wachovia and First Union and
a termination of the stock option agreement granted to First Union in
exchange for a cash payment (which the Wachovia board noted are not
actions it is permitted to take unilaterally under the terms of those
agreements); and
+adoption of a merger agreement with SunTrust by Wachovia's board; in
light of the fact that the Wachovia board determined that the SunTrust
proposal was not in the best interests of Wachovia's shareholders, the
Wachovia board determined that this condition of SunTrust's proposal
could not be satisfied.
55
The Wachovia board also considered various positive factors concerning
SunTrust, including its historical earnings, returns to shareholders, capital
and credit quality statistics. The board concluded, however, that these
positive factors were substantially outweighed by the other factors discussed
above, including adverse earnings trends in recent periods.
The Wachovia board did not find it useful, and did not attempt, to quantify,
rank or otherwise assign relative weights to these factors. In addition, except
as noted above, the Wachovia board did not undertake to make any specific
determination as to whether any particular factor or any aspect of any
particular factor was favorable or unfavorable to the Wachovia board's ultimate
determination. Rather, the Wachovia board conducted an overall analysis of the
factors described above, including thorough discussions with, and questioning
of, Wachovia's senior management and its financial and legal advisors. In
considering the factors described above, individual members of Wachovia's board
may have given different weight to different factors.
As indicated above, following consultation with its senior management and
its financial and legal advisors, the Wachovia board based its decision to
reject the SunTrust proposal on a number of strategic and financial
considerations regarding the relative long-term benefits of the SunTrust
proposal versus the First Union merger. In light of this and because the
Wachovia board concluded that a merger with SunTrust would not be an effective
means of enhancing long-term shareholder value or achieving the board's
strategic goals for the company, Wachovia did not request either of its
financial advisors to render an opinion with respect to the fairness from a
financial point of view of the exchange ratio proposed by SunTrust.
As noted above, one Wachovia director, Morris W. Offit, who is also chief
executive officer of a wholly owned subsidiary of Wachovia, dissented from the
board's decision at its May 22 meeting to reject the SunTrust proposal and
reaffirm its approval of the First Union merger. That director indicated that
he was dissenting based on disagreements with the process surrounding the
termination of the discussions with SunTrust in December 2000; his view that he
was more comfortable with the SunTrust business model, which he viewed as more
retail-oriented compared to the First Union model with its greater emphasis on
capital markets activities; and his view that the cultural fit with SunTrust
was better because of its focus on relationship-based banking while he regarded
First Union as more focused on transactional-based services. No other Wachovia
director, including any of the 13 independent directors (all of whom were
present at the meeting), joined in his dissent on any point.
Wachovia's board of directors realizes that there can be no assurance about
future results, including results expected or considered in the factors listed
above, such as assumptions regarding potential revenue enhancements,
anticipated cost savings and earnings accretion. It should be noted that this
explanation of the Wachovia board's reasoning and all other information
presented in this section is forward-looking in nature and, therefore, should
be read in light of the factors discussed under the heading "Forward-Looking
Statements".
Cost Savings
A factor considered by both First Union and Wachovia in deciding to enter
into the merger agreement is First Union's and Wachovia's assessment that the
combined company is projected to save about $890 million in costs annually by
2004 and beyond. These cost savings primarily relate to overlapping or
duplicative technology systems, personnel functions and real property
facilities. The projected annual cost savings were determined by both First
Union and Wachovia management over the course of their due diligence review of
each other's company. Senior management teams from functional business and
staff units were matched with their counterparts and discussed strategy and
similarities between the two organizations. From those discussions and using
several underlying assumptions discussed below, each business unit provided a
comprehensive analysis of the resources required to combine the two companies
and the potential cost savings that could be generated following the merger.
Following this business unit determination, support units were able to have
more detailed discussions to formulate the resource requirements necessary to
support the combined company. By comparing these resource requirements against
current expenditures at each company, the support units were able to generate
further cost savings projections from resources dedicated to duplicative
support functions.
56
The following chart illustrates an itemization of the combined company's
projected annual cost savings for the years following the merger.
Annual Cost
Savings (in
millions)
--------------
2002 2003 2004
---- ---- ----
Duplicative technology and operations functions................. $ 73 159 318
Duplicative staff unit functions................................ 134 139 146
Business unit function reductions............................... 184 229 216
Facility consolidations......................................... 9 34 92
Purchasing synergies............................................ 91 107 107
---- ---- ----
$490 $668 $890
The preceding chart illustrates that approximately 55% of the combined
company's projected annual cost savings would be achieved in 2002, 75% achieved
in 2003, and 100% achieved in 2004.
The following discussion provides additional detail about the components of
the projected cost savings illustrated in the preceding chart.
Duplicative technology and operations functions. The projected annual cost
savings from "duplicative technology and operations functions" results from:
. reductions in duplicative support personnel required to maintain
operations systems for the combined company,
. reduced support needs for the decreased combined company employee base
and facilities,
. cancellation of duplicative software and master licenses, and
. reduced planned expenditures for data storage and processing due to
excess capacity created by combining the two companies' technology and
operations systems.
Duplicative staff unit functions. The projected annual cost savings from
"duplicative staff unit functions" result from job position reductions in
administrative staff and corporate support functions where both Wachovia and
First Union maintain functions that will be duplicative for the combined
company. The projected annual cost savings from "duplicative technology and
operations functions", "duplicative staff unit functions" and "business unit
function reductions" (discussed below) are expected to total 7,000 job
positions over the three-year transition period following the merger. Wachovia
and First Union believe up to one-half of these work force reductions could
occur through normal attrition during this three-year period following the
merger. The remaining position reductions are expected to come from both First
Union and Wachovia. Since the merger is structured as a merger-of-equals
instead of an acquisition, the combined company will select the most qualified
candidates from both companies, regardless of which company they worked for
prior to the merger. Of the total 7,000 job positions projected to be impacted
over the three-year transition period following the merger, we currently
estimate that approximately 2,500 are in administrative staff and corporate
support functions.
Business unit function reductions. The projected annual cost savings from
"business unit function reductions" result principally from job reductions due
to job attrition, consolidations of the branch banking network and integration
of other business lines. Of the total 7,000 job positions projected to be
impacted over the three-year transition period following the merger, we
currently estimate that approximately 4,300 are in business unit functions.
Facility consolidations. The projected annual cost savings from "facility
consolidations" result from the number of branch banking facilities that are
expected to be consolidated by the combined company. We determined that there
are approximately 325 Wachovia branch banking offices within 1 mile of a First
Union branch banking office. The projected annual cost savings assume that
these branch facilities will be combined,
57
over the projected three-year integration period, so that the business of
approximately 325 branch banking offices will be combined with a nearby branch
banking office. The "surviving" branch banking offices will be comprised of
both Wachovia and First Union banking branches (excluding those required to be
divested). Neither First Union nor Wachovia has yet concluded which branches
will be closed and which will be the "surviving" branches.
In addition to combining branch banking offices, other facilities housing
operations and data centers which provide support to business units may be
combined with facilities housing similar operations and data center functions.
As of the date of this document, neither First Union nor Wachovia has
identified which of these facilities are to be closed and which are to be the
"surviving" facilities.
Purchasing synergies. The projected annual cost savings from "purchasing
synergies" result from the combined company's stronger purchasing power and
more favorable negotiated usage rates.
The projected annual cost savings described in this document assume that the
merger is completed in the third quarter of 2001, systems and technology
conversions proceed in accordance with the projected merger transition plan
over three years, and external factors do not unreasonably delay the merger.
For more information about whether the combined company can achieve these
cost savings estimates, see "Risk Factors" beginning on page 24 and "Forward--
Looking Statements" beginning on page 179.
Opinion of First Union's Financial Advisor
First Union retained Merrill Lynch to act as its financial advisor in
connection with the merger. On April 12, 2001, April 15, 2001 and May 21, 2001,
First Union's board of directors held meetings, in which Merrill Lynch
participated, to evaluate the proposed merger. At the meeting on April 15,
2001, Merrill Lynch rendered its oral opinion that, as of that date and based
upon and subject to the factors and assumptions set forth in its opinion, the
exchange ratio was fair, from a financial point of view, to First Union and to
First Union's shareholders. This opinion was subsequently confirmed in writing.
At the May 21, 2001 meeting, Merrill Lynch confirmed that the exchange ratio
was fair, from a financial point of view, to First Union and to First Union's
shareholders. Merrill Lynch has subsequently confirmed and updated its opinion
by delivering to the board of directors of First Union a written opinion dated
as of the date of this joint proxy statement-prospectus. In connection with its
written opinion dated as of the date of this document, Merrill Lynch confirmed
the appropriateness of its reliance on the analyses used to render its earlier
opinion. It also performed procedures to update certain of its analyses and
reviewed the assumptions used in its analyses and the factors considered in
connection with its earlier opinion.
The full text of the Merrill Lynch opinion dated the date of this document,
and that describes, among other things, the assumptions made, matters
considered, and qualifications and limitations on the review undertaken by
Merrill Lynch, is attached as Appendix D to this document and is incorporated
in this document by reference. First Union shareholders are urged to, and
should, read Merrill Lynch's opinion carefully and in its entirety.
Merrill Lynch's opinion is directed to First Union's board and addresses
only the fairness, from a financial point of view, of the exchange ratio to
First Union and First Union's shareholders. The opinion does not address any
other aspect of the merger or any related transaction, nor does it constitute a
recommendation to any shareholder as to how to vote at the meeting. The summary
of the fairness opinion set forth in this document is qualified in its entirety
by reference to the full text of the opinion.
In arriving at its opinion, Merrill Lynch, among other things:
. reviewed publicly available business and financial information from
government agencies and market sources relating to First Union and
Wachovia that Merrill Lynch deemed to be relevant;
58
. reviewed information relating to the respective businesses, earnings,
assets, liabilities and prospects of First Union and Wachovia furnished
to Merrill Lynch by First Union's senior management, as well as the
amount and timing of the cost savings, revenue enhancements and related
expenses expected to result from the merger furnished to Merrill Lynch
by First Union's senior management;
. conducted discussions with members of senior management and
representatives of First Union and Wachovia concerning the matters
described in the bullet points set forth above, as well as their
respective businesses and prospects before and after giving effect to
the merger and the expected cost savings, revenue enhancements and
related expenses;
. reviewed the market prices and certain valuation multiples for First
Union common stock and Wachovia common stock and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to
be relevant;
. reviewed the respective publicly reported financial condition and
results of operations of First Union and Wachovia and compared them with
those of certain publicly traded companies that Merrill Lynch deemed to
be relevant;
. compared the proposed financial terms of the merger with the financial
terms of certain other transactions that Merrill Lynch deemed to be
relevant;
. participated in certain discussions among representatives of First Union
and Wachovia and their respective financial and legal advisors with
respect to the merger;
. reviewed the potential pro forma impact of the merger;
. reviewed the merger agreement and the related stock option agreements
provided to Merrill Lynch; and
. reviewed other financial studies and analyses and took into account
other matters that Merrill Lynch deemed necessary, including Merrill
Lynch's assessment of general economic, market and monetary conditions.
In rendering its opinion, Merrill Lynch assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to
Merrill Lynch, or that was discussed with, or reviewed by or for Merrill Lynch,
or that was publicly available. Merrill Lynch also did not assume any
responsibility for independently verifying this information or undertake an
independent evaluation or appraisal of the assets or liabilities of First Union
or Wachovia, and Merrill Lynch has not been furnished any evaluation or
appraisal on these matters.
Merrill Lynch is not an expert in the evaluation of allowances for loan
losses, and neither made an independent evaluation of the adequacy of the
allowances for loan losses of First Union or Wachovia, nor reviewed any
individual credit files of First Union or Wachovia nor been requested to
conduct such a review. As a result, Merrill Lynch has assumed that the
aggregate allowances for loan losses for both First Union and Wachovia are
adequate to cover such losses and will be adequate on a pro forma basis for the
combined company. In addition, Merrill Lynch did not assume any obligation to
conduct, and Merrill Lynch did not conduct, any physical inspection of the
properties or facilities of First Union or Wachovia. With respect to the
financial and operating information, including, without limitation, valuations
of contingencies and projections regarding under-performing or non-performing
assets, net charge-offs, adequacy of reserves, future economic conditions and
information on the cost savings, revenue enhancements and related expenses
expected to result from the merger, in each case furnished to or discussed with
Merrill Lynch by First Union or Wachovia, Merrill Lynch assumed that the
information was reasonably prepared and reflects the best currently available
estimates and judgments of the senior management of First Union and Wachovia as
to the future financial and operating performance of First Union, Wachovia or
the combined entity, as the case may be, and the expected cost savings, revenue
enhancements and related expenses. Merrill Lynch's opinion is based upon
market, economic and other conditions as in effect on, and on the information
made available to Merrill Lynch as of, the date of its opinion.
59
For purposes of rendering its opinion, Merrill Lynch assumed that, in all
respects material to its analysis:
. the merger will be completed substantially in accordance with the terms
set forth in the merger agreement;
. the representations and warranties of each party in the merger agreement
and in all related documents and instruments referred to in the merger
agreement are true and correct;
. First Union and Wachovia will perform all of the covenants and
agreements required to be performed by them under the merger agreement
and any related documents;
. all conditions to completing the merger will be satisfied without any
waivers; and
. in the course of obtaining any necessary regulatory or other consents or
approvals (contractual or otherwise) for the merger, no restrictions,
including any divestiture requirements or amendments or modifications,
will be imposed that will have a material adverse effect on the future
results of operations or financial condition of First Union, Wachovia or
the combined entity, or on the contemplated benefits of the merger,
including the cost savings, revenue enhancements and related expenses
expected to result from the merger.
Merrill Lynch also assumed that the merger will be accounted for as a
purchase under U.S. generally accepted accounting principles, which we refer
to in this document as GAAP, and that it will qualify as a tax-free
reorganization for U.S. federal income tax purposes. Merrill Lynch's opinion
is not an expression of an opinion as to the prices at which shares of First
Union common stock or shares of Wachovia common stock will trade following the
announcement of the merger, or the prices at which the shares of common stock
of the combined entity will trade following the completion of the merger.
Analyses of Merrill Lynch
In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business, economic, market and
financial conditions and other matters, many of which are beyond the control
of Merrill Lynch, First Union and Wachovia. Any estimates contained in the
analyses performed by Merrill Lynch are not necessarily indicative of actual
values or future results, which may be significantly more or less favorable
than suggested by these analyses. Additionally, estimates of the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which those businesses or securities might actually be sold.
Accordingly, these analyses and estimates are inherently subject to
substantial uncertainty. The Merrill Lynch opinion was among several factors
taken into consideration by First Union's board in making its determination to
adopt the plan of merger contained in the merger agreement and the merger. In
addition, First Union's board did not rely on any single analysis in making
its determination. Consequently, the analyses described below should not be
viewed as determinative of the decision of First Union's board or management
with respect to the fairness of the exchange ratio.
The summary that follows is not a complete description of the analyses
underlying the Merrill Lynch opinion or the presentation made by Merrill Lynch
to First Union's board but summarizes the material analyses performed and
presented in connection with its opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular circumstances. Therefore, a
fairness opinion is not readily susceptible to partial analysis or summary
description.
In arriving at its opinion, Merrill Lynch did not attribute any particular
weight to any analysis or factor that it considered, but rather made
qualitative judgments as to the significance and relevance of each analysis
and factor. The financial analyses summarized below include information
presented in tabular format. Accordingly, Merrill Lynch believes that its
analyses and the summary of its analyses must be considered as a whole and
that selecting portions of its analyses and factors or focusing on the
information presented below in tabular format, without considering all
analyses and factors or the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of the process underlying its
analyses and opinion. The tables alone do not constitute a complete
description of the financial analyses.
60
The following is a summary of the material financial analyses presented by
Merrill Lynch to First Union's board at its meeting on April 12, 2001. At the
time of this presentation, the exchange ratio proposed by First Union was 1.9,
and Merrill Lynch's analyses were based on that exchange ratio. In light of the
increase in the exchange ratio from 1.9 to 2.0 that was finally arrived at
through the ongoing negotiations of various terms and conditions of the
transaction between April 12 and April 15, 2001, which are described above
under the heading "Background of the Merger", certain of the data that appear
in the following summary have been updated from that presented to First Union's
board on April 12, 2001 to take into account the agreed upon increase in the
exchange ratio. As part of the meeting of First Union's board on April 15,
2001, Merrill Lynch noted the effect of the proposed increase of the exchange
ratio on certain of the financial analyses previously presented to First
Union's board, including the analyses summarized below under the heading "Pro
Forma Financial Impact," but did not provide revised written presentation
materials to First Union's board. Merrill Lynch rendered its fairness opinion
to First Union's board on April 15, 2001 based on the 2-for-1 exchange ratio.
Merrill Lynch has reviewed and consented to the inclusion of the disclosure
relating to its fairness opinion that follows.
Calculation of Transaction Value. Merrill Lynch reviewed the terms of the
merger. It noted that the exchange ratio of 2 shares of First Union common
stock for each share of Wachovia common stock meant that the transaction had a
per share value of $63.84 for each share of Wachovia common stock based upon
the closing price of First Union of $31.92 on April 12, 2001. Merrill Lynch
also noted that, based on the exchange ratio, the transaction also had an
implied aggregate value of approximately $13 billion as of April 12, 2001.
Contribution/Implied Exchange Ratio Analysis. Merrill Lynch also analyzed
selected balance sheet, income statement, and stock market data of First Union
and Wachovia to determine the estimated pro forma ownership of the combined
entity based on each company's contributions. Merrill Lynch then used this data
to determine the exchange ratio that would be required to equate pro forma
ownership in a combined First Union/Wachovia with each institution's
contribution of the specified criteria and against which the exchange ratio of
2.0 could be compared. Merrill Lynch's analysis illustrated that the exchange
ratio approximated the implied exchange ratio derived from the analysis for
each of the specified criteria. The results of Merrill Lynch's analysis are set
forth in the following table.
Factor Pro Forma Ownership
------ -------------------- Implied
First Union Wachovia Exchange Ratio
----------- -------- --------------
Total Assets....................... 76.7% 23.3% 1.466x
Total Deposits..................... 75.4 24.6 1.569
Gross Loans........................ 69.2 30.8 2.141
Total Equity....................... 70.9 29.1 1.973
Tangible Equity.................... 69.7 30.3 2.091
Current Market Capitalization...... 71.9 28.1 1.886
30 Day Average Market
Capitalization.................... 72.1 27.9 1.867
60 Day Average Market
Capitalization.................... 71.2 28.8 1.953
2001 Estimated Cash Income......... 72.2 27.8 1.856
2002 Estimated Cash Income......... 73.0 27.0 1.780
Discounted Dividend Analysis....... 73.0 27.0 1.780
For the discounted dividend analysis referenced in the table, Merrill Lynch
assumed a terminal multiple of 11.0x forward cash earnings, 10% earnings per
share growth, and a 13% discount rate.
61
Historical Market-for-Market Exchange Ratio Analysis. Merrill Lynch also
analyzed the exchange ratio that existed between First Union common stock and
Wachovia common stock for certain selected periods during the past year to
illustrate the exchange ratio that existed between the companies' common stock
for those periods and against which the exchange ratio of 2.0 could be
compared. Merrill Lynch's analysis illustrated that the exchange ratio
approximated the historical implied exchange ratio derived from the analysis
for the selected periods. The results of Merrill Lynch's analysis are set forth
in the following table.
Historical Implied
Exchange Ratio
---------------------------------
Current (April 12, 2001) 1.886x
Last 5 Days Average 1.865x
Last 30 Days Average 1.867x
Last 60 Days Average 1.953x
Last 3 Months Average 1.962x
Last 6 Months Average 1.939x
Last Year Average 1.960x
Peer Group Stock Trading Multiple Analysis. Merrill Lynch also reviewed and
compared selected financial and stock market information of First Union and
Wachovia to the publicly available corresponding data for the following
publicly traded commercial banking organizations located throughout the United
States that Merrill Lynch determined were comparable to First Union and
Wachovia:
. Bank of America Corporation . KeyCorp
. Bank One Corporation . National City Corporation
. BB&T Corporation . SunTrust Banks, Inc.
. Comerica Incorporated . The PNC Financial Services Group,
. Fifth Third Bancorp Inc.
. FleetBoston Financial Corporation . U.S. Bancorp
. Wells Fargo & Company
The following table compares the information for First Union and Wachovia
with corresponding mean data for the companies listed above for the purpose of
evaluating First Union's and Wachovia's performance against those companies in
the categories listed. The information is based on financial data at December
31, 2000, earnings per share estimates from First Call, and market prices as of
April 12, 2001. The calculations of price-to-2001 and price-to-2002 estimated
GAAP earnings per share are based on First Call estimated earnings per share
calculated in accordance with GAAP. The calculations of price-to-2001 and
price-to-2002 estimated cash earnings per share are based on First Call
estimated earnings per share plus amortization of intangible assets per share.
First Call is a recognized data service that monitors and publishes
compilations of earnings estimates by selected research analysts regarding
companies of interest to institutional investors. Merrill Lynch's analysis
illustrated that, when considering the stock market and financial data
selected, both First Union and Wachovia were trading at multiples and values,
or had other financial characteristics, approximating the comparable companies.
Stock Stock
Stock Price/ Stock Price/ First Call
Price/ 2001 Price/ 2002 Stock Stock Projected
2001 Estimated 2002 Estimated Price/ Price/ Five Year
Estimated Cash Estimated Cash Book Tangible Dividend EPS Growth
GAAP EPS EPS GAAP EPS EPS Value Book Yield Rate
--------- --------- --------- --------- ------ -------- -------- ----------
First Union............. 12.4x 11.0x 11.2x 10.0x 2.04x 2.68x 3.0% 10.0%
Wachovia................ 12.0x 11.1x 11.4x 10.3x 1.95x 2.42x 4.0% 10.0%
Merrill Lynch Selected
Company Average........ 13.7x 12.8x 12.2x 11.5x 2.64x 3.41x 3.0% 10.7%
62
No company used in the analyses described above is identical to First Union,
Wachovia, or the pro forma combined company. Accordingly, an analysis of the
results of the foregoing necessarily involves complex considerations and
judgments concerning financial and operating characteristics and other factors
that could affect the merger, public trading, or other values of the companies
to which they are being compared. In addition, mathematical analyses, such as
determining the average or median, are not of themselves meaningful methods of
using comparable company data.
Discounted Dividend Analysis--First Union. Merrill Lynch performed a
discounted dividend analysis to estimate a range of present values per share of
First Union common stock assuming First Union continued to operate as a stand-
alone entity. This range was determined by adding (1) the present value, which
is a representation of the current value of a sum that is to be received some
time in the future, of the estimated future dividends that First Union could
generate through December 31, 2006, and (2) the present value of the terminal
value, which is a representation of the ongoing value of an entity at a
specified time in the future, of First Union common stock.
In calculating a terminal value of First Union common stock, Merrill Lynch
applied multiples of 10.0x, 11.0x and 12.0x to year 2007 forecasted cash
earnings. These multiples were used to approximate current stock market trading
multiples for First Union. In performing this analysis, Merrill Lynch used
First Call earnings per share estimates for 2001 and 2002. For periods after
2002, earnings per share were assumed to increase at projected annual long-term
earnings growth rates of 8%, 9%, 10%, 11%, and 12%. These projected growth
rates were used to approximate current analyst estimates of projected 5 year
growth rates for First Union. The combined dividend stream and terminal value
were then discounted back to March 31, 2001 using an assumed 13.0% cost of
equity. Merrill Lynch viewed this rate as the appropriate discount rate for a
company with First Union's risk characteristics.
In performing this analysis, Merrill Lynch also assumed an annual asset
growth rate for First Union of 5.0%, and further assumed that earnings in
excess of those necessary to maintain First Union's tangible common equity
ratio at 4.5% could be paid out as dividends. Based on the foregoing criteria
and assumptions, Merrill Lynch determined that the stand-alone present value of
the First Union common stock ranged from $30.68 to $40.24 per share. This data
compared to the closing price of First Union's common stock of $31.92 on April
12, 2001, which value was within the range of values derived from the analysis
performed by Merrill Lynch. The results of Merrill Lynch's analysis are set
forth in the following table.
Terminal Year
Price/Cash
Earnings Multiple
-----------------
5-Year Earnings Growth Rate 10.0x 11.0x 12.0x
--------------------------- ----- ----- -----
8.0%...................................................... 30.68 32.70 34.77
9.0....................................................... 31.80 33.92 36.03
10.0....................................................... 32.96 35.17 37.39
11.0....................................................... 34.16 36.47 38.79
12.0....................................................... 35.40 37.82 40.24
Discounted Dividend Analysis--Wachovia. Merrill Lynch also performed a
discounted dividend analysis to estimate a range of present values per share of
Wachovia common stock assuming Wachovia continued to operate as a stand-alone
entity. As was the analysis performed with regard to First Union, this range
was determined by adding (1) the present value of the estimated future dividend
stream that Wachovia could generate through December 31, 2006, and (2) the
present value of the terminal value of Wachovia common stock.
In calculating a terminal value of Wachovia common stock, Merrill Lynch
again applied multiples of 10.0x, 11.0x and 12.0x to year 2007 forecasted cash
earnings. These multiples were used to approximate current stock market trading
multiples for Wachovia. In performing this analysis, Merrill Lynch used First
Call earnings per share estimates for 2001 and 2002. As with the analysis
performed with regard to First Union, for periods after 2002, earnings per
share were assumed to increase at projected annual long-term earnings growth
rates of 8%, 9%, 10%, 11%, and 12%. These projected growth rates were used to
approximate current analyst
63
estimates of projected 5 year growth rates for Wachovia. The combined dividend
stream and terminal value were also then discounted back to March 31, 2001
using the same assumed 13% cost of equity that Merrill Lynch used in its
analysis for First Union, which rate Merrill Lynch also viewed as the
appropriate discount rate for a company with Wachovia's risk characteristics.
In performing this analysis, Merrill Lynch also assumed an annual asset
growth rate for Wachovia of 5.0%, and further assumed that earnings in excess
of those necessary to maintain Wachovia's tangible common equity ratio at 7.0%
could be paid out as dividends. Based on the foregoing criteria and
assumptions, Merrill Lynch determined that the stand-alone present value of the
Wachovia common stock ranged from $54.08 to $72.24 per share. This data
compared to the closing price of Wachovia's common stock of $60.20 on April 12,
2001, which value was within the range of values derived from the analysis
performed by Merrill Lynch. The results of Merrill Lynch's analysis are set
forth in the following table.
Terminal Year
Price/Cash
Earnings Multiple
-----------------
5-Year Earnings Growth Rate 10.0x 11.0x 12.0x
--------------------------- ----- ----- -----
8.0%...................................................... 54.08 57.96 61.85
9.0....................................................... 56.19 60.25 64.31
10.0....................................................... 58.38 62.62 66.86
11.0....................................................... 60.64 65.07 69.50
12.0....................................................... 62.97 67.60 72.24
The discounted dividend analyses of First Union and Wachovia do not
necessarily indicate actual values or actual future results and do not purport
to reflect the prices at which any securities may trade at the present or at
any time in the future. The discount rates applied to First Union and Wachovia
referred to in these paragraphs above were based on several factors, including
the financial advisor's knowledge of each of First Union and Wachovia and the
industry in which they operate, the business risk of each company and the
overall interest rate environment as of April 12, 2001. The asset growth rates
applied for First Union and Wachovia took into consideration several factors,
including the historical asset growth rate of each of First Union and Wachovia
as well as projected long-term growth rates. Dividend discount analysis is a
widely used valuation methodology, but the results of this methodology are
highly dependent upon the numerous assumptions that must be made, including
earnings growth rates, dividend payout rates, terminal values and discount
rates.
Pro Forma Financial Impact. Based on the 2-for-1 exchange ratio, Merrill
Lynch also analyzed the pro forma per share financial impact of the merger on
First Union's and Wachovia's cash earnings per share and GAAP earnings per
share. For purposes of this analysis, Merrill Lynch assumed the effectiveness
of certain anticipated modifications to GAAP that are expected to take effect
at the end of 2001. The anticipated modifications to GAAP assume that all new
and existing goodwill will cease being amortized and instead be reviewed for
impairment when an event or series of events occur indicating that goodwill
might be impaired. Merrill Lynch also analyzed the pro forma financial impact
of the merger on return on common equity, cash return on tangible common
equity, Tier 1 leverage, and tangible common equity to assets for the combined
entity. Merrill Lynch further analyzed the pro forma per share financial impact
of the merger on First Union's and Wachovia's dividend payment, book value, and
tangible book value. The analysis indicated that the impact of the merger would
be accretive, or additive, for both First Union and Wachovia on a cash and GAAP
earnings per share basis. The analysis further indicated that the merger would
be neutral to First Union's dividend payment and dilutive to, or decrease,
Wachovia's dividend payment, accretive to both First Union's and Wachovia's
book value per share, and dilutive to both First Union's and Wachovia's
tangible book value per share. The following table sets forth the results of
Merrill Lynch's analyses.
64
2002 2003 2004
---- ---- ----
Cash EPS Impact
First Union............................................... 3.7% 5.3% 7.1%
Wachovia.................................................. 15.2 17.4 19.8
GAAP EPS Impact
First Union............................................... 0.0% 2.5% 5.4%
Wachovia.................................................. 9.1 12.8 16.6
Key Ratios
Return on Common Equity................................... 14.5% 15.0% 15.4%
Cash Return on Tangible Common Equity..................... 25.5 24.1 23.0
Tier 1 Leverage........................................... 6.11% 6.65% 7.26%
Tangible Common Equity/Assets............................. 5.24 5.83 6.48
Per Share Impact at Closing First Union Wachovia
----------- --------
Dividend Impact..................................... 0% (20.00)%
Book Value Per Share................................ 17.72 17.19
Tangible Book Value Per Share....................... (16.04) (18.74)
The analysis was based on First Call earnings estimates for First Union and
Wachovia, and estimated pre-tax cost savings of $890 million realized
approximately 55% in 2002, 75% in 2003, and 100% in 2004. In analyzing the pro
forma financial impact of the merger, Merrill Lynch also assumed that there
would be an estimated one time, pre-tax restructuring charge of $1.45 billion,
or 163% of fully-realized synergies (with an associated additional $450 million
pre-tax credit related charge), and approximately $2 billion in deposit
divestitures (with associated foregone income of $30 million after-tax
annually).
Internal Rate of Return Analysis. Merrill Lynch also performed an internal
rate of return analysis for First Union based on the 2-for-1 exchange ratio. An
internal rate of return analysis measures the expected return on investment
and, with regard to the analysis performed by Merrill Lynch, took into account
the criteria and assumptions referenced below.
In performing this analysis, Merrill Lynch assumed, in addition to the
assumptions set forth in the immediately preceding paragraph, an annual asset
growth rate for the pro forma combined company of 5.0%. Merrill Lynch also
assumed cash inflows through December 31, 2006 were equal to earnings in excess
of those necessary to maintain the pro forma combined company's tangible common
equity ratio at 5.0% adjusted for First Union's estimated pro forma ownership
of the combined company. Merrill Lynch further assumed that the final cash
inflow in 2006 included a terminal value for the pro forma combined company
based on multiples of 11.0x and 12.0x 2007 forecasted cash earnings, also
adjusted for First Union's estimated pro forma ownership of the combined
company. Merrill Lynch further calculated that the initial cash outflow was
equal to First Union's contribution to the estimated pro forma market
capitalization of the combined company in addition to the estimated market
premium to Wachovia. Based on the foregoing criteria and assumptions, Merrill
Lynch estimated internal rates of return to First Union from 18.7% to 20.4%.
The actual operating and financial results achieved by the pro forma
combined company may vary from projected results and variations may be material
as a result of business and operational risks, and the timing, amount and costs
associated with achieving cost savings and revenue enhancements, if any, as
well as other factors.
First Union retained Merrill Lynch based upon its experience and expertise.
Merrill Lynch is an internationally recognized investment banking and advisory
firm. As part of its investment banking business, Merrill Lynch is regularly
engaged in the valuation of businesses and securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes.
65
In addition, in the ordinary course of its business, Merrill Lynch and its
affiliates may actively trade the debt and equity securities of First Union and
its affiliates and Wachovia and its affiliates for their own account and/or the
accounts of their respective customers, and, accordingly, may at any time hold
long or short positions in these securities. As of June 12, 2001, Merrill Lynch
held through its retail brokerage accounts 36,945,735 shares of First Union
common stock and 5,315,361 shares of Wachovia common stock. Merrill Lynch does
not hold any of these shares as principal, which means that the voting and
disposition power generally is held by the retail owner of the shares. In the
past two years, Merrill Lynch has provided to First Union and Wachovia
financial advisory, investment banking and other services unrelated to the
proposed merger, for which services Merrill Lynch has received fees. Merrill
Lynch may provide these types of services to the combined company in the future
and receive fees for those services.
Pursuant to a letter agreement between First Union and Merrill Lynch, dated
as of April 9, 2001, First Union agreed to pay Merrill Lynch for financial
advisory services rendered through the closing of the merger (1) a fee of $5
million upon the execution of the letter agreement, and (2) a fee of $15
million payable in cash upon the closing of the merger. First Union also
agreed, among other things, to reimburse Merrill Lynch for certain expenses
incurred in connection with the services provided by Merrill Lynch, and to
indemnify Merrill Lynch and its affiliates from and against certain liabilities
and expenses, which may include certain liabilities under federal securities
laws, in connection with its engagement.
Opinion of Wachovia's Financial Advisors
Credit Suisse First Boston
Credit Suisse First Boston has acted as Wachovia's lead financial advisor in
connection with the merger. Wachovia selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation. Credit
Suisse First Boston is an internationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with Credit Suisse First Boston's engagement, Wachovia
requested that Credit Suisse First Boston evaluate the fairness, from a
financial point of view, to the holders of Wachovia common stock of the
exchange ratio provided for in the First Union/Wachovia merger. On April 15,
2001, at a meeting of Wachovia's board of directors, Credit Suisse First Boston
rendered to Wachovia's board an oral opinion, which opinion was confirmed by
delivery of a written opinion dated April 15, 2001, the date of the merger
agreement, to the effect that, as of that date and based on and subject to the
matters described in its opinion, the exchange ratio was fair, from a financial
point of view, to the holders of Wachovia's common stock. On May 22, 2001, at a
meeting of Wachovia's board of directors, Credit Suisse First Boston rendered
to Wachovia's board an oral opinion, which opinion was confirmed by delivery of
a written opinion dated May 22, 2001, to the effect that, as of that date and
based on and subject to the matters described in its opinion, the exchange
ratio was fair, from a financial point of view, to the holders of Wachovia
common stock. Credit Suisse First Boston has confirmed its opinion dated May
22, 2001 by delivery of a written opinion dated the date of this joint proxy
statement-prospectus. In connection with its opinion dated the date of this
joint proxy statement-prospectus, Credit Suisse First Boston updated the
analyses performed in connection with its earlier opinion and reviewed the
assumptions on which the analyses were based and the factors considered in
connection with its opinion.
The full text of Credit Suisse First Boston's written opinion, dated the
date of this joint proxy statement-prospectus, to Wachovia's board of
directors, which sets forth the procedures followed, assumptions made, matters
considered and limitations on the review undertaken, is attached as Appendix E
and is incorporated into this document by reference. Holders of Wachovia common
stock are urged to, and should, read this opinion carefully and in its
entirety. Credit Suisse First Boston's opinion is addressed to Wachovia's board
of directors and relates only to the fairness of the exchange ratio from a
financial point of view, does not address any other aspect of the proposed
merger or any related
66
transaction and does not constitute a recommendation to any shareholder as to
the form of consideration the shareholder should elect to receive or as to any
matters relating to the First Union/Wachovia merger. The summary of Credit
Suisse First Boston's opinion in this document is qualified in its entirety by
reference to the full text of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed publicly
available business and financial information relating to Wachovia and First
Union, as well as the merger agreement and related documents. Credit Suisse
First Boston also reviewed other information relating to Wachovia and First
Union provided to or discussed with Credit Suisse First Boston by Wachovia and
First Union, including publicly available financial forecasts for Wachovia and
First Union, and met with the managements of Wachovia and First Union to
discuss the businesses and prospects of Wachovia and First Union. Credit Suisse
First Boston also considered financial and stock market data of Wachovia and
First Union, and compared that data with similar data for other publicly held
companies in businesses similar to Wachovia and First Union and considered, to
the extent publicly available, the financial terms of other business
combinations and transactions that have been effected. Credit Suisse First
Boston also considered other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant. Credit Suisse First Boston also considered the views of Wachovia's
and First Union's managements concerning the business, operational and
strategic benefits and implications of the merger, including financial
forecasts provided to Credit Suisse First Boston by Wachovia and First Union
relating to the synergistic values and operating cost savings expected to be
achieved through the combination of the operations of Wachovia and First Union.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. Credit Suisse First Boston
reviewed and discussed with the managements of Wachovia and First Union
publicly available financial forecasts relating to Wachovia and First Union and
was advised, and assumed, that the forecasts represent reasonable estimates and
judgments as to the future financial performance of Wachovia and First Union.
In addition, Credit Suisse First Boston relied, without independent
verification, upon the estimates and judgments of the managements of Wachovia
and First Union as to the potential cost savings and other potential synergies,
including the amount, timing and achievability of those cost savings and
synergies, anticipated to result from the merger. Wachovia also advised Credit
Suisse First Boston, and Credit Suisse First Boston assumed, that the merger
would be treated as a tax-free reorganization for federal income tax purposes.
Credit Suisse First Boston assumed, with Wachovia's consent, that in the course
of obtaining the necessary regulatory and third party approvals and consents
for the merger, no modification, delay, limitation, restriction or condition
would be imposed that would have a material adverse effect on the expected
benefits of the merger. Wachovia also advised Credit Suisse First Boston, and
Credit Suisse First Boston assumed, that the merger would be consummated in
accordance with the terms of the merger agreement, without waiver, amendment or
modification of any material term, condition or agreement contained in the
merger agreement.
Credit Suisse First Boston was not requested to conduct, and did not
conduct, a review of individual credit files or make an independent evaluation
or appraisal of the assets or liabilities (contingent or otherwise) of Wachovia
or First Union, nor was Credit Suisse First Boston furnished with any
evaluations or appraisals, including loan or lease portfolios or the allowances
for losses with respect to loan or lease portfolios, and Credit Suisse First
Boston was advised and therefore assumed that allowances for losses with
respect to loan or lease portfolios for Wachovia and First Union, as adjusted
in connection with the merger, will be in the aggregate adequate to cover the
losses with respect to loan or lease portfolios. Credit Suisse First Boston's
opinion did not address the relative merits of the merger as compared to other
business strategies that may be available to Wachovia (including but not
limited to any proposal received from SunTrust) or the effect of any other
transaction in which Wachovia might engage, nor did it address the underlying
business decision of Wachovia to engage in the First Union/Wachovia merger.
Credit Suisse First Boston's opinion was necessarily based upon information
available to it, and financial, economic, market and other conditions as they
existed and could be evaluated on the date of the Credit Suisse First Boston
opinion. In connection with its engagement,
67
Credit Suisse First Boston was not requested to, and did not, solicit third
party indications of interest in the possible acquisition of all or a part of
Wachovia. Credit Suisse First Boston did not express any opinion as to the
actual value of First Union common stock or the DEPs when issued pursuant to
the First Union/Wachovia merger or the prices at which First Union common stock
or the DEPs would trade at any time.
Although Credit Suisse First Boston evaluated the exchange ratio from a
financial point of view, Credit Suisse First Boston was not requested to, and
did not, recommend the specific consideration payable in the First
Union/Wachovia merger, which consideration was determined between Wachovia and
First Union. Wachovia's board of directors imposed no other limitations on
Credit Suisse First Boston with respect to investigations made or procedures
followed in rendering its opinion.
In preparing its opinion to Wachovia's board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below performed by Credit Suisse First Boston in
connection with its opinion dated May 22, 2001. The summary of Credit Suisse
First Boston's analyses described below is not a complete description of the
analyses underlying Credit Suisse First Boston's opinion. The preparation of a
fairness opinion is a complex analytical process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances,
and, therefore, a fairness opinion is not readily susceptible to summary
description. In arriving at its opinion, Credit Suisse First Boston made
qualitative judgments as to the significance and relevance of each analysis and
factor that it considered. Credit Suisse First Boston arrived at its ultimate
opinion based on the results of all of the analyses undertaken by it and
assessed as a whole. Credit Suisse First Boston did not draw, in isolation,
conclusions from or with regard to any one factor or method of analysis.
Rather, Credit Suisse First Boston believed that the totality of the factors
considered and analyses performed by Credit Suisse First Boston in connection
with its opinion operated collectively to support its determination as to the
fairness to the holders of Wachovia common stock of the exchange ratio in the
merger from a financial point of view. Accordingly, Credit Suisse First Boston
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors or focusing on information presented in
tabular format, without considering all analyses and factors or the narrative
description of the analyses, could create a misleading or incomplete view of
the processes underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Wachovia and First
Union. No company, transaction or business used in Credit Suisse First Boston's
analyses as a comparison is identical to Wachovia or First Union or the
proposed First Union/Wachovia merger, and an evaluation of the results of those
analyses is not entirely mathematical. Rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions being analyzed.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one of
many factors considered by Wachovia's board of directors in its evaluation of
the proposed First Union/Wachovia merger and should not be viewed as
determinative of the views of Wachovia's board of directors or management with
respect to the First Union/Wachovia merger or the exchange ratio.
The following is a summary of the material financial analyses underlying
Credit Suisse First Boston's opinion dated May 22, 2001 delivered to Wachovia's
board of directors in connection with the merger. The financial analyses
summarized below include information presented in tabular format. In order to
fully understand Credit Suisse First Boston's financial analyses, the tables
must be read together with the text
68
of each summary. The tables alone do not constitute a complete description of
the financial analyses. Considering the data in the tables below without
considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of Credit Suisse First Boston's financial
analyses.
Exchange Ratio Analysis. Credit Suisse First Boston reviewed the ratio of
the closing price of Wachovia common stock divided by the closing price of
First Union common stock on April 12, 2001, the last day of trading before
public announcement of the First Union/Wachovia merger, referred to as the
current market, and the average of this ratio computed over various periods
ended April 12, 2001. Credit Suisse First Boston then calculated the fully
diluted ownership of Wachovia's shareholders in the combined company implied by
the current market and the average of the ratios over these various periods.
This analysis indicated a range of average exchange ratios of 1.791x to
1.973x over the various periods as compared to the 2.0 exchange ratio in the
First Union/Wachovia merger, as indicated in the following table:
Implied Wachovia
Average Exchange Fully Diluted
Period Prior to April 12, 2001 Ratio Over Period Ownership Percentage
------------------------------ ----------------- --------------------
Current market........................ 1.886x 26%
5 day average......................... 1.865x 26%
30 day average........................ 1.867x 26%
90 day average........................ 1.973x 27%
1 year average........................ 1.963x 27%
2 year average........................ 1.932x 27%
3 year average........................ 1.791x 25%
Contribution Analysis. Credit Suisse First Boston computed the relative
contributions of Wachovia and First Union to the net loans, total assets, and
total deposits as of December 31, 2000, and common equity and tangible common
equity as of March 31, 2001, estimated net income for calendar years 2001 and
2002 and market values for various periods ending April 12, 2001, of the
combined company. Estimated financial data for Wachovia and First Union was
based on research analysts' estimates adjusted, in the case of Wachovia, for
the acquisition of Republic Security Financial Corp., the sale of Wachovia's
credit card business and the use of proceeds from the sale for share
repurchase, and in the case of First Union, for the divestiture of deposits in
certain branches which was pending December 31, 2000. Credit Suisse First
Boston then computed the pro forma ownership of Wachovia's and First Union's
shareholders in the combined company implied by each company's relative
contribution, the resulting implied exchange ratios and the premium/(discount)
implied by the 2.0 exchange ratio in the First Union/Wachovia merger.
69
This analysis indicated a range of pro forma ownership of Wachovia's
shareholders in the combined company of 22.1% to 29.7% as compared to 27.1% in
the First Union/Wachovia merger and a range of implied exchange ratios of 1.50x
to 2.24x as compared to the 2.0 exchange ratio in the First Union/Wachovia
merger, as indicated in the following table:
Implied
----------------
Wachovia First Union Exchange
% % Ratio Premium
-------- ----------- -------- -------
Loans, Net............................. 29.7% 70.3% 2.24x 12%
Total Assets........................... 22.1 77.9 1.50 (25)
Total Deposits......................... 24.6 75.4 1.72 (14)
Common Equity.......................... 27.3 72.7 2.02 1
Tangible Common Equity................. 28.0 72.0 2.09 4
2001E Net Income--GAAP................. 26.1% 73.9% 1.90x (5)%
2002E Net Income--GAAP................. 26.1 73.9 1.90 (5)
2001E Net Income--Cash................. 25.3 74.7 1.82 (9)
2002E Net Income--Cash................. 25.4 74.6 1.83 (9)
4/12/2001 Market Value................. 26.3% 73.7% 1.89x (5)%
5 Day Average Market Value............. 26.1 73.9 1.87 (6)
30 Day Average Market Value............ 26.1 73.9 1.87 (6)
90 Day Average Market Value............ 27.2 72.8 1.97 (2)
Ownership.............................. 27.1 72.9 2.00 --
Credit Suisse First Boston also noted that the exchange ratio implied by the
various operational metrics represented a range of premiums/(discounts) of
approximately (25%) to 12% to the 2.0 exchange ratio in the First
Union/Wachovia merger, as indicated in the above table.
Comparable Companies Trading Multiples Comparison. Credit Suisse First
Boston compared financial, operating and stock market data of Wachovia, First
Union and the following 8 publicly traded companies in the commercial banking
industry:
. Bank of America Corp.
. Bank One Corporation
. BB&T Corp.
. FleetBoston Financial Corporation
. National City Corporation
. PNC Financial Services Group Inc.
. U.S. Bancorp
. Wells Fargo & Company
Credit Suisse First Boston compared stock prices as a multiple of estimated
calendar years 2001 and 2002 earnings per share and as a multiple of book and
tangible book values per share for the quarter ended March 31, 2001. Credit
Suisse First Boston also compared the returns on assets, the returns on equity,
net interest margins and efficiency ratios for the quarter ended December 31,
2000. All multiples were based on closing stock prices on May 18, 2001.
Estimated financial data for Wachovia, First Union and the selected banking
industry companies were based on research analysts' estimates adjusted, in the
case of Wachovia, for the acquisition of Republic Security Financial Corp., the
sale of Wachovia's credit card business and the use of proceeds from the sale
for share repurchase, and in the case of First Union, for the divestiture of
deposits in certain branches pending as of December 31, 2000, and in the case
of FleetBoston Financial Corporation and U.S. Bancorp, for then pending
acquisitions.
70
The multiples for Wachovia and First Union relative to the average multiples
for the selected banking industry companies were as follows:
Selected
First Companies
Wachovia Union Average
-------- ----- ---------
Price to:
2001E EPS......................................... 12.0x 11.9x 13.8x
2002E EPS......................................... 12.1 10.9 12.3
Book Value........................................ 1.97 1.88 2.61
Tangible Book Value............................... 2.47 2.44 3.69
ROA................................................. 1.27% 1.14% --
ROE................................................. 15.8 18.4 --
Net Interest Margin................................. 3.10 3.47 --
Efficiency Ratio.................................... 59.8 64.4 --
The above data was reviewed with the Wachovia board of directors not for
comparative purposes with respect to the 2.0 exchange ratio in the First
Union/Wachovia merger, but rather for informational purposes.
Discounted Cash Flow Analysis. Credit Suisse First Boston performed a
discounted cash flow analysis of Wachovia and First Union using an equity
dividend discount model, which is a valuation model that arrives at a common
stock valuation by calculating the present value of future dividends that
Wachovia and First Union could generate for fiscal years 2001 through 2006,
based on research analysts' estimates adjusted, in the case of Wachovia, for
the acquisition of Republic Security Financial Corp., the sale of Wachovia's
credit card business and the use of proceeds from the sale for share
repurchase, and in the case of First Union, for the divestiture of deposits in
certain branches pending December 31, 2000. Credit Suisse First Boston
calculated a range of estimated terminal values by applying multiples ranging
from 10.0x to 12.0x, based on comparable companies trading ranges, Wachovia's
and First Union's projected fiscal year 2006 net income. "Present value" means
the current value of future cash flows obtained by discounting such future cash
flows by a rate that takes into account risk, the opportunity cost of capital,
expected returns and other appropriate factors. The present value of the excess
equity and terminal values, which is equivalent to the projected 2006 value per
share, were calculated using a discount rate of 11.0%, which Credit Suisse
First Boston viewed as the appropriate discount rate for Wachovia's and First
Union's risk characteristics, and a target tangible leverage ratio of 7.5% for
Wachovia and 6.0% for First Union. "Tangible leverage ratio" refers to common
stockholders' equity minus all intangibles divided by total assets minus all
intangibles.
This analysis indicated an implied per share equity reference range for
Wachovia of approximately $59.47 to $67.29, as compared to the closing price of
Wachovia common stock on April 12, 2001, the last trading day before public
announcement of the First Union/Wachovia merger, of $60.20, as indicated in the
following table. This analysis indicated an implied per share equity reference
range for First Union of approximately $30.48 to $34.64 as compared to the
closing price of First Union common stock on April 12, 2001 of $31.92, as
indicated in the following table.
Implied Per Share Equity Value
Reference Range Based on an 11%
Discount Rate
--------------------------------
April 12, 2001 Price 10.0x 11.0x 12.0x
-------------------- ---------- ---------- ----------
Wachovia.............. $60.20 $ 59.47 $ 63.38 $ 67.29
First Union........... $31.92 $ 30.48 $ 32.56 $ 34.64
Precedent Transaction Analysis. Credit Suisse First Boston reviewed 7 merger
transactions since 1994 involving companies in the commercial banking industry.
Credit Suisse First Boston calculated the premium of the exchange ratio in the
selected transactions to the ratio of the average stock price for the parties
in the selected transactions over the one week period prior to the announcement
of the transaction and calculated the resulting ownership percentages of the
constituent shareholders in the combined company. Credit Suisse First Boston
then compared the results of this analysis to corresponding data for the First
Union/Wachovia merger.
71
This indicated a range of premiums/(discounts) in the selected merger
transactions of approximately (2%) to 21% as compared to the implied premium
for Wachovia common stock of 6% based on the 2.0 exchange ratio in the First
Union/Wachovia merger and the closing price of Wachovia common stock on April
12, 2001, as indicated in the following table:
Smaller
Board Co. Gets
Announce Market Ownership Composition CEO
Date Premium (%) (%) Position Name Headquarters
-------- ------- --------- ----------- -------- ----------------- -------------
First Union/Wachovia.... 4/01 6% 73%/27% 50/50 No Wachovia Charlotte
Corporation
Fleet Financial Group
Inc./BankBoston
Corporation............ 3/99 21 60/40 55/45 No FleetBoston Boston
Financial
Corporation
Wells Fargo & Company/
Norwest Corp. ......... 6/98 9 53/47 50/50 Yes Wells Fargo & San Francisco
Company
NationsBank Corp./
BankAmerica Corp. ..... 4/98 (2) 55/45 55/45 No Bank of America Charlotte
Corp.
Banc One Corp./First
Chicago NBD
Corporation............ 4/98 11 58/42 50/50 No Bank One Chicago
Corporation
Travelers Group Inc./
Citicorp............... 4/98 10 50/50 50/50 Co-CEO Citigroup Inc. New York
Chemical Banking Corp./
The Chase Manhattan
Corporation............ 8/95 8 57/43 57/43 No The Chase New York
Manhattan
Corporation
First Chicago Corp./
NBD Bancorp, Inc. ..... 7/95 (2) 51/49 50/50 Yes First Chicago NBD Chicago
Corporation
As indicated in the table above, Credit Suisse First Boston also reviewed
the selected transactions with respect to the composition of the board of
directors of the combined company, the affiliation of the chief executive
officer of the combined company, the name of the combined company and the
headquarters of the combined company. This data was reviewed with the Wachovia
board of directors not for comparative purposes with respect to the 2.0
exchange ratio in the First Union/Wachovia merger, but rather for informational
purposes.
Merger Consequences. Credit Suisse First Boston analyzed the potential pro
forma effect of the First Union/Wachovia merger on Wachovia's and First Union's
estimated earnings per share for calendar years 2002 through 2004, based on
research analysts' estimates and incorporating the impact of potential
synergies and anticipated deposit divestitures. This analysis was based on
estimated cost savings of $825 million and a straight-line amortization of core
deposit intangibles. Based on the 2.0 exchange ratio and under anticipated
modifications to GAAP (the modifications are expected to take effect at the end
of 2001 and it is assumed that after the modifications become effective all new
and existing goodwill will cease being amortized and instead be reviewed for
impairment when an event or series of events occur indicating that goodwill
might be impaired), this analysis indicated that, except in the case of First
Union's estimated earnings per share in calendar year 2002, the First
Union/Wachovia merger could be accretive to Wachovia's and First Union's GAAP
and cash earnings per share in each of the years analyzed, as indicated in the
following table:
2002 2003 2004
---- ---- ----
Impact to Wachovia:
Accretion/(Dilution)--proposed GAAP..................... 9.7% 12.2% 14.4%
Accretion/(Dilution)--CASH.............................. 14.4 16.4 18.3
Impact to First Union:
Accretion/(Dilution)--proposed GAAP..................... (1.7)% 0.9% 3.1%
Accretion/(Dilution)--CASH.............................. 2.5 4.7 6.6
72
The actual results achieved by the combined company may vary from projected
results and the variation may be material.
Miscellaneous. Wachovia has agreed to pay Credit Suisse First Boston for
its financial advisory services in connection with the First Union/Wachovia
merger an aggregate fee of $30 million, $20 million of which is payable upon
consummation of the merger. Wachovia also has agreed to reimburse Credit
Suisse First Boston for its out-of-pocket expenses, including reasonable fees
and expenses of legal counsel and any other advisor retained by Credit Suisse
First Boston, and to indemnify Credit Suisse First Boston and related parties
against liabilities, including liabilities under the federal securities laws,
arising out of its engagement.
Credit Suisse First Boston and its affiliates in the past have provided,
and may in the future provide, investment banking and financial services to
Wachovia and First Union unrelated to the First Union/Wachovia merger, for
which services Credit Suisse First Boston and its affiliates have received,
and expect to receive, compensation. In the ordinary course of business,
Credit Suisse First Boston and its affiliates may actively trade the debt and
equity securities of Wachovia and First Union for their own accounts and for
the accounts of customers and, accordingly, may at any time hold long or short
positions in those securities.
Goldman Sachs
Goldman Sachs was retained to act as financial advisor to Wachovia in
connection with the merger. At a meeting of Wachovia's board held on May 22,
2001, Goldman Sachs rendered its oral opinion, which was subsequently
confirmed in writing, to the effect that, based upon and subject to the
considerations set forth in the opinion and based upon such other matters as
Goldman Sachs considered relevant, as of May 22, 2001, the exchange ratio
pursuant to the merger agreement was fair from a financial point of view to
the holders of Wachovia common stock. Goldman Sachs also noted that, pursuant
to the merger agreement, each holder of Wachovia common stock will receive at
the option of each holder either a cash payment of $0.48 for each share of
Wachovia common stock or two dividend equalization preferred shares, or DEPs,
of First Union for each share of Wachovia common stock. Goldman Sachs has
delivered to Wachovia's board a substantially identical written opinion dated
the date of this joint proxy statement-prospectus, confirming its opinion
dated May 22, 2001.
You should consider the following when reading the discussion of the
opinion of Goldman Sachs below:
. We urge you to read carefully the entire opinion of Goldman Sachs, which
is contained in Appendix F of this document and is incorporated by
reference. The description of Goldman Sachs' opinion set forth below is
qualified in its entirety by reference to the entire opinion.
. Goldman Sachs' advisory services and its opinion were provided for the
information and assistance of Wachovia's board in connection with its
consideration of the merger.
. Goldman Sachs' opinion does not constitute a recommendation as to how any
holder of Wachovia common stock should vote with respect to the merger or
what election any holder should make as to whether to receive the cash
payment or the DEPs pursuant to the transaction.
. Goldman Sachs' opinion does not address the relative merits of the merger
as compared to any alternative business transaction that might be
available to Wachovia, nor does it address the underlying business
decision of Wachovia to engage in the merger. In particular, Goldman
Sachs was not requested to and did not render an opinion concerning the
fairness from a financial point of view of the SunTrust proposal.
In arriving at its opinion, Goldman Sachs:
. reviewed the merger agreement;
. reviewed the registration statement on Form S-4 of First Union, as filed
with the SEC;
. reviewed the Annual Reports to shareholders and Annual Reports on Form
10-K of Wachovia and First Union for the five years ended December 31,
2000;
73
. reviewed certain interim reports to shareholders and Quarterly Reports on
Form 10-Q of Wachovia and First Union; and
. reviewed certain other communications from Wachovia and First Union to
their respective shareholders.
Goldman Sachs also held discussions with members of the senior managements
of Wachovia and First Union regarding their assessment of the strategic
rationale for, and the potential benefits of, the transaction contemplated by
the merger agreement and the past and current business operations, financial
condition and future prospects of their respective companies. In addition,
Goldman Sachs:
. examined certain internal financial analyses and forecasts for Wachovia
and First Union prepared by their respective managements, including
certain cost savings, operating synergies, and the impact of certain
divestitures projected by the managements of First Union and Wachovia to
result from the proposed merger;
. reviewed the letter dated May 14, 2001 from SunTrust to Wachovia with
respect to a possible transaction between SunTrust and Wachovia and
related public filings of SunTrust;
. reviewed the reported price and trading activity for Wachovia common
stock and First Union common stock;
. compared certain financial and stock market information for Wachovia and
First Union with similar information for certain other companies the
securities of which are publicly traded;
. reviewed the financial terms of certain recent business combinations in
the commercial banking industry specifically and in other industries
generally; and
. performed such studies and analyses as Goldman Sachs considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting and other information discussed with or reviewed by it
and assumed such accuracy and completeness for purposes of rendering its
opinion. In that regard, Goldman Sachs assumed that the internal financial
analyses and forecasts for Wachovia and First Union prepared by their
respective managements as well as the cost savings, operating synergies and the
impact of certain divestitures projected by the managements of Wachovia and
First Union to result from the merger were reasonably prepared on a basis
reflecting the best currently available judgments and estimates of the
managements of Wachovia and First Union, and that these forecasts and synergies
will be realized in the amounts and at the times contemplated.
Goldman Sachs is not an expert in the evaluation of loan and lease
portfolios for purposes of assessing the adequacy of the allowances for losses
with respect to loan and lease portfolios and has assumed, with the consent of
Wachovia's board, that such allowances for Wachovia and First Union (which take
into account adjustments of such allowances in connection with the merger) are
each in the aggregate adequate to cover all such losses with respect to loan
and lease portfolios. In addition, Goldman Sachs did not review individual
credit files nor did it make an independent evaluation or appraisal of the
assets and liabilities (including any hedge or derivative positions) of
Wachovia and First Union and it was not furnished with any such evaluation or
appraisal of those assets and liabilities. Goldman Sachs also assumed that all
material governmental, regulatory or other consents and approvals necessary for
the completion of the transaction contemplated by the merger agreement will be
obtained without any adverse effect on Wachovia or First Union or on the
expected benefits of the transaction contemplated by the merger agreement.
Goldman Sachs was not requested to solicit, and did not solicit, interest from
other parties with respect to an acquisition of or a business combination with
Wachovia.
The following is a summary of the material analyses performed by Goldman
Sachs in arriving at its opinion as presented at the May 22, 2001 Wachovia
board meeting, and does not purport to be a complete description of the
analyses performed by Goldman Sachs. Unless otherwise indicated, the following
quantitative information, to the extent it is based on market data, is based on
market data as it existed at or
74
prior to May 18, 2001, the second-to-last trading day prior to the date on
which Goldman Sachs made its presentation to Wachovia's board, and is not
necessarily indicative of current or future market conditions. You should
understand that the order of analyses, and results of those analyses, described
below is not intended to indicate any relative importance given to those
analyses by Goldman Sachs. The following summaries of financial analyses
include information presented in tabular format. You should read these tables
together with the text of each summary. Goldman Sachs has reviewed and
consented to the inclusion of the disclosure relating to its fairness opinion
that follows.
Precedent Transactions Analysis. Goldman Sachs analyzed publicly available
financial, operating and stock market information for six selected comparable
"merger-of-equal" transactions in the commercial banking industry, including:
. Fleet/BankBoston
. Wells Fargo/Norwest
. Banc One/First Chicago NBD
. NationsBank/BankAmerica
. Travelers/Citicorp
. Chemical/Chase
Goldman Sachs calculated the premium to the stock price for the last trading
day prior to the announcement of the transaction implied by the exchange ratio
for the precedent transaction, the price-to-earnings (or P/E) multiples of the
constituent corporations based on the market price for the stock as of the last
trading day prior to the announcement of the transaction and the estimated
earnings as of the year of the announcement and the resulting ownership
percentages of the constituent shareholders in the combined company. Goldman
Sachs then compared the results of this analysis to corresponding data for the
First Union/Wachovia merger and, with respect to calculating P/E ratios for
Wachovia and First Union, relied on median 2001 earnings-per-share (or EPS)
estimates of $2.58 for First Union and $4.82 for Wachovia as published by First
Call Corporation (which publishes summaries of financial forecasts made by
various investment banking firms). Goldman Sachs also reviewed certain non-
financial terms of the precedent transactions, including a review of the
respective affiliations of the chairman and chief executive officer of the
combined company, the composition of the board of directors of the combined
company and the name of the combined company.
The results of these analyses and reviews are summarized in the following
table:
First Banc One/
Union/ Fleet/ Wells Fargo/ First Chicago NationsBank/ Travelers/ Chemical/
Wachovia BankBoston Norwest NBD BankAmerica Citicorp Chase
----------- ----------- -------------- ------------- --------------- ---------- ---------
Premium to 6% to 13% to 7.3% to 6.4% to At market 8% to 7% to
Market Wachovia BankBoston Wells Fargo First Chicago Citicorp Chase
(30 day
average price)
P/E Ratios 12.4x/12.5x 15.6x/14.7x 23.9x/20x 16.9x/17.7x 16.4x/17.7x 19x/15.2x 8.8x/9.6x
Pro Forma 72.5%/27.5% 62%/38% 53%/47% 60%/40% 55%/45% 50%/50% 58%/42%
Ownership
Chairman/ Chairman-- Chairman Chairman-- Chairman-- Chairman-- Co-CEOs-- Chairman
CEO Wachovia; & CEO-- Wells Fargo; First NationsBank; Travelers, & CEO--
Arrangements Pres. & Fleet; Pres. & Chicago Pres. & Citicorp Chemical;
CEO-- Pres. & CEO-- NBD; CEO-- Pres. &
First Union COO-- Norwest Pres. & BankAmerica CEO--
BankBoston CEO-- CMB
Banc One
Board of 50%/50% 55%/45% 50%/50% 50%/50% 55%/45% 50%/50% 56%/44%
Directors
Name Wachovia Fleet Wells Fargo Bank One Bank of America Citigroup Chase
75
As set forth in the above table, the premium-to-market in the selected
precedent transactions ranged from 0% to 13% and the 6% premium-to-market for
Wachovia shareholders was within this range.
Contribution Analysis. Goldman Sachs calculated the relative contributions
of Wachovia and First Union to the net loans, total assets, total deposits,
common equity, tangible common equity and estimated 2001 and 2002 net income of
the pro forma combined company on both a "GAAP" basis and a "cash" basis (as
described below). Estimated financial data for Wachovia and First Union were as
of December 31, 2001, adjusted, in the case of Wachovia, for the acquisition of
Republic Security Financial Corp., the sale of Wachovia's credit card business
and the use of proceeds from the sale for share repurchase, and in the case of
First Union, for the pending divestiture of deposits in certain branches. "GAAP
income" is computed in accordance with generally accepted accounting
principles. "Cash income" adds back amortization of any intangibles. Goldman
Sachs then determined the exchange ratio that would be required to equate pro
forma ownership in a combined Wachovia/First Union company with each
constituent company's contribution with respect to the particular financial
criteria. Goldman Sachs also compared each pro forma exchange ratio to the
exchange ratio of two shares of First Union common stock for each share of
Wachovia common stock pursuant to the merger agreement. The results of Goldman
Sachs' analysis are set forth in the following table:
Wachovia First Union
------------------ ------------------ Pro Forma
$ $ Exchange
(in millions) % (in millions) % Ratio
------------- ---- ------------- ---- ---------
% Ownership Based on 2.0
Exchange Ratio............... 27.5 72.5 2.00x
Net Loans..................... 51,531 29.7 121,788 70.3 2.24x
Total Assets.................. 71,885 22.1 253,728 77.9 1.5
Total Deposits................ 46,294 24.6 142,168 75.4 1.72
Common Equity................. 5,855 27.6 15,382 72.4 2.01
Tangible Common Equity........ 4,625 28.3 11,718 71.7 2.09
2001E Net Income--GAAP........ 896 26 2,545 74 1.86
2001E Net Income--Cash........ 970 25.3 2,865 74.7 1.79
2002E Net Income--GAAP........ 981 26 2,790 74 1.86
2002E Net Income--Cash........ 1,056 25.3 3,110 74.7 1.79
As set forth in the above table, the pro forma exchange ratios implied by
the contributions of each company to each of the financial categories set forth
above ranged from 1.5x to 2.24x and the exchange ratio of 2.0 shares of First
Union common stock for each share of Wachovia common stock was within this
range.
Comparable Companies Analysis. Goldman Sachs reviewed and compared certain
financial information as well as capital and profitability ratios of Wachovia
and First Union with eleven selected U.S. super-regional banks, including:
. Bank of America
. Wells Fargo
. Bank One
. FleetBoston Financial Corporation
. U.S. Bancorp
. Fifth Third Bancorp
. PNC Bank Corp.
. SunTrust Banks, Inc.
. National City
. BB&T Corporation
. Key Corp
76
The financial data used were for the latest 12 months (or LTM) ended March 31,
2001 and pro forma for recent acquisitions, and the market data and earnings
and projected growth rates estimates, as reported by the Institutional
Brokerage Estimate System (a data service that compiles earnings estimates of
securities research analysts), were as of May 15, 2001.
The following table compares information derived by Goldman Sachs with
respect to Wachovia and First Union and the median figures indicated for the
comparable peer group of selected super-regional banks.
Median for
selected
First super-regional
Wachovia Union banks
-------- ----- --------------
P/E, based on estimated 2001 EPS 13.6x 11.9x 12.9x
P/E, based on estimated 2002 EPS 12.1x 10.7x 11.8x
P/E, based on estimated 2001 cash EPS 12.4x 10.5x 12.6x
P/E, based on estimated 2002 cash EPS 11.2x 9.6x 11.6x
Projected five-year growth rate 10% 10% 10.1%
P/E, based on estimated 2002 EPS, to
projected growth rate 1.2x 1.1x 1.2x
As set forth in the above table, Wachovia's P/E multiples based on estimated
2001 EPS and 2002 EPS were above the median ratio for the peer group, P/E
multiples based on estimated 2001 cash EPS and 2002 cash EPS were below the
median ratios for the peer group, projected five-year growth rate was below the
median rate for the peer group and ratio of P/E multiple, based on estimated
2002 EPS, to projected growth rate was equal to the median ratio for the peer
group. First Union's ratios for these same financial criteria were below the
median ratios for the peer group.
Accretion/Dilution Analysis. Goldman Sachs prepared pro forma analyses of
the financial impact of the merger on Wachovia's and First Union's EPS using
estimates provided by Wachovia's and First Union's respective managements
regarding projected earnings, after-tax synergies, core deposit amortization
and the impact of certain anticipated divestitures. Goldman Sachs compared the
EPS on a proposed GAAP basis and a cash basis of Wachovia and First Union as
stand-alone entities to that of the combined Wachovia/First Union company on a
pro forma basis for 2002, 2003 and 2004. For purposes of this analysis, Goldman
Sachs assumed the effectiveness of certain anticipated modifications that are
expected to take effect at the end of 2001. The anticipated modifications to
GAAP assume that all new and existing goodwill will cease being amortized and
instead be reviewed for impairment when an event or series of events occur
indicating that goodwill might be impaired. The results of Goldman Sachs'
analysis are set forth in the following table:
2002 2003 2004
---- ---- ----
Wachovia
--------
Accretion/(Dilution)-- 5.8% 9.5% 13.7%
Proposed GAAP
Accretion/(Dilution)-- 15.3% 17.1% 19.1%
Cash
2002 2003 2004
---- ---- ----
First Union
-----------
Accretion/(Dilution)-- (2.2)% 1.1% 4.2%
Proposed GAAP
Accretion/(Dilution)-- 3.4% 5.4% 7.5%
Cash
77
Based on this analysis and the assumptions described above, the above table
indicates that the proposed merger was accretive to Wachovia's EPS on a GAAP
basis in 2002, 2003 and 2004, accretive to Wachovia's EPS on a cash basis in
2002, 2003 and 2004, slightly dilutive to First Union's EPS on a GAAP basis in
2002 and accretive to First Union's EPS on a GAAP basis in 2003 and 2004.
Comparative Discounted Cash Flow Analysis. Goldman Sachs performed a
comparative discounted cash flow analysis to generate a range of estimated
present values per share of (1) Wachovia common stock assuming Wachovia
continued to operate as a stand-alone company and (2) the common stock of a
combined Wachovia/First Union company. This range was determined in each case
by adding, respectively, (1) the "present value" of the estimated future excess
capital of Wachovia and the combined company and (2) the "present value" of the
"terminal value" of Wachovia common stock and the common stock of the combined
company as of calendar year 2006. "Terminal value" refers to the value of a
particular asset at a specific future time. "Present value" refers to the
current value of future cash flows obtained by discounting such future cash
flows by an interest rate that takes into account risk, the opportunity cost of
capital, expected returns and other appropriate factors.
In this analysis, the range of estimated terminal values was determined by
applying P/E multiples ranging from 9x to 13x, based on the current range of
P/E multiples for a peer group of super-regional banks, to the projected
calendar year 2007 forecasted earnings of each company based upon a net income
growth rate after 2007 of 9.5%, as reported by First Call. The future excess
capital and terminal values were then discounted back using discount rates of
11%, 13% and 15%, which Goldman Sachs viewed as the appropriate range of
discount rates for a company with Wachovia's risk characteristics. This
analysis assumed, based on management estimates, a targeted ratio of total
common equity to total assets of 7% and a tangible asset growth rate of 6% and
further assumed the sale of Wachovia's credit card business and the use of the
proceeds from the sale for share repurchase.
Based on these assumptions, the implied per share present value of Wachovia
common stock ranged from $51.82 to $81.47 and the implied per share present
value of the common stock of the combined company (adjusted for the 2-for-1
exchange ratio) ranged from $58.37 to $92.12. Applying an intermediate discount
rate of 13%, Goldman Sachs determined that the incremental (increased) implied
per share value of the combined company (adjusted for the 2-for-1 exchange
ratio) relative to Wachovia as a stand-alone company was $7.22 per share
assuming a 9x terminal P/E multiple, $8.43 per share assuming a 11x terminal
P/E multiple and $9.64 per share assuming a 13x terminal P/E multiple.
The results of Goldman Sachs' analysis are set forth in the following
tables.
Wachovia Stand-Alone
--------------------
Terminal P/E
Multiple
--------------------
Discount
Rate 9x 11x 13x
-------- ------ ------ ------
11% $61.85 $71.66 $81.47
13% $56.55 $65.41 $74.26
15% $51.82 $59.83 $67.83
Wachovia/First Union Combined
-----------------------------
Terminal P/E
Multiple
--------------------
Discount
Rate 9x 11x 13x
-------- ------ ------ ------
11% $69.82 $80.97 $92.12
13% $63.77 $73.84 $83.90
15% $58.37 $67.47 $76.57
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, is not necessarily susceptible to partial analysis or summary
description. Goldman Sachs believes that selecting portions of the analyses or
of the summary set forth above, without considering the analyses as a whole,
could create an incomplete view of the evaluation process underlying Goldman
Sachs' opinion. In arriving at its fairness determination, Goldman Sachs
considered the results of all of its analyses and did not isolate specific
factors or analyses and reach separate conclusions as to whether or not any
78
particular factor or analysis supported its opinion and did not attribute any
particular weight to any particular factor or analysis considered by it;
rather, Goldman Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the results of all these
analyses. In addition, in performing its analyses, Goldman Sachs relied upon
numerous assumptions made by Wachovia and First Union with respect to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Wachovia or First Union.
No company or transaction used in the above analyses as a comparison is
directly comparable to Wachovia or First Union or the merger.
The analyses were prepared solely for the purpose of Goldman Sachs'
providing its opinion to Wachovia's board as to the fairness of the exchange
ratio and do not purport to be appraisals or necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based on
forecasts of future results are not necessarily indicative of actual future
results, which may be significantly more or less favorable than suggested by
such analyses. Because such estimates are inherently subject to uncertainty,
being based upon numerous factors or events beyond the control of Wachovia or
First Union, none of Wachovia, First Union, Goldman Sachs or any other person
assumes responsibility if future results or actual values are materially
different from those forecasts or assumptions. As described above, the opinion
of Goldman Sachs to Wachovia's board was among many factors taken into
consideration by Wachovia's board in making its determination on May 22, 2001
with respect to the merger agreement.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. Wachovia selected
Goldman Sachs to act as its financial advisor because Goldman Sachs is a
nationally recognized investment banking firm that has substantial experience
in investment banking in general and because of its familiarity with Wachovia,
having provided investment banking services to Wachovia from time to time,
including having participated as an underwriter in various medium term note and
straight debt offerings. Goldman Sachs has also provided, and may in the future
provide, certain investment banking services to First Union.
In addition, Goldman Sachs provides a full range of financial advisory and
securities services and, in the course of its normal trading activities, may
from time to time effect transactions and hold securities, including derivative
securities, of Wachovia or First Union for its own account and for the accounts
of customers. As of May 22, 2001, Goldman Sachs held: a long position of
510,703 shares of Wachovia against which Goldman Sachs is short 180,727 shares;
a long position of options equivalent, if exercisable, to 282,800 shares of
Wachovia against which Goldman Sachs is short on options equivalent, if
exercisable, to 110,000 shares; and a short position of $25,000,000 of straight
debt of Wachovia against which Goldman Sachs is long $7,800,000 of straight
debt. In addition, as of May 22, 2001, Goldman Sachs held: a long position of
431,153 shares of First Union against which Goldman Sachs is short 265,650
shares; a long position of options equivalent, if exercisable, to 100,000
shares of First Union; and a short position of $37,155,000 of straight debt of
First Union against which Goldman Sachs is long $3,350,000 of straight debt.
Goldman Sachs was retained by Wachovia on May 17, 2001. Pursuant to the
engagement letter subsequently entered into between Wachovia and Goldman Sachs,
Wachovia has agreed to pay Goldman Sachs for its services rendered in
connection with the merger an initial fee of $5 million payable upon delivery
of the opinion and a transaction fee of $15 million payable upon the
acquisition by any person or company of at least 50% of the outstanding stock
(by means of a tender offer, merger or otherwise) or substantially all of the
assets of Wachovia. Additionally, Wachovia has agreed that (1) if the
transaction fee has not become payable and Wachovia sells, distributes or
liquidates all or a portion of its assets or sells or distributes its
securities, then Wachovia will pay Goldman Sachs a mutually agreeable
transaction fee based upon fees for similar transactions and a percentage of
the aggregate value and (2) if no transaction fee has become payable prior to
May 22, 2002, then Wachovia will pay Goldman Sachs a financial advisory fee of
$5 million on that date. Wachovia has also agreed to reimburse Goldman Sachs
for its reasonable out-of-pocket expenses arising in connection with its
engagement, including the fees and disbursements of its counsel, and to
indemnify Goldman Sachs against certain liabilities, including certain
liabilities arising under the federal securities laws.
79
THE MERGER AGREEMENT
The following sections of this document describe the material provisions of
the amended merger agreement and also describe the effects of the merger
agreement provisions. The following description does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the merger
agreement, which is attached as Appendix A and incorporated by reference into
this document. You are urged to read the merger agreement carefully and in its
entirety.
Structure
Subject to the terms and conditions of the merger agreement, and in
accordance with North Carolina law, at the completion of the merger, Wachovia
will merge into First Union. First Union will be the surviving corporation and
will continue its corporate existence under the laws of North Carolina. When
the merger is completed, the separate corporate existence of Wachovia will
terminate. First Union's articles of incorporation will be the articles of
incorporation of the combined company, and First Union's by-laws will be the
by-laws of the combined company, except that the combined company's articles of
incorporation will be amended to (1) authorize up to 3 billion shares of common
stock, (2) authorize the issuance of up to 500 million DEPs to be issued to
Wachovia shareholders in connection with the merger, (3) change the name of the
combined company to "Wachovia Corporation", and (4) include provisions related
to management succession and procedures for nomination of persons to the board
of directors. See "Comparison of Shareholder Rights" beginning on page 119.
After completion of the merger, former Wachovia shareholders will own
approximately 30% of the outstanding common stock of the combined company and
First Union shareholders will own approximately 70% of the outstanding common
stock of the combined company.
Board Composition of the Combined Company
When the merger is completed, the board of directors of the combined company
will be comprised of 9 current board members of First Union selected by First
Union and 9 current board members of Wachovia selected by Wachovia. These
directors will be split as equally as possible among the three classes of
directors of the combined company's board. The members of the combined
company's board of directors at completion of the merger will serve as
directors until their respective successors are duly elected and qualified in
accordance with First Union's articles of incorporation, First Union's by-laws
and applicable law.
The current Chairman, President and Chief Executive Officer of Wachovia, Mr.
L.M. Baker, Jr., will be a member of the combined company's board of directors
and will serve as its Chairman until the 2004 annual meeting of shareholders,
unless he retires or resigns, or as otherwise determined according to the
combined company's articles of incorporation and by-laws.
The current Chairman, President and Chief Executive Officer of First Union,
Mr. G. Kennedy Thompson, will be a member of the combined company's board of
directors, as well as its President and Chief Executive Officer, unless he
retires or resigns, or as otherwise determined according to the combined
company's articles of incorporation and by-laws, and will succeed Mr. Baker as
Chairman not later than the 2004 annual shareholders' meeting.
The articles of incorporation will be amended to include provisions intended
to maintain the even split between First Union and Wachovia nominated
directors. The new provisions in First Union's articles of incorporation are
included in the plan of merger contained in the merger agreement. These
provisions create a nomination procedure for director nominees who are to be
nominated by the board of directors or who are to fill a vacancy to be filled
by the board of directors. In effect, if the board of directors of the combined
company decides to increase or decrease the number of directors on the board,
or the board of directors is nominating persons for directorships that are up
for election, the persons nominated must be first chosen by a nominating
committee. For a position to be occupied by a person replacing a former First
Union director, a committee of two former First Union directors will choose a
person to qualify for nomination by the board. For a position to
80
be occupied by a person replacing a former Wachovia director, a committee of
two former Wachovia directors will choose a person to qualify for nomination by
the board. In accordance with the existing articles of incorporation, once
nominated, a nominee to fill a vacancy or newly created directorship must be
elected by a majority of the existing or remaining board and a nominee to be
elected at an annual or special meeting of shareholders or by written consent
of shareholders must be elected by a plurality of the shareholders voting at a
meeting.
In addition, the amendments to First Union's articles of incorporation will
include provisions where votes of the board of directors will require a
"special majority" in the situations described below. A special majority of the
board of directors will be equal to at least 75% of the board, plus a majority
of both the former First Union directors and the former Wachovia directors then
serving on the board. A special majority vote of the board will be needed for:
. nominating a director to fill a directorship in a manner other than set
forth above;
. filling the positions of Chairman or Chief Executive Officer and
President;
. removing Mr. Baker from the Chairman position or Mr. Thompson from the
Chairman (if he has succeeded Mr. Baker), Chief Executive Officer or
President position;
. making any modification to Mr. Thompson's or Mr. Baker's employment
agreements; or
. making any recommendation to shareholders to modify the nomination
procedures and the special majority procedures of the articles of
incorporation.
These new provisions will lapse immediately following the 2004 annual
meeting of shareholders. The amendments to First Union's articles of
incorporation to effect these provisions are set forth in Annex 3 to the merger
agreement attached to this document as Appendix A.
Operations
Headquarters. Following completion of the merger, the combined company will
be headquartered in Charlotte, North Carolina.
Cost Savings and Charges. While there can be no assurances, First Union and
Wachovia presently expect to achieve approximately $890 million in annual pre-
tax expense savings by the end of 2004 with lower amounts expected to be
realized during the years between 2001 and 2004. First Union and Wachovia
expect that these expense savings will be from elimination of duplicative
technology and operations functions, duplicative staff unit functions, business
unit function reductions, facility consolidations and purchasing synergies. See
"Cost Savings" beginning on page 56 above. First Union and Wachovia also expect
that the combined company will record restructuring charges, merger-related
charges and purchase accounting adjustments currently estimated at
approximately $1.4 billion before tax. A portion of these charges and
adjustments will be recorded upon completion of the merger, with the remainder
expected to be recorded partially in each year following completion of the
merger through 2004. These charges and adjustments include amounts related to
retention and severance, real estate and systems integration, and other
miscellaneous accruals. See "First Union and Wachovia Unaudited Pro Forma
Condensed Combined Financial Information" beginning on page 181.
Credit Card Businesses. Wachovia has agreed to sell its consumer credit card
business to First USA. First Union sold its credit card business to MBNA last
year. Each agreement includes an arrangement providing for First USA and MBNA,
respectively, to be the sole credit card issuer to customers of Wachovia and
First Union, respectively. Wachovia and First Union, as of the date of this
document, are in discussions with First USA and MBNA to arrive at mutually
acceptable methods of administering the respective agent bank arrangements in a
manner consistent with the respective contractual arrangements or such other
arrangements as the parties may decide are appropriate in the circumstances.
Wachovia and First Union do not believe that the outcome of those discussions
will have a material effect on the combined company.
81
Management. In addition, the following individuals will hold the following
responsibilities in the combined company:
. Robert P. Kelly, currently First Union's Executive Vice President and
Chief Financial Officer--Chief Financial Officer;
. Benjamin P. Jenkins, III, currently a First Union Vice Chairman--Head of
General Banking;
. Stanhope A. Kelly, currently a Wachovia Senior Executive Vice
President--Head of Wealth Management;
. Donald A. McMullen, Jr., currently a First Union Vice Chairman--Head of
Brokerage and Mutual Funds;
. W. Barnes Hauptfuhrer and Stephen E. Cummings, currently First Union's
Co-Heads of Capital Markets--Co-Heads of Corporate and Investment
Banking;
. Donald K. Truslow, currently Wachovia's Chief Risk Officer--Head of Risk
Management;
. Jean E. Davis, currently a Wachovia Senior Executive Vice President--
Head of Operations and Technology;
. Mark C. Treanor, currently First Union's General Counsel--Head of Legal
Affairs; and
. Paul George, currently a Wachovia Executive Vice President--Head of
Human Resources.
Conversion of Stock; Treatment of Options
First Union Common Stock. Each share of First Union common stock outstanding
at the time of the merger will remain outstanding and those shares will be
unaffected by the merger.
Wachovia Common Stock. Upon completion of the merger, each share of Wachovia
common stock outstanding will be converted into 2 shares of common stock of
First Union, with the appropriate number of attached stock purchase rights
under First Union's shareholder rights plan. See "Description of First Union
Capital Stock--Shareholder Protection Rights Plan" beginning on page 117. This
exchange ratio is subject to customary and proportionate adjustments in the
event of stock splits, reverse stock splits or similar events before the merger
is completed.
In addition to the 2 shares of First Union common stock, each share of
Wachovia common stock will be exchanged, at the shareholder's option, for
either:
. a one-time cash payment of $0.48; or
. 2 of the combined company's DEPs, each of which will give the holder the
right to receive cumulative quarterly dividends equal to the difference,
if any, between $0.30 and the amount of quarterly dividends paid by the
combined company on each share of common stock. We estimate each DEP has
a present value of $0.24, or $0.48 for two.
Wachovia shareholders who choose to receive DEPs will be entitled to receive
an additional dividend on each DEP for each quarter that will make up any
difference between the common stock dividend declared by the combined company
and $0.30. For example, if the common stock dividend is $0.24 per share the
DEPs dividend will be $0.06 per DEP, bringing the total to $0.30 per quarter.
Because the exchange ratio converts each Wachovia common share into two shares
of the combined company's common stock, this dividend is intended to preserve
the effect of the $0.60 per share quarterly dividend that Wachovia shareholders
currently receive. The right to receive dividends under the terms of the DEPs
will expire when the aggregate amount of dividends paid on a share of the
combined company's common stock for four consecutive quarters equals at least
$1.20, although the right to receive all the accrued but unpaid dividends will
not be lost. See "Expiration of Dividend Rights" on page 116.
82
Alternatively, for those Wachovia shareholders who choose to receive the
$0.48 per share cash payment, that cash payment represents our estimate of the
present value of the difference, for two of the combined company's common
shares, between a $0.30 per share regularly quarterly dividend and what we
expect the regularly quarterly dividend will be on the combined company's
common shares until that dividend reaches $0.30. Because the exchange ratio
converts each Wachovia common share into two of the combined company's common
shares, this also is intended to preserve the effect of the $0.60 quarterly
dividend that Wachovia shareholders currently receive.
Based on the same calculations we used to determine the amount of the $0.48
cash payment, we estimate that two DEPs have a present value of $0.48, or $0.24
each. This $0.48 amount for two DEPs is the same amount as the fixed per share
cash payment. In deciding on the amount of the fixed cash payment and
estimating the present value of the DEPs, we assumed that the combined
company's regular quarterly dividend will be equal to slightly less than 33% of
its cash net earnings over time. This resulted in dividends of $0.06 per DEP
for the first two quarters after the merger, $0.04 per DEP for the next two
quarters and $0.02 per DEP for the next three quarters. However, the combined
company's dividend policy is subject to change at any time and, accordingly,
the amount of dividends actually paid may differ from the amounts we assumed.
In estimating the present value of the DEPs we also assumed a discount rate of
13%, although this rate may be higher or lower than you may earn on any cash
you receive.
You should not assume the DEPs will trade at a price that equals what we
estimate to be their present value. There is currently no market for the DEPs.
We do not know if a market for the DEPs will develop or what their trading
prices will be. First Union has agreed to use reasonable efforts to cause the
DEPs to be listed on an exchange or quoted on an interdealer quotation system,
but we do not know if a listing or quotation will be possible. See "Risk
Factors" beginning on page 24.
As with all dividends, dividends on the combined company's common stock and
DEPs will be payable when, as and if declared by the board of directors out of
funds legally available in accordance with North Carolina law.
No interest will be paid or accrued on the cash payment or any dividend
resulting from the DEPs. There will be no adjustments to the $0.48 cash payment
or the 2 DEPs that are similar to the adjustments to the common stock exchange
ratio in the event of changes in the common stock before the merger is
completed.
First Union Stock Options. Each option to acquire First Union common stock
outstanding and unexercised immediately prior to completion of the merger will
continue on the same terms and conditions in effect immediately prior to
completion of the merger.
Wachovia Stock Options. Each option to acquire Wachovia common stock
outstanding and unexercised immediately prior to completion of the merger will
be converted into an option to purchase First Union common stock, with the
following adjustments:
. the number of shares of First Union common stock subject to the new
option will equal the product of the number of shares of Wachovia common
stock subject to the original option and the exchange ratio (rounded to
the nearest share); and
. the exercise price per share of First Union common stock subject to the
new option will equal the exercise price under the original option
divided by the exchange ratio (rounded to the nearest cent).
The duration and other terms of each new option will be the same as the
original Wachovia option. Options that are incentive stock options under the
federal tax code will be adjusted in the manner prescribed by the federal tax
code.
A holder of an option to acquire Wachovia common stock will not be entitled
to receive either the cash payment or the 2 DEPs, unless the option is
exercised for issued and outstanding Wachovia common stock before the merger is
completed.
83
Fixed Exchange Ratio Considerations. Because the exchange ratio is fixed and
because the market price of First Union common stock will fluctuate, the market
value of the First Union common stock that Wachovia shareholders will receive
in the merger may increase or decrease both before and after the merger. Taking
this into account, the boards of First Union and Wachovia considered that a
fixed exchange ratio was preferable. The material reasons for this decision are
described below.
The boards of First Union and Wachovia considered that fixed exchange
ratios, with no "collars," have become customary in the financial services
industry and other industries. Such exchange ratios fix the percentage
ownership of the parties in the combined firm at the time the merger agreement
is adopted by the boards and symmetrically allocate the risks associated with
movements in the price of the issuer's stock. The use of a fixed exchange ratio
is intended to capture the relative contribution of each company based on
fundamental financial factors. In this respect, fixed exchange ratios reflect
the intention to share risk and rewards generally presumed in stock-for-stock
merger transactions such as our proposed merger.
The boards also concluded that a fixed exchange ratio is appropriate in view
of the long-term strategic purposes of the merger, including the goal to
combine our companies into a platform that creates an opportunity for continued
strong earnings growth. While a fixed exchange ratio exposes the recipient
shareholders to a decline in nominal value if the price of the issuer's stock
falls in the period between announcement and closing, it also allows the
recipient shareholders to benefit from the potential long-term strength of the
combination. The ultimate value of our combined company will not be determined
by movements in each party's stock price between announcement and closing, but
by the performance of the combined company over time. The boards concluded that
concerns about short-term market fluctuations generally should not outweigh
judgments about longer-term value.
Finally, the boards recognized that an exchange ratio that does not
fluctuate with the prices of our common stocks provides relative certainty
about the number of shares that will be issued in the merger and greater
assurance that the merger will be completed. In the boards' judgment, short-
term movements in market prices are often unrelated to the fundamental
financial and strategic factors supporting the combination. But in the context
of a collar or adjustable exchange ratio, such movements can create uncertainty
with respect to the consummation of a transaction if the issuer is forced to
issue more shares to compensate for short-term changes in nominal value. In
fact, the existence of a collar or adjustable exchange ratio can aggravate an
initial decline in an issuer's stock price because it could require the company
to issue additional shares. The avoidance of the uncertainty created by a
collar or adjustable exchange ratio was another important factor in the boards'
decision to agree to a fixed ratio.
Exchange of Certificates; Fractional Shares
Exchange Procedures. At completion of the merger, First Union will deposit
with an exchange agent, which will be First Union National Bank or another bank
or trust company reasonably acceptable to each of us, certificates representing
the shares of First Union common stock, certificates representing the DEPs,
sufficient cash to be paid to any Wachovia shareholder electing the $0.48 cash
payment, and sufficient cash to be paid instead of any fractional shares of
common stock or DEPs to be issued under the merger agreement in exchange for
outstanding shares of Wachovia common stock.
First Union will then mail a transmittal letter to Wachovia shareholders.
The transmittal letter will contain instructions about the surrender of
Wachovia common stock certificates for First Union common stock certificates
and any cash in lieu of fractional shares of common stock or DEPs. The
transmittal letter will also include an election form on which Wachovia
shareholders must elect to receive either the $0.48 cash payment per Wachovia
share or 2 DEPs per Wachovia share. If you do not make a proper election within
90 days after completion of the merger, you will receive the $0.48 cash payment
per Wachovia share, without interest, upon surrender of your Wachovia shares.
Once you make an election, you may not change your mind.
84
Wachovia common stock certificates should not be returned with the enclosed
proxy card. They should not be forwarded to the exchange agent unless and until
you receive a transmittal letter following completion of the merger.
Wachovia common stock certificates presented for transfer after completion
of the merger will be canceled and exchanged for certificates representing the
applicable number of shares of First Union common stock and either the cash
payment or certificates representing the applicable number of DEPs. Any
Wachovia shareholder requesting that First Union common stock or DEPs
certificates be issued in a name other than that in which the certificate being
surrendered is registered will have to pay to the exchange agent in advance any
transfer taxes that may be owed.
After the merger, there will be no transfers on the stock transfer books of
Wachovia of shares of Wachovia common stock issued and outstanding immediately
prior to merger completion.
All shares of First Union common stock and DEPs into which shares of
Wachovia common stock are converted on the merger completion date will be
deemed issued as of that date. After that date, former Wachovia shareholders of
record will be entitled to vote, at any meeting of First Union shareholders
having a record date on or after the merger completion date, the number of
whole shares of First Union common stock into which their shares of Wachovia
common stock have been converted, regardless of whether they have surrendered
their Wachovia stock certificates. First Union dividends having a record date
on or after the merger completion date will include dividends on First Union
common stock issued to Wachovia shareholders in the merger. However, no $0.48
cash payment and no dividend, including any dividend resulting from the DEPs,
or other distribution payable to the holders of record of First Union common
stock after the merger completion date will be distributed to the holder of any
Wachovia common stock certificates until that holder physically surrenders all
of his or her Wachovia common stock certificates as described above. Promptly
after surrender, the combined company's common stock certificates to which that
holder is entitled, all undelivered dividends and other distributions, the
$0.48 cash payment, if applicable, DEPs, if applicable, and payment for any
fractional share interests, if applicable, will be delivered to that holder, in
each case without interest.
No Fractional Shares Will Be Issued. First Union will not issue fractional
shares of First Union common stock or DEPs to you in the merger. There will be
no dividends or voting rights with respect to any fractional common shares or
DEPs. For each fractional share of common stock that would otherwise be issued,
First Union will pay cash in an amount equal to the fraction of a whole share
that would otherwise have been issued, multiplied by the closing sale price of
First Union common stock on the NYSE for the last NYSE trading day immediately
preceding the date the merger is completed. For each fractional DEP that would
otherwise be issued, First Union will pay cash in an amount equal to the
fraction of a whole DEP that would otherwise be issued multiplied by $0.24.
First Union will pay fractional amounts of the $0.48 per share cash payment. No
interest will be paid or accrued on the cash in lieu of fractional shares of
common stock, the cash payment or DEPs. Generally, because of the 2-for-1
exchange ratio, only participants in Wachovia's Dividend Reinvestment and
Common Stock Purchase Plan may be eligible to receive fractional share
payments.
None of First Union, Wachovia or any other person will be liable to any
former holder of Wachovia common stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
Lost, Stolen or Destroyed Wachovia Common Stock Certificates. If you have
lost a certificate representing Wachovia common stock, or it has been stolen or
destroyed, First Union will issue the common stock and the DEPs or cash
payment, as the case may be, payable under the merger agreement if you post
bond in a customary amount to protect against any claim that may be made
against First Union about ownership of the lost, stolen or destroyed
certificate.
No Transfer by First Union Shareholders Required. First Union shareholders
will not be required to exchange certificates representing their shares of
First Union common stock or otherwise take any action after
85
completion of the merger. Despite the proposed change of First Union's name to
Wachovia Corporation, you do not need to submit share certificates for First
Union common stock to First Union, Wachovia, the exchange agent or to any other
person in connection with the merger.
For a description of the common stock of the combined company, a description
of the DEPs and a description of the differences between the rights of Wachovia
shareholders and First Union shareholders, see "Description of First Union
Capital Stock" beginning on page 114, "Dividend Equalization Preferred Shares"
beginning on page 115 and "Comparison of Shareholder Rights" beginning on page
119.
Effective Time
The effective time of the merger will be the time set forth in the legal
documents that we will file with the Secretary of State of the State of North
Carolina on the date the merger is completed. We plan to complete the merger on
the third business day after the satisfaction or waiver, where waiver is
legally permissible, of the last remaining condition to the merger unless we
agree to another date or time. See "Conditions to Completion of the Merger"
beginning on page 90.
We anticipate that we will complete the merger during the fiscal quarter
ending September 30, 2001. However, completion could be delayed if there is a
delay in obtaining the necessary regulatory approvals or for other reasons.
There can be no assurances as to if or when these approvals will be obtained or
as to whether or when the merger will be completed. If we do not complete the
merger by January 16, 2002, either of us may terminate the merger agreement
without penalty unless the failure to complete the merger by this date is due
to the failure of the party seeking to terminate the merger agreement to
perform or observe its obligations under the merger agreement. See "Conditions
to Completion of the Merger" beginning on page 90 and "Regulatory Approvals
Required for the Merger" beginning on page 92. In some cases, one or both of
the stock options we have granted to each other may continue after termination
of the merger agreement. The options are described under "Stock Option
Agreements" below.
Representations and Warranties
The merger agreement contains representations and warranties of First Union
and Wachovia, to each other, as to, among other things:
. the corporate organization and existence of each party and its
subsidiaries and the valid ownership of its significant subsidiaries;
. the capitalization of each party;
. the ability of each party and its subsidiaries to enter into the merger
agreement and make it valid and binding;
. the fact that the merger agreement and the stock option agreements do
not breach:
. the articles of incorporation and by-laws of each party,
. applicable law, and
. agreements, instruments or obligations;
. governmental approvals;
. regulatory investigations and orders;
. each party's status as a financial holding company under the Bank
Holding Company Act of 1956;
. each party's financial statements and filings with the SEC;
. the absence of material changes in each party's business since December
31, 2000;
86
. the absence of undisclosed material legal proceedings and injunctions;
. the filing and accuracy of each party's tax returns;
. each party's employee benefit plans and related matters;
. each party's compliance with applicable law;
. the validity of, and the absence of material defaults under, material
contracts;
. the accuracy of each party's books and records;
. the inapplicability to the merger and the stock option agreements of
state anti-takeover laws and the anti-takeover provisions in our
articles of incorporation and First Union's shareholder rights plan;
. the tax treatment of the merger; and
. each party's relationships with financial advisors.
Conduct of Business Pending The Merger
Each of us has agreed, except as expressly contemplated by the merger
agreement or as disclosed prior to signing the merger agreement, that it will
not, and will not agree to, without the consent of the other party:
. conduct business other than in the ordinary and usual course;
. fail to use reasonable best efforts to preserve intact our business
organizations, assets and other rights, and our existing relations with
customers and other parties;
. take any action reasonably likely to impair materially our ability to
perform our obligations under the merger agreement or the stock option
agreements or complete the transactions described in those documents;
. enter into any new material line of business or change its material
banking and operating policies;
. incur or guarantee any indebtedness for borrowed money other than in the
ordinary course of business consistent with past practice;
. adjust, split, combine or otherwise reclassify or acquire any of our own
stock (other than repurchases of common shares in the ordinary course of
business to satisfy obligations under dividend reinvestment or employee
benefit plans);
. declare or pay any dividend or distribution on any shares of its stock,
except for:
+ regular quarterly dividends on our common stock at the same rate paid
by each of us in the fiscal quarter immediately preceding signing of
the merger agreement,
+ dividends paid by any of the wholly owned subsidiaries of each of First
Union and Wachovia to First Union or Wachovia or any of their wholly
owned subsidiaries, respectively, and
+ in the case of Wachovia, the distribution of rights pursuant to a
shareholder rights plan that contains an exemption for the First Union
merger, if adopted after April 15, 2001;
. with limited exceptions, permit any additional shares of stock to become
subject to new grants of rights to acquire stock;
. except for issuances pursuant to Wachovia's dividend reinvestment and
common stock purchase plan and the stock option agreements, issue, sell,
or dispose of or encumber, or authorize or propose the creation of, any
additional shares of capital stock, including issuances of new shares of
Wachovia common stock under Wachovia's Retirement Savings and Profit
Savings Plan;
87
. sell, transfer, mortgage, encumber or otherwise dispose of any assets,
deposits, business or properties, except in a nonmaterial transaction in
the ordinary course of business consistent with past practice or, in the
case of Wachovia, in the transactions contemplated by Wachovia's
agreement to sell its consumer credit card business;
. acquire the assets, business, deposits or properties of any other entity
except in a nonmaterial transaction in the ordinary course of business
consistent with past practice;
. knowingly take, or knowingly omit to take, any action that is reasonably
likely to impede the merger from qualifying as a tax-free reorganization
under federal tax laws;
. amend its articles of incorporation or by-laws;
. knowingly take, or knowingly omit to take, any action that is reasonably
likely to result in any of the conditions to the merger not being
satisfied; or
. change its accounting principles, practices or methods, except as
required by generally accepted accounting principles.
Acquisition Proposals by Third Parties
We agreed that neither of us would initiate, solicit, encourage or knowingly
facilitate inquiries or proposals with respect to, or engage in any
negotiations concerning, or provide any confidential or nonpublic information
or data to, or have any discussions with, any third party relating to any
acquisition proposal.
However, if either of us receives an unsolicited acquisition proposal and
the receiving company's board concludes in good faith that it is reasonably
likely to be or result in a superior proposal, that company may furnish
nonpublic information and participate in negotiations or discussions to the
extent its board concludes in good faith (and based on the advice of counsel)
that failure to take those actions would more likely than not violate its
fiduciary duties. However, before providing any nonpublic information, that
company must enter into a confidentiality agreement with the third party no
less favorable to it than First Union's and Wachovia's confidentiality
agreement. For purposes of the merger agreement, a superior proposal is one
that the board of the receiving company concludes in good faith is more
favorable, from a financial point of view, than the merger, after taking into
account the advice of a nationally recognized investment banking firm, the
likelihood of consummation, all financial, legal and regulatory factors of the
proposal and all other relevant factors permitted under applicable law.
This provision governs SunTrust's takeover proposal for Wachovia. Wachovia's
board concluded that SunTrust's proposal did not satisfy the criteria described
above, and Wachovia has not had discussions or negotiations with, or provided
information to, SunTrust in connection with its May 14, 2001 proposal.
First Union also agreed not to waive any provision or amend the terms of
First Union's shareholder protection rights plan. We also agreed to the
following:
. for purposes of the merger agreement, we agreed that the term
"acquisition proposal" would mean, with respect to either of us, any
proposal or offer with respect to:
+a merger, consolidation or other business combination involving either
of us or any of our significant subsidiaries,
+an acquisition of more than 15% of the voting power in either of us or
any of our significant subsidiaries, or
+an acquisition of more than 15% of the business, assets or deposits of
either of us or any of our significant subsidiaries,
and, in each case, other than the transactions contemplated by the merger
agreement or the Purchase and Sale Agreement, dated as of April 8, 2001,
relating to the sale of Wachovia's consumer credit card business;
88
. we agreed to use all reasonable best efforts to obtain from our
shareholders approval of the plan of merger contained in the merger
agreement; however, if either board determines that to continue to
recommend the merger agreement to its shareholders would more likely
than not violate its fiduciary duties because of a conflict of interest
or other special circumstances, including such special circumstances as
an acquisition proposal the board concludes in good faith is a superior
proposal, it may submit the plan of merger without recommendation and
communicate the basis for its lack of recommendation to its
shareholders; however, we agreed that before taking that action, the
relevant party must give the other party five business days to respond
to the acquisition proposal and must consider any amendment or
modification to the merger agreement proposed by the other party;
. we agreed to cease immediately any activities, negotiations or
discussions conducted before the date of the merger agreement with any
other persons with respect to acquisition proposals and to use
reasonable best efforts to enforce any confidentiality or similar
agreement relating to such acquisition proposals and notify the other
within one business day of receiving any acquisition proposal and the
substance of the proposal; and
. we agreed not to take any actions that would cause the transactions
contemplated by the merger agreement to be subject to any takeover laws
or takeover provisions of our by-laws or articles of incorporation.
Other Agreements
In addition to the agreements about the conduct of our businesses we have
described above, we have also agreed in the merger agreement to take several
other actions, such as:
. we agreed to use all reasonable best efforts to complete the merger;
. First Union agreed to execute supplemental indentures and other
instruments required to assume Wachovia's outstanding debt, guarantees
and other securities;
. we agreed, subject to applicable law, to cooperate with each other and
to prepare promptly and file all necessary documentation to obtain all
required permits, consents, approvals and authorizations of third
parties and governmental entities, including this joint proxy statement-
prospectus and the registration statement for the First Union common
stock to be issued in the merger;
. Wachovia agreed to cause each of its affiliate shareholders to deliver
to First Union and Wachovia a written agreement restricting the ability
of such person to sell or otherwise dispose of any Wachovia common stock
or First Union common stock held by that person;
. we agreed to provide each other information concerning our business and
to give each other access to our books, records, properties and
personnel and to cause our subsidiaries to do the same;
. we agreed to keep any non-public information confidential;
. we agreed to cooperate on shareholder and employee communications and
press releases;
. we agreed to convene meetings of our shareholders as soon as practicable
to consider and vote on the plan of merger;
. we agreed to give notice to the other party of any fact, event or
circumstance that is reasonably likely to result in any material adverse
effect or that would constitute a material breach of any of our
representations, warranties, covenants or agreements in the merger
agreement;
. we agreed that, upon completion of the merger, the combined company will
indemnify and hold harmless all past and present officers, directors and
employees of Wachovia and its subsidiaries to the same extent they are
indemnified or have the right to advancement of expenses under
Wachovia's articles, by-laws and indemnification agreements and to the
fullest extent permitted by law;
. we agreed that the combined company will use reasonable best efforts to
provide directors' and officers' liability insurance for a period of six
years after completion of the merger to Wachovia's former directors and
officers;
89
. we agreed that the combined company will comply with Wachovia's benefit
arrangements and will continue providing benefit coverage until such
time as the employees of Wachovia become participants in replacement
benefit arrangements;
. we agreed that the combined company would provide employees from
Wachovia who become employees of the combined company with employee
benefit plans no less favorable in the aggregate than those provided to
similarly situated First Union employees;
. we agreed that the combined company would provide Wachovia employees who
become employees of the combined company with certain pension benefits
under our tax-qualified defined benefit pension plan;
. Wachovia agreed to make a determination for purposes of the Amended and
Restated Wachovia Corporation Stock Plan that the merger would not
constitute a change in control and, therefore, outstanding and unvested
stock options and other stock-based awards would not vest as a result of
the merger or shareholder approval of the plan of merger;
. First Union agreed that, between completion of the merger and 90 days
after the final conversion of computer systems of First Union and
Wachovia, but no later than 4 years after completion of the merger, the
combined company will provide severance benefits to its employees who
terminate employment during that period in accordance with the formulae
used to determine the duration or equivalent lump sum value of salary
continuation and COBRA subsidy under Wachovia's severance policies as of
the date of the merger agreement, and using the Wachovia definition of
eligibility under its current severance plan, but the definition of a
"comparable job" may be more narrowly defined than as currently defined
in the Amended and Restated Wachovia Corporation Severance Pay Plan; and
. First Union agreed that it would use reasonable best efforts to list the
First Union common stock to be issued in the merger on the NYSE, as
promptly as practicable before the completion of the merger and that it
would use reasonable efforts to list the DEPs on a securities, futures
or options exchange or to have them quoted on a dealer quotation system;
we cannot be sure at this time, however, that the DEPs will be listed or
quoted or that a market will exist for them.
Conditions to Completion of the Merger
First Union's and Wachovia's obligations to complete the merger are subject
to the satisfaction or written waiver, where permissible, of a number of
conditions including the following:
. the plan of merger must be approved by the holders of a majority of the
outstanding shares of common stock of each company;
. the First Union common stock that is to be issued in the merger must be
approved for listing on the NYSE and the registration statement filed
with the SEC with this document must be effective;
. the required regulatory approvals must have been obtained without any
conditions that could have a material adverse effect on the combined
company and any statutory waiting periods required by law must have
expired;
. there must be no government action or other legal restraint or
prohibition preventing completion of the merger;
. First Union must have received an opinion of Sullivan & Cromwell and
Wachovia must have received an opinion of Simpson Thacher & Bartlett,
each dated as of the date the merger is completed, that, on the basis of
facts, representations and assumptions set forth in each of these
opinions, the merger will be treated as a tax-free reorganization under
federal tax laws and no gain or loss will be recognized by Wachovia
shareholders who receive shares of First Union stock in exchange for all
of their Wachovia common stock, except with respect to consideration
received that does not constitute stock of First Union, including any
cash payment or cash received instead of fractional interests; and
90
. the representations and warranties of the other party to the merger
agreement must be true and correct, except as would not or would not
reasonably be expected to have a material adverse effect, as defined in
the merger agreement; and the other party to the merger agreement must
have performed in all material respects all obligations required to be
performed by it under the merger agreement.
No assurance can be provided as to if, or when, the required regulatory
approvals necessary to consummate the merger will be obtained, or whether all
of the other conditions to the merger will be satisfied or waived by the party
permitted to do so. As discussed below, if the merger is not completed on or
before January 16, 2002, either First Union or Wachovia may terminate the
merger agreement, unless the failure to complete the merger by that date is due
to the failure of the party seeking to terminate the merger agreement to
perform or observe covenants and agreements of that party set forth in the
merger agreement.
Termination of the Merger Agreement
The merger agreement may be terminated at any time whether before or after
approval of the plan of merger by First Union and Wachovia shareholders:
. by our mutual consent;
. by either of us if any governmental entity that must grant a regulatory
approval has denied approval of the merger by final and nonappealable
action, but not by a party whose action or inaction caused such denial;
. by either of us if the other party's board of directors submits the plan
of merger to its shareholders without a recommendation for approval or
with special and materially adverse conditions on the approval, or if
the other party's board otherwise withdraws or materially and adversely
modifies its recommendation for approval or discloses an intention to do
so, or if the other party's board recommends an acquisition proposal
other than the merger;
. by either of us if the other party's board of directors negotiates or
authorizes negotiations with a third party regarding an acquisition
proposal other than the merger and such negotiations have continued for
at least five business days;
. by either of us if the merger is not completed on or before January 16,
2002, but not by a party whose action or inaction caused such delay; or
. by either of us if the other party is in a continuing breach of a
representation, warranty or covenant contained in the merger agreement,
after 60 days' written notice to the breaching party, as long as that
breach would also allow the non-breaching party not to complete the
merger.
The SunTrust proposal constitutes an acquisition proposal for purposes of
the third and fourth bullet points above. Its existence, however, does not
entitle Wachovia to terminate the merger agreement or First Union to exercise
rights under its stock option agreement.
The failure of either Wachovia or First Union to obtain the shareholder vote
required for the merger will not by itself give either company the right to
terminate the merger agreement. As long as no other termination event has
occurred, both companies will remain obligated to continue to use their
reasonable best efforts to complete the merger until January 16, 2002, which,
depending on the timing of the failed meeting, could include calling additional
shareholders' meetings. In addition, during this period neither company could
undertake any other material acquisitions or mergers. The boards of directors
of both companies considered, and believed it was appropriate to make, this
commitment for the limited period of time involved, especially in light of the
nature of the transaction as a merger-of-equals based on long-term strategic
considerations, the relatively short term of this commitment and the relatively
lengthy regulatory and integration processes involved in such transactions.
Moreover, a similar provision has been used in half of the recent transactions
like the merger. Since 1998, 4 out of the 8 banking mergers involving
consideration over $10 billion (not including the proposed First Union/Wachovia
merger) have had such a provision.
91
Waiver and Amendment of the Merger Agreement
At any time before completion of the merger, either of us may, to the extent
legally allowed, waive compliance by the other with any provision contained in
the merger agreement. Subject to compliance with applicable law, we may amend
the merger agreement by a written agreement at any time before or after First
Union shareholders or Wachovia shareholders approve the plan of merger, except
that after the First Union shareholders or Wachovia shareholders have given
their approval, there may not be any amendment of the merger agreement that
would require the plan of merger to be resubmitted to the First Union or
Wachovia shareholders.
We may also agree to change the structure of the merger, as long as any
change does not change the amount or type of consideration to be received by
Wachovia shareholders and the holders of options to purchase Wachovia common
stock, does not adversely affect the timing of completion of the merger, does
not affect the ability to receive the legal opinions relating to the tax-free
nature of the merger and does not adversely affect the interests of our
shareholders.
Regulatory Approvals Required for the Merger
We have agreed to use reasonable best efforts to obtain the regulatory
approvals required for the merger. We refer to these approvals, along with the
expiration of any statutory waiting periods related to these approvals, as the
"requisite regulatory approvals." These include approval from the Board of
Governors of the Federal Reserve System or Federal Reserve Board, and various
state regulatory authorities. We have filed our application with the Federal
Reserve Board and it was accepted for filing on May 9, 2001. The Federal
Reserve Board notified us that it intends to act on our filing by July 8, 2001.
In addition to that application, we have filed or intend promptly to complete
the filing of applications and notifications to obtain the other requisite
regulatory approvals. The merger cannot proceed in the absence of the requisite
regulatory approvals. We cannot assure you as to whether or when the requisite
regulatory approvals will be obtained, and, if obtained, we cannot assure you
as to the date of receipt of any of these approvals or the absence of any
litigation challenging them. Likewise, we cannot assure you that the U.S.
Department of Justice, or DOJ, or a state attorney general will not attempt to
challenge the merger on antitrust grounds, or, if such a challenge is made, as
to the result of that challenge.
We are not aware of any other material governmental approvals or actions
that are required prior to the parties' consummation of the merger other than
those described below. We presently contemplate that if any additional
governmental approvals or actions are required, these approvals or actions will
be sought. However, we cannot assure you that any of these additional approvals
or actions will be obtained.
Federal Reserve Board. The merger is subject to approval by the Federal
Reserve Board under the Bank Holding Company Act. Assuming the Federal Reserve
Board approves the merger, the merger may not be consummated for 30 days,
during which time the DOJ may challenge the merger on antitrust grounds and
seek divestiture of certain assets and liabilities. With agreement of the
Federal Reserve Board and the DOJ, this waiting period may be reduced to no
fewer than 15 days.
The Federal Reserve Board is prohibited from approving any transaction under
the applicable statutes that would result in a monopoly, or that would be in
furtherance of any combination or conspiracy to monopolize, or to attempt to
monopolize, the business of banking in any part of the United States, or that
may have the effect in any section of the United States of substantially
lessening competition, or tending to create a monopoly, or resulting in a
restraint of trade, unless the Federal Reserve Board finds that the anti-
competitive effects of the transaction are clearly outweighed in the public
interest by the probable effect of the transaction in meeting the convenience
and needs of the communities to be served.
Also, in reviewing a transaction under the Bank Holding Company Act, the
Federal Reserve Board will consider the financial and managerial resources of
our companies and their subsidiary banks and the
92
convenience and needs of the communities to be served. As part of its
consideration of these factors, we expect that the Federal Reserve Board will
consider the regulatory status of First Union and Wachovia, including legal and
regulatory compliance, and the overall capital and safety and soundness
standards established by the Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended, and the regulations issued under that statute.
Under the Community Reinvestment Act of 1977, as amended, the Federal
Reserve Board will take into account our records of performance in meeting the
credit needs of our entire communities, including low- and moderate-income
neighborhoods, served by our companies. Each of our banking subsidiaries has
received either an outstanding or a satisfactory rating in their most recent
Community Reinvestment Act examinations from its federal regulator with respect
to this criterion.
The Federal Reserve Board will furnish notice and a copy of the application
for approval of the merger to the Office of the Comptroller of the Currency,
the Federal Deposit Insurance Corporation and the appropriate state regulatory
authorities. These agencies have 30 days to submit their views and
recommendations to the Federal Reserve Board. The Federal Reserve Board is
required to hold a public hearing in the event it receives a written
recommendation of disapproval of the application from any of these agencies
within this 30-day period. Furthermore, the Bank Holding Company Act and
Federal Reserve Board regulations require published notice of, and the
opportunity for public comment on, the application submitted by First Union for
approval of the merger, and authorize the Federal Reserve Board to hold a
public hearing or meeting if the Federal Reserve Board determines that a
hearing or meeting would be appropriate. Any hearing or meeting or comments
provided by third parties could prolong the period during which the application
is under review by the Federal Reserve Board.
If the DOJ were to commence an antitrust action, that action would stay the
effectiveness of Federal Reserve Board approval of the merger unless a court
specifically orders otherwise. In reviewing the merger, the DOJ could analyze
the merger's effect on competition differently than the Federal Reserve Board,
and thus it is possible that the DOJ could reach a different conclusion than
the Federal Reserve Board regarding the merger's effects on competition. In
particular, the DOJ may focus on the impact of the merger on competition for
loans and other financial services to small and middle market businesses. A
determination by the DOJ not to object to the merger may not prevent the filing
of antitrust actions by private persons or state attorneys general.
We estimate that we will need to make divestitures of branches with deposits
of approximately $1.49 billion, and related loans, in order to avoid a
determination by the Federal Reserve Board or the DOJ that the merger would
have a significantly adverse effect on competition in the relevant markets in
some states. These estimates are based on Federal Reserve Board decisions in
other cases and published deposit figures. Although there can be no assurances,
we believe that the divestitures will not have a material negative effect on
the combined company. Under Federal Reserve Board policy, the merger cannot be
completed until there is an executed definitive agreement for the divestitures.
First Union and Wachovia are cooperating fully with these agencies in order to
receive clearance for these divestitures as promptly as practicable.
Other Regulatory Authorities. Applications or notifications are being filed
with various state and/or foreign regulatory authorities and self-regulatory
organizations in connection with acquisitions or changes in control of
subsidiaries of First Union and/or Wachovia, including banks, broker-dealers
and insurance subsidiaries, that may be deemed to result from the merger. In
addition, the merger may be reviewed by the attorneys general in the various
states in which First Union and Wachovia own banking subsidiaries. These
authorities may be empowered under the applicable state laws and regulations to
investigate or disapprove the merger under the circumstances and based upon the
review provided for in applicable state laws and regulations.
Antitrust. Because the merger involves activities that are not subject to
review by the Federal Reserve Board under Section 4 of the Bank Holding Company
Act, it is partially subject to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, or HSR Act. The HSR Act prohibits the completion of large
transactions
93
unless the parties notify the Federal Trade Commission, or FTC, or the DOJ in
advance and a specified waiting period expires. First Union and Wachovia filed
the required premerger notification and received clearance to complete the
merger and early termination of the waiting period.
Material Federal Income Tax Consequences
General. In the opinion of Sullivan & Cromwell, counsel to First Union, and
Simpson Thacher & Bartlett, counsel to Wachovia, the following are the material
U.S. federal income tax consequences of the merger to shareholders who hold
Wachovia common stock as a capital asset. This opinion is based on the U.S. tax
code, regulations of the U.S. Treasury Department under the U.S. tax code,
administrative rulings and court decisions, in each case as in effect as of the
date of this joint proxy statement-prospectus, all of which are subject to
change at any time, possibly with retroactive effect. This opinion does not
address all of the possible tax consequences of the merger applicable to you if
you are a member of a class of shareholders subject to special treatment under
U.S. federal income tax law, including, for example:
. holders who are not citizens or residents of the United States for U.S.
federal income tax purposes
. holders that actually or constructively own 10% or more of the voting
stock of Wachovia or First Union
. financial institutions
. dealers in securities or currencies
. traders in securities that elect to apply a mark-to-market method of
accounting
. insurance companies
. holders whose functional currency is not the US dollar
. tax-exempt entities
. investors in pass-through entities
. holders that acquired their shares of First Union common stock or
Wachovia common stock through exercise of an employee stock option or
right, or otherwise as compensation
. holders that hold First Union common stock or Wachovia common stock as
part of a hedge, straddle, constructive sale or conversion transaction
. holders liable for alternative minimum tax
In addition, we do not provide any information in this joint proxy
statement-prospectus about the tax consequences of the merger under applicable
foreign, state or local laws.
In connection with the filing of the registration statement with the SEC,
Sullivan & Cromwell, tax counsel to First Union, and Simpson Thacher &
Bartlett, tax counsel to Wachovia, have delivered to First Union and Wachovia
opinions, dated the date of this joint proxy statement-prospectus, addressing
the U.S. federal income tax consequences of the merger described below. These
opinions are exhibits to the registration statement filed with the SEC in
connection with this document. Based on factual representations contained in
representation letters provided by First Union and Wachovia, all of which must
continue to be true and accurate in all material respects as of the effective
time, it is the opinion of Sullivan & Cromwell, tax counsel to First Union, and
Simpson Thacher & Bartlett, tax counsel to Wachovia, that the material United
States federal income tax consequences of the merger are as follows:
. The merger will constitute a reorganization within the meaning of Section
368(a) of the U.S. tax code.
. First Union and Wachovia will each be a party to the reorganization
within the meaning of Section 368(b) of the U.S. tax code.
. No gain or loss will be recognized by Wachovia shareholders who receive
shares of First Union common stock and DEPs in exchange for their
Wachovia common stock, except:
94
. exchanging Wachovia shareholders that elect to receive the $0.48 per
share cash payment will recognize gain, but not loss, with respect to
each Wachovia share exchanged in the amount equal to the lesser of:
- the excess, if any, of
(1) the sum of the fair market value at the date of the merger of the
First Union common stock and the cash payment, over
(2) the shareholder's tax basis in the share of Wachovia common stock
surrendered in the merger; and
- the amount of the cash payment received.
. gain or loss will be recognized with respect to the payment of cash in
lieu of fractional shares of First Union common stock and ordinary
income will be recognized with respect to the payment of cash in lieu
of fractional DEPs.
While Sullivan & Cromwell and Simpson Thacher & Bartlett are of the opinion
that no gain will be recognized on the receipt of DEPs in the merger, there is
no clear authority concerning the tax treatment of the receipt of DEPs in the
merger. If the Internal Revenue Service successfully asserted that DEPs were
not stock of First Union, a Wachovia shareholder that elects to receive DEPs
would recognize gain, but not loss, based on the fair market value of DEPs in
the same manner as a recipient of the $0.48 per share cash payment.
Adjusted Basis and Holding Period. The aggregate basis for U.S. federal
income tax purposes in the First Union common stock and DEPs, if any, that each
Wachovia shareholder receives in the merger will be the same as such
shareholder's aggregate basis in the surrendered Wachovia common stock,
decreased by the amount of the cash received in the merger, other than cash
received for fractional shares, and increased by the amount of gain recognized
by the holder. A Wachovia shareholder will include in its holding period of the
First Union common stock and DEPs its holding period of the surrendered
Wachovia common stock. The basis of a Wachovia shareholder who receives DEPs
will be allocated between the First Union common stock and DEPs in proportion
to their relative fair market values.
Cash Received in Lieu of Fractional Shares. Holders of Wachovia common stock
receiving cash in lieu of a fractional share of First Union common stock will
be treated as first having received the fractional share in the merger and then
having sold the fractional share for cash. These holders will generally
recognize capital gain or loss equal to the difference between such holder's
tax basis in the deemed-received fractional First Union common stock (which
shall include any basis that would have been allowed to a fractional DEP) and
the amount of cash received.
Holders of Wachovia common stock that receive cash instead of a fractional
DEP will generally recognize ordinary income in the amount of that cash.
Dissenting Shareholders. Holders of Wachovia common stock who receive cash
in respect of a dissenting share of Wachovia common stock will recognize gain
or loss equal to the difference between the amount of cash received and their
aggregate tax basis in the dissenting shares. Any gain or loss attributable to
dissenting shares generally will be capital gain or loss and will be long-term
capital gain or loss if the Wachovia common stock exchanged has been held for
more than one year at merger completion.
Taxation of Capital Gain. Gain or loss recognized by an exchanging Wachovia
shareholder in connection with the receipt of the $0.48 per share cash payment
and any cash in lieu of fractional shares of First Union common stock will
generally be capital gain or loss. Capital gain of a noncorporate shareholder
is generally taxed at a maximum rate of 20% where the Wachovia common stock was
held more than one year on the effective date of the merger. The deduction of
any capital losses is subject to limitations.
95
DEPs. There is no clear authority establishing the tax treatment of the
ownership of a security similar to the DEPs. The following discussion is based
on the opinion of Sullivan & Cromwell and Simpson Thacher & Bartlett that DEPs
will be treated as stock for federal income tax purposes although the Internal
Revenue Service might assert otherwise.
Distributions on DEPs will be treated as ordinary dividend income to the
extent paid out of First Union's current or accumulated earnings and profits.
Corporate shareholders will not, in all likelihood, be entitled to claim a
dividends received deduction in respect of dividends on DEPs.
In addition, while not free from doubt, proceeds from a sale or redemption
of DEPs would generally be treated as ordinary income, without regard to the
holder's gain or loss on the sale or redemption under section 306 of the U.S.
tax code or otherwise. Certain exceptions to ordinary income treatment apply
where the sale or redemption of DEPs terminates the holder's interest in First
Union, is coupled with a sale of an equivalent percentage of the holder's First
Union common stock, or results in proceeds that exceed the value of DEPs on the
day of the merger.
We urge you to consult with your own tax advisors about the particular tax
consequences of the merger to you, including the effects of U.S. federal, state
or local, or foreign and other tax laws. The tax treatments for the $0.48 per
share cash payment and the dividends received on DEPs are not the same. Please
read this information carefully prior to your decision on electing to receive
either the $0.48 per share cash payment or the DEPs in the merger.
Tax Opinions as Condition to Merger. We will not be obligated to complete
the merger unless First Union receives a further opinion of Sullivan & Cromwell
and Wachovia receives a further opinion of Simpson Thacher & Bartlett, each in
form and substance reasonably satisfactory to us, and dated as of the date of
completion of the merger substantially to the effect of the conclusions set out
under the heading "General" immediately above. In rendering their opinions,
counsel will require and rely upon factual representations contained in
certificates of officers of First Union and Wachovia.
Like other conditions to the merger, the merger agreement allows us to waive
this condition. However, if the receipt of either of the legal opinions is
waived, we will recirculate revised proxy materials and resolicit the vote of
shareholders.
None of the tax opinions delivered or to be delivered to the parties in
connection with the merger as described in this joint proxy statement-
prospectus is binding on the Internal Revenue Service or the courts, and
neither Wachovia nor First Union intends to request a ruling from the IRS with
respect to the merger.
Information Reporting and Backup Withholding. In general, payments related
to Wachovia common stock will be subject to information reporting requirements
and backup withholding tax for a non-corporate holder that:
. fails to provide an accurate taxpayer indemnification number,
. is notified by the Internal Revenue Service regarding a failure to report
all interest or dividends required to be shown on its federal income tax
returns, or
. in certain circumstances, fails to comply with applicable certification
requirements.
Persons that are not United States persons may be required to establish
their exemption from information reporting and backup withholding by certifying
their status on an appropriate Internal Revenue Service Form W-8.
96
Reporting Requirements. A holder of Wachovia common stock that receives
First Union common stock in the merger may be required to retain records
related to such holder's Wachovia common stock, and to file with its U.S.
federal income tax return a statement setting forth facts relating to the
merger.
Because the tax consequences of the merger may vary depending upon your
particular circumstances, you are urged to consult your own tax advisor as to
the specific tax consequences of the merger to you, including the application
and effect of U.S. federal, state and local, foreign and other tax laws.
Accounting Treatment
We intend to treat the merger as a purchase by First Union of Wachovia under
generally accepted accounting principles. Under the purchase method of
accounting, the assets and liabilities of the company not surviving a merger
are, as of completion of the merger, recorded at their respective fair values
and added to those of the surviving company. Financial statements of the
surviving company issued after consummation of the merger reflect these values,
but are not restated retroactively to reflect the historical financial position
or results of operations of the company not surviving.
All unaudited pro forma financial information contained in this joint proxy
statement-prospectus has been prepared using the purchase method to account for
the merger. See "First Union and Wachovia Unaudited Pro Forma Condensed
Combined Financial Information" on page 181. The final allocation of the
purchase price will be determined after the merger is completed and after
completion of a thorough analysis to determine the fair values of Wachovia's
tangible and identifiable intangible assets and liabilities. In addition,
estimates related to restructuring and merger-related charges are subject to
final decisions related to combining the companies. Accordingly, the final
purchase accounting adjustments, restructuring and merger-related charges may
be materially different from the unaudited pro forma adjustments presented in
this document. Any decrease in the net fair value of the assets and liabilities
of Wachovia as compared to the information shown in this document will have the
effect of increasing the amount of the purchase price allocable to goodwill.
Stock Exchange Listing
First Union has agreed to use all reasonable best efforts to list the common
stock to be issued in the merger on the NYSE. It is a condition to the
consummation of the merger that those shares be approved for listing on the
NYSE, subject to official notice of issuance. Following the merger, we expect
that the shares of the combined company will trade on the NYSE under the symbol
"WB."
First Union has also agreed to use reasonable efforts to cause the DEPs to
be listed on a securities, futures or option exchange or quoted on a dealer
quotation system. No assurance can be given at this time whether the DEPs will
qualify for listing or be listed, whether a market for DEPs will develop, or,
if a market develops, whether the DEPs will be actively traded or at what price
they will trade. Obtaining such a listing or quotation is not a condition to
completing the merger.
Expenses
The merger agreement provides that each of First Union and Wachovia will pay
its own expenses in connection with the merger and the transactions
contemplated by the merger agreement. However, First Union and Wachovia will
divide equally the payment of all printing costs, filing fees and registration
fees paid to the SEC in connection with the filing of this document and the
payment of all fees paid for filings with governmental authorities.
Dividends
Before the merger, we will coordinate the declaration and payment of regular
quarterly cash dividends on First Union common stock and Wachovia common stock
with the intent that you will not receive more than one dividend, or fail to
receive one dividend, for any single quarter.
97
First Union's dividend policy will continue for the combined company, but
this policy is subject to change at any time. In the first and second quarters
of 2001, First Union declared a dividend of $0.24 per First Union share
(equivalent to $0.48 per Wachovia share at the two-for-one exchange ratio in
the merger), whereas Wachovia declared a dividend of $0.60 per share of
Wachovia common stock.
Wachovia shareholders may choose to receive either DEPs or a $0.48 per share
one-time cash payment in the merger. Wachovia shareholders who choose to
receive DEPs in the merger will be entitled to receive, on each DEPs, an
additional dividend each quarter that will make up any difference between the
common stock dividend declared by the combined company and $0.30. For example,
the DEPs dividend will be $0.06 per share if the common stock dividend is $0.24
per share, bringing the total to $0.30 per quarter. Because the exchange ratio
converts each applicable Wachovia common share into two DEPs, this dividend is
intended to preserve the effect of the $0.60 quarterly dividend that Wachovia
shareholders currently receive. The dividend rights on the DEPs will terminate
when the total dividends paid on the combined company's common stock over four
straight quarters reaches the equivalent of what would have been paid at
Wachovia's current dividend rate ($2.40 per Wachovia share).
Alternatively, for those Wachovia shareholders who elect to receive the one-
time $0.48 per share cash payment in the merger rather than the DEPs, that cash
payment represents our estimate of the present value of the difference between
the amount of dividends Wachovia shareholders would have received at the
equivalent of Wachovia's current regular $0.60 quarterly dividend and the
regular quarterly dividends we expect they will receive on the combined
company's common shares they receive in the merger, over the period the
difference is expected to exist. However, the combined company's dividend
policy is subject to change at any time and, accordingly, the amount of
dividends actually paid may be more or less than the amounts we assumed in
calculating the $0.48 per share cash payment.
All dividends on common and preferred shares (including DEPs) of the
combined company will be payable when, as and if declared by the board of
directors out of funds legally available for the payment of dividends by a
North Carolina corporation. Dividends on the DEPs, however, are cumulative and
not lost should the board fail to declare them. See "Material Federal Income
Tax Consequences" on page 94 and "Dividend Policy" beginning on page 111.
Interests of Certain Persons in the Merger
Some of Wachovia's and First Union's executive officers and directors have
interests in the merger that are in addition to and may be different from the
interests as Wachovia shareholders or First Union shareholders they may share
with you. The Wachovia and First Union boards were aware of these different
interests and considered them, among other matters, in adopting the merger
agreement and the transactions it contemplates.
In summary, we estimate that the value of the incremental payments and
benefits for the executive officers and directors of the respective parties is
as set forth in the chart below:
Supplemental
Severance and Retirement
Company Other Benefits Agreement Total
----------------------------------------------------------------------------------------
First Union $11.2 million N/A $11.2 million
----------------------------------------------------------------------------------------
Wachovia $40 million $30 million $70 million
As described under "Board Composition of the Combined Company" and
"Operations" beginning on page 80, 7 executive officers and 9 directors of
First Union and 5 executive officers and 9 directors of Wachovia will serve as
executive officers and directors of the combined company. In addition, as
described below, completion of the merger will constitute a change in control
of Wachovia for purposes of determining the entitlement of certain executive
officers of Wachovia to severance and other benefits under existing
98
agreements. Furthermore, as described below, some members of the management of
Wachovia are expected to enter into agreements, the form of which is to be
negotiated, relating to their employment with the combined company that will
provide employment and severance benefits following the merger. One member of
First Union's management has entered into an amendment to his existing
employment agreement with First Union.
Mr. Baker's Employment Agreement. In connection with the merger, First Union
entered into a three-year employment agreement with L.M. Baker, Jr., Chairman,
President and Chief Executive Officer of Wachovia, which was amended and
restated as of May 18, 2001. The agreement provides that he will serve as
Chairman of the board of the combined company during the term of his
employment. For his services, Mr. Baker will be entitled to receive an annual
base salary of at least $1,000,000 and an annual cash incentive bonus in an
amount to be determined by the combined company's board of directors, but in no
event may Mr. Baker's base salary and annual bonus be less than that of the
combined company's Chief Executive Officer. Mr. Baker's current salary is
$998,000. In addition, he will continue to be eligible to participate in
various employee benefit plans and will continue to be entitled to certain
fringe benefits. The employment agreement also provides for the continued
payment of premium amounts with respect to Mr. Baker's existing split dollar
life insurance agreement and executive life insurance program as set forth in
the applicable agreement or program, regardless of whether he continues to be
employed by the company. Also, upon the earlier of the expiration of his
employment period or the termination of his employment for any reason, the
combined company will honor Mr. Baker's current Supplemental Retirement
Agreement, which will entitle Mr. Baker to receive an annual retirement benefit
in addition to his normal pension benefit. See also "Wachovia Supplemental
Retirement Agreements" beginning on page 100. Upon termination of employment,
Mr. Baker will also receive a payment of $200,000 per year for life, net of
taxes, for office space, secretarial support and transportation. Mr. Baker's
right to the restricted stock award of 60,000 shares of Wachovia common stock
described in the "Wachovia Employment Agreements" section beginning on page 168
is preserved.
The agreement provides that Mr. Baker's employment will automatically
terminate upon his death, disability or retirement. In addition, the combined
company may terminate his employment for "cause" and he may terminate his
employment for any reason. If Mr. Baker's employment is terminated for any
reason other than for illegal conduct then he will be entitled to (1) a pro
rata annual bonus for the period prior to his termination based on the highest
bonus paid to him during either the three-year period prior to his termination
date or the three-year period prior to the date of the agreement, (2) an amount
equal to his annual base salary plus the bonus determined under (1) above
multiplied by the sum of the number of years and fractions of years remaining
in his employment period, or by three if the termination occurs after a "change
in control" of the combined company, plus one, (3) medical, dental and life
insurance benefits for him and his family for the period from the termination
date to the expiration of the employment period, or for life if the termination
date occurs after a "change in control" of the combined company, and (4)
continue to vest in restricted stock and options. Also, Mr. Baker will be
entitled to a gross-up payment equal to the amount of excise taxes, plus the
applicable income taxes due on such gross-up payment, payable by him if such
taxes become payable under his agreement or otherwise, including such taxes
which become payable as a result of the merger. A copy of Mr. Baker's
employment agreement with First Union has been filed as an exhibit to the
registration statement to which this document is a part.
This employment agreement will commence when the merger occurs. It will
replace Mr. Baker's existing employment agreement with Wachovia. For a
description of that agreement, please see "Wachovia Employment Agreements"
beginning on page 168.
Other Employment Agreements. First Union and Wachovia both have employment
agreements with their respective executive officers. As a result of the merger,
some First Union executive officers will not have similar positions with the
combined company. Such First Union executives will be entitled to terminate
their employment for "good reason" as defined under the respective First Union
employment agreements. In general, such a termination will entitle such
executives to receive a payment equal to three times their annual base salary
and highest annual bonus for the preceding three years.
99
Under the Wachovia employment agreements, if an executive resigns for any
reason (or, in the case of one executive, for "good reason" as defined in his
employment agreement), or is terminated other than for "cause" within the three
year period following the merger, then for the period ending on the third
anniversary of the termination, known as the compensation period, the executive
will be entitled to receive monthly payments equal to one-twelfth of the sum of
(1) the highest annual base salary rate in effect during the 12-month period
before termination, plus (2) annual incentive compensation equal to the highest
annual average based on any three-year period during the final five years of
employment, provided the compensation committee approves such bonus amounts,
and (3) the total amount of company contributions under the Wachovia Retirement
Savings and Profit-Sharing Plan and any executive deferred compensation plans
or arrangements in which the executive participated based on the highest annual
average during any three-year period among the final five years of employment.
During the compensation period the executive will also be entitled to continued
vesting with respect to stock options, restricted stock awards or other stock
based awards granted under Wachovia's stock-based plans, and employee benefits,
other than tax-qualified retirement plans, and supplemental and equalization
benefits to which the executive was entitled prior to termination, or
substantially equivalent benefits. The executive is also entitled to "gross-up"
payments equal to the amount of excise taxes, income taxes, interest and
penalties if such severance payments are deemed excess parachute payments for
federal income tax purposes.
It is currently expected that 3 First Union executive officers will be
entitled to receive payments under their respective employment agreements
following the merger, and up to 10 Wachovia executive officers, including Mr.
Baker, would be entitled to receive payments and benefits under their
respective employment agreements if their employment terminates within the
three year period following the merger. The aggregate amount of such payments
and benefits, if such amounts were determined as of the date of this joint
proxy statement-prospectus, would equal approximately $11.2 million for the 3
First Union executive officers, and $40 million plus the amount of the excise
tax for Wachovia executive officers. It is our current expectation that several
of Wachovia's executive officers will remain in the employment of the combined
company so that such amount may be substantially lower. Some of Wachovia's
executives may enter into retention arrangements with the combined company to
ensure their services for transitional periods following the merger. Those
retention arrangements may involve the payment of retention bonuses.
Wachovia Supplemental Retirement Agreements. 9 executive officers of
Wachovia, including Mr. Baker, are parties to nonqualified, unfunded retirement
agreements which are intended to supplement the retirement payments received by
the executives under Wachovia's defined benefit pension plan. In connection
with the merger, the executives' rights to benefits under the agreements fully
vest. Further, if the executive resigns or is terminated by the employer for
any reason other than "cause" during the three-year period following the
merger, the executive's supplemental benefit will be (1) deferred until the
later of the third anniversary of the executive's termination or the date the
executive attains age 55, and (2) adjusted to reflect any continuation benefits
under the executive's employment agreement. Assuming that the employment of
each such executive terminates on the date of the merger, we estimate that the
present value of the accelerated vesting and adjustment for continuation
benefits under these agreements is approximately $30 million. It is our current
expectation that several of Wachovia's executive officers will remain in the
employment of the combined company so that such incremental benefit may be
substantially lower.
Wachovia's Outside Directors. In connection with the merger, non-employee
directors of Wachovia may elect to obtain a cash settlement of the phantom
stock units then credited to the non-employee director's account under
Wachovia's director deferred stock unit plan, in a lump sum or in annual
payments over a period of up to ten years.
Other Wachovia Plans. Wachovia has agreed to cause the Management Resources
and Compensation Committee of Wachovia's board of directors to determine that
all unvested Wachovia stock options, phantom stock and restricted stock awards
granted under the Amended and Restated Wachovia Corporation Stock Plan will not
vest as a result of the merger.
100
Indemnification; Directors' and Officers' Liability Insurance. The merger
agreement provides that, upon completion of the merger, the combined company
will indemnify and hold harmless all past and present officers, directors and
employees of Wachovia and its subsidiaries to the same extent they are
indemnified or have the right to advancement of expenses under Wachovia's
articles and bylaws and to the fullest extent permitted by law. In addition, we
also agreed that the combined company will use reasonable best efforts to
provide directors' and officers' liability insurance equivalent to that
currently provided by Wachovia for a period of six years after completion of
the merger to Wachovia's former directors and officers. First Union officers,
directors and employees are currently covered under existing First Union
policies and applicable provisions of First Union's articles of incorporation
and by-laws.
Restrictions on Resales by Affiliates
The shares of First Union common stock that Wachovia shareholders will own
following the merger have been registered under the Securities Act of 1933.
They may be traded freely and without restriction by you if you are not deemed
to be an affiliate of First Union, Wachovia or the combined company under the
Securities Act. An "affiliate" of First Union, Wachovia or the combined
company, as defined by the rules under the Securities Act, is a person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, First Union, Wachovia or the
combined company, as the case may be. Persons that are affiliates of First
Union or Wachovia at the time the merger is submitted for vote of the Wachovia
shareholders or of the combined company following completion of the merger may
not sell their shares of First Union common stock acquired in the merger except
pursuant to an effective registration statement under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act,
including Rules 144 and 145 issued by the SEC under the Securities Act.
Affiliates generally include directors, executive officers and beneficial
owners of 10% or more of any class of capital stock.
This joint proxy statement-prospectus does not cover any resale of First
Union common stock received in the merger by any person that may be deemed to
be an affiliate of Wachovia, First Union or the combined company.
Dissenters' Appraisal Rights
The boards of directors of First Union and Wachovia have elected to provide
Wachovia shareholders with dissenters' rights in connection with the merger.
Therefore, the merger agreement provides that a Wachovia shareholder may elect
to be paid for his or her shares in accordance with the procedures in the North
Carolina Business Corporation Act, or BCA.
The following discussion is not a complete description of the law relating
to appraisal rights available under North Carolina law and is qualified in its
entirety by the full text of Article 13 of the BCA. Article 13 is reprinted in
its entirety as Appendix K to this joint proxy statement-prospectus. If you
wish to exercise appraisal rights, you should review carefully Article 13 and
are urged to consult a legal advisor before electing or attempting to exercise
these rights.
If the merger is completed, and you are a shareholder of record of Wachovia
who objects to the merger and who fully complies with Article 13 of the BCA,
you will be entitled to demand and receive payment in cash of an amount equal
to the fair value of all, but not less than all, of your shares of Wachovia
common stock. A shareholder of record may assert dissenters' rights as to fewer
than all of the shares registered in that shareholder's name only if that
shareholder dissents with respect to all shares beneficially owned by any one
beneficial owner and notifies Wachovia in writing of the name and address of
each person on whose behalf that registered shareholder asserts dissenters'
rights. For the purpose of determining the amount to be received in connection
with the exercise of statutory dissenters' rights, the fair value of a
dissenting shareholder's Wachovia common stock equals the value of the shares
immediately before the merger completion date, excluding any appreciation or
depreciation in anticipation of the merger.
101
Under Article 13, all shareholders entitled to appraisal rights in the
merger must be notified in the meeting notice relating to the merger that
shareholders are entitled to assert dissenters' rights. This joint proxy
statement-prospectus constitutes that notice, and Article 13 is attached as
Appendix K to this joint proxy statement-prospectus. If you wish to exercise
your appraisal rights or wish to preserve your right to do so, you should
review the following discussion and Appendix K carefully.
If you are a Wachovia shareholder and desire to dissent and receive cash
payment of the fair value of your Wachovia common stock, you must:
. deliver to Wachovia, prior to the shareholder vote on the plan of merger,
a written notice of your intent to demand payment for your shares if the
merger is completed;
. not vote your shares in favor of the plan of merger; and
. demand payment and deposit your stock certificates with Wachovia in
accordance with the terms of a dissenters' notice to be sent to all
dissenting shareholders within 10 days after the merger is approved by
the shareholders of Wachovia.
The dissenters' notice sent to dissenting shareholders will specify the
dates and place for receipt of the payment demand and the deposit of the
Wachovia stock certificates. As soon as the merger is completed or within 30
days after receipt of a payment demand from a dissenting shareholder who has
complied with the statutory requirements, whichever is later, First Union will
pay the dissenter the amount that First Union estimates to be the fair value of
the dissenting shareholder's shares, plus accrued interest. First Union's
payment will be accompanied by:
. Wachovia's balance sheet as of the end of a fiscal year ended not more
than 16 months before the date of the payment, an income statement for
that year, a statement of cash flows for that year and the latest
available interim financial statements, if any;
. an explanation of the estimation of the fair value of the shares;
. an explanation of how the interest was calculated;
. a statement of the dissenting shareholder's right to demand payment of a
different amount under Section 55-13-28 of the BCA; and
. a copy of the dissenters' rights provisions of the BCA.
Within 30 days after First Union pays for the shares of a dissenting
shareholder, or within 30 days of First Union failing to timely act in
accordance with the BCA, the dissenting shareholder may notify First Union that
he or she does not accept the estimate of fair value of the shares and interest
due on that fair value and that the shareholder demands payment in the amount
of the shareholder's own estimate of the fair value of the shares and interest
due. If, within 60 days of First Union's payment or a dissenting shareholder's
demand for payment of a different amount, whichever is earlier, the payment
amount has not been settled, the dissenting shareholder may file an action in
the Superior Court Division of the General Court of Justice requesting that the
fair value of the dissenting shareholder's shares and the accrued interest be
determined. The dissenting shareholder will not have the right to a jury trial.
The court will have discretion to make all dissenting shareholders whose
demands remain unsettled parties to the proceeding. If a dissenting shareholder
does not begin the proceeding within the 60-day period, he will be deemed to
have withdrawn his dissent and demand for payment.
Wachovia shareholders should note that cash paid to dissenting shareholders
in satisfaction of the fair value of your shares will be recognized as gain or
loss for federal income tax purposes.
Failure by a Wachovia shareholder to follow precisely the steps required by
the BCA for perfecting appraisal rights may result in the loss of those rights.
In view of the complexity of these provisions and the requirement that they be
strictly complied with, if you hold Wachovia common stock and are considering
dissenting from the approval of the plan of merger and exercising your
appraisal rights under the BCA, you should consult your legal advisors.
102
The BCA provides that the exercise of dissenters' rights will be the
exclusive method for a Wachovia shareholder to challenge the merger in the
absence of a showing that the merger is either unlawful or fraudulent as to
that shareholder.
All written communications from shareholders with respect to the exercise of
appraisal rights should be mailed before completion of the merger to Wachovia
Corporation, 100 North Main Street, P.O. Box 3099, Winston-Salem, North
Carolina 27150, Attention: Secretary, and after completion of the merger to
First Union Corporation, One First Union Center, Charlotte, North Carolina
28288-0013, Attention: General Counsel.
Voting against, abstaining from voting or failing to vote on the proposal to
approve the plan of merger is not enough to satisfy the requirements of the
BCA. You must also comply with all of the conditions relating to the separate
written notice of intent to dissent to the merger, the separate written demand
for payment of the fair value of your shares of Wachovia common stock and the
deposit of your stock certificates.
Stock Option Agreements
The following description sets forth the material provisions of the Wachovia
stock option agreement and the First Union stock option agreement, each as
amended and restated. These descriptions are not complete and they are subject
to, and qualified by reference to, the stock option agreements, which are
attached as Appendices B and C, respectively, to this document and are
incorporated herein by reference. You are urged to read each of these documents
carefully and in its entirety.
General. To induce each other to enter into the merger agreement, First
Union and Wachovia issued each other options to purchase common stock of their
respective companies. The terms and conditions of the two stock options are
materially the same, except as described in this section. We amended both
option agreements to clarify the parties' intent and to prevent particular
terms of the option agreements from distracting shareholders from the merits of
the merger. This section describes the amended option agreements.
The option that Wachovia issued allows First Union to buy up to 19.9% of the
number of Wachovia common shares outstanding as of April 12, 2001. The exercise
price is $59.482 per share. The option that First Union issued allows Wachovia
to buy up to 19.9% of the number of First Union common shares outstanding as of
April 12, 2001. The exercise price is $31.892 per share. These exercise prices
were determined by using the average of the closing prices for the issuer's
common shares for the five trading days ending April 12, 2001, the last trading
day before we announced the merger. The exercise price of each option and the
number of shares subject to it may be adjusted if the capitalization of the
issuing company changes, including through stock dividends and
recapitalizations. However, neither option can ever be for more than 19.9% of
the number of the issuer's outstanding common shares.
The options only become exercisable if one of the initial triggering events
and one of the subsequent triggering events described below under "Exercise"
occurs. To our knowledge, neither option was exercisable as of the time we
mailed this document. In particular, nothing SunTrust has done that we knew of
at that time has caused either option to become exercisable.
If an option becomes exercisable, the holder may exercise the option by
paying cash for the exercise price. The holder may also exercise by paying with
securities. Any securities must be transferred at fair value, as agreed upon by
two nationally recognized investment banks that we select. We have agreed that
we will only use debt securities or preferred stock that are investment grade
and readily marketable.
If either company were able to, and did, exercise its option, it would own
between 16% and 17% of the other's common shares and have the ability to vote
those shares in the future. Because North Carolina law generally requires a
majority vote for merger proposals, the holder would not be able to force a
merger or veto future business combinations or strategic transactions, based
solely on the shares received upon exercise of the
103
option. SunTrust has publicly indicated that it does not "currently intend" to
continue its hostile proposal if First Union refuses to cancel its option to
purchase Wachovia shares in exchange for a cash payment equal to its "in the
money" value, or if First Union is able to, and does, exercise the option and
acquires Wachovia shares. However, SunTrust has said that it reserves the right
to change its mind.
Purpose. Publicly traded companies, particularly companies in the banking
industry, often issue options or agree to termination fees when they announce
mergers. They do so to increase the likelihood that their transaction will be
completed and to compensate the party receiving the option for its efforts and
its expenses and losses if the transaction is not completed. The options we
issued each other may have the effect of discouraging offers by third parties
to acquire the issuer of the option, even if those persons were prepared to
offer to the issuer's shareholders a greater value than these shareholders will
receive in that contemplated merger.
The options and termination fees that publicly traded companies issue or
agree to in mergers often differ from each other in important respects,
although they are all designed to increase the likelihood that an agreed-upon
merger will be completed. For example, the options that we have issued each
other limit the maximum total profit the holder can receive to $780 million. In
contrast, the option that SunTrust required in its last major bank acquisition
and the options in some other bank merger transactions had no limit. As another
example, the number and type of shares subject to our option, and the exercise
price, also adjusts if the issuer consummates a significant, agreed-upon
transaction that fundamentally alters the value of its common stock. Our
adjustment is described under "Substitute Option" below and is a different
feature. Finally, it is also different for options to permit the exercise price
to be paid in securities. We made the latter change because recently proposed
changes in accounting policies that apply to most companies may make it more
desirable to exercise options to purchase shares (rather than using other
rights under the option) and exercising the options would otherwise require a
substantial cash payment that would adversely affect the exercising company's
bank regulatory capital ratios.
Exercise. An option will become exercisable if both an initial triggering
event and a subsequent triggering event occur before the option expires.
However, because each subsequent triggering event includes in it an initial
triggering event, an option will always become exercisable if a subsequent
triggering event occurs before the option expires.
104
An initial triggering event means any of A subsequent triggering event means
the following: any of the following:
------------------------------------------------------------------------------------
. The issuer agrees to: .The issuer agrees to:
+ a merger or consolidation or any + a merger or consolidation or any
similar transaction of it or any similar transaction of it or any
significant significant subsidiary
subsidiary
+ a purchase, lease or other acquisition + a purchase, lease or other
of more than 15% of the business, acquisition of more than 25% of the
assets or deposits of it or any business, assets or deposits of it
significant subsidiary or any significant subsidiary
+ a purchase or other acquisition of + a purchase or other acquisition of
securities representing more than 15% securities representing more than
of the voting power of it or any 25% of the voting power of it or any
significant subsidiary. significant subsidiary.
. The board of directors of the issuer . The board of directors of the issuer
recommends any of the preceding recommends any of the preceding to
transactions to its shareholders. its shareholders
. A person acquires 15% of the issuer's . A person acquires 25% of the
common shares. issuer's common shares.
. The issuer's shareholders do not approve
the First Union/Wachovia merger after a
third party has publicly proposed an
acquisition transaction with the issuer.
. The issuer's board changes its
recommendation of the merger in
anticipation of another acquisition
transaction (or publicly announces its
intention to do so).
. Any person files a registration statement
or tender offer materials with the SEC or
a notice or application with any bank or
antitrust authority for a potential
alternative acquisition transaction with
the issuer.
. The issuer willfully breaches an
agreement in the merger agreement after a
third party has proposed an alternative
acquisition transaction and the breach
entitles the grantee to terminate the
merger agreement and is not cured before
the option holder gives notice of the
exercise.
Once an option becomes exercisable, it may be exercised in whole or in part
for up to 6 months. However, the right to exercise the option will be extended
for up to a maximum of 6 additional months if time is needed to comply with
regulatory requirements or to avoid liability under the short-swing trading
restrictions contained in the Securities Exchange Act or if an injunction
prohibits exercise. The holder of the option may not exercise the option if it
is in breach of any of its agreements in the merger agreement that entitles the
issuer to terminate the merger agreement.
Expiration. Unless the option is exercisable at the time, the option will
expire on the first of the following events:
. the First Union/Wachovia merger;
. the termination of the merger agreement other than
+ any termination after an initial triggering event
+ a termination for a continuing breach by the issuer
105
+ a termination because the issuer failed to recommend the merger to its
shareholders or began and continued for five business days negotiations
with a third party concerning an alternative acquisition proposal to
the First Union/Wachovia merger; or
. 18 months after any termination of the merger agreement listed under
"other than" in the preceding bullet.
On May 30, 2001, SunTrust filed with the Federal Reserve Board an
application for approval to complete its unsolicited acquisition proposal with
Wachovia. This action is an "initial triggering event" under the sixth bullet
in the definition of initial triggering event above. Therefore, if the merger
agreement terminates, the option issued by Wachovia will not expire until 18
months after the date of termination of the merger agreement. If a "subsequent
triggering event" occurs anytime between now and the end of that 18-month
period, the option would become exercisable. At the time we are mailing this
document to you, we are not aware of any event that has occurred that would be
a "subsequent triggering event" or that would cause the option issued by
Wachovia to become exercisable. Because SunTrust is not proposing to acquire
First Union, neither SunTrust's proposal nor its filing of the Federal Reserve
Board application to acquire Wachovia has the same effect on the option issued
by First Union.
Repurchase and Surrender. The holder of an option or option shares may
require the issuer to repurchase the option or such shares at any time before
the option expires if one of the following events occurs:
. a person acquires 50% or more of the issuer's outstanding common shares,
or
. the issuer completes:
+ a merger or consolidation or any similar transaction of it or any
significant subsidiary
+ a purchase, lease or other acquisition of more than 25% of the
business, assets or deposits of it or any significant subsidiary
+ a purchase or other acquisition of securities representing 25% or more
of the voting power of it or any significant subsidiary
The repurchase of the option will be at a price per share equal to the amount
by which the market or offer price calculated in accordance with the stock
option agreement of the issuer's common stock is higher than the option price
and the repurchase of the option shares will be at the market or offer price.
During the time that the holder of an option has the right to require the
issuer to repurchase the option as described above, the holder may, if it has
not exercised its repurchase rights of the option, also surrender the option to
the issuer for a cash payment equal to $375 million. This price will be
adjusted if there have been purchases of stock under the option and gains on
sales of stock purchased under the option. If the holder surrenders the option
for this cash payment, the holder must also surrender any shares that it still
holds after purchasing them under the option.
Limit on Profit. A holder's total profit from an option cannot be more than
$780 million. If a holder's total profit would be more than $780 million,
before exercising rights under the option the holder must take actions to
reduce the total profit to $780 million. Total profit is defined to mean the
total of:
. any excess of the net value received by the holder on the sale of any
shares purchased under the option over the holder's purchase price,
. plus all amounts received by the holder on the repurchase or surrender
of the option or option shares,
. plus all equivalent amounts with respect to the substitute option (as
described below) and related excess cash payments,
. minus any cash paid or option shares delivered to the issuer to reduce
the holder's total profit.
106
Also, an option may not be exercised for a number of shares that would result
in a notional total profit of more than $780 million. If the exercise of the
option would otherwise result in a higher notional amount, then before
purchasing the shares the holder must take actions to reduce the notional total
profit to $780 million. Notional total profit is defined to mean, with respect
to any shares subject to a proposed exercise of an option, the total profit on
the proposed exercise date assuming the exercise occurred on such date and all
shares purchased under the option and then held by the holder were sold for
cash at the closing market price on the preceding trading day.
Substitute Option. Neither option prohibits the issuer from agreeing to
acquisition transactions in which the issuer is no longer the surviving
corporation, in which the value of the issuer's common shares is fundamentally
altered or in which the issuer's business is transferred to another party.
However, each option includes provisions that ensure that the option's value
will not be negatively affected by one of these transactions.
These substitute option provisions apply if the issuer agrees to one of the
following:
. a merger in which the issuer does not survive,
. a merger or plan of exchange in which the issuer's common shares end up
converted into cash, securities of another company or property,
. a merger or plan of exchange in which the issuer's common shares end up
representing less than 50% of the merged or acquiring company, or
. a sale of all or substantially all of the issuer's or any significant
subsidiary's assets or deposits.
The substitute option provisions require that, while the option is outstanding,
any agreement by the issuer to one of these transactions must allow the holder
of the option to receive a new option when the transaction is completed. We
call this new option a "substitute option" because it substitutes for the
existing option.
The holder of the original option will have the ability to select the common
shares that are covered by the new substitute option. The holder can select the
common shares of any of the following, although not all may apply to any
particular transaction:
. the continuing or surviving person of a consolidation or merger with the
issuer,
. the acquiring person in a plan of exchange in which the issuer is
acquired,
. the issuer in a merger or plan of exchange in which the issuer is the
acquiring person,
. the transferee of all or substantially all of the assets or deposits of
the issuer or any of its significant subsidiaries, or
. any person that controls any of the entities in the above bullets.
The substitute option will be exercisable for shares representing twice the
value (taking into account the price being offered by the acquiring person) of
the shares that could have been bought from the issuer of the original option.
Also, the total exercise price of the substitute option will be twice that of
the old option. The substitute option will otherwise have the same terms and
conditions as the original option, unless otherwise required by law. The
following summarizes the terms of the substitute option:
107
Original Option Substitute Option
-----------------------------------------------------------------------------------
Issuer: First Union or Wachovia Issuer: Selected by holder of the
original option based on the
transaction the issuer of the original
option agrees to
-----------------------------------------------------------------------------------
Number of shares covered by option: 19.9% Number of shares covered by option: A
of the issuer's common shares on the date number of shares that is equal to 2
we signed the merger agreement times the value (taking into account
the price being offered by the
acquiring person) of the shares
covered by the original option
-----------------------------------------------------------------------------------
Exercise Price: Based on the average Exercise Price: Equal to 2 times the
closing prices before we signed the merger total exercise price of the original
agreement option
-----------------------------------------------------------------------------------
Maximum Profit: $780 million Maximum Profit: $780 million
If the exercise price of the original option is less than the market or
offer price for the issuer's common shares, the adjustments discussed above
will result in the new substitute option having a higher financial value,
measured at the time of exercise, than the original option--subject in all
cases to the $780 million limit on total profit. The boards of directors of
both First Union and Wachovia considered this feature and believed it to be
appropriate because they believed that $780 million in total profit represented
an appropriate amount to increase the likelihood that the merger will be
completed and to compensate the party receiving the option for its efforts and
its expenses and losses if the merger is not completed. They also considered
that the substitute option will only be issued if the issuer agrees to a
substantial transaction that is actually completed. As examples, we have
compared below the circumstances in which the original option will become
exercisable and in which a substitute option will be issued.
The following are enough for the original However, a substitute option will be
option to become exercisable: exercisable only under the following
circumstances:
------------------------------------------------------------------------------------
. The issuer's agreement with or . Only if the covered transactions
recommendation of one of the covered are actually completed
transactions
------------------------------------------------------------------------------------
. A hostile purchase of 25% or more of the . Only in transactions to which the
common stock of the issuer issuer actually agrees (and then
only if they are actually completed)
------------------------------------------------------------------------------------
. The issuer's agreement or recommendation . Only sales of all or substantially
of a sale of more than 25% of the all of the business, assets or
business, assets or deposits by, or the deposits of the issuer or any
acquisition of more than 25% of the significant subsidiary
common stock of, the issuer or any
significant subsidiary
------------------------------------------------------------------------------------
. The issuer's agreement or recommendation . Only completed mergers or
of any merger or consolidation by the consolidations in which the issuer
issuer or any significant subsidiary of the original option does not
survive or in which the issuer's
stock does not represent at least
50% of the outstanding voting
shares of the surviving company or
the issuer's stock is converted
into other stock or securities
Substitute Option That Could Apply to SunTrust. If SunTrust were to complete
its proposed acquisition of Wachovia by completing a merger with Wachovia and
the option issued by Wachovia is still outstanding, First Union could receive a
substitute option on SunTrust's common stock. The value of the option, and
therefore the required payment if the option were surrendered, would depend
upon a number of factors, and it is not possible at this time to calculate
these values. However, assuming that the market or offer price under the stock
option agreement does not exceed Wachovia's high price of $69.21 for the past
six months, SunTrust's average common stock price is about $55.49 and
SunTrust's share price at the time was $61.37, which is what it was on June 12,
the value of the substitute option would be calculated as follows:
108
Formula in the Option Amount
--------------------------------------------------------------------------------
Number of SunTrust The market or offer price times ($69.21 x 2 x 41,856,660
shares subject to twice the number of Wachovia Wachovia shares) / $55.49
the substitute shares subject to the option = about 104 million
option divided by the average price of SunTrust shares
SunTrust shares
--------------------------------------------------------------------------------
Total exercise Twice the total exercise price 2 x $59.482 x 41,856,660
price of the of the existing option (based Wachovia shares = about
substitute option on the original per-share $4.98 billion
exercise price of $59.482)
--------------------------------------------------------------------------------
"in-the-money SunTrust share price times $61.37 x about 104 million
value" of the number of shares subject to the shares - about $4.98
substitute option substitute option minus the billion = over $780
total exercise price million
Because the "in-the-money value" of the substitute option under these
assumptions would be more than $780 million, the maximum limit on profit would
apply and the substitute option would be worth $780 million.
The specific facts of a particular acquisition transaction and its timing
will result in changes to variables in the formula and may result in values
lower than the maximum profit limit. Neither Wachovia nor First Union believes
that payment of the maximum amount would preclude it from engaging in a
strategic transaction with another party, and SunTrust has publicly stated that
the payment of $780 million will detract only marginally from its projected
accretion (which assumed a $440 million payment).
Litigation Challenging the Options. First Union and Wachovia believe that
the options are valid and binding. When SunTrust announced its hostile
proposal, it said that it reserved its right to challenge the validity of our
options. As a result, on May 22, First Union filed a lawsuit in North Carolina
seeking to have the options declared valid by a court. On the morning of May
23, Wachovia joined our lawsuit. Later that day, SunTrust filed a lawsuit in
Georgia challenging the options. Since that time, there have been a variety of
legal steps taken in these cases regarding the validity of the options. These
lawsuits and their current status as of the date of this document are described
in more detail under the heading "Litigation Relating to the Proposed
Wachovia/First Union Merger" on page 171. Both First Union and Wachovia believe
that SunTrust's lawsuit is without merit and intend to defend it vigorously.
Both First Union and Wachovia believe the option agreements are valid under
North Carolina law.
109
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
First Union
First Union common stock is listed on the NYSE and traded under the symbol
"FTU." The following table shows the high and low reported closing sale prices
per share of First Union common stock on the NYSE composite transactions
reporting system and the quarterly cash dividends declared per share of First
Union common stock.
Price Range
of Common
Stock
------------- Dividends
High Low Declared
------ ------ ---------
1999
First Quarter......................................... $65.06 48.63 .47
Second Quarter........................................ 55.94 42.06 .47
Third Quarter......................................... 48.38 35.31 .47
Fourth Quarter........................................ 43.63 32.44 .47
2000
First Quarter......................................... 37.94 28.44 .48
Second Quarter........................................ 38.88 25.00 .48
Third Quarter......................................... 32.63 25.00 .48
Fourth Quarter........................................ 34.13 24.00 .48
2001
First Quarter......................................... 34.09 27.81 .24
Second Quarter (through June 25, 2001)................ 34.55 29.70 .24
Past price performance is not necessarily indicative of likely future
performance. Because market prices of First Union common stock will fluctuate,
you are urged to obtain current market prices for shares of First Union common
stock.
There is no market for the DEPs and First Union does not currently know
whether one will develop.
Wachovia
Wachovia common stock is listed on the NYSE and traded under the symbol
"WB." The following table shows the high and low reported closing sale prices
per share of Wachovia common stock on the NYSE composite transactions reporting
system and the quarterly cash dividends declared per share of Wachovia common
stock.
Price Range
of Common
Stock
------------ Dividends
High Low Declared
------ ----- ---------
1999
First Quarter.......................................... $91.00 79.00 .49
Second Quarter......................................... 92.31 80.56 .49
Third Quarter.......................................... 85.25 75.31 .54
Fourth Quarter......................................... 88.88 65.44 .54
2000
First Quarter.......................................... 68.94 53.63 .54
Second Quarter......................................... 75.25 53.56 .54
Third Quarter.......................................... 60.38 53.38 .60
Fourth Quarter......................................... 58.56 47.44 .60
2001
First Quarter.......................................... 69.36 54.50 .60
Second Quarter (through June 25, 2001)................. 69.10 57.65 .60
110
Past price performance is not necessarily indicative of likely future
performance. Because market prices of Wachovia common stock will fluctuate, you
are urged to obtain current market prices for shares of Wachovia common stock.
Dividend Policy
After the merger, the combined company is expected to pay (when, as and if
declared by the board of directors out of funds legally available) regular
quarterly cash dividends of $0.24 per share, in accordance with First Union's
current practice. The timing and amount of future dividends paid by
corporations, including First Union, Wachovia and the combined company, are
subject to determination by the applicable board of directors in its discretion
and will depend upon earnings, cash requirements and the financial condition of
the respective companies and their subsidiaries, applicable government
regulations and other factors deemed relevant by the applicable company's board
of directors. Various U.S. state and federal laws limit the ability of
affiliate banks to pay dividends to First Union and Wachovia and the same laws
will apply to the combined company following the merger. The merger agreement
restricts the cash dividends that may be paid on First Union and Wachovia
common stock pending consummation of the merger. See "Conduct of Business
Pending the Merger" beginning on page 87 and "Other Agreements" beginning on
page 89.
Wachovia shareholders may choose to receive either DEPs or a $0.48 per
Wachovia share cash payment in the merger. Wachovia shareholders who choose to
receive DEPs in the merger will be entitled to receive, on each DEPs, an
additional dividend each quarter that will make up any difference between the
common stock dividend declared by the combined company and $0.30. For example,
the DEPs dividend will be $0.06 per share if the common stock dividend is $0.24
per share, bringing the total to $0.30 per quarter. Because the exchange ratio
converts each applicable Wachovia common share into two DEPs, this dividend is
intended to preserve the effect of the $0.60 quarterly dividend that Wachovia
shareholders currently receive. The dividend rights on the DEPs will terminate
when the total dividends paid on the combined company's common stock for four
straight quarters reaches the equivalent of what would have been paid at
Wachovia's current dividend rate ($2.40 per Wachovia share). Dividends on the
DEPs will be cumulative, which means that even if they are not paid in a
particular quarter they will continue to be owed to the DEPs holder. However, a
failure to pay dividends on the DEPs will not prevent the combined company from
paying future dividends on the common stock.
Moreover, following the merger, the combined company will be subject to
limitations on dividend capacity arising out of federal banking laws, other
laws and debt instruments. See "Description of First Union Capital Stock"
beginning on page 114.
111
INFORMATION ABOUT FIRST UNION AND WACHOVIA
First Union
First Union was incorporated under the laws of North Carolina in 1967 and is
registered as a financial holding company and a bank holding company under the
Bank Holding Company Act. First Union provides a wide range of commercial and
retail banking and trust services through full-service banking offices in
Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North
Carolina, Pennsylvania, South Carolina, Virginia and Washington, D.C. First
Union also provides various other financial services, including asset and
wealth management, mortgage banking, credit card, investment banking,
investment advisory, home equity lending, asset-based lending, leasing,
insurance, international and securities brokerage services through its
subsidiaries.
First Union's principal executive offices are located at One First Union
Center, Charlotte, North Carolina 28288-0013, and our telephone number is (704)
374-6565.
Since the 1985 Supreme Court decision upholding regional interstate banking
legislation, First Union has concentrated its efforts on building a large,
diversified financial services organization, primarily doing business in the
eastern region of the United States. Since November 1985, First Union has
completed over 90 banking-related acquisitions.
First Union established a new strategic direction in 2000, with the focus on
generating improved core earnings growth from our three key businesses--Capital
Management, the General Bank and Capital Markets. After a six-month strategic
review, on June 26, 2000, First Union announced the strategic repositioning of
the company, which resulted in the disposition of certain businesses, assets
and branches that did not provide scale or strategic advantages. First Union
will continue to evaluate its operations and organizational structures to
ensure they are closely aligned with its goal of maximizing performance in core
business lines. When consistent with overall business strategy, First Union may
consider the disposition of certain assets, branches, subsidiaries or lines of
business. While acquisitions are no longer a primary business activity, First
Union continues to explore routinely acquisition opportunities, particularly in
areas that would complement core business lines, and frequently conducts due
diligence activities in connection with possible acquisitions. As a result,
acquisition discussions and, in some cases, negotiations frequently take place
and future acquisitions involving cash, debt or equity securities can be
expected.
Wachovia
Wachovia is an interstate financial holding company with dual headquarters
in Atlanta, Georgia and Winston-Salem, North Carolina, serving regional,
national and international markets. Wachovia had total consolidated assets of
$76 billion and total consolidated deposits of $46 billion as of March 31, 2001
and is ranked 14th and 15th, respectively, among U.S. banking companies in
those categories. At December 31, 2000, Wachovia had 20,325 employees and its
market capitalization was $12 billion, ranking it 20th among U.S. banking
companies.
Wachovia has a heritage of more than 100 years of providing innovative and
quality personal, corporate and institutional financial services, backed by in-
depth expertise and resources and a commitment to client trust. The principal
banking subsidiary is Wachovia Bank, N.A., which has 668 branches and 1,356
ATMs in Florida, Georgia, North Carolina, South Carolina and Virginia. Wachovia
serves 3.8 million consumers and 180,000 small business customers in the five
states. Wachovia is a corporate bank with more than 28,000 business
relationships and global activities in 40 countries.
Wachovia's other principal subsidiaries are Wachovia Securities, Inc., The
First National Bank of Atlanta and OFFITBANK. Wachovia Securities, Inc. is a
registered broker dealer and investment banking firm that provides a full range
of corporate and retail financial services. Retail brokerage services are
provided under the name IJL Wachovia. The First National Bank of Atlanta, whose
sale of assets is pending, provides credit card
112
services nationwide. OFFITBANK, a New-York based wealth management company,
serves high-net-worth individuals and institutional clients.
Wachovia, through its many subsidiaries, offers a wide array of credit and
deposit services, insurance, investment and trust products, capital markets,
wealth management and information services to consumers, primarily in the
Southeast, and to both domestic and foreign corporations. In addition to the
traditional network of retail branches and ATMs, products and services are
available through Wachovia On-Call(C) telephone banking, automated Phone Access
and Internet-based investing and banking at www.wachovia.com.
Wachovia's corporate headquarters are located at 100 North Main Street,
Winston-Salem, North Carolina 27150, (336) 770-5000 and 191 Peachtree Street,
N.E., Atlanta, Georgia 30303, (404) 332-5000.
113
DESCRIPTION OF FIRST UNION CAPITAL STOCK
As a result of the merger, Wachovia shareholders will become shareholders of
First Union. Your rights as shareholders of First Union will be governed by
North Carolina law and the articles of incorporation and by-laws of the
combined company, which will generally be the same as those of First Union with
the changes contemplated by the merger agreement and described in this joint
proxy statement-prospectus. This description of the capital stock of the
combined company, including the common stock and the DEPs to be issued in the
merger, reflects the anticipated state of affairs upon completion of the
merger. The following summarizes the material terms of the capital stock of the
combined company but does not purport to be complete, and is qualified in its
entirety by reference to the applicable provisions of federal law governing
bank holding companies, North Carolina law and the articles of incorporation
and by-laws of the combined company.
Common Stock
Following the merger, the combined company will be authorized to issue up to
3 billion shares of common stock, par value $3.33 1/3 per share.
Voting and Other Rights. Subject to the rights of any holders of any class
of preferred stock outstanding, holders of First Union common stock will be
entitled to one vote per share, and, in general, a majority of votes cast with
respect to a matter will be sufficient to authorize action upon routine
matters. Directors are to be elected by a plurality of the votes cast, and
shareholders of the combined company will not have the right to cumulate their
votes in the election of directors.
No Preemptive or Conversion Rights. Common stock of the combined company
will not entitle its holders to any preemptive rights, subscription rights or
conversion rights.
Assets upon Dissolution. In the event of liquidation, holders of common
stock of the combined company would be entitled to receive proportionately any
assets legally available for distribution to shareholders of the combined
company with respect to shares held by them, subject to any prior rights of any
preferred stock of the combined company then outstanding.
Distributions. Subject to the rights of holders of any class of preferred
stock outstanding, holders of common stock of the combined company will be
entitled to receive the dividends or distributions that the board of directors
of the combined company may declare out of funds legally available for these
payments. The payment of distributions by the combined company will be subject
to the restrictions of North Carolina law applicable to the declaration of
distributions by a corporation. Under North Carolina law, a corporation may not
make a distribution if as a result of the distribution the company would not be
able to pay its debts, or would not be able to satisfy any preferential rights
preferred shareholders would have if the company were to be dissolved at the
time of the distribution.
Pursuant to an indenture between First Union and Wilmington Trust Company,
as trustee, under which some First Union junior subordinated debt securities
were issued, First Union agreed that it generally will not pay any dividends
on, or acquire or make a liquidation payment with respect to, any of First
Union's capital stock, including First Union common stock, First Union
preferred stock and First Union class A preferred stock if, at any time, there
is a default under the indenture or a related First Union guarantee or First
Union has deferred interest payments on the securities issued under the
indenture.
As a bank holding company, the ability of the combined company to pay
distributions will be affected by the ability of its banking subsidiaries to
pay dividends. The ability of these banking subsidiaries, as well as of the
combined company, to pay dividends in the future currently is, and could be
further, influenced by bank regulatory requirements and capital guidelines.
Restrictions on Ownership. The Bank Holding Company Act generally prohibits
any company that is not engaged in banking activities and activities that are
permissible for a bank holding company or a financial
114
holding company from acquiring control of the combined company (or of First
Union or Wachovia). Control is generally defined as ownership of 25% or more of
the voting stock or other exercise of a controlling influence. In addition, any
existing bank holding company would require the prior approval of the Federal
Reserve Board before acquiring 5% or more of the voting stock of the combined
company (or of First Union or Wachovia). In addition, the Change in Bank
Control Act of 1978, as amended, prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the Federal Reserve Board
has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the Federal Reserve Board, the acquisition of 10% or
more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as First Union
or Wachovia (or the combined company), would, under the circumstances set forth
in the presumption, constitute acquisition of control of the bank holding
company.
Antitakeover Provisions. First Union's articles and by-laws contain various
provisions which may discourage or delay attempts to gain control of First
Union. First Union's articles include provisions:
. classifying the board of directors into three classes, each class to
serve for three years, with one class elected annually;
. authorizing the board of directors to fix the size of the board between
nine and 30 directors;
. authorizing directors to fill vacancies on the board occurring between
annual shareholder meetings, except that vacancies resulting from a
director's removal by a shareholder vote may only be filled by a
shareholder vote;
. providing that directors may be removed only for a valid reason and only
by majority vote of shares entitled to vote in electing directors,
voting as a single class;
. authorizing only the board of directors, First Union's Chairman or
President to call a special meeting of shareholders, except for special
meetings called under special circumstances for classes or series of
stock ranking superior to common stock; and
. requiring an 80% shareholder vote by holders entitled to vote in
electing directors, voting as a single class, to alter any of the above
provisions.
First Union's by-laws include specific conditions governing the conduct of
business at annual shareholders' meetings and the nominations of persons for
election as First Union directors at annual shareholders' meetings. For a
description of the board nomination procedures to be reflected in the articles
of incorporation of the combined company, see "Board Composition of the
Combined Company" beginning on page 80.
Preferred Stock
The combined company will be authorized to issue up to 10 million shares of
preferred stock, no par value, and 40 million shares of class A preferred
stock, no par value. The board of directors of the combined company will be
authorized to issue preferred stock and class A preferred stock in one or more
series, to fix the number of shares in each series, and to determine dividend
rates, liquidation prices, liquidation rights of holders, redemption,
conversion and voting rights and other series terms.
Dividend Equalization Preferred Shares (DEPs)
The combined company will also be authorized to issue up to 500,000,000
DEPs, no par value. The board of directors of the combined company will be
authorized to issue the DEPs solely as consideration to former holders of
Wachovia common stock in the merger.
Election. In connection with the merger, Wachovia shareholders will have the
right to choose either (1) a one-time cash payment of $0.48 per Wachovia common
share or (2) two DEPs per Wachovia common share. If
115
you are a Wachovia shareholder and do not indicate a choice on the election
form that will be mailed to you by the combined company within 90 days after
the completion of the merger, you will receive the $0.48 per Wachovia common
share cash payment.
Ranking Upon Dividend Declaration and Upon Liquidation or Dissolution. With
regard to the receipt of dividends, the DEPs will rank junior to any class or
series of preferred stock established by the combined company's board of
directors after the completion of the merger and will rank equally with the
common stock of the combined company. With regard to distributions upon
liquidation or dissolution of the combined company, the DEPs will rank junior
to any class or series of preferred stock established by the combined company's
board of directors after completion of the merger and will rank senior to the
common stock for the $0.01 liquidation preference described below.
Cancellation. DEPs that are redeemed, purchased or otherwise acquired by the
combined company or any of its subsidiaries will be cancelled and may not be
reissued.
Dividends. Subject to the rights of holders of any preferred stock
outstanding, holders of DEPs will be entitled to receive dividends or
distributions on DEPs that the board of directors of the combined company
declares out of funds legally available for these payments, on the date in each
fiscal quarter that regular quarterly dividends are payable on the common
stock, and if no common stock dividend is paid in a quarter, the dividend on
the DEPs for that quarter will be paid on the last day of the third month of
that quarter. The payment of distributions by the combined company will be
subject to the restrictions of North Carolina law applicable to the declaration
of distributions by a corporation. Under North Carolina law, a corporation may
not make a distribution if as a result of the distribution the company would
not be able to pay its debts, or its assets would not exceed its liabilities
plus the amount needed to satisfy any preferential rights preferred
shareholders would have if the company were to be dissolved at the time of the
distribution.
If the amount payable in cash as a dividend per share of the combined
company's common stock in a particular fiscal quarter is less than $0.30, then
the holder of one DEP will be entitled to receive the difference between the
amount payable per common share and $0.30. No amount of dividend will be paid
on any DEPs in any particular quarter if the regular dividend declared on a
share of the combined company's common stock is greater than or equal to $0.30.
The DEPs will be entitled to cumulative dividends, so that the failure of the
board to declare a dividend in any quarter will result in that dividend's
accrual. However, a failure to pay dividends on the DEPs will not prevent the
combined company from paying future dividends on the common stock. No interest
will be payable in respect of accrued but unpaid dividends.
Commencement of Dividend Rights. The dividend rights of the DEPs will begin
on the first regular quarterly dividend record date to occur after the merger
is completed.
Expiration of Dividend Rights. The dividend rights of the DEPs will expire
immediately after the date upon which a regular quarterly dividend on the
combined company's common stock was paid if the amount paid per share for that
quarter plus the total amount of regular quarterly dividends paid per share on
the combined company's common stock for the three quarters immediately
preceding that date is equal to or greater than $1.20, and all accrued
dividends have been paid in full. After that date, holders of DEPs will not be
entitled to any dividends on those shares, regardless of whether any DEPs
remain outstanding.
Assets Upon Dissolution. In the event of liquidation, holders of DEPs will
be entitled to receive, before any distribution is made to the holders of
common stock or any other junior stock, but after any distribution to any class
or series of preferred stock established by the combined company's board of
directors after completion of the merger, an amount equal to $0.01 per DEP,
together with any accrued and unpaid dividends. The holders of DEPs will have
no other right or claim to any of the remaining assets of the combined company.
Redemption, Conversion and Exchange. The DEPs will not be convertible or
exchangeable. The DEPs may be redeemed, at the combined company's option and
with 30 to 60 days prior notice, after December 31, 2021, for an amount equal
to $0.01 per DEP, together with any accrued and unpaid dividends.
116
Voting Rights. Holders of DEPs will not have voting rights, except those
required by applicable law or the rules of a securities exchange or quotation
system on which the DEPs may be listed or quoted.
Shareholder Protection Rights Plan
First Union has a shareholder protection rights plan that could discourage
unwanted or hostile takeover attempts that are not approved by First Union's
board. The rights plan allows holders of First Union common stock to purchase
shares in either First Union or an acquiror at a discount to market value in
response to specified takeover events that are not approved in advance by First
Union's board. The rights plan does not apply to the merger or to the stock
option granted by First Union to Wachovia. The rights plan is expected to
continue in effect after the merger as the rights plan of the combined company.
The Rights. On December 19, 2000, First Union's board declared a dividend of
one preferred share purchase right for each First Union common share
outstanding. The rights currently trade with, and are inseparable from, the
common stock.
Exercise Price. Each right allows its holder to purchase from First Union
one one-hundredth of a First Union participating class A preferred share for
$105. This portion of a preferred share will give the shareholder approximately
the same dividend, voting, and liquidation rights as would one share of common
stock.
Exercisability. The rights will not be exercisable until:
. 10 days after a public announcement by First Union that a person or
group, other than Wachovia, has obtained beneficial ownership of 10% or
more of First Union's outstanding common stock; or
. 10 business days after a person or group begins a tender or exchange
offer that, if completed, would result in that person or group becoming
the beneficial owner of 10% or more of First Union's outstanding common
stock.
The date when the rights become exercisable is referred to in the rights
plan as the "separation time." After that date, the rights will be evidenced by
rights certificates that First Union will mail to all eligible holders of
common stock. A person or member of a group that has obtained beneficial
ownership of 10% or more of First Union's outstanding common stock may not
exercise any rights even after the separation time.
Consequences of a Person or Group Becoming an Acquiring Person. A person or
group, other than Wachovia, that acquires beneficial ownership of 10% or more
of First Union's outstanding common stock is called an "acquiring person."
Flip In. Once First Union publicly announces that a person has acquired
10% or more of its outstanding common stock, First Union can allow for
rights holders, other than the acquiring person, to buy $210 worth of its
common stock for $105. This is called a "flip-in." Alternatively, First
Union's board may elect to exchange 2 shares of First Union common stock
for each right, other than rights owned by the acquiring person, thus
terminating the rights.
Flip Over. If, after a person or group becomes an acquiring person,
First Union merges or consolidates with another entity, or if 50% or more
of First Union's consolidated assets or earning power are sold, all holders
of rights, other than the acquiring person, may purchase shares of the
acquiring company at half their market value.
First Union's board may elect to terminate the rights at any time before a
flip-in occurs. Otherwise, the rights are currently scheduled to terminate in
2010.
The rights will not prevent a takeover of First Union. However, the rights
may cause a substantial dilution to a person or group that acquires 10% or more
of our common stock unless First Union's board first terminates
117
the rights. Nevertheless, the rights should not interfere with a transaction
that is in First Union's and its shareholders' best interests because the
rights can be terminated by the board before that transaction is completed.
The complete terms of the rights are contained in the Shareholder Protection
Rights Agreement. The foregoing description of the rights and the rights
agreement is qualified in its entirety by reference to the agreement. A copy of
the rights agreement can be obtained upon written request to First Union
National Bank, 1525 West W.T. Harris Blvd., Charlotte, North Carolina 28288-
1153.
118
COMPARISON OF SHAREHOLDER RIGHTS
The rights of First Union shareholders are governed by the North Carolina
Business Corporation Act, or BCA, First Union's articles of incorporation and
by-laws. The rights of Wachovia shareholders are also governed by the BCA, but
additionally by the Wachovia articles of incorporation and by-laws. After the
merger, the rights of combined company shareholders will be governed by the BCA
and the articles of incorporation and by-laws of the combined company, which
will be those of First Union, with the changes specified in the merger
agreement and described in this document. The following summarizes the material
differences between the governing documents of First Union and Wachovia. Where
applicable, it also describes changes to the First Union articles of
incorporation that we intend to make in connection with the merger. This
summary does not purport to be a complete discussion of, and is qualified in
its entirety by reference to, the First Union articles of incorporation, the
First Union by-laws, the provisions in Annex 3 and Annex 4 of the merger
agreement that will amend First Union's articles of incorporation and by-laws,
the Wachovia articles of incorporation, the Wachovia by-laws, the articles of
incorporation and by-laws of the combined company and the BCA.
Authorized Capital Stock
First Union. First Union's articles of incorporation authorize it to issue
up to 2 billion shares of common stock, par value $3.33 1/3 per share, 10
million shares of preferred stock, no-par value per share, and 40 million
shares of class A preferred stock, no-par value per share. The articles of the
combined company will be amended as of completion of the merger and will
authorize it to issue 3 billion shares of common stock, 10 million shares of
preferred stock and 40 million shares of class A preferred stock, with the same
par values as before the amendment. The articles of incorporation of the
combined company will also be amended to authorize it to issue up to 500
million DEPs. See "Description of First Union Capital Stock--Dividend
Equalization Preferred Shares" on page 115.
Wachovia. Wachovia's articles of incorporation authorize it to issue up to 1
billion shares of common stock, par value of $5 per share, and 50 million
shares of preferred stock, par value of $5 per share.
Size of Board of Directors
First Union. First Union's articles of incorporation provide for First
Union's board to consist of not less than 9 nor more than 30 directors. The
exact number is fixed by First Union's board from time to time. See "First
Union Proposal 2. A Proposal to Elect Directors" beginning on page 126.
After completion of the merger, the board of directors of the combined
company will have 18 members. Furthermore, the composition of the combined
board will be subject to the provisions described in this document intended to
maintain the 50/50 split between former Wachovia and former First Union
directors until the annual meeting of shareholders in 2004.
Wachovia. Wachovia's articles of incorporation provide that Wachovia's board
must consist of not less than 9 directors, and that the exact number may be
fixed in the by-laws. The by-laws set the maximum number of directors at 25,
the exact number of which may be determined by the shareholders or by the board
of directors. See "Wachovia Proposal 2. Election of Directors" beginning on
page 153.
Classes of Directors
First Union. First Union's articles of incorporation provide that First
Union's board is divided into 3 classes of directors as nearly equal in number
as possible, with each class being elected to a staggered three-year term.
Wachovia. Wachovia's articles of incorporation and by-laws provide for a
class structure substantially the same as First Union's.
119
Removal of Directors
Under BCA Section 55-8-08, the shareholders may remove one or more directors
with or without cause unless the articles of incorporation provide that the
directors may be removed only for cause.
First Union. Except for directors elected under specified circumstances by
holders of any stock class or series having a dividend or liquidation
preference over First Union common stock, First Union directors may be removed
only for cause and only by a majority vote of the shares then entitled to vote
in the election of directors, voting together as a single class.
Wachovia. Except for directors elected pursuant to the terms of a class or
series of Wachovia preferred stock, in which case the terms of the preferred
stock define the features of the related directorships, a director of Wachovia
may be removed only for cause and only by the affirmative vote of the holders
of 66 2/3% of the outstanding voting shares, including a majority of the voting
shares not held by shareholders owning 10% or more of Wachovia's voting shares.
Filling Vacancies on the Board of Directors
First Union. Under First Union's articles of incorporation, any vacancy
occurring in First Union's board shall be filled by a majority of the remaining
directors unless the vacancy is a result of the director's removal by a vote of
the shareholders. In that case, the vacancy may be filled by a shareholder vote
at the same meeting.
Wachovia. Under Wachovia's articles of incorporation and by-laws, any
vacancy occurring in Wachovia's board may be filled by a majority of the
remaining directors or the sole remaining director if there is only one. The
shareholders may elect a director at any time to fill a vacancy not filled by
the directors.
Nomination of Director Candidates by Shareholders
First Union. First Union's by-laws establish procedures shareholders must
follow to nominate persons for election to First Union's board. The shareholder
making the nomination must deliver written notice to First Union's Secretary
between 60 and 90 days before the annual meeting at which directors will be
elected. However, if less than 70 days notice is given of the meeting date,
that written notice by the shareholder must be delivered by the tenth day after
the day on which the meeting date notice was given. Notice will be deemed to
have been given more than 70 days prior to the meeting if the meeting is called
on the third Tuesday of April. The nomination notice must set forth certain
information about the person to be nominated similar to information required
for disclosure in proxy solicitations for director election pursuant to
Exchange Act Regulation 14A, and the nominee's written consent to being
nominated and to serving as a director if elected. The nomination notice must
also set forth certain information about the person submitting the notice,
including the shareholder's name and address and the class and number of First
Union shares that shareholder owns of record or beneficially. The meeting
chairman may, if the facts warrant, determine that a nomination was not made in
accordance with First Union's by-law provisions, and the defective nomination
will be disregarded. These procedures do not apply to any director nominated
under specified circumstances by holders of any stock class or series having a
dividend or liquidation preference over First Union common stock.
Wachovia. Wachovia's by-laws require that all shareholder proposals or
nominations for directors must be received by the corporate secretary between
90 and 120 days prior to the shareholders' meeting, if Wachovia has provided at
least 100 days' notice or public disclosure of the meeting. If less than 100
days' notice or prior public disclosure of the meeting is given, then, in order
to be timely, the shareholder proposal or nomination must be received by
Wachovia's corporate secretary not later than the close of business on the
tenth day following the day on which such notice or public disclosure of the
meeting was given or made. The by-law provision setting forth the content of
the nomination notice is substantially identical to First Union's provision. In
addition, the notice must describe all arrangements between the shareholder and
the nominee and any other
120
person (naming that person) pursuant to which the nomination is being made, and
any other information that a proxy statement would require if one were
necessary. If a nomination does not comply with these procedures, the chairman
of the meeting may disregard the nomination and any votes cast for the nominee.
Anti-Takeover Provisions
North Carolina has three takeover-related statutes. The first, the
Shareholder Protection Act does not apply to either First Union or Wachovia.
The second is the Control Share Acquisition Act. The Control Share Acquisition
Act precludes an acquiror of the shares of a North Carolina corporation who
crosses one of three voting thresholds (20%, 33 1/3% or 50%) from obtaining
voting control of the shares, under certain circumstances, unless a majority in
interest of the disinterested shareholders of the corporation votes to give
voting power to those shares. The corporation's shareholders, other than
holders of control shares, may cause the corporation to redeem their shares
under the North Carolina Control Share Acquisition Act in the event control
shares are accorded voting rights and, as a consequence, the holders of the
control shares have a majority of all voting power for the election of
directors. First Union elected not to be covered by the Control Share
Acquisition Act, but Wachovia is covered.
In addition, North Carolina has a Tender Offer Disclosure Act, which
contains certain prohibitions against deceptive practices in connection with
making a tender offer and also contains a filing requirement with the North
Carolina Secretary of State that has been held unenforceable as to its 30-day
waiting period.
Wachovia's articles of incorporation also contain a "fair price" provision,
but First Union has no such provision in its governing documents. This
provision, which will not apply to the merger, limits the ability of an
interested shareholder to enter into certain transactions involving Wachovia.
An "interested shareholder" is defined in Wachovia's articles to mean a
shareholder who directly or indirectly beneficially owns, alone or with
associates or affiliates, more than 10% of the outstanding voting shares of
Wachovia or a subsidiary of Wachovia, and, subject to certain limits, certain
assignees of, or successors to, the stock once held by an interested
shareholder. The transactions limited by the fair price provisions are referred
to below collectively as a "business combination." They include:
. any merger with or consolidation into an interested shareholder or an
affiliate of an interested shareholder by Wachovia or a subsidiary;
. any sale, mortgage or other disposition of $25 million or more in assets
of Wachovia or a subsidiary to an interested shareholder or an associate
or affiliate of an interested shareholder;
. any issuance or transfer to any interested shareholder, or affiliate of
an interested shareholder by Wachovia or a subsidiary, of equity
securities of Wachovia or a subsidiary having a fair market value of $10
million or more; or
. any recapitalization or reclassification of Wachovia securities or
similar transaction increasing the percentage of outstanding shares of
Wachovia or a subsidiary owned by an interested shareholder or an
affiliate or any proposal for liquidation or dissolution of Wachovia.
Under the fair price provisions, a business combination must either (1) be
approved by the holders of at least 66 2/3% of the outstanding voting shares of
Wachovia and the holders of at least a majority of the outstanding voting
shares of Wachovia not owned by the interested shareholder or an affiliate of
the interested shareholder or (2) comply with either the continuing director
approval requirements described in this paragraph or the price requirements
described in the following paragraph, in which case a business combination must
be approved by the affirmative vote of a majority of the outstanding voting
shares of Wachovia entitled to vote thereon. Under the continuing director
requirement, the business combination must be approved by 66 2/3% of the
"continuing directors," which consist of (1) directors elected by shareholders
of Wachovia prior to the interested shareholder's acquisition of more than 10%
of the voting securities and (2) any directors recommended to join Wachovia's
board by a majority of the directors mentioned in clause (1). These approval
provisions are less stringent than those contained in the North Carolina
Shareholder Protection Act, which is not applicable to Wachovia, but are more
stringent than the standard North Carolina law provisions, which would apply in
the absence of the fair price provisions.
121
Under the price requirements of the fair price provisions, the price per
share paid in a business combination must be at least equal to the greater of:
. the fair market value per share of Wachovia common stock on the date of
the first public announcement of the proposed business combination or on
the date on which the interested shareholder became an interested
shareholder, whichever is higher, multiplied by the ratio of:
. the highest per share price paid by the interested shareholder for any
shares of Wachovia common stock acquired by it during the two-year
period immediately prior to the first public announcement date; to
. the fair market value per share of Wachovia common stock on the first
day during such two-year period on which the interested shareholder
acquired any shares of Wachovia common stock; and
. the highest per share price paid by such interested shareholder in
acquiring any shares of Wachovia common stock.
In addition, the consideration paid for Wachovia common stock in a business
combination must be either cash or the same form of consideration paid by the
interested shareholder to acquire its shares of Wachovia common stock. Also,
the interested shareholder must not have:
. directly or indirectly acquired, after having become an interested
shareholder, additional shares of newly issued Wachovia capital stock
from Wachovia, other than upon conversion of convertible securities, a
pro rata stock dividend or stock split or pursuant to the fair price
provisions;
. received the benefit, directly or indirectly, of financial assistance
from Wachovia; or
. made any major changes in Wachovia's business or equity capital
structure.
Shareholder Protection Rights Plan
First Union. First Union has a shareholder protection rights plan, which
will be in effect for the combined company after the merger. This plan is
described above in the section entitled "Description of First Union Capital
Stock--Shareholder Protection Rights Plan" beginning on page 117.
Wachovia. Wachovia does not currently have a shareholder rights plan.
Shareholder Action without a Meeting
First Union. First Union's by-laws provide that any action that may be
taken by shareholders at a meeting may be taken without a meeting only if a
consent describing the action to be taken is signed by all of the shareholders
entitled to vote with respect to the subject matter and is delivered to First
Union for inclusion in the minutes or filing with the corporate records. This
is consistent with the BCA.
Wachovia. The rights of Wachovia shareholders to act without a meeting are
identical to First Union's.
Calling Special Meetings of Shareholders
First Union. A special meeting of shareholders may be called for any
purpose only by First Union's board, by First Union's Chairman of the board or
by First Union's President.
Wachovia. A special meeting of Wachovia shareholders may be called only by
its Chief Executive Officer or Wachovia's board of directors.
Change in North Carolina Law. As a result of a recent change in North
Carolina law supported by First Union, provisions permitting shareholders of
public corporations to call a special meeting must appear in the articles of
incorporation and not in the by-laws of the corporation.
122
Shareholder Proposals
First Union. First Union's by-laws establish procedures a shareholder must
follow to submit a proposal to a First Union shareholder vote at a
shareholders' annual meeting. The shareholder making the proposal must deliver
written notice to First Union's Secretary between 60 and 90 days prior to the
meeting. However, if less than 70 days' notice is given, that written notice by
the shareholder must be so delivered not later than the tenth day after the day
on which such meeting date notice was given. Notice will be deemed to have been
given more than 70 days prior to the meeting if the meeting is called on the
third Tuesday of April. The shareholder proposal notice must set forth:
. a brief description of the proposal and the reasons for its submission;
. the name and address of the shareholder, as they appear on First Union's
books;
. the classes and number of First Union shares the shareholder owns; and
. any material interest of the shareholder in that proposal other than the
holder's interest as a First Union shareholder.
The meeting chairman may, if the facts warrant, determine that any proposal
was not properly submitted in accordance with First Union's by-laws, and the
defective proposal will not be submitted to the meeting for a shareholder vote.
Wachovia. Wachovia's by-laws require that all shareholder proposals must be
received by the corporate secretary between 90 and 120 days prior to the
shareholders' meeting, if Wachovia has provided at least 100 days' notice or
public disclosure of the meeting. If less than 100 days' notice or prior public
disclosure of the meeting is given, then, in order to be timely, the
shareholder proposal must be received by Wachovia's corporate secretary not
later than the close of business on the tenth day following the day on which
such notice or public disclosure of the meeting was given or made. The by-law
provisions setting forth the required content of such proposals are
substantially identical to First Union's provisions.
Notice of Shareholder Meetings
First Union. First Union's by-law provisions are nearly identical to
Wachovia provisions, except that First Union's by-laws only require that a
description of the purpose of the meeting be included in the case of a special
meeting or where otherwise required by law.
Wachovia. Wachovia's by-laws provide that Wachovia must notify the
shareholders between 10 and 60 days before any annual or special meeting of the
date, time and place of the meeting. Wachovia must briefly describe the purpose
or purposes of a special or substitute annual meeting or any meeting where
required to do so by law.
Indemnification
The BCA contains specific provisions relating to indemnification of
directors and officers of North Carolina corporations. In general, the statute
provides that:
. a corporation must indemnify a director or officer who is wholly
successful in his defense of a proceeding to which he is a party because
of his status as a director or officer, unless limited by the articles of
incorporation, and
. a corporation may indemnify a director or officer if he is not wholly
successful in that defense, if it is determined as provided in the
statute that the director or officer meets a certain standard of conduct,
provided that when a director or officer is liable to the corporation,
the corporation may not indemnify him.
123
The statute also permits a director or officer of a corporation who is a
party to a proceeding to apply to the courts for indemnification unless the
articles of incorporation provide otherwise, and the court may order
indemnification under certain circumstances set forth in the statute. The
statute further provides that a corporation may in its articles of
incorporation or by-laws or by contract or resolution provide indemnification
in addition to that provided by the statute, subject to certain conditions set
forth in the statute. The BCA does not permit eliminating liability with
respect to:
. acts or omissions that the director at the time of the breach knew or
believed were clearly in conflict with the best interests of the
corporation;
. any liability for unlawful distributions;
. any transaction from which the director derived an improper personal
benefit; or
. acts or omissions occurring prior to the date the provisions became
effective.
First Union. First Union's by-laws provide for the indemnification of First
Union's directors and executive officers by First Union against liabilities
arising out of their status as directors or executive officers, excluding any
liability relating to activities which were, at the time taken, known or
believed by such person to be clearly in conflict with the best interests of
First Union. First Union's articles of incorporation eliminate personal
liability of each First Union director to the fullest extent the BCA permits.
Wachovia. Wachovia's articles of incorporation provide that, to the full
extent permitted by law, a director of Wachovia will have no personal liability
for monetary damages for breach of his or her duty as a director, whether such
action is brought by, or on behalf of, Wachovia or otherwise. Wachovia's by-
laws provide for indemnification of any liability of directors, officers,
employees or agents of Wachovia or any wholly-owned subsidiary.
Indemnification payments for liabilities and litigation expenses may be made
only following a determination that the activities of the person to be
indemnified were at the time taken not known or believed by the person to be
indemnified to be clearly in conflict with the best interests of Wachovia. This
determination will be made: (1) by a majority of disinterested directors if
there are at least two such directors, (2) if there are not two such directors
or if a majority of the disinterested directors so directs, by independent
legal counsel in a written opinion, (3) by a majority of the shareholders, or
(4) in accordance with any reasonable procedures prescribed by the Wachovia
board of directors prior to the assertion of the claim for which
indemnification is sought. If the person to be indemnified is an officer or an
employee of Wachovia, the determination may be made by the chief executive
officer or a designee of the chief executive officer.
Amendments to Articles of Incorporation and By-Laws
First Union. Under North Carolina law, an amendment to the articles of
incorporation generally requires the board to recommend the amendment, and
either a majority of all shares entitled to vote thereon or a majority of the
votes cast thereon to approve, depending on the amendment's nature. In
accordance with North Carolina law, First Union's board may condition the
proposed amendment's submission on any basis. Under certain circumstances, the
affirmative vote of holders of at least two-thirds, or in some cases a
majority, of the outstanding First Union preferred stock or First Union class A
preferred stock is needed to approve an amendment to the articles of
incorporation. In addition, amendments to provisions of First Union's articles
of incorporation or First Union's by-laws related to the maximum and minimum
number of directors, the classes of directors, the vote for filling vacancies
of the board of directors, removal of directors, or the authority to call
special shareholders' meetings require the approval of not less than 80% of the
outstanding First Union shares entitled to vote in the election of directors,
voting together as a single class. An amendment to First Union's by-laws
generally requires either the shareholders or First Union's board to approve
the amendment. First Union's board generally may not amend any by-law the
shareholders approve, in addition to the other restrictions against the board
amending the by-laws.
124
Wachovia. The affirmative vote of at least 66 2/3% of outstanding voting
shares of Wachovia, including a majority of the shares held by persons other
than an interested shareholder (as defined in "Anti-Takeover Provisions" on
page 121 above), is required under Wachovia's articles of incorporation to
amend or repeal provisions of the articles of incorporation that relate to (1)
the duration of the corporation, (2) the authorized capital stock, (3) the
number, classification, election and removal of directors, (4) preemptive
rights of shareholders, (5) business combinations and (6) amendment of
Wachovia's articles of incorporation.
However, the affirmative vote of the holders of at least a majority of the
voting shares is sufficient to approve any amendment relating to the foregoing
provisions of Wachovia's articles of incorporation if (1) there is no
interested shareholder and the amendment is approved by a majority of the
Wachovia board of directors or (2) an interested shareholder exists, but the
amendment is approved by at least 66 2/3% of the continuing directors (as
defined in "Anti-Takeover Provisions" on page 121 above).
An amendment to Wachovia's by-laws generally requires either the
shareholders or Wachovia's board to approve the amendment. Wachovia's board
generally may not amend a by-law that the shareholders approve unless either
the articles of incorporation or the by-laws specifically provides otherwise
with respect to the subject matter of that by-law. Any by-law that fixes a
greater quorum or voting requirement for the board may only be amended by (1)
the shareholders, in the event that the by-law was originally adopted by the
shareholders and did not provide otherwise or (2) either the shareholders or
the directors, in the event that the by-law was originally adopted by the
directors.
Certain Votes of Board of Directors
First Union. After the amendments to the articles of incorporation of First
Union are effected by the merger agreement and until the 2004 annual
shareholders' meeting, the combined company's articles of incorporation will
require the vote of a "special majority" of directors to take any of the
following actions:
. nominating a director to fill a directorship other than in the manner set
forth in the nomination procedures of the amendments to First Union's
articles of incorporation;
. filling the positions of Chairman or Chief Executive Officer and
President;
. removing of Mr. Baker from the Chairman position or Mr. Thompson from the
Chairman, Chief Executive Officer or President position;
. making any modification to Mr. Thompson's or Mr. Baker's employment
agreement; and
. making any recommendation to shareholders to modify the director
nominating procedures and the special majority procedures of the articles
of incorporation.
A special majority of the board of directors will be equal to at least 75%
of the board, plus a majority of both the former First Union directors and the
former Wachovia directors then serving on the board.
Wachovia. Wachovia's articles of incorporation or by-laws do not contain any
similar director vote provisions.
125
OTHER MATTERS TO BE CONSIDERED AT THE FIRST UNION MEETING
First Union's annual shareholder meeting was previously scheduled for April
17, 2001. However, in light of the announcement of the Wachovia merger
agreement on April 16, First Union's board of directors concluded that it was
prudent to postpone the annual meeting.
The shareholder meeting at which the merger will be considered will also be
First Union's annual meeting of shareholders for 2001. Therefore, a number of
proposals requiring shareholder action in the ordinary course of First Union's
business also are being presented for consideration and voting. This portion of
the document discusses these other proposals.
The information discussed below replaces the proxy statement originally sent
to First Union shareholders in connection with the postponed annual meeting.
First Union Proposal 2. A Proposal To Elect Directors
General Information and First Union Nominees
First Union's board of directors is divided into three classes. At each
annual meeting of shareholders, you elect the members of one of the three
classes to three-year terms. First Union's board of directors determines the
number of directors but it cannot be less than nine or more than 30. For
purposes of electing directors at the meeting, the number of directors has been
fixed at 14, with five directors in Class I, five directors in Class II, and
four directors in Class III.
The terms of the directors serving in Class III will expire at the First
Union meeting. Unless the merger is completed before the next annual meeting,
the terms of the directors serving in Classes I and II will expire at the 2002
and 2003 annual meetings of shareholders, respectively, except as otherwise
indicated below. If the merger is completed prior to the next annual meeting of
First Union shareholders, then, at the completion of the merger, some of the
directors elected by First Union shareholders at the First Union meeting may no
longer be directors of the combined company. In addition, 9 persons designated
by Wachovia will become members of the combined company's board of directors.
Immediately following completion of the merger, the combined company's board
will consist of 18 members, 9 of whom are chosen by First Union and 9 of whom
are chosen by Wachovia.
G. Alex Bernhardt, Sr., Joseph Neubauer, Ruth G. Shaw and Lanty L. Smith are
being nominated to serve as directors in Class III with terms expiring at the
2004 annual meeting of shareholders. Mr. Bernhardt is currently serving as a
Class III director, Mr. Neubauer and Ms. Shaw as Class I directors and Mr.
Smith as a Class II director. In addition, Roddey Dowd, Sr., who is currently
serving as a Class II director, is being nominated to serve as a Class I
director with a term expiring at the 2002 annual meeting of shareholders.
Edward E. Barr, W. Waldo Bradley, Norwood H. Davis, Jr., B.F. Dolan, Frank
M. Henry, Ernest E. Jones and James M. Seabrook, each of whose term of office
was scheduled to expire at the annual meeting of shareholders originally
scheduled for April 17, 2001, retired as a director of First Union on that
date. Directors who reach retirement age (70) during their term in office are
to retire from the board at the annual meeting of shareholders next following
their 70th birthday, subject to the board authorizing the retirement to be
deferred when deemed appropriate.
Directors are elected by a plurality of votes cast. Shares cannot be voted
for a greater number of persons than the number of nominees named herein.
Should any nominee be unavailable for election by reason of death or other
unexpected occurrence, the enclosed proxy, to the extent permitted by
applicable law, may be voted with discretionary authority in connection with
the nomination by the board and the election of any substitute nominee. In
addition, the board may reduce the number of directors to be elected at the
meeting.
126
The board recommends that shareholders vote "FOR" the election of the five
nominees named below as directors of First Union in the classes and for the
terms indicated. Proxies, unless indicated to the contrary, will be voted "FOR"
the election of the five nominees.
Listed below are the names of the four nominees to serve as Class III
directors, the one nominee to serve as a Class I director and the nine
incumbent directors who will be continuing in office following the meeting,
together with: their ages; their principal occupations during the past five
years; any other directorships they serve with publicly-held companies; the
year during which they were first elected a director; and the number of shares
of First Union common stock they beneficially owned as of June 12, 2001
(including common stock equivalents owned as of that date (see footnote (1)
following the list)). In addition, see footnote (1) following the list for
information about the beneficial ownership of First Union common stock by each
of First Union's executive officers listed under "First Union Executive
Compensation".
Name, Age, Principal Occupation Director Shares
and Certain Other Directorships Since Owned(1)
------------------------------- -------- --------
FIRST UNION NOMINEES FOR ELECTION TO CLASS III--TERMS EXPIRING IN 2004
G. ALEX BERNHARDT, SR. (58). Chairman and Chief Executive 1992 33,040
Officer, Bernhardt Furniture Company, Lenoir, North
Carolina, a residential and executive office furnishings
[photo] manufacturer, since August 1996. Formerly, President and
Chief Executive Officer, Bernhardt Furniture Company.
Director, Duke Energy Corporation.
JOSEPH NEUBAUER (59). Chairman and Chief Executive Officer, 1996 23,704
[photo] ARAMARK Corporation, Philadelphia, Pennsylvania, a service
management company. Director, Verizon Communications, Inc.,
CIGNA Corporation and Federated Department Stores, Inc.
RUTH G. SHAW (53). Executive Vice President and Chief 1990 16,396
[photo] Administrative Officer, Duke Energy Corporation, Charlotte,
North Carolina, an energy company, since June 1997.
Formerly, Senior Vice President, Corporate Resources, and
Chief Administrative Officer, Duke Energy Corporation.
LANTY L. SMITH (58). Chairman, Soles Brower Smith & Co., 1987 67,428
[photo] Greensboro, North Carolina, an investment and merchant
banking firm, since December 1998. Also, Chairman, Precision
Fabrics Group, Inc., Greensboro, North Carolina, a
manufacturer of engineered, specification textile products,
since November 1997. Prior to November 1997, Chairman and
Chief Executive Officer, Precision Fabrics Group, Inc.
FIRST UNION NOMINEE FOR ELECTION TO CLASS I--TERM EXPIRING IN 2002
RODDEY DOWD, SR. (68). Chairman of the Executive Committee, 1988 64,791
[photo] Charlotte Pipe and Foundry Company, Charlotte, North
Carolina, a manufacturer of pipe and fittings, since
September 1998. Formerly, Chairman, Charlotte Pipe and
Foundry Company. Director, Ruddick Corporation.
127
Name, Age, Principal Occupation Director Shares
and Certain Other Directorships Since Owned(1)
------------------------------- -------- ---------
FIRST UNION INCUMBENT CLASS I DIRECTORS--TERMS EXPIRING IN 2002
[photo] ERSKINE B. BOWLES (55). General Partner, Forstmann Little & 1999 17,454
Co., New York, New York, and Managing Director, Carousel
Capital Company, LLC, Charlotte, North Carolina, merchant
banking private equity companies, since January 1999.
Formerly, Chief of Staff, The White House, November 1996 to
November 1998, and Managing Director, Carousel Capital
Company, LLC, prior to November 1996. Director, McLeodUSA
Incorporated, Merck & Co., Inc. and VF Corporation.(2)
[photo] ROBERT J. BROWN (66). Chairman and Chief Executive Officer, 1993 10,169
B&C Associates, Inc., High Point, North Carolina, a public
relations and marketing research firm. Director, AutoNation,
Inc., Duke Energy Corporation and Sonoco Products Company.
[photo] HERBERT LOTMAN (67). Chairman and Chief Executive Officer, 1998 162,738
Keystone Foods Holding Company, Inc., Bala Cynwyd,
Pennsylvania, a global food processor and logistics company.
[photo] PATRICIA A. McFATE (69). Senior Scientist, Strategies Group, 1998 11,141
Science Applications International Corporation, Santa Fe,
New Mexico, a systems engineering company.
FIRST UNION INCUMBENT CLASS II DIRECTORS--TERMS EXPIRING IN 2003
[photo] A. DANO DAVIS (56). Chairman, Winn-Dixie Stores, Inc., 1997 2,858,438
Jacksonville, Florida, a food retailer, since November 1999.
Prior to November 1999, also Principal Executive Officer.
Director, Winn-Dixie Stores, Inc.
[photo] WILLIAM H. GOODWIN, JR. (60). Chairman, CCA Industries, 1993 1,074,902
Inc., Richmond, Virginia, a diversified holding company.
128
[photo]
Name, Age, Principal Occupation Director Shares
and Certain Other Directorships Since Owned(1)
------------------------------- -------- --------
RADFORD D. LOVETT (67). Chairman, Commodores Point Terminal 1985 415,190
[photo] Corporation, Jacksonville, Florida, an operator of a marine
terminal and a real estate management company. Director,
Florida Rock Industries, Inc., Patriot Transportation
Holding, Inc. and Winn-Dixie Stores, Inc.
MACKEY J. MCDONALD (54). Chairman (since October 1998), 1997 13,371
President and Chief Executive Officer, VF Corporation,
[photo] Greensboro, North Carolina, an apparel manufacturer.
Director, Hershey Foods Corporation and VF Corporation.
G. KENNEDY THOMPSON (50). Chairman (since March 2001), 1999 631,511
President (since December 1999) and Chief Executive Officer
[photo] (since April 2000), First Union Corporation. Formerly, Vice
Chairman, First Union Corporation, October 1998 to December
1999, Executive Vice President, November 1996 to October
1998, and President, First Union-Florida, prior to November
1996. Director, Florida Rock Industries, Inc.(2)
--------
(1) The foregoing directors and nominees have sole voting and investment power
over the shares of common stock beneficially owned by them on June 12,
2001, except for the following shares over which the directors indicated
shared voting and/or investment power: Bernhardt--1,177 shares; Brown--200
shares; A. Dano Davis--2,471,514 shares; Goodwin--1,050,500 shares;
Lotman--45,360 shares; Shaw--1,700 shares; and Thompson--22,616 shares.
In addition, each of the following executive officers listed under "First
Union Executive Compensation" (other than Thompson, whose share ownership
is indicated above) beneficially owned, as of June 12, 2001, the following
shares of common stock: Benjamin P. Jenkins, III--386,033 shares (including
18,200 shares in which he shares voting and/or investment power); Donald A.
McMullen, Jr.--409,676 shares; David M. Carroll--302,712 shares; Austin A.
Adams--353,053 shares; and Edward E. Crutchfield--1,250,254 shares
(including 15,778 shares in which he shares voting and/or investment
power).
The foregoing continuing directors, nominees, named executive officers and
other executive officers of First Union beneficially owned a total of
9,143,109 shares, or less than 1% of the outstanding shares of common stock
as of June 12, 2001. Such persons share voting and/or investment power with
others with respect to 3,699,299 of such shares. As of June 12, 2001, no
continuing director, nominee, or executive officer beneficially owned more
than 1% of the outstanding shares of common stock.
Included in the shares set forth above are the following shares held under
certain of our employee benefit plans, including options exercisable on
June 12, 2001, or within 60 days thereafter, by each of the following named
executive officers and by all of the directors and all of our executive
officers as a group: Thompson--383,554 shares; Crutchfield--1,000,045
shares; Jenkins--281,462 shares; McMullen--331,806 shares; Carroll--253,642
shares; Adams--304,312 shares; and members of the group (including the
foregoing)--3,217,977 shares. Non-employee directors are not eligible to
participate in any of our stock option or other employee benefit plans.
Such directors are eligible, however, to participate in our Deferred
Compensation Plan for Non-Employee Directors. Included in the shares set
forth above are the
129
following number of units of common stock equivalents credited, as of June
12, 2001, to the following non-employee directors under that plan:
Bernhardt--28,061 units; Bowles--4,954 units; Brown--8,231 units; A. Dano
Davis--6,724 units; Dowd--42,995 units; Goodwin--18,402 units; Lotman--530
units; Lovett--52,098 units; McDonald--9,371 units; McFate--2,515 units;
Neubauer--12,040 units; Shaw--13,696 units; Smith--47,428 units; and all
directors as a group --247,045 units. These units will be paid in cash,
based on the fair market value of the common stock at the time of payment,
which would generally occur following retirement as a director. There are
no voting rights with respect to these units. See "Compensation of First
Union Directors".
The following continuing directors and nominees disclaim beneficial
ownership of certain shares of common stock held by certain of their
related interests, as a result of which these shares are not included in
the number of shares indicated above: Lotman--114,245 shares.
(2) See (i) "First Union Employment Contracts" and "First Union Executive
Compensation", and (ii) "Other Matters Relating to Executive Officers and
Directors of First Union".
Committees of the First Union Board and Attendance
Attendance. The First Union board held eight meetings in 2000. In 2000, all
of the directors attended at least 75% of the meetings of the board and the
relevant committees, except for Messrs. A. Dano Davis and Seabrook (a retired
director), who were not able to do so due to illness, business or other
conflicts.
Executive Committee. The Executive Committee held nine meetings in 2000. The
Committee is authorized, between meetings of the board, to perform all duties
and exercise all authority of the board, except for those duties and
authorities delegated to other committees of the board or which are exclusively
reserved to the board by our by-laws or by statute. In addition, the Chair of
the Executive Committee, a non-employee director, also serves as the lead
independent director of the board. The responsibilities of the lead independent
director include, among other things, assisting the Chairman of the board with
certain board-related matters, and acting, as necessary, as the principal
liaison between the independent directors and the Chairman of the board. As of
December 31, 2000, the members of the Committee were as follows: Dolan
(Chairman) (a retired director), Smith (Vice Chairman), Crutchfield (a retired
director), Goodwin, Lovett, McDonald, Neubauer and Thompson. The current
members of the Committee are as follows: Smith (Chairman), Goodwin, Lovett,
McDonald, Bowles, Neubauer and Thompson.
Credit/Market Risk Committee. The Credit/Market Risk Committee held six
meetings in 2000. The Committee is authorized, among other things, to assist
the board in overseeing, and receiving information regarding, First Union
policies, procedures and practices relating to asset and liability management,
and credit, market and operational risk. As of December 31, 2000, the members
of the Committee were as follows: McDonald (Chairman), Goodwin (Vice Chairman),
Bernhardt, Dowd, Henry (a retired director) and Neubauer. The current members
of the Committee are as follows: Neubauer (Chairman), A. Dano Davis, Lotman,
Brown and Lovett.
Financial Services Committee. The Financial Services Committee held five
meetings in 2000. The Committee had authority, among other things, to review
First Union's commercial, consumer and mortgage banking, capital management and
capital markets activities. As of December 31, 2000, the members of the
Committee were as follows: Shaw (Chairman), Bowles (Vice Chairman), Barr (a
retired director), Lovett and Seabrook. This Committee will not be a committee
of the board in 2001.
Human Resources Committee. The Human Resources Committee held six meetings
in 2000. The HR Committee is authorized, among other things, to review and make
recommendations to the board regarding employee compensation, to administer
various employee benefit plans, to act as the executive compensation committee
and to monitor conditions of employment and First Union's personnel policies.
As of December 31, 2000, the members of the Committee were as follows: Lotman
(Chairman), Brown (Vice Chairman), Dolan and McFate. The current members of the
Committee are as follows: Shaw (Chairman), Dowd, Goodwin and McFate.
130
Nominating Committee. The Nominating Committee held two meetings in 2000.
The Committee is authorized, among other things, to recommend the number of
directors to be elected to the board, to recommend any changes in board
membership, to recommend director prospects and to study the compensation for
directors and recommend changes when appropriate. As of December 31, 2000, the
members of the Committee were as follows: Bernhardt (Chairman), Goodwin (Vice
Chairman), Bowles, Dolan, Lotman, Lovett, McDonald and Smith. The current
members of the Committee are as follows: McDonald (Chairman), Goodwin,
Bernhardt, Bowles, Lovett and Smith. First Union's by-laws include provisions
setting forth specific conditions under which persons may be nominated as
directors at an annual meeting of shareholders. A copy of such provisions is
available upon request to: First Union Corporation, One First Union Center,
Charlotte, North Carolina 28288-0013, Attention: Corporate Secretary.
Audit Committee. The Audit Committee held five meetings in 2000. This
Committee operates pursuant to a written charter adopted by the board. A copy
of the charter is attached to this joint proxy statement-prospectus as Appendix
G. As set forth in the charter, the Committee's principal responsibilities are
to assist the board in overseeing First Union's financial reporting process. As
of December 31, 2000, the members of the Committee were as follows: Smith
(Chairman), Norwood H. Davis, Jr. (Vice Chairman) (a retired director), Bradley
(a retired director), A. Dano Davis and Jones (a retired director). The current
members of the Committee are as follows: Bowles (Chairman), McDonald, Bernhardt
and Smith. The board, in its business judgment, determined that all of the
current members of the Committee are, and all of the retired directors were,
"independent", in accordance with the applicable sections of the NYSE's listing
standards. On March 13, 2001, the Committee issued the following audit
committee report:
Audit Committee Report. As noted above, the role of the Audit Committee is
to assist the board in its oversight of First Union's financial reporting
process. As set forth in the Committee's charter, management is responsible for
the preparation, presentation and integrity of First Union's financial
statements. The independent auditors are responsible for auditing the financial
statements and expressing an opinion as to their conformity with generally
accepted accounting principles.
In the performance of its oversight function and in accordance with its
responsibilities under its charter, the Committee has reviewed and discussed
the audited financial statements with management and the independent auditors.
The Committee has also discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61, as
currently in effect. Finally, the Committee has received the written
disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees), as currently in effect, has considered whether the provision
of information technology consulting services relating to financial information
systems design and implementation and other non-audit services by the
independent auditors to First Union is compatible with maintaining the
auditor's independence, and has discussed with the auditors the auditors'
independence.
Based upon the review and discussions described in this report, the
Committee recommended to the board that the audited financial statements be
included in First Union's Annual Report on Form 10-K for the year ended
December 31, 2000, to be filed with the SEC.
Lanty L. Smith, Chairman
Norwood H. Davis, Jr., Vice Chairman (a retired director)
W. Waldo Bradley (a retired director)
A. Dano Davis
Ernest E. Jones (a retired director)
First Union Executive Compensation
The following information relates to compensation paid or payable to (i) the
current Chief Executive Officer who has served as such since April 2000, (ii)
the former CEO, who, during the calendar year 2000,
131
served as such from January 2000 to April 2000, and (iii) the 4 other most
highly compensated executive officers who were serving as such at December 31,
2000. The current CEO, the former CEO and those four other executive officers
are called the "Named Officers" in this document. See "First Union Employment
Contracts".
Summary Compensation Table. The following table sets forth for the Named
Officers: (i) their name and principal position on December 31, 2000 (column
(a)); (ii) years covered (column (b)); (iii) annual compensation (columns (c),
(d) and (e)), including (A) base salary (column (c)), (B) bonus (column (d)),
and (C) other annual compensation not properly categorized as salary or bonus
(column (e)); (iv) long-term compensation (columns (f), (g) and (h)), including
(A) the dollar value of any award of restricted stock (calculated by
multiplying the closing sale price of the common stock on the date of grant by
the number of shares awarded) (column (f)), (B) the sum of the number of stock
options granted (column (g)) and (C) the dollar value of all payments pursuant
to long-term incentive plans ("LTIPs") (column (h)); and (v) all other
compensation for the covered year that we believe could not be properly
reported in any other column of the table (column (i)).
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------------- ----------------------- ---------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Salary Bonus Compensation Award Options/SARs Payouts Compensation
Name and Position Year ($) (1) ($) (1) ($) (2) ($) (3) (#) (4) ($) (1) ($) (5)
----------------- ---- --------- ----------- ------------ ---------- ------------ --------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
G. Kennedy Thompson..... 2000 940,000 -- 30,834 697,531 477,900 -- 4,255,158(4)
President and CEO 1999 500,000 -- 16,183 824,063 35,800 -- 106,020
1998 400,000 1,908,563(6) 143,285 689,960 34,138 -- 101,611
Benjamin P. Jenkins,
III.................... 2000 525,000 600,000 523,632 473,438 334,500 -- 298,095
Vice Chairman 1999 445,000 -- 426,876 809,986 67,900 300,000 210,972
1998 405,000 880,000 5,600 561,820 22,982 300,000 196,031
Donald A. McMullen,
Jr. ................... 2000 500,000 2,063,000 23,531 552,334 272,500 -- 106,628
Chairman 1999 490,000 -- 18,495 979,975 42,962 441,403 76,069
1998 445,000 880,000 33,964 809,986 39,206 320,217 29,197
David M. Carroll........ 2000 475,000 500,000 19,707 426,094 325,050 -- 111,023
Executive Vice 1999 400,000 -- 191,453 809,986 63,850 325,000 77,081
President 1998 370,000 500,000 120,463 609,976 22,982 250,000 68,543
Austin A. Adams......... 2000 460,000 350,000 20,125 441,875 191,000 -- 196,164
Executive Vice 1999 460,000 -- 17,227 840,544 36,500 347,171 170,736
President(7) 1998 405,000 600,000 11,886 689,960 34,138 320,217 127,178
Edward E.
Crutchfield(8)......... 2000 786,667 -- 146,663 -- -- -- 345,653
Chairman and 1999 1,180,000 -- 115,631 2,359,950 257,843 1,130,784 310,944
former CEO 1998 1,025,000 2,280,000 107,186 2,049,939 400,844 1,015,812 320,378
--------
(1) Amounts include dollars deferred by the Named Officers under First Union's
Deferred Compensation Plans. At the election of the participants in such
plans, account balances are paid in a lump sum or in ten annual
installments upon termination of employment due to death, disability or
retirement, except in the event of a "change in control" of First Union
where the successor or acquiring corporation does not elect to continue
such Plans, in which case such balances are to be paid in a lump sum. A
nonqualified retirement trust has been established to fund certain
nonqualified benefit plans, including First Union's Deferred Compensation
Plans. Prior to a "change in control" of First Union, benefits are paid
from the trust only upon our direction. Upon the occurrence of a "change in
control", First Union is required to contribute an amount to the trust
sufficient to pay the benefits required to be paid under such plans as of
the date on which the "change in control" occurs. The merger with Wachovia
will not be a "change in control" of First Union for these purposes.
132
(2) Represents reimbursement for (i) payment of taxes, and (ii) personal
benefits, if the personal benefits exceed the lesser of $50,000 or 10% of
the total of the amounts in columns (c) and (d). Personal benefits for a
Named Officer which exceeded 25% of the Named Officer's total personal
benefits in 2000 were as follows:
Thompson Jenkins McMullen Carroll Adams Crutchfield
-------- ------- -------- ------- ------ -----------
Membership fees and
dues................... -- -- -- -- -- 48,407
Amounts reimbursed for
relocation............. -- 248,397 -- -- -- --
Amounts reimbursed for
payment of taxes....... 30,834 249,512 25,531 19,707 20,125 79,319
(3) The aggregate number of shares of restricted stock held as of December 31,
2000, and the value thereof as of such date, were as follows: Thompson:
49,323 shares ($1,371,796); Jenkins: 46,085 ($1,281,739); McMullen: 47,991
shares ($1,334,750); Carroll: 35,389 shares ($984,257); and Adams: 41,303
shares ($1,148,740). All of Mr. Crutchfield's restricted shares became
vested upon his retirement as an employee in September 2000. Restricted
stock awards granted in 2000 vest at a rate of 20% per year over five years
or upon termination due to death, disability, retirement (as defined in the
stock plan), or a "change in control" of First Union. See also footnote (6)
below. Dividends on shares of restricted stock are paid at the same time
dividends on the other outstanding shares of common stock are paid.
(4) As more fully discussed in "First Union Option/SAR Grants Table" and "First
Union HR Committee Report on Executive Compensation", each of the Named
Officers (except for Mr. Crutchfield) in October 2000 received a special
one-time (and also in January 2001 for Mr. Thompson) stock option grant
(and also a cash payment to Mr. Thompson) in lieu of future participation
in First Union's Supplemental Retirement Plan, known as the SERP, which was
terminated as of December 31, 2000. The amount of option grant to an
individual was based upon the projected value of the SERP over the next
five years. Due to limitations in the number of shares available for
issuance to an individual under First Union's 1998 Stock Incentive Plan,
First Union was unable to provide Mr. Thompson with a sufficient number of
stock options equal to his projected SERP value. To more closely
approximate his projected SERP value, First Union granted Mr. Thompson
250,000 stock options in January 2001 and made a payment of $4,095,625 to
Mr. Thompson in October 2000. These awards are intended to further align
those executives' interests with First Union's shareholders by making their
future retirement benefits more contingent on stock price appreciation and
less dependent on cash entitlements for service tenure.
(5) Amounts shown for 2000 consist of the following:
Thompson Jenkins McMullen Carroll Adams Crutchfield
---------- ------- -------- ------- ------ -----------
Savings Plan matching
contributions.......... $ 56,700 31,800 30,300 28,800 27,900 47,500
Value of life insurance
premiums*.............. 21,971 49,564 45,055 10,225 30,742 235,492
Value of disability
insurance.............. 1,136 3,166 -- 865 2,275 --
Value of gift of
automobile............. 10,831 38,978 28,897 30,869 43,633 43,850
Above market interest on
deferred compensation.. 68,895 174,587 2,376 40,264 91,613 18,810
SERP payment (See also
footnote (4)).......... 4,095,625 -- -- -- -- --
* The value of life insurance premiums includes the value of premiums
advanced by First Union under split-dollar life insurance agreements. First
Union may terminate certain of such agreements and receive our interest in
the related life insurance policies under certain conditions, provided we
may not terminate such agreements if certain of such conditions occur after
a "change in control" of First Union.
(6) Mr. Thompson participated in an annual incentive bonus plan for the
Capital Markets Group in 1998 that required 25% of his annual incentive
bonus be paid in shares of restricted stock, known as the Bonus Shares.
First Union matched 50% of the Bonus Shares with additional shares of
restricted stock. The shares of restricted stock awarded under the plan
vest at the end of a three-year period. The bonus amounts set forth in the
Summary Compensation Table represent the total bonus, including the
portions attributable to such matched shares of restricted stock. These
shares of restricted stock are not included in footnote (3) above.
133
(7) Mr. Adams terminated employment with First Union on February 28, 2001.
(8) Mr. Crutchfield retired as a director on March 1, 2001. In addition to the
payments indicated, pursuant to an Employment Agreement entered into in
August 1985, Mr. Crutchfield was paid $1,573,333 upon his retirement as an
employee in September 2000. In addition, pursuant to a Special Retirement
Agreement, Mr. Crutchfield was paid $1,800,000 upon his retirement, will
receive certain future retirement payments and benefits and was given an
automobile valued at $43,850. See "First Union Employment Contracts" for
more information regarding these payments and benefits.
First Union Option/SAR Grants Table
The following table sets forth with respect to grants of stock options made
during 2000 to each of the Named Officers: (i) the name of such officer (column
(a)); (ii) the number of options granted (column (b)); (iii) the percent the
grant represents of the total options granted to all employees during 2000
(column (c)); (iv) the per share exercise price of the options granted (column
(d)); (v) the expiration date of the options (column e)); and (vi) the Black-
Scholes value of the options at grant date (column (f)).
OPTION/SAR GRANTS IN 2000
-------------------------------------------------------------------
Individual Grants
-------------------------------------------------------------------
Number of Securities % of Total
Underlying Options/SARs Options/SARs Granted Exercise or Black-Scholes
Granted to Employees Base Price Expiration Grant Date Value(3)
Name (#) in 2000 ($/Sh) Date ($)
---- ----------------------- -------------------- ----------- ---------- -------------------
(a) (b) (c) (d) (e) (f)
Thompson................ 198,900(1) 31.5624 01/03/10 1,217,262
279,000(2) 27.5625 10/17/10 1,427,252
-------
Total................. 477,900 3.83
Jenkins................. 94,500(1) 31.5625 01/03/10 578,337
240,000(2) 27.5625 10/17/10 1,227,744
-------
Total................. 334,500 2.68
McMullen................ 157,500(1) 31.5625 01/03/10 963,895
115,000(2) 27.5625 10/17/10 588,294
-------
Total................. 272,500 2.18
Carroll................. 85,050(1) 31.5625 01/03/10 520,503
240,000(2) 27.5625 10/17/10 1,227,744
-------
Total................. 325,050 2.60
Adams(4)................ 126,000(1) 31.5625 01/03/10 744,116
65,000(2) 27.5625 10/17/10 332,514
-------
Total................. 191,000 1.53
Crutchfield............. 0 0.00
--------
(1) These options are nonqualified stock options. The options are exercisable
after one year from the date of grant, at an option exercise price equal
to the market price of the common stock at the date of grant. See footnote
(3) below.
(2) As more fully discussed under "First Union HR Committee Report on
Executive Compensation", First Union terminated its SERP in December 2000.
These options were granted under First Union's 1998 Stock Incentive Plan
to SERP participants in lieu of future participation in the SERP and are
nonqualified stock options. The amount of the option grant to an
individual was based upon the projected value of the SERP over the next
five years. The option exercise price is equal to the market value of the
common stock on the date of grant. The options are exercisable 33 1/3% per
year in 2001, 2002 and 2003. The special one-time stock option grants are
intended to further align those executives' interests with First Union's
shareholders by making their future retirement benefits more contingent on
stock price appreciation and less dependent on cash entitlements for
service tenure. See footnote (4) of "Summary Compensation Table", footnote
(3) below and "First Union Pension Plan Table".
134
(3) The values shown for the options referred to in footnote (1) reflect
standard application of the Black-Scholes pricing model using (i) 60-month
volatility (26.90%) and daily stock prices for the five years prior to
grant date, (ii) an option term of ten years, (iii) an interest rate that
corresponds to the U.S. Treasury rate with a ten-year maturity (6.28%),
and (iv) dividends at the annualized rate in place on the date of grant
($1.88). The values shown for the options referred to in footnote (2)
reflect standard application of the Black-Scholes options pricing model
using (i) 60-month volatility (36.01%) and daily stock prices for the five
years prior to grant date, (ii) an option term of ten years, (iii) an
interest rate that corresponds to the U.S. Treasury rate with a five-year
maturity (5.74%), and (iv) dividends at the annualized rate in place on
the date of grant ($1.92). The values do not take into account risk
factors such as non-transferability and limits on exercisability. The
Black-Scholes options pricing model is a commonly utilized model for
valuing options. The model assumes that the possibilities of future stock
returns (dividends plus share price appreciation) resemble a normal "bell-
shaped" curve. In assessing the values indicated in the above table, it
should be kept in mind that no matter what theoretical value is placed on
a stock option on the date of grant, the ultimate value of the option is
dependent on the market value of the common stock at a future date, which
will depend to a large degree on the efforts of the Named Officers to
bring future success to First Union for the benefit of all shareholders.
(4) In connection with his termination of employment in February 2001, Mr.
Adams forfeited 57,282 of the stock options referred to in footnote (2)
above.
First Union Aggregated Option/SAR Exercises and Year-End Option/SAR Value
Table
The following table sets forth with respect to each exercise of stock
options or tandem stock appreciation rights, known as SARs, and freestanding
SARs during 2000 by each of the Named Officers and the year-end value of
unexercised options and SARs on an aggregated basis: (i) the name of such
officer (column (a)); (ii) the number of shares received upon exercise, or if
no shares were received, the number of securities with respect to which the
options or SARs were exercised (column (b)); (iii) the aggregate dollar value
realized upon exercise (column (c)); (iv) the total number of unexercised
options and SARs held at December 31, 2000, separately identifying the
exercisable and unexercisable options and SARs (column (d)); and (v) the
aggregate dollar value of in-the-money, unexercised options and SARs held at
December 31, 2000, separately identifying the exercisable and unexercisable
options and SARs (column (e)).
AGGREGATED OPTION/SAR EXERCISES IN 2000 AND DECEMBER 31, 2000 OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs
12/31/00(#) (1) at 12/31/00($)
--------------- --------------
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
---- --------------- -------- --------------- --------------
(a) (b) (c) (d) (e)
Thompson................ 844 4,695 184,654/478,540 286,999/69,750
Jenkins................. 5,244 100,670 186,962/335,140 333,289/60,000
McMullen................ 844 4,484 174,306/273,140 84,378/28,750
Carroll................. 844 4,167 168,592/325,690 229,787/60,000
Adams(2)................ 0 0 204,354/191,640 311,288/16,250
Crutchfield(3).......... 3,631 26,097 990,289/0 766,304/0
--------
(1) Upon a "change in control" of First Union, all outstanding options will
become exercisable. The merger with Wachovia will not be a "change in
control" under First Union's stock plans.
(2) In connection with his termination of employment, Mr. Adams forfeited
57,282 of the unexercisable options in column (d).
(3) In accordance with the terms of the applicable stock option plans, all of
Mr. Crutchfield's unexercisable options became exercisable upon his
retirement in September 2000.
135
First Union Long-Term Incentive Plan Awards Table
The following table sets forth, with respect to each award made to a Named
Officer in 2000 under any long-term incentive plan, or LTIP: (i) the name of
such officer (column (a)); (ii) the number of shares, units or other rights
awarded under any LTIP (column (b)); (iii) the performance or other time period
until payout or maturation of the award (column (c)); and (iv) for LTIPs not
based on stock price, the dollar value of the estimated payout or range of
estimated payouts under the award (threshold, target and maximum amount),
whether such award is denominated in stock or cash (columns (d) through (f)).
In the table, "MLTCIP" means First Union's Management Long-Term Cash Incentive
Plan and "CPRP" means First Union's 2000 Cash Performance and Retention Plan.
LONG-TERM INCENTIVE PLANS--AWARDS IN 2000
Estimated Future Payments under
Number of Non-Stock Price-Based Plans (1)
Shares, Units Performance or Other ------------------------------------
or Other Rights Period Until Maturation Threshold Target Maximum
Name (#) Or Payout ($ or #) ($ or #)(4) ($ or #)(5)
---- --------------- ----------------------- --------- ----------- -----------
(a) (b) (c) (d) (e) (f)
Thompson................ MLTCIP: 0 3 years 0 0 1,000,000
CPRP: 225,000(2) 3 years 1,000,000(3) 0 --
Jenkins................. MLTCIP: 0 3 years 0 0 525,000
CPRP: 135,000(2) 3 years 525,000(3) 0 --
McMullen................ MLTCIP: 0 3 years 0 0 500,000
CPRP: 100,000(2) 3 years 500,000(3) 0 --
Carroll................. MLTCIP: 0 3 years 0 0 475,000
CPRP: 115,000(2) 3 years 475,000(3) 0 --
Adams................... MLTCIP: 0 3 years 0 0 460,000
CPRP: 100,000(2) 3 years 460,000(3) 0(6) -- (6)
Crutchfield............. -- -- -- -- --
--------
(1) See the Summary Compensation Table. Under the MLTCIP, if First Union
achieves not less than a 10% average return on equity, known as ROE
(calculated as indicated below under "First Union HR Committee Report on
Executive Compensation") for the three year period ending each December
31, based on First Union's "adjusted net income" (as defined in such
Plan), a contribution to a management incentive pool will be made, based
on (i) our average ROE ranking for the applicable period compared to the
average ROE of the 25 largest bank holding companies in the U.S. for such
period (ranging from a ranking of one to 13), and (ii) a percentage of
base salaries of the participants in such Plan for the last year of the
period (gradually decreasing from 50% of such salaries if our ranking is
one, to 27% if our ranking is 13). Participants receive awards under such
Plan, subject to the discretion of the HR Committee, at the end of each
three-year period on the basis of individual performance as determined by
the HR Committee. The maximum potential award is 100% of base salary. No
payments were made in 2000 under the MLTCIP. See "First Union HR Committee
Report on Executive Compensation".
(2) Represents units granted pursuant to First Union's CPRP. Each unit
represents the right to receive amounts in cash based on increases in
First Union common stock earnings per share over a three-year period
ending December 31, 2003. In no event shall the participants in such plan
receive less than their base salary as of December 31, 2000, known as the
retention amount. Payouts under the plan will occur in early 2004. Units
are valued based on earnings per share growth in each fiscal year, with no
value assigned for growth less than 10% per year; $4.50 per unit assigned
for growth equal to 10% but less than 11%; $6.00 per unit assigned for
growth equal to 11% but less than 12%; $8.00 per unit assigned for growth
equal to 12% but less than 12.50%; and an additional $0.50 per unit for
each 0.5% increase in excess of 12.50%. In the event of a "change in
control" of First Union, units will accelerate and become payable in an
amount equal to the greater of (a) the aggregate value of such unit plus
$10 per unit or (b) the retention amount plus $10 per unit. The merger
with Wachovia will not be a "change in control" for these
136
purposes. See "First Union HR Committee Report on Executive Compensation".
First Union intends to terminate the CPRP in 2001. Participants in the CPRP
would receive stock options having a value representing the projected cash
value of the CPRP based on estimates of First Union's earnings per share
growth calculated on a First Union stand-alone basis, as if the merger with
Wachovia did not occur, in lieu of the right to participate in the CPRP.
(3) Threshold amounts under the CPRP represent the retention amount. See
footnote (2) above.
(4) Targets are not determinable under either the MLTCIP or CPRP. Awards
indicated represent awards granted in 2000 under the MLTCIP for the 1997-
1999 three-year period. Future awards under the MLTCIP may be higher or
lower than such awards.
(5) Represents 2000 annual salaries, the maximum awards that can be granted
under the MLTCIP in 2001 for the 1998-2000 three-year period. Maximum
awards under the CPRP are undeterminable. See footnote (2) above.
(6) As a result of his termination of employment in February 2001, Mr. Adams
will not receive any future payments under the MLTCIP and will receive
2/36ths of his retention amount under the CPRP.
First Union Pension Plan Table
The following table sets forth the estimated annual benefits payable upon
retirement under First Union's tax qualified pension plan in the specified
compensation and years of service classifications indicated below.
The compensation covered by First Union's pension plan includes basic
compensation. The portions of compensation which are considered covered
compensation under First Union's pension plan for the Named Officers are the
salary amounts indicated in the Summary Compensation Table less deferred
amounts. As of January 1, 2001, the credited full years of service under First
Union's pension plan were as follows: Thompson--25 years; Jenkins--26 years;
McMullen--6 years; Carroll--19 years; and Adams--27 years. Mr. Crutchfield was
not serving as an executive officer on that date. Upon his retirement in
September 2000, Mr. Crutchfield received his vested benefit under First
Union's tax qualified pension plan and his vested benefit under First Union's
SERP. Pursuant to the SERP, Mr. Crutchfield was entitled to be paid $1,781,455
annually for the remainder of his life, which was paid to Mr. Crutchfield in a
lump sum present value of such amount at his retirement in September 2000.
Prior to the termination of First Union's SERP as of December 31, 2000,
officers covered under the SERP (which included the Named Officers) who
attained age 60 with at least 10 years of service with us were eligible to
receive a maximum SERP benefit equal to 2% of five-year final average pay for
each year of service (up to 30 years), reduced by the amount of benefits
received under First Union's tax qualified pension plan, deferred compensation
plan and Social Security. Actuarially reduced early retirement SERP benefits
were available beginning at age 50 with 10 years of service. The compensation
used to calculate final average pay under the SERP included base salary and
cash incentive payments (including short-term and long-term cash incentives).
As discussed under "First Union HR Committee Report on Executive
Compensation", First Union terminated the SERP as of December 31, 2000.
Pursuant to the terms of the SERP, upon termination participants were entitled
to receive the lump sum present value of their accrued vested benefit as of
December 31, 2000, as if those participants actually retired on that date.
Pursuant to the SERP, the actuarial assumptions used to calculate the lump sum
payments made to the Named Officers under the SERP were essentially the same
assumptions that are used to calculate lump sum payments under First Union's
tax qualified pension plan. As a result, the following Named Officers were
paid the following amounts: Thompson--$8,708,310; Jenkins--$8,134,084;
McMullen--$1,136,827; Carroll--$2,856,788; and Adams--$7,739,443. See also
"First Union Option/SAR Grants Table" for a description of awards in lieu of
future SERP participation.
137
Estimated annual pension plan
retirement benefit, assuming a married
participant, a straight life annuity
and the years of service indicated (1)
---------------------------------------
15 20 25 30 35
years years years years years
------- ------- ------- ------- -------
Average annual compensation
$ 400,000............................ $35,397 $47,196 $58,995 $70,794 $74,894
600,000............................ 35,397 47,196 58,995 70,794 74,894
800,000............................ 35,397 47,196 58,995 70,794 74,894
1,000,000............................ 35,397 47,196 58,995 70,794 74,894
1,200,000............................ 35,397 47,196 58,995 70,794 74,894
--------
(1) For the year ending December 31, 2001, the annual retirement benefit
payable under First Union's pension plan is limited by federal law to
$135,000 and the maximum covered compensation is limited to $170,000.
Compensation of First Union Directors
First Union's directors receive a quarterly retainer of $11,250, plus $1,500
for each committee meeting attended and $2,000 for each meeting of the board
attended. In addition, the Chairman of each committee receives a quarterly fee
of $2,500. First Union reimburses for travel and accommodation expenses.
Directors who are employees of First Union (including Mr. Crutchfield following
his retirement as an employee in September 2000) do not receive any directors'
fees. Directors' fees totaling $1,610,203 were either paid to the directors in
2000 or deferred under the terms of First Union's Deferred Compensation Plan
for Non-Employee Directors.
Under the Deferred Compensation Plan for Non-Employee Directors, directors
who are not employees of First Union may defer payment of all or any part of
their directors' fees. Deferred amounts are payable after the end of the
calendar year in which the director ceases to be a director, in annual
installments over a ten-year period, unless otherwise determined by the HR
Committee. In 2000, 17 directors deferred $1,141,717 of their 2000 directors'
fees. Deferred fees may either earn interest or be valued based on the market
value of First Union common stock, at the option of the director.
Directors who elect to have their deferred fees valued based on the market
value of First Union common stock, are investing in common stock equivalents.
This means that the value of their deferred account is based on the market
value of First Union common stock and will rise and fall as if the account was
actually invested in the stock. As of June 12, 2001, a total of 13 directors
had an aggregate of $8,194,658 in their common stock equivalent deferred
accounts, which would equate to an aggregate of 247,050 shares of First Union
common stock based on the market value of First Union stock on that date.
All non-employee directors who serve 5 years or more are eligible to
participate in First Union's Retirement Plan for Non-Employee Directors. Under
that plan, after the end of the calendar year in which the director retires,
the director is entitled to receive an annual retirement benefit equal to 80%
of the amount of the annual director retainer in effect at that time.
The foregoing does not include payments being made to 5 former directors for
serving as special advisory consultants to the board. Those former directors
retired as of the 1998 annual meeting of shareholders, are to be paid a $60,000
annual retainer fee for the three-year period from April 1998 to April 2001,
and are eligible during that period to participate in the same benefit programs
in which the current directors are eligible to participate.
First Union Employment Contracts
Crutchfield. In August 1985, First Union entered into a five-year Employment
Agreement with Mr. Crutchfield, the former Chairman and CEO of First Union,
subject to (i) extension so that the unexpired portion would be not less than
five years, (ii) the right of either party to terminate the agreement at any
time, and (iii)
138
the right of Crutchfield to terminate the agreement if the board changed the
offices held by him or his power and authority or duties or responsibilities.
The agreement provided for an annual salary of not less than $330,000 and an
annual bonus based on his performance and other factors. If First Union
terminated the agreement other than for "cause" or if he terminated the
agreement as provided in (iii) above, he would be paid an amount equal to the
sum of (a) the result of multiplying (i) his then current annual salary by (ii)
the number of years (including any fraction thereof) then remaining in the term
of employment, and (b) the result of multiplying (i) his annual average short-
term Management Incentive Plan bonus during the three calendar years preceding
the termination date by (ii) the number of years (including any fraction
thereof) then remaining in the term of employment. If he terminated his
employment other than as provided in (iii) above, he would be paid 66 2/3% of
his then current annual salary for a period of two years, subject to forfeiture
of such amount if he were to violate a two-year non-compete provision. The
agreement also provided for a gross-up payment equal to the amount of excise
taxes (plus the applicable federal and state income, FICA and excise taxes due
on such gross-up payment) payable by him if his employment was terminated in
conjunction with a "change in control" of First Union and such taxes became
payable as a result of payments to him under the agreement or otherwise, being
deemed to be "excess parachute payments" for federal tax purposes. Pursuant to
that employment agreement, Mr. Crutchfield received a payment of $1,573,333,
representing a lump-sum of two times 66 2/3% of his salary, upon his retirement
as an employee in September 2000.
In addition, in connection with his retirement as an employee in September
2000, First Union and Mr. Crutchfield entered into a Special Retirement
Agreement which provides for (A) a special retirement benefit of $1,800,000 per
year for the remainder of Mr. Crutchfield's life (or for no less than 15 years
payable to his beneficiary in the event Mr. Crutchfield shall die in less than
15 years), (B) use of First Union's corporate aircraft for up to 120 hours per
year for 10 years, (C) office and secretarial support for the remainder of Mr.
Crutchfield's life, and (D) gift of the automobile Mr. Crutchfield was using at
the time of retirement. See "First Union HR Committee Report on Executive
Compensation".
Thompson. In November 1999, First Union entered into a five-year Employment
Agreement with G. Kennedy Thompson, the current Chairman, President and CEO of
First Union. The five-year employment period is automatically extended on an
annual basis unless either party determines otherwise prior to the annual
extension date. The agreement provides that if First Union terminates his
employment for reasons other than "cause", death, disability or retirement or
he terminates his employment for "good reason" then he will be entitled to (i)
a pro rata annual bonus for the period prior to his termination date, based on
the highest bonus paid to him during either the three-year period prior to his
termination or the three-year period prior to the date of the agreement, (ii)
an amount equal to five times his annual base salary and the highest bonus
determined under (i) above, and (iii) medical and life insurance benefits for
him and his family for five years after his termination date (or for life if
the termination date occurs after a "change in control" of First Union). The
agreement also provides for a gross-up payment equal to the amount of excise
taxes (plus the applicable federal and state income, FICA and excise taxes due
on such gross-up payment) payable by him if his employment is terminated in
conjunction with a "change in control" of First Union and such taxes become
payable as a result of payments to him under the agreement or otherwise, being
deemed to be "excess parachute payments" for federal tax purposes.
Other Employment Agreements. First Union has also entered into employment
agreements with Messrs. Jenkins, McMullen, Carroll and Adams and certain other
executive officers which are similar to the employment agreement with Mr.
Thompson, except those agreements are for three-year terms and the amount
payable pursuant to (ii) in the preceding paragraph is three times their annual
base salary and highest bonus.
Compensation Committee Interlocks and Insider Participation at First Union
As of December 31, 2000, the members of the HR Committee were Messrs. Brown,
Dolan, Lotman and Dr. McFate, none of whom is, or has been, an officer or
employee of First Union.
139
Edward E. Crutchfield, who retired as a director on March 1, 2001, serves on
the board of Bernhardt Furniture Company, and as one of the outside directors
on its Compensation Advisory Committee during 2000. G. Alex Bernhardt, Sr., a
director of First Union, serves as Chairman and Chief Executive Officer of
Bernhardt Furniture Company. See also "Others Matters Relating to Executive
Officers and Directors of First Union --General".
First Union HR Committee Report on Executive Compensation
The HR Committee, which consists solely of non-employee directors,
administers our executive compensation program and determines the compensation
of senior management. On March 13, 2001, the HR Committee issued the following
HR Committee report:
Compensation Philosophy. The HR Committee has established guiding principles
for First Union's compensation programs. The programs are intended to:
. Attract and retain key talent critical to First Union's long-term
success
. Motivate executives to achieve strategic business objectives and to
reward executives for their achievement
. Provide compensation opportunities that are competitive with those
provided by appropriate peer financial organizations
. Emphasize performance-based pay over fixed salary, and
. Use long-term pay based on the performance of First Union common stock
to further align the interests of senior management with First Union
shareholders.
The executive compensation program is reviewed periodically to ensure it
meets First Union's strategic needs. During 2000, a special review was
conducted with a nationally recognized executive compensation consultant to
accomplish the following objectives:
. Determine the strategy for executive compensation under First Union's
new operating model
. Assess the overall competitiveness of the compensation package,
including the mix of base salary, short term and long term cash
incentives and common stock incentives, and
. Ensure that the overall program supports First Union's strategy and is
strongly aligned with shareholder interests.
Results of this review will be reflected in a number of changes for 2001.
Peer groups differ for each of the businesses headed by executive and senior
officers and generally consist of those comparable financial institutions that
compete in the same markets, providing similar financial services and products.
The peer groups will change over time and will consist of other major U. S.
bank holding companies and other competitors. The HR Committee believes that
the most direct competitors for executive talent are not necessarily all of the
companies that would be included in a published industry index for comparing
total shareholder value; therefore, peer groups will not directly correspond to
the broad list of institutions that make up the indices shown on page 143.
Compensation Program. Compensation paid to the executive officers for 2000
consisted primarily of salary, performance-based incentives and awards of stock
options and restricted stock under the Management Incentive Plan and the 1998
Stock Incentive Plan. The payment of incentives and awards of stock options and
restricted stock are directly related to corporate and individual performance,
as well as business unit performance, where relevant.
140
In 2000, at management's recommendation, the HR Committee discontinued the
SERP. As a result of this termination, participants in the SERP were paid
their vested benefit in a cash lump sum actuarial equivalent as of December
31, 2000, as if those participants actually retired on that date. These
payments are discussed under "First Union Pension Plan Table" above. As a
result of the SERP termination, the HR Committee determined that First Union
would save approximately $16 million per year over the next five-year period.
Both First Union and the HR Committee believe that the SERP benefit is not
consistent with the desire to align the majority of compensation with
shareholder interests. Executives formerly covered by the SERP received a one-
time (and also in January 2001 for Mr. Thompson) grant of stock options (and
also a cash payment for Mr. Thompson) in partial recognition of foregone
benefits under the SERP. The special one-time stock option grants are intended
to make those executives' future retirement benefits more contingent on stock
price appreciation and less dependent on cash entitlements for service tenure.
See "First Union Option/SAR Grants Table".
Annual Compensation. Annual cash compensation consists of base salary and
annual incentive awards.
For each executive, the HR Committee reviews salaries paid to similarly
situated executives in a peer group of other U. S. bank holding companies and
other relevant competitors. A particular executive's actual salary will be set
based on this competitive review as well as the executive's performance and
level of experience. Such reviews are conducted annually, although changes to
base salaries may or may not be made as a result. For 2001, no salary
increases will be made to executives earning $150,000 or more, except in the
case of promotion.
The short-term Management Incentive Plan covering executive officers is
funded based on First Union's return on equity, known as ROE. For 2000, the
threshold ROE was 15%. Individual awards may range from 0% to 200% of base
salary. Determination of individual awards is based primarily on ROE, but
includes a subjective assessment of individual performance, where permitted.
Measures of individual performance include meeting business unit objectives,
customer service goals, promoting corporate values and providing leadership to
employees. First Union's ROE for 2000 was 17.23%, resulting in payments which
ranged from 5% to 114% of base salaries. The Management Incentive Plan will be
discontinued beginning in 2001 and will be replaced with the Senior Management
Incentive Plan. See "First Union Proposal 3. A Proposal to Approve First
Union's Senior Management Incentive Plan" beginning on page 144.
Long-Term Cash Compensation. The Management Long-Term Cash Incentive Plan
provides an opportunity for cash awards based on ROE rank against a peer group
consisting of the top 25 bank holding companies, based on asset size, over a
three-year period. Actual ROE performance and individual performance are
considered in determining actual payouts from this plan. No payments were made
under this plan in 2000 for the period 1997-1999, even though the three-year
average ROE rank of 5th resulted in the plan funding at a level sufficient to
pay 46% of base salaries in the aggregate. The decision to make no payments
under the Management Long-Term Cash Incentive Plan was made by the CEO, in the
exercise of his discretion. The Management Long-Term Cash Incentive Plan will
be terminated after making final payments, if any, in 2001 for the performance
period 1998-2000. The Operating Committee (First Union's senior officer
management team) will not receive any payouts in 2001 under the Management
Long-Term Cash Incentive Plan.
In 2000, the HR Committee approved a Cash Performance and Retention Plan
under which certain key executives, including the Named Officers (with the
exception of Mr. Crutchfield), were granted performance units. The unit
valuations have an annual performance component and a long-term retention
component. The annual performance component is that the unit values are
determined by annual increases in earnings per share over a three-year period,
beginning January 1, 2001. The long-term retention component is that in no
event will the performance units have a value less than the applicable
executive's base salary as of December 31, 2000. The number of performance
units granted to each executive was based on management's assessment of his or
her ability to positively impact our future success. Payment of awards will be
in cash and will not take place until February 2004. Payments to "covered
officers", as defined in Section 162(m) of the Internal Revenue Code, will not
qualify as performance-based compensation under that code section. To the
extent any award
141
paid under this plan, combined with other compensation not qualifying as
performance-based compensation, exceeds $1 million, it will not qualify for tax
deductibility under Section 162(m). In making this determination, the HR
Committee considered the materiality of any possible lost deductions.
Long-Term Equity-Based Compensation. The stock compensation plans are made
up of two elements, stock options and restricted stock awards. Award sizes are
determined by past performance, and are considered an incentive for future
performance. Additionally, the awards made in 2000 took into account the total
value of compensation paid to executives.
Stock Ownership Guidelines. First Union has established stock ownership
guidelines for senior executives. These guidelines specify that the CEO should
own First Union common stock with a value equal to at least five times his
annual salary. Vice Chairmen have an ownership requirement of at least four
times their respective annual salaries, and other members of the Operating
Committee have a requirement of at least three times their respective annual
salaries. Newly hired executives and executives whose stock ownership did not
meet the guidelines at the time established, have a reasonable period of time
to achieve the level of ownership set forth in the guidelines. All Named
Officers meet the level of stock ownership required by the guidelines.
Deductibility of Executive Compensation. The HR Committee's review of
executive compensation relative to the $1,000,000 limit on tax deductible
compensation under Section 162(m) of the Internal Revenue Code was made in the
context of insuring the ability to balance sound compensation decisions with
appropriate fiscal responsibility. The HR Committee's intention has been to
modify our executive compensation plans to minimize the possibility of lost
deductions. However, it is also the HR Committee's intent to balance the
effectiveness of such plans against the materiality of any possible lost
deductions.
2000 Compensation for the CEO. G. Kennedy Thompson is eligible to
participate in the same executive compensation plans available to the other
executive officers as described above. In 2000, Mr. Thompson voluntarily
advised the board that he would not accept, if granted, a short-term Management
Incentive Plan payment for the 2000 performance period (normally granted in
December 2000). The stock option grant and restricted stock awards made to him
in 2000 were based on the various considerations set forth in this report.
These awards were determined by the HR Committee such that Mr. Thompson's total
compensation would approximate First Union's expected relative rankings of
asset size and ROE performance within the peer group.
In 2000, Mr. Thompson also voluntarily advised the board that he would not
accept, if granted, a salary increase for 2001. Mr. Thompson's salary was last
adjusted in April 2000 to reflect his election as CEO. In addition, Mr.
Thompson voluntarily advised the board that he would not accept, if granted, a
Management Long-Term Cash Incentive Plan payout in 2001.
Retirement of Edward E. Crutchfield. In August 2000, the HR Committee
reviewed and recommended for the board's approval, terms of a special
retirement agreement with Mr. Crutchfield covering various financial and non-
financial provisions in connection with his retirement. A summary of this
agreement is set forth under "First Union Employment Agreements" above. Based
upon a thorough review of competitive practices at peer companies and other
pertinent information provided to the HR Committee, and based upon Mr.
Crutchfield's substantial contributions to First Union over a long and
distinguished career, which spanned more than 35 years, and particularly his
leadership as CEO for 16 years, the HR Committee was satisfied as to the
appropriateness of the terms of the agreement.
Herbert Lotman, Chairman
Robert J. Brown, Vice Chairman
B. F. Dolan (a retired director)
Patricia A. McFate
142
First Union Performance Graph
The following graph compares (i) the yearly change in the cumulative total
stockholder return on First Union common stock with (ii) the cumulative return
of the Standard & Poor's 500 Stock Index, or the S&P 500, and the Keefe,
Bruyette & Woods, Inc. 50 Index KBW 50. The graph assumes that the value of an
investment in the common stock and in each index was $100 on December 31, 1995,
and that all dividends were reinvested.
The S&P 500 and the KBW 50 are market-capitalization-weighted indices,
meaning that companies with a higher market value count for more in both
indices. The KBW 50 is comprised of 50 bank holding companies, including all
money-center and major regional bank holding companies.
[GRAPH]
December 31,
------------------------------------------
1995 1996 1997 1998 1999 2000
------- ------ ------ ------ ------ ------
First Union.......................... $100.00 137.57 195.57 238.62 135.32 121.80
S&P.................................. 100.00 122.96 163.98 210.85 255.21 231.98
KBW50................................ 100.00 141.46 206.80 223.91 216.14 259.50
The information set forth above under the subheadings "First Union HR
Committee Report on Executive Compensation", "First Union Performance Graph"
and "Audit Committee Report" (to the extent permitted under the Exchange Act)
(i) shall not be deemed to be "soliciting material" or to be "filed" with the
SEC or subject to Regulation 14A or the liabilities of Section 18 of the
Exchange Act, and (ii) notwithstanding anything to the contrary that may be
contained in any filing by First Union under the Exchange Act or the Securities
Act, shall not be deemed to be incorporated by reference in any such filing.
Other Matters Relating to Executive Officers and Directors of First Union
General. The directors (including organizations they are affiliated with and
their immediate family members) and executive officers are customers of First
Union's bank. In management's opinion, the lending relationships with these
directors and officers were made in the ordinary course of business and on
substantially the same terms, including interest rates, collateral and
repayment terms, as comparable transactions with other customers and do not
involve more than normal collectibility risk or present other unfavorable
features. During 2000, the aggregate monthly outstanding loan balances made by
First Union's bank to these directors and officers, including to certain
related interests, ranged from a high of approximately $4.5 billion to a low of
approximately $3.3 billion. In addition to these lending relationships, some
directors and their affiliated organizations provide services or otherwise do
business with First Union and its affiliated entities, and First
143
Union in turn provides services or otherwise does business with the directors
and their organizations, in each case in the ordinary course of business.
Certain of these relationships are discussed below.
Certain Relationships. Erskine B. Bowles is a general partner of Forstmann
Little & Co. and a Managing Director and member of Carousel Capital Company,
LLC. Carousel Capital Company is the general partner of Carousel Capital
Partners, LP and Carousel Capital Partners II, LP. First Union has a 15%
limited partnership interest in Carousel Capital Partners, which is represented
by a $25 million commitment. As of December 31, 2000, we had invested $21.7
million in Carousel Capital Partners, leaving a remaining commitment of $3.3
million. First Union currently has a 17.7% limited partnership interest in
Carousel Capital Partners II, which is represented by a $25 million commitment,
none of which was invested as of December 31, 2000. As part of our investments
in Carousel Capital Partners and Carousel Capital Partners II, First Union pays
Carousel Capital Company a semi-annual management fee, which totaled $462,065
in 2000. First Union is a lender to several of the companies that the Carousel
entities and Forstmann Little have investments in and may engage in other
transactions with those companies. In 1990, First Union entered into a
sale/leaseback transaction with a real estate finance company that involved
various First Union bank branches in North Carolina, Florida and Georgia. The
lease agreement expires in 2010. Mr. Bowles is a passive investor (7.15%
limited partnership interest) in Investment Partners Leasing Corporation, which
has an option to lease all or part of those branches, at a fixed rate, upon
expiration of the lease. First Union entered into an agreement with Investment
Partners whereby we have the option to sublease those branches from Investment
Partners, at market rates, at the expiration of the lease, if they exercise
their option.
Frank M. Henry, a retired director, is a partner in Frank M. Henry
Associates, from which First Union leases a branch office in Wilkes-Barre,
Pennsylvania. The initial term expires on April 30, 2003, and has four five-
year renewal options. The rent paid in 2000 totaled $75,140.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Exchange Act requires the directors and executive officers covered by that
Section to file reports with the SEC and the NYSE relating to their First Union
common stock ownership and any changes in that ownership. To First Union's
knowledge, based solely on a review of the copies of those reports or other
written representations, during or prior to the year ended December 31, 2000,
all Section 16(a) filing requirements applicable to directors and executive
officers were complied with, except as set forth in prior proxy statements and
except for late filings by: A. Dano Davis, a director, relating to sales by a
trust and purchases by a partnership which resulted in a net decrease of 4,859
shares in Mr. Davis' proportionate beneficial interest; Reginald E. Davis, a
Section 16(a) reporting officer, relating to the sale of 968 shares; William H.
Goodwin, Jr., a director, relating to the purchase of 100,000 shares by his
children; and Benjamin P. Jenkins, III, a Section 16(a) reporting officer,
relating to the withholding of 920 shares for payment of taxes in connection
with a 1999 restricted stock award vesting.
First Union Proposal 3. A Proposal To Approve First Union's Senior Management
Incentive Plan
Proposal 3 relates to approval of a new benefit plan the First Union board
adopted in February 2001, the Senior Management Incentive Plan, known in this
document as the Plan. The following description of the Plan is a summary and
does not purport to be fully descriptive. The summary is subject, in all
respects, to the terms of the Plan, which is attached as Appendix H to this
document. This proposal is being presented to the shareholders as a result of
the Omnibus Budget Reconciliation Act of 1993 and the regulations promulgated
thereunder by the Internal Revenue Service, known in this document as OBRA, in
order to preserve the federal income tax deduction with respect to certain
executive compensation payable under the Plan.
Under OBRA, the allowable federal income tax deduction by a publicly held
corporation for compensation paid or accrued with respect to the CEO and the
four other most highly compensated executive officers of that corporation
serving as such at the end of the corporation's fiscal year is limited to no
more than $1,000,000 per year. Certain types of compensation, including
performance-based compensation, are generally excluded from this deduction
limit. By approving the Plan, First Union shareholders will be approving, among
other things, the performance measures, eligibility requirements and limits on
the cash awards which may be made pursuant to the Plan.
144
Pursuant to the foregoing, First Union shareholders approved certain
amendments to our existing Management Incentive Plan, known in this document as
the Short-Term Plan, at the 1995 annual meeting of shareholders and the 2000
annual meeting of shareholders. Since the Plan is a new plan intended to
replace the Short-Term Plan for certain key executives, including the Named
Officers (with the exception of Messrs. Adams and Crutchfield), and which has
not yet been approved by First Union shareholders, First Union is submitting
this proposal for shareholder approval.
First Union and the board believe the Plan will benefit First Union and
First Union shareholders by providing significant and sustaining motivation to
officers and key employees, including the continuing Named Officers, to achieve
specific goals which are aligned with shareholder interests.
Administration and Eligibility. The Plan will be administered by the HR
Committee, each member of which qualifies as an "outside director" under OBRA.
Among other things, the HR Committee will have the authority to select which of
our officers and employees may be granted awards and to determine the terms and
conditions of any awards under the Plan. The HR Committee will also have the
authority to construe and interpret the Plan, and establish, amend or waive
rules for its administration. The HR Committee will have no authority to take
any action that would cause any award to any participant to fail to qualify as
"performance-based compensation" under OBRA. All decisions made by the HR
Committee will be final and binding.
Determination and Description of Awards. Each fiscal year, the HR Committee
will fix in advance the corporate performance criteria and goals to be achieved
before any award will be payable. The corporate performance criteria will be
objective and based on certain corporate financial performance measures, which
may include earnings per share, economic profit, shareholder value added,
return on equity, net income, pre-tax net income, operating income, return on
assets, or revenue growth, and which may be used singularly or in combination,
as the HR Committee determines. The corporate performance criteria and goals
set by the HR Committee may vary from year to year.
If and to the extent the annual corporate performance criteria are achieved,
all or a portion of an award may be paid. The level of achievement of the
corporate performance criteria for that year will determine the amount a
participant may receive. If the minimum level of achievement of the corporate
performance criteria is not met, no payment will be made to participants for
that year. The HR Committee has determined that, to the extent minimum
achievement levels are met or surpassed under the corporate performance
criteria, the percentage of award which may be payable to participants changes
upon and in relation to where our performance for the year (expressed as a
percentage) falls within the range of 90% to 115% of the year's performance
goal. Awards may be expressed in dollars, as a percentage of the participant's
base salary at the beginning of the performance period or on a formula basis.
In addition to corporate performance criteria, individual performance goals
are also established for each participant in the Plan. The nature of these
goals differs depending upon each participant's job responsibilities.
Individual goals are both qualitative in nature, such as leadership, customer
satisfaction, employee satisfaction and retention and adherence to First
Union's core values, and quantitative in nature, such as business unit net
income, sales and revenue goals and cost containment. Actual awards to
participants under the Plan are determined by that participant's performance
relative to her or his individual goals. In awarding payments under the Plan,
the individual goals vary between business units and between participants. The
HR Committee may also vary the relative weighting between individual
qualitative and quantitative goals from year to year, depending on corporate or
business unit goals. The number of variables under review, including First
Union's corporate performance relative to our annual performance criteria and
individual performance relative to individual goals, prevents any strict
correlation between any one performance factor and a participant's annual
bonus. The maximum amount of award that is payable to a participant under the
Plan for a fiscal year is 0.25% of First Union's net operating income for the
applicable fiscal year. "Net operating income" is our reported net income
applicable to stockholders excluding reported
. extraordinary gains or losses or gains or losses as a result of changes
in accounting principles
145
. restructuring, merger-related or restructuring-related charges, and
. similar one-time accounting or operational charges.
CEO's Discretionary Payments. In addition to the foregoing, the HR Committee
has authorized First Union's CEO to have the ability to reduce individual
awards, in his sole discretion, based on individual contribution to corporate
performance. The Plan also provides that the CEO will have a pool available for
additional discretionary bonus payments in the event First Union meets certain
corporate performance criteria. If the corporate performance criteria are
satisfied, this pool will contain between 5% and 10% of the aggregate potential
awards to participants. In no event may the CEO award a discretionary bonus
payment to an individual participant of more than 25% of that participant's
award opportunity, nor may any discretionary bonus payment cause the maximum
individual award limitation discussed above to be exceeded. In addition, no
discretionary bonus payment may be made to a covered employee that causes any
other payment under the Plan to fail to be tax deductible under Section 162(m)
of the Code.
Payment of Awards. The HR Committee will annually determine the extent to
which the corporate performance criteria and individual performance goals for
that year have been satisfied. Payments will be made to participants following
such determination.
New Plan Benefits. Because the amount payable to a participant under the
Plan is subject to discretion both as to corporate performance and individual
performance, neither the amount that will be paid in the future to any eligible
participant nor the amount that would have been paid in 2000 had the Plan been
in effect is determinable. However, the annual cash bonuses paid to the Named
Officers for 2000 and prior years under the Short-Term Plan are set forth in
the bonus column of the Summary Compensation Table on page 132.
The board recommends that shareholders vote "FOR" approval of this proposal.
Proxies, unless indicated to the contrary, will be voted "FOR" approval of the
proposal.
First Union Proposal 4. A Proposal To Approve an Amendment to First Union's
1998 Stock Incentive Plan
First Union's board proposes that you approve an amendment to our 1998 Stock
Incentive Plan, known in this document as the Stock Plan. First Union's board
adopted the Stock Plan in February 1998 and our shareholders approved the Stock
Plan at the 1998 annual meeting of shareholders. First Union's board amended
the Stock Plan in April 2001, subject to First Union's shareholders approving
the amendment. The following description of the Stock Plan is a summary and
does not purport to be fully descriptive. This description is subject, in all
respects, to the terms of the Stock Plan, which is attached as Appendix I to
this document. This proposal is being presented to First Union shareholders as
a result of OBRA, in order to preserve the federal income tax deduction with
respect to certain executive compensation payable under the Stock Plan.
Summary of the Stock Plan
The primary purposes of the Stock Plan are to help align employees' long-
term financial interests with those of shareholders, reinforce a performance-
oriented culture and strategy, reward employees for increasing our common stock
price over time, and attract, retain and motivate employees. The Stock Plan
authorizes the HR Committee to achieve these purposes by encouraging and
providing for the acquisition of equity interests by key employees through
grants of stock options, SARs, and other stock awards, including restricted
stock, any of which may be granted singly, in tandem or in combination as the
HR Committee may determine.
The Stock Plan provides that in any calendar year up to 1.5% of the
outstanding shares of First Union common stock, as reported in our Annual
Report on Form 10-K for the preceding year, may be subject to awards under the
Stock Plan. If any awards are forfeited or expire, shares represented by those
forfeited or expired awards may again become available for issuance under the
Stock Plan, in addition to the 1.5%
146
indicated above. In addition, any unused portion of the limit of awards for any
calendar year may be carried forward for use in succeeding calendar years.
Currently, no more than 500,000 shares represented by awards may be granted to
any single individual in any calendar year under the Stock Plan.
In the event of any change in the outstanding shares of common stock that
occurs by reason of a stock dividend, stock split, recapitalization, merger,
consolidation, combination, exchange of shares or other similar corporate
change, the aggregate number of shares subject to each outstanding option under
the Stock Plan, and its stated option price, may be appropriately adjusted by
the HR Committee. In such event, the HR Committee will also have discretion to
make appropriate adjustments in the number and type of shares subject to stock
grants and any other awards then outstanding under the Stock Plan. In addition,
in the event of a "change of control" of First Union, each outstanding award
granted under the Stock Plan will become immediately exercisable and/or fully
vested and nonforfeitable, as the case may be. The merger with Wachovia does
not constitute a change of control under the Stock Plan.
Eligibility and Participation; Administration
Participants in the Stock Plan are selected by the HR Committee from among
our officers and other key employees who are in a position to contribute
materially to our growth and development and to our long-term financial
success. Our current executive officers have received and are anticipated to
receive additional options and stock awards under the Stock Plan in such
amounts and at such times as the HR Committee may determine.
The HR Committee is responsible for the administration of the Stock Plan.
The HR Committee is authorized to interpret the Stock Plan, to prescribe, amend
and rescind rules and regulations relating to it, to provide for conditions and
assurances deemed necessary or advisable to protect our interests, and to make
all other determinations necessary or advisable for the administration of the
Stock Plan, but only to the extent not contrary to the express provisions of
the Stock Plan.
The HR Committee may alter, amend, suspend or discontinue the Stock Plan or
any agreements granted thereunder to the extent permitted by law. However,
stockholder approval is necessary to increase the number of shares available
for awards or to cancel any outstanding stock options or SARs for the purpose
of replacing or regranting those options or SARs with an exercise price that is
less than the original exercise price.
Options
Options granted under the Stock Plan are exercisable at such times and
subject to such restrictions and conditions as the HR Committee in each
instance approves, which need not be the same for all participants. Each option
will expire at such time as the HR Committee determines at the time it is
granted; provided, however, that no option may be exercisable later than the
tenth anniversary date of its grant. Only incentive stock options ("ISOs") to
purchase up to $100,000 of common stock (measured as of the date of grant of
the option) may vest as to each optionee in each calendar year (taking into
account all ISOs granted pursuant to any of our stock plans). No options
granted pursuant to the Stock Plan will have an option price that is less than
the fair market value of the common stock on the date the option is granted.
The number of shares of common stock that may be issued pursuant to ISOs during
the term of the Stock Plan may not exceed 100,000,000 in the aggregate.
The option price upon exercise of any option is payable by methods the HR
Committee designates, including, but not limited to
. in cash or its equivalent
. by tendering shares of previously owned common stock having a fair
market value at the time of exercise equal to the total option price, or
. by a combination of the foregoing.
147
The proceeds from any cash payments are added to our general corporate funds
and used for general corporate purposes. Pursuant to the foregoing and subject
to HR Committee approval, an optionee can apply the shares received upon the
exercise of a portion of a stock option to satisfy the exercise price for
additional portions of the option, thereby enabling the optionee to effectively
deliver a relatively small number of shares in satisfaction of the exercise
price of a much larger option.
In the event the employment of a participant is terminated by reason of
death, disability or retirement, any outstanding options held by the
participant shall become immediately exercisable. Unless the HR Committee
determines otherwise, any such outstanding options will be forfeited on the
expiration date of such options or within three years after such date of
termination of employment, whichever period is shorter. Unless the HR Committee
determines otherwise, if the employment of a participant shall terminate for
any reason other than death, disability or retirement, any then outstanding but
unexercisable options granted to such participant will be forfeited upon such
termination of employment. Any then outstanding and exercisable options granted
to such participant will be forfeited on the expiration date of such options or
three months after such date of termination of employment, whichever period is
shorter.
Stock Awards; SARs
The HR Committee may impose restrictions on any stock awards, including
shares of restricted stock, granted under the Stock Plan as it may deem
advisable, including, without limitation, continuous service requirements
and/or achievement of performance goals. During the period of restriction,
participants holding restricted stock granted under the Stock Plan may exercise
full voting rights on those shares and are entitled to receive all dividends
and other distributions paid on those shares. An SAR represents a right to
receive a payment in cash, shares of common stock or a combination of both,
equal to the excess of the fair market value of a specified number of shares of
common stock on the date the SAR is exercised over an amount which is no less
than the fair market value of the shares of common stock on the date of grant.
In the event the employment of a participant is terminated because of normal
retirement, disability or death, any remaining period of restriction applicable
to a stock award shall automatically terminate, and any then outstanding SARs
shall automatically become exercisable. Unless the HR Committee determines
otherwise, in the event that employment is terminated for any other reason
during the period of restriction, then any shares still subject to restrictions
at the date of termination of employment, or any unexercisable SARs, shall
automatically be forfeited and returned to us. In the event of early retirement
or any involuntary termination of employment, the HR Committee may, in its sole
discretion, waive the automatic forfeiture of any or all such shares and/or may
add such new restrictions to such shares as it deems appropriate.
Federal Tax Consequences
An optionee will not be taxed at the time a non-ISO is granted. In general,
an employee exercising a non-ISO will recognize ordinary income equal to the
excess of the fair market value on the exercise date of the stock purchased
over the option price. Upon subsequent disposition of the stock purchased, the
difference between the amount realized and the fair market value of the stock
on the exercise date will constitute capital gain or loss. We will not
recognize income, gain or loss upon the granting of a Non-ISO. Upon the
exercise of that option, we are entitled to an income tax deduction equal to
the amount of ordinary income the employee recognizes.
An employee will not be taxed at the time an ISO is granted. In general, an
employee exercising an ISO will not be taxed at the time an ISO is exercised if
the stock purchased is held for at least one year after the exercise date and
at least two years after the date of grant; provided, however, the bargain
element of exercised ISOs is treated as a tax preference item under the
alternative minimum tax rules.
If these holding periods are satisfied, the difference between the option
price and the amount realized upon subsequent disposition of the stock will
constitute long-term capital gain or loss.
148
If these holding periods are not satisfied, the employee will recognize
ordinary income to the extent of the lesser of the gain realized and the excess
of the fair market value of the stock on the exercise date over the option
price. Any gain realized in excess of the amount recognized as ordinary income
by the employee will be capital gain. We will not recognize income, gain or
loss upon the granting or exercise of an ISO, nor will we be entitled to any
deduction upon the disposition of an ISO if the holding periods referred to
above are satisfied. If those holding periods are not satisfied, we will be
entitled to a deduction equal to the amount of the ordinary income the employee
recognizes.
An employee will not be taxed at the time an SAR is granted. Upon exercise
of an SAR, the optionee will recognize ordinary income in an amount equal to
the cash or the fair market value of the stock received on the exercise date
(or, if an optionee exercising an SAR for shares of common stock is subject to
certain restrictions, upon lapse of those restrictions, unless the optionee
makes a special tax election under Section 83(b) of the Code, within 30 days
after exercise, to have the income recognized at the time of transfer). We
generally will be entitled to a deduction in the same amount and at the same
time as the optionee recognizes ordinary income.
In general, an employee who has received shares of restricted stock and who
has not made an election under Section 83(b) of the Code to be taxed upon
receipt, will include in his gross income as compensation income an amount
equal to the fair market value of the shares of restricted stock at the earlier
of the first time the rights of the employee are transferable or the
restrictions lapse. We are entitled to a deduction at the time that the
employee is required to recognize income, subject to the limitations set forth
below.
The proposed amendment does not affect the performance goals for the Stock
Plan previously approved by First Union's shareholders at the 1998 annual
meeting of shareholders. The HR Committee may grant awards under the Stock Plan
which are not based on the performance goals, in which case the compensation
paid under such awards to officers to which Section 162(m) of the Code is
applicable may not be deductible. The HR Committee, however, may not grant
stock awards in lieu of performance stock awards that are not granted because
of the failure to meet the performance goals specified for a particular year.
Summary of Proposed Amendment to the Stock Plan
First Union's board adopted an amendment to the Stock Plan in April 2001,
subject to shareholder approval as described below. The amendment requires
shareholder approval under Section 162(m) of the Code. Section 162(m) of the
Code and related regulations require that performance based compensation paid
to certain covered employees in excess of $1,000,000 is not eligible for tax
deduction by First Union unless the compensation is based upon material
performance goals approved by shareholders. Under Section 162(m) of the Code
and related regulations, the maximum number of shares with respect to which
awards may be granted during a specified period must be approved by
shareholders in order for compensation arising from the exercise of stock
options to be considered performance based and thus eligible for tax
deductibility.
As noted above, the Stock Plan currently limits the number of shares of
First Union common stock which may be subject to a stock award to an individual
participant in any calendar year to 500,000.
The Stock Plan is proposed to be amended to provide that in any calendar
year, the maximum number of shares of First Union common stock which may be
subject to a stock award to an individual participant be increased to
1,250,000.
The HR Committee believes that the proposed amendment to increase the
maximum number of shares which may be granted to an individual in a calendar
year would further the purposes of the Stock Plan and are in First Union's best
interests and the best interests of shareholders. To the extent that Code
Section 162(m) applies to compensation paid to certain executives, it is in
First Union's best interests for that compensation to be eligible for
deductibility. As indicated in the "HR Committee Report on Executive
Compensation", the HR Committee believes corporate and shareholder interests
are best served when the interests of management are aligned with those of
shareholders. As a result, the HR Committee has determined to eliminate the
149
Management Long-Term Cash Incentive Plan beginning in 2001 and use common stock
and options as the most predominant form of long-term incentive compensation.
The HR Committee has also determined, as a result of the planned merger with
Wachovia, to terminate First Union's Cash Performance and Retention Plan and
award stock options to former participants in that plan in 2001. As a result of
that action, First Union expects to save approximately $32 million per year for
the next three years and further align long-term incentive compensation of key
executives with shareholders' interests. In addition, the HR Committee
terminated the SERP and awarded stock options to former participants in that
plan in 2000, with the intention of having participants' retirement benefits
aligned with shareholder interests instead of as a cash entitlement for service
tenure.
The HR Committee has made no decisions regarding whether any participant
will be granted an award involving the maximum number of shares of common stock
in any given year. As set forth under "Option/SAR Grants Table", in 2000, due
to the one-time grant of options in lieu of future SERP benefits, Ken Thompson,
our CEO, was granted options for 477,900 shares in 2000. In addition, as part
of the SERP replacement grant, Mr. Thompson was granted options for 250,000
shares in January 2001. Mr. Thompson was granted options for 500,000 shares in
April 2001; however, 250,000 of such options are contingent upon shareholder
approval of the amendment to the Stock Plan. In connection with terminating
First Union's Cash Performance and Retention Plan, First Union expects to grant
Mr. Thompson options for 288,000 shares, which grant will be contingent upon
shareholder approval of the Stock Plan amendment. No other Named Officer,
executive officer or Stock Plan participant is expected to receive stock awards
in 2001 that exceed the current 500,000 individual limitation. See "Option/SAR
Grants Table" for a list of grants to the Named Officers in 2000. The selection
of employees who will receive awards under the Stock Plan and the size and type
of awards will be determined by the HR Committee in its discretion.
The board recommends that shareholders vote "FOR" approval of this proposal.
Proxies, unless indicated to the contrary, will be voted "FOR" approval of the
proposal.
First Union Proposal 5. A Proposal To Ratify The Appointment Of Auditors
The accounting firm of KPMG LLP has been appointed as First Union's auditors
for the year 2001, and, in accordance with established policy, that appointment
is being submitted to shareholders for ratification. In the event the
appointment is not ratified by a majority of votes cast, in person or by proxy,
it is anticipated that no change in auditors would be made for the current year
because of the difficulty and expense of making any change so long after the
beginning of the current year, but that vote would be considered in connection
with the auditors' appointment for 2002.
KPMG LLP were First Union's auditors for the year ended December 31, 2000,
and a representative of the firm is expected to attend the annual meeting,
respond to appropriate questions and if the representative desires, which is
not now anticipated, make a statement.
Set forth below is information relating to the aggregate KPMG LLP fees for
professional services rendered for the fiscal year ended December 31, 2000.
Audit Fees
The aggregate KPMG LLP fees for all professional services rendered in
connection with the audit of our consolidated financial statements for the
fiscal year ended December 31, 2000, and for the reviews of the unaudited
consolidated financial statements included in First Union's Quarterly Reports
on Form 10-Q for that fiscal year, were $7,254,000.
Financial Information Systems Design and Implementation Fees
The aggregate KPMG LLP fees for professional services rendered for
information technology services relating to financial information systems
design and implementation for the fiscal year ended December 31, 2000, were
$301,000.
150
All Other Fees
The aggregate KPMG LLP fees for professional services rendered to First
Union, other than the services described above under "Audit Fees" and
"Financial Information Systems Design and Implementation Fees", for the fiscal
year ended December 31, 2000, were $24,545,000. These primarily consist of fees
for tax matters, process and risk management control reviews, employee benefit
financial statement audits, common trust fund audits, compliance attestation
services, and other advisory services.
See also "First Union Proposal 2: A Proposal to Elect Directors--Committees
of the First Union Board and Attendance--Audit Committee".
The board recommends that shareholders vote "FOR" this proposal. Proxies,
unless indicated to the contrary, will be voted "FOR" this proposal.
Shareholder Proposal. A Shareholder Proposal Regarding Political Contributions
Ms. Patricia S. Broderick, of 105 Quail Lane, Mooresville, North Carolina
28117, an owner of 1,200 shares of First Union common stock, has advised First
Union that she intends to present the proposal set forth below at the meeting.
In accordance with applicable proxy regulations, the proposal, which is
presented as received by First Union and for which First Union and the board
accept no responsibility, is as follows:
"Whereas the money for donations to political movements and political
entities comes from the profits of the company's operations, and belongs to the
shareholders; and since these contributions are nothing more than an overt
effort to control elections, shareholders should not be made to support
political movements or political entities with whom they do not agree.
"The Board of Directors is requested to adopt a policy that no contribution
to any political movement or entity shall be made by First Union Corporation;
nor shall solicitations for contributions to any political movement or entity
be made on company property, nor to any company employee; nor shall any company
facilities or equipment be used for this purpose."
Position Of First Union's Board
The board recommends that shareholders vote "AGAINST" the proposal set forth
above for the following reasons:
The board strongly believes that it is in the best interests of First Union
and its shareholders that First Union be an active and effective participant in
the political process. As a financial services company involved in many
different businesses, including consumer and commercial lending, securities
brokerage and insurance, First Union is subject to significant federal, state
and local regulation. First Union's ultimate success depends upon our ability,
within this complex and evolving regulatory environment, to deliver our
existing financial products and services, and to develop new and innovative
products and services for our customers. The shareholder proposal, if enacted,
may unnecessarily limit First Union's ability to participate effectively in
legislative and regulatory developments directly affecting the success and
profitability of our businesses.
First Union's political activities consist primarily of our sponsorship of
political action committees, known as PACs, which would be prohibited if the
shareholder proposal were enacted. Our PACs solicit voluntary contributions
from employees and make campaign contributions to candidates who may be
involved in issues or legislation important to our company. These activities
permit us and our employees to support candidates whose views may be consistent
with our business goals and interests. We also have made contributions to
national political parties; however, such contributions, which are a matter of
public record, are not the main focus of our political activities. In sum,
First Union's efforts are not intended to control the outcome of elections, as
stated in the proposal, but rather are designed to increase the likelihood that
our views are included in the legislative process for our and our shareholders'
benefit.
151
The board also believes that the shareholder proposal is not in the best
interests of First Union and its shareholders because many of our competitors
in the financial services industry currently participate in the political
process to improve their business advantage. If we were restricted from
similarly participating in that process, we ultimately would be placed at a
significant competitive disadvantage, which may have a detrimental impact on us
and our shareholders.
For the reasons set forth above, the board believes that continuing its
current activities in the political process is in the best interests of the
shareholders and First Union.
The board recommends that shareholders vote "AGAINST" this proposal.
Proxies, unless indicated to the contrary, will be voted "AGAINST" the
proposal.
Certain Matters Relating To First Union Proxy Materials And Annual Reports
The SEC recently adopted amendments to its rules regarding delivery of proxy
statements and annual reports to shareholders sharing the same address. We may
now satisfy these delivery rules by delivering a single proxy statement and
annual report to an address shared by two or more of our shareholders. This
delivery method is referred to as "householding" and can also result in
significant cost savings for us. In order to take advantage of this
opportunity, we have delivered only one joint proxy statement-prospectus and
annual report to multiple shareholders who share an address and who have
consented to householding, unless we received contrary instructions from the
impacted shareholders prior to the mailing date. We undertake to deliver
promptly upon written or oral request a separate copy of the joint proxy
statement-prospectus or annual report, as requested, to a shareholder at a
shared address to which a single copy of those documents was delivered. If you
prefer to receive separate copies of this document or this year's annual
report, or if you wish to receive separate copies of First Union's proxy
statement or annual report in the future, you can request a separate copy of
those documents by writing to us at the following address: Investor Relations,
First Union Corporation, One First Union Center, Charlotte, North Carolina
28288-0206, or by telephoning us at (704) 374-6782.
If you are currently a shareholder sharing an address with another First
Union shareholder and wish to have your future proxy statements and annual
reports householded, please contact us at the above address or telephone
number.
152
OTHER MATTERS TO BE CONSIDERED AT THE WACHOVIA MEETING
Wachovia's annual shareholder meeting was previously scheduled for April 27,
2001. However, in light of the announcement of the First Union merger agreement
on April 16, Wachovia's board of directors concluded that it was prudent to
postpone the annual meeting.
The shareholder meeting at which the merger will be considered will also be
Wachovia's annual meeting of shareholders for 2001. Therefore, a number of
proposals requiring shareholder action in the ordinary course of Wachovia's
business are also being presented for consideration and voting. This portion of
the document discusses these other proposals.
The information discussed below replaces the proxy statement originally sent
to Wachovia shareholders in connection with the postponed annual meeting.
Wachovia Proposal 2. Election Of Directors
The by-laws of Wachovia provide that the number of directors shall not be
less than nine nor more than 25. There are presently 16 directors divided into
three classes. The by-laws further provide that an individual may not be
elected a director or continue to serve past an annual meeting if such person
has reached the age of 67 (or 66 as to persons who have served for five or more
years as Chief Executive Officer of Wachovia), and an individual may not be
elected a director who has retired from active participation or practice of the
individual's principal business or profession, provided that a director who
retires from active participation in his or her principal business or
profession during the course of an unexpired term as director may complete the
unexpired term subject to the age limitation. Mr. Prendergast retired as of
January 1, 2001, and Mr. Smith retired as of April 27, 2001.
At the annual meeting, five directors are to be elected to serve for a term
of three years, until the 2004 annual meeting of shareholders. Unless the
merger is completed before the next annual meeting, if elected, the nominees
are expected to serve until their respective terms expire, except as the age
and other retirement provisions of Wachovia's by-laws otherwise require, and
until their successors are elected and qualified. The remaining members of the
board of directors are expected to continue to serve until their respective
terms expire.
As a result of the retirement of Messrs. Smith and Prendergast and following
the election of all of the nominees for director at the annual meeting, the
board will consist of 15 directors. If the merger is completed prior to the
next annual meeting of Wachovia shareholders, then, at the completion of the
merger, 9 persons designated by Wachovia from its board of directors will
become members of the combined company's board of directors. Immediately
following completion of the merger, the combined company's board will consist
of 18 members, 9 of whom are chosen by First Union and 9 of whom are chosen by
Wachovia.
It is not anticipated that any of the nominees will be unable or unwilling
to serve, but if that should occur, the proxyholders named in the proxy intend
to vote for such other individual or individuals for director as the board of
directors may nominate or, if recommended by the board of directors, to reduce
the number of directors to be elected at the annual meeting by the number of
individuals unable or unwilling to serve (subject to the requirement of
Wachovia's articles of incorporation that the number of directors in each of
the three classes be as equal in number as possible). Proxies cannot be voted
for a greater number of nominees than the number named in this joint proxy
statement-prospectus.
Set forth on the following pages for each nominee for election as a director
of Wachovia, and for each director whose term will continue after the annual
meeting, is a brief statement including the age, year of first election as a
director of Wachovia, principal occupation and business experience during the
past five years, and certain other directorships, all as of December 31, 2000,
unless otherwise indicated.
153
WACHOVIA NOMINEES FOR ELECTION AS DIRECTORS
Term Expiring 2004 Annual Meeting of Shareholders
[Photo]
JAMES S. BALLOUN, 62, has served since 1996 as Chairman,
President and Chief Executive Officer of National Service
Industries, Inc., which is engaged in multi-industry
manufacturing and diversified services. Prior thereto, he
was a director with McKinsey & Company, Inc., a management
consulting firm. Mr. Balloun also serves as a director of
Radiant Systems, Inc. and Georgia-Pacific Corporation. He
was first elected a director of Wachovia in 1997 and was
elected for his present term at the 1998 Annual Meeting of
Shareholders.
Committee: Technology
--------------------------------------------------------------------------------
[Photo]
PETER C. BROWNING, 59, has served since September 2000 as
Chairman and a director of Nucor Corporation, a steel
products manufacturing company. Previously, he served as
President and Chief Executive Officer of Sonoco Products
Company from April 1998 until July 2000 and as its President
and Chief Operating Officer from 1996 to 1998. He also
serves as a director of Lowe's Companies, Inc., Phoenix Home
Life Mutual Insurance Company, and, since January 2001,
National Service Industries, Inc. Mr. Browning was first
elected a director of Wachovia in 1997 and was elected for
his present term at the 1998 Annual Meeting of Shareholders.
Committees: Corporate Governance and Nominating
Management Resources and Compensation
Executive
--------------------------------------------------------------------------------
[Photo]
W. HAYNE HIPP, 60, is Chairman, President, Chief Executive
Officer and a director of The Liberty Corporation, a
broadcast holding company. He also serves as a director of
SCANA Corporation. Mr. Hipp has been a director of Wachovia
since 1991 and was elected for his present term at the 1998
Annual Meeting of Shareholders.
Committees: Credit
Finance
--------------------------------------------------------------------------------
[Photo]
LLOYD U. NOLAND, III, 57, is Chairman, President, Chief
Executive Officer and a director of Noland Company, a
supplier of industrial products. He was first elected as a
director of Wachovia in 1997 and was elected for his present
term at the 1998 Annual Meeting of Shareholders.
Committee: Technology
--------------------------------------------------------------------------------
[Photo]
DONA DAVIS YOUNG, 46, has served since February 2000 as
President of Phoenix Home Life Mutual Insurance Company, a
mutual insurance company. Prior thereto, she served as
Executive Vice President--Individual Insurance and General
Counsel. Ms. Young also is a director of Phoenix Home Life
Mutual Insurance Company, Sonoco Products Company, and,
since January 2001, the Venator Group, Inc. She was first
elected a director of Wachovia in October 2000.
Committees: Credit
Finance
154
--------------------------------------------------------------------------------
WACHOVIA DIRECTORS CONTINUING IN OFFICE
Term Expiring 2002 Annual Meeting of Shareholders
[Photo]
LESLIE M. BAKER, JR., 58, has served as Chairman of the
Board of Wachovia since April 1998, Chief Executive Officer
of Wachovia since 1994, and President of Wachovia since
January 2001 and from January 1994 to April 1999. Mr. Baker
also is a director of National Service Industries, Inc. Mr.
Baker was first elected a director of Wachovia in 1993 and
was elected for his present term at the 1999 Annual Meeting
of Shareholders.
Committee: Executive
--------------------------------------------------------------------------------
[Photo]
THOMAS K. HEARN, JR., 63, is President of Wake Forest
University. He was first elected a director of Wachovia in
1990 and was elected for his present term at the 1999 Annual
Meeting of Shareholders.
Committees: Credit
Finance
--------------------------------------------------------------------------------
[Photo]
ELIZABETH VALK LONG, 50, is Executive Vice President of Time
Inc., an AOL Time Warner subsidiary, and a publisher and
direct marketer of magazines, books, music and video
products. Ms. Long also is a director of the J.M. Smucker
Company. She was first elected a director of Wachovia in
January 1999 and was elected to her present term at the 1999
Annual Meeting of Shareholders.
Committees: Audit
Compliance
--------------------------------------------------------------------------------
[Photo]
MORRIS W. OFFIT, 64, is Chairman and Chief Executive Officer
of OFFITBANK, a New York State trust bank and a wholly owned
subsidiary of Wachovia, and was Chairman of the Board and
Chief Executive Officer of OFFITBANK Holdings, Inc. from
January 1999 through August 1999. He was first elected as a
director of Wachovia in October 1999 and was elected for his
present term at the 2000 Annual Meeting of Shareholders.
--------------------------------------------------------------------------------
[Photo]
JOHN C. WHITAKER, JR., 63, is Chairman of the Board and
Chief Executive Officer of Inmar Enterprises, Inc., an
information services and transaction processing company. He
was first elected a director of Wachovia in 1996 and was
elected for his present term at the 1999 Annual Meeting of
Shareholders.
Committees: Corporate Governance and Nominating
Management Resources and Compensation
Executive
155
--------------------------------------------------------------------------------
WACHOVIA DIRECTORS CONTINUING IN OFFICE
Term Expiring 2003 Annual Meeting of Shareholders
[Photo]
F. DUANE ACKERMAN, 58, has served as Chairman of the Board,
President and Chief Executive Officer of BellSouth
Corporation since December 1997. He was Vice Chairman of the
Board, President and Chief Executive Officer from December
1996 to December 1997, and Vice Chairman of the Board and
Chief Operating Officer from January 1995 to December 1996.
He also serves as a director of Allstate Corporation. He was
first elected a director of Wachovia at the 2000 Annual
Meeting of Shareholders.
Committees: Audit
Compliance
--------------------------------------------------------------------------------
[Photo]
JOHN T. CASTEEN III, 57, is President of the University of
Virginia. He was first elected as a director of Wachovia in
1997 and was elected for his present term at the 2000 Annual
Meeting of Shareholders.
Committees: Audit
Compliance
--------------------------------------------------------------------------------
[Photo]
GEORGE W. HENDERSON, III, 52, is Chairman, Chief Executive
Officer and a director of Burlington Industries, Inc., which
manufactures textiles and home furnishings. He was elected
Chairman in February 1998 and Chief Executive Officer in
1995. He also served as President from 1993 to 1998. Mr.
Henderson also serves as a director of Jefferson Pilot
Corporation. He was first elected a director of Wachovia in
1997 and was elected for his present term at the 2000 Annual
Meeting of Shareholders.
Committees: Audit
Compliance
--------------------------------------------------------------------------------
[Photo]
ROBERT A. INGRAM, 58, has served as Chief Operating Officer
and President, Pharmaceutical Operations, of GlaxoSmithKline
plc, a pharmaceutical research and development company,
since the merger of Glaxo Wellcome plc and SmithKline
Beecham plc in December 2000. Prior thereto, Mr. Ingram
served as Chief Executive Officer of Glaxo Wellcome plc from
1997 to December 2000 and Executive Director from September
1996 to October 1997, and Chief Executive Officer of Glaxo
Wellcome Inc. from 1994 to January 1999, Chairman from
October 1997 to January 2001, and President from 1994 to
January 1999. Mr. Ingram serves as a director of Nortel
Networks Corporation and TheraCom, Inc. He was first elected
as a director of Wachovia in 1997 and was elected for his
present term at the 2000 Annual Meeting of Shareholders.
Committees:
Corporate Governance and Nominating
Management Resources and Compensation
Executive
--------------------------------------------------------------------------------
156
[Photo]
GEORGE R. LEWIS, 59, has served since 1997 as President and
Chief Executive Officer of Philip Morris Capital
Corporation, which engages in various financing and
investment activities. Prior thereto, he was Vice President
and Treasurer of Philip Morris Companies Inc., the parent
company of Philip Morris Capital Corporation, which engages
in the manufacture and sale of various consumer products. He
serves as a director of Ceridian Corporation and Kemper
National Insurance Companies. Mr. Lewis was first elected as
a director of Wachovia in 1997 and was elected for his
present term at the 2000 Annual Meeting of Shareholders.
Committee: Technology
--------------------------------------------------------------------------------
Additional Information Concerning the Wachovia Board of Directors
Meetings of Wachovia Board
The board of directors of Wachovia held seven meetings during 2000. During
2000, each director, with the exception of Messrs. Hearn and Ingram, attended
at least 75% of the aggregate of the total number of meetings of the board of
directors and of all committees of the board on which such director served.
Wachovia Compensation
Nonemployee directors of Wachovia are paid a cash retainer of $12,500 per
calendar quarter for their services as members of the board of directors and
$1,000 per meeting for any special meetings beyond the four regularly scheduled
quarterly meetings of the board and each committee. There are no additional
payments for attendance at regularly scheduled board or committee meetings.
Cash retainer and meeting fees may be deferred into the Wachovia Corporation
Director Deferred Stock Unit Plan described below, known in this document as
the Deferred Stock Unit Plan.
Nonemployee directors of Wachovia are credited with a quarterly grant of
$4,500 under the Deferred Stock Unit Plan. Amounts credited to or deferred into
the Deferred Stock Unit Plan, which is administered by the Management Resources
and Compensation Committee, are equal to such number of shares of common stock
that could be purchased with the $4,500 grant and any deferred cash retainer
fee on the quarterly award date at a price equal to the average of the closing
price of Wachovia's common stock for the preceding ten trading days, known as
the fair market value. Deferred Stock Unit Plan account balances are fully
vested at all times and are payable in cash after a director's termination for
any reason (or upon a change of control of Wachovia). The amount of cash
payment will equal the fair market value per share of the common stock on the
payment date times the number of deferred stock units redeemed from the
director's account. Payment may be made in a lump sum or annual installments
for up to 10 years after termination. Deferred stock unit balances under the
Deferred Stock Unit Plan also are credited each quarter with dividend
equivalent grants based on the number of units credited to each Director's
account on each dividend record date.
Wachovia's Stock Plan provides for the award of 1,000 shares of restricted
stock to each nonemployee director who is newly elected or appointed to the
board of directors and the award of 250 shares of restricted stock at each
annual meeting to each nonemployee director who has been a Director for at
least one year. The initial award of 1,000 shares is restricted for three years
and vests on the third anniversary of the date of grant provided the director
is still in service. The annual award of 250 shares vests one year after the
date of grant provided the director is still in service. In addition, a
director award not otherwise forfeited will vest upon the death, disability or
retirement of the director or upon a change in control. Director awards not
otherwise earned are forfeited upon the termination of the director from
service on the board of directors.
Directors who formerly served on the board of directors of Central Fidelity
Banks, Inc. hold common stock equivalents as a result of retainer and meeting
fees deferred under the Central Fidelity Compensation Plan
157
for Non-Employee Directors, known as the Central Fidelity Directors Plan, which
are equivalent in value to shares of Wachovia common stock. These equivalents
are settled in stock according to the distribution election of the director.
Committees of Wachovia's Board
The Wachovia board of directors has the following standing committees:
Audit, Compliance, Corporate Governance and Nominating, Credit, Executive,
Finance, Management Resources and Compensation, and Technology. The members of
each committee as of December 31, 2000 are identified above under the heading
"Wachovia Proposal 2. Election of Directors." Information concerning certain of
these standing committees is set forth below.
The Audit Committee consists entirely of directors who are considered
independent under applicable sections of the NYSE's listing standards. The
Audit Committee is responsible for assuring that there exist viable internal
and independent auditing processes for Wachovia and its subsidiaries and
affiliated companies. The committee recommends to the board of directors the
appointment of the independent auditors. The committee communicates with
internal auditors, independent auditors and regulatory examiners for the
purpose of satisfying the committee that audit scopes and programs are
comprehensive and adequate, that management takes appropriate and timely action
on recommendations made by internal auditors, independent auditors and
regulatory examiners, and that Wachovia personnel cooperate fully with internal
auditors, independent auditors and regulatory examiners. In fulfilling its
responsibilities, the committee reviews and considers written and oral reports
of examinations by the regulatory authorities, management letters and other
comments of independent auditors, reports of the internal auditors, and other
audit-related information it considers appropriate. The Chairman of the Audit
Committee regularly reports to the board of directors on the committee's
findings, any recommendations made by the committee and action taken by
management on such recommendations. During 2000, the Audit Committee met four
times. The board of directors has adopted a written charter for the Audit
Committee, a copy of which is attached as Appendix J to this joint proxy
statement-prospectus. See also "Wachovia Audit Committee and Other Audit
Matters" on page 160.
The Management Resources and Compensation Committee, known as the
Compensation Committee, has the responsibility for establishing and
administering salary, incentive, benefit and stock plans, including setting the
compensation of senior officers, reviewing and recommending assignment and
succession of executive management, and at least annually reviewing the
performance and compensation of the Chief Executive Officer and reporting its
findings to the nonmanagement members of the board. The Compensation Committee,
or a subcommittee thereof, also serves as the committee of outside directors
for the purposes of the qualified performance-based compensation requirements
for employer compensation deductions that are set forth in Section 162(m) of
the Internal Revenue Code of 1986, as amended. The Compensation Committee met
four times during 2000.
The Corporate Governance and Nominating Committee has the responsibility to
consider and recommend nominees for the board of directors of Wachovia, assess
the performance of the board, evaluate issues of corporate governance and
recommend the processes and practices through which the board conducts its
business. If the merger occurs, the board of directors will nominate members of
the combined company as described above in "The Merger Agreement--Board
Composition of the Combined Company; Operations." Shareholders of the combined
company must follow the First Union's procedures set forth below in
"Shareholder Proposals for Next Year" to nominate directors for consideration
at the combined company's 2002 annual meeting of shareholders. If the merger
does not occur, Wachovia's shareholders must follow Wachovia's procedures set
forth below in "Shareholder Proposals for Next Year" to nominate directors for
consideration at Wachovia's 2002 Annual Meeting of Shareholders.
158
Security Ownership of Wachovia Directors and Executive Officers
The following table sets forth, as of the record date, the number of shares
of Wachovia common stock held by each director, nominee for director and
executive officer named in the Summary Compensation Table, and by all directors
and executive officers as a group. Unless otherwise noted, each individual has
sole voting and investment authority with respect to the number of shares set
forth opposite their names.
Amount and Nature of Beneficial Percent of
Name Ownership of Common Stock (1) Shares Outstanding (2)
---- ------------------------------- ----------------------
F. Duane Ackerman....... 2,470 *
Leslie M. Baker, Jr.
(3)(5)................. 491,520 *
James S. Balloun........ 2,500 *
Peter C. Browning....... 1,700 *
John T. Casteen III..... 2,429 *
Jean E. Davis (3)....... 60,321 *
Mickey W. Dry
(3)(4)(5).............. 237,934 *
Thomas K. Hearn, Jr..... 3,398 *
George W. Henderson, III
(8).................... 3,745 *
W. Hayne Hipp........... 7,950 *
Robert A. Ingram........ 1,950 *
George R. Lewis......... 6,707 *
Elizabeth Valk Long..... 2,350 *
Robert S. McCoy, Jr.
(3)(5)................. 153,907 *
Lloyd U. Noland, III
(6).................... 89,750 *
Morris W. Offit (7)..... 489,201 *
G. Joseph Prendergast
(3)(9)................. 234,422 *
Sherwood H. Smith, Jr.
(10)................... 9,550 *
John C. Whitaker, Jr.... 5,814 *
Dona Davis Young........ 412 *
All Directors and Execu-
tive Officers as a
Group
(26 persons) (5)....... 2,269,640 1.12%
--------
* Less than 1%
(1) Includes the following number of shares of common stock that may be
acquired within 60 days of the record date through the exercise of stock
options or stock appreciation rights that are settled in shares of common
stock, or the vesting of restricted stock awards under one or more of
Wachovia's stock plans: Mr. Baker, 359,686 shares; Ms. Davis, 54,900
shares; Mr. Dry, 130,331 shares; Mr. McCoy, 122,000 shares;
Mr. Prendergast, 167,000 shares; and all directors and executive officers
as a group, 1,229,211 shares.
(2) Based on the number of shares outstanding at, or acquirable within 60 days
of, the record date.
(3) Includes shares held by Wachovia Bank, as Trustee under Wachovia's
Retirement Savings and Profit-Sharing Plan, as follows: Mr. Baker,
167.7923 shares; Ms. Davis, 3,703.3161 shares; Mr. Dry, 132.5105 shares;
Mr. McCoy, 11,649.6644 shares; Mr. Prendergast, 171.9494 shares; and all
executive officers as a group, 22,972.7310 shares.
(4) Retired as of January 31, 2001.
(5) Excludes shares owned by or for the benefit of family members of the
following directors and executive officers, each of whom disclaims
beneficial ownership of such shares: Mr. Baker, 15,888 shares; Mr. Dry,
3,000 shares; Stanhope Kelly, 300 shares; Mr. McCoy, 973 shares; John C.
McLean, Jr., 6,850 shares; and Beverly B. Wells, 1,024 shares.
(6) Includes 848 shares held in trusts of which Mr. Noland is a co-trustee.
Excludes 2,970 units held by Wachovia Bank, as Trustee under the Central
Fidelity Directors Plan, for Mr. Noland. The units are equivalent to
shares of common stock and do not have voting rights. The units will be
settled in stock according to Mr. Noland's election under the plan.
(7) Includes 114,200 shares held by a family limited liability company of
which Mr. Offit is a member. Excludes 99,200 shares held by a charitable
remainder trust of which Mr. Offit's spouse is a co-trustee and of which
Mr. Offit's adult children have a remainder interest.
(8) Includes 810 shares held in a grantor trust.
(9) Retired as of January 1, 2001.
(10) Retired as of April 27, 2001.
159
Section 16(a) Beneficial Ownership Reporting Compliance of Wachovia Directors
and Officers
Section 16(a) of the Exchange Act requires Wachovia's directors and
designated executive officers, and any persons who own beneficially more than
10% of the outstanding shares of Wachovia common stock, to file with the SEC
and the NYSE reports disclosing their initial ownership of Wachovia common
stock, as well as subsequent reports disclosing changes in such ownership. To
Wachovia's knowledge, based solely on a review of the copies of such reports
furnished to Wachovia and written representations that no other reports were
required during the fiscal year ended December 31, 2000, Wachovia's directors
and designated executive officers timely complied with their respective Section
16(a) filing requirements except as noted below.
During January 2000, Mr. Lewis acquired 282 shares of Wachovia's common
stock through the conversion of phantom stock units previously granted under
the Central Fidelity Directors Plan. The transaction was reported in a Form 4
filed with the SEC in February 2000, but after the deadline for the filing of
such form. During April 1999, Mr. McCoy acquired 3,000 shares of Wachovia's
common stock upon the exercise of an option. The transaction was reported in a
Form 4 filed with the SEC in May 2000.
Wachovia Audit Committee and Other Audit Matters
Report of the Audit Committee
The Audit Committee oversees Wachovia's financial reporting process for the
board of directors. Management has primary responsibility for Wachovia's
financial statements and reporting process, including internal controls. In
fulfilling its responsibilities, the Audit Committee reviewed the audited
financial statements in the annual report with management and discussed the
acceptability of the accounting principles used, the reasonableness of
significant judgments, and the clarity of disclosures.
The Audit Committee reviewed with the independent auditors, who are
responsible for planning and carrying out a proper audit and reviews and
expressing an opinion on the conformity of those audited financial statements
with accounting principles that are generally accepted in the United States,
their judgments as to the acceptability of Wachovia's accounting principles,
and such other matters as are required to be discussed with the committee under
Statement on Auditing Standards No. 61, as currently in effect. In addition,
the Audit Committee has received the written disclosures and the letter from
the independent auditors required by Independence Standards Board Standard No.
1 (Independence discussions with Audit Committees) as currently in effect, and
considered the compatibility of nonaudit services with the auditors'
independence and has discussed with the auditors the auditors' independence.
The Audit Committee discussed with Wachovia's internal and independent
auditors the overall scope and plans for their respective audits. The Audit
Committee met with the internal and independent auditors, with and without
management present, to discuss the results of their examinations, their
evaluations of Wachovia's internal controls and the overall quality of
Wachovia's financial reporting.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the board of directors, and the board has approved,
that the audited financial statements be included in Wachovia's annual Report
on Form 10-K for the year ended December 31, 2000. The Audit Committee and the
board also have recommended, subject to shareholder approval, the selection of
Wachovia's independent auditors.
George W. Henderson, III, Chairman
F. Duane Ackerman John T. Casteen III Elizabeth Valk Long
Audit, Financial Information Systems Design and Implementation, and Other Fees
Billed for 2000
During 2000, Ernst & Young LLP served as Wachovia's independent auditors and
provided additional services to Wachovia and its affiliates. The following
table sets forth the Ernst & Young LLP fees for 2000 in
160
connection with (1) the audit of Wachovia's annual financial statements and
reviews of the various financial statements included in Wachovia's quarterly
reports on Form 10-Q, known as Audit Fees on the chart below; (2) consulting
services relating to the design and implementation of systems that aggregate
data underlying, or generate information significant to, Wachovia's financial
statements, known as Financial Information Systems Design and Implementation
Fees on the chart below; and (3) all other services, including audit-related
services, rendered by Ernst & Young LLP, known as All Other Fees.
Financial Information Systems
Audit Fees Design and Implementation Fees All Other Fees
---------- ------------------------------ --------------
$2,113,500 $ 0 $1,100,124
Wachovia Compensation Committee Report On Executive Compensation
Wachovia's senior management compensation program is administered by the
Compensation Committee. The Compensation Committee is responsible for the
establishment, approval and oversight of the total compensation and benefit
policies, plans, programs and agreements for senior management and consists
entirely of nonemployee directors who are not eligible to participate in any of
the management compensation programs. During 2000, the following individuals
served on the Compensation Committee: Peter C. Browning, John L. Clendenin,
Robert A. Ingram, George R. Lewis and John C. Whitaker, Jr. None of these
individuals is, or has been, an officer or employee of Wachovia. Messrs.
Clendenin and Lewis served on the Compensation Committee until April 2000.
The senior management compensation program consists of base salary, annual
cash incentive and stock-based awards based on the performance of Wachovia and
the responsibility, experience, skills and performance of participating
individuals. This program utilizes competitive peer group information, targeted
and maximum incentive pay levels and stock award guidelines, which are
established and administered to reinforce the alignment of the interests of
senior management employees with the interests of Wachovia's shareholders. The
purposes of the program are to enable Wachovia to attract and retain talent
needed for Wachovia to compete successfully in an intensely competitive
environment, and to provide the participants with reasonable and competitive
total compensation opportunities based on the sustained performance of Wachovia
and the individual's contributions to that performance. The peer institutions
used for comparison are 12 of the highest performing regional banking companies
in the country, all of which are included in the KBW Index used in the stock
performance graph on page 170.
Federal law limits to $1,000,000 per year the tax deduction available to
public companies for certain compensation paid to designated executive officers
unless an exception for qualified compensation is available. Wachovia's
compensation program, including the Senior Management Incentive Plan and the
Stock Plan, is designed to enable Wachovia to be eligible for full
deductibility of qualified performance-based compensation in excess of
$1,000,000. Wachovia reserves the right to award compensation that does not
comply with the $1,000,000 limitation exception if, based on the overall goals
and objectives of Wachovia, it is determined to be in the best interest of
Wachovia and its shareholders to do so.
The Compensation Committee from time to time retains independent executive
compensation and benefit consultants to assist the Compensation Committee in
its establishment, assessment and evaluation of the appropriateness and
competitiveness of the senior management compensation program. Based on
consulting assistance provided in 2000, the Compensation Committee determined
that base salaries, stock-based incentive awards, and retirement plans at
Wachovia were reasonably competitive with those of its peers. The Compensation
Committee also determined that Wachovia's annual cash incentive targets were in
line with those of its peers.
A description of each of the major elements of the senior management
compensation program and its specific relationship to corporate performance,
and a summary of the decisions and actions taken by the
161
Compensation Committee with regard to 2000 senior management compensation and
the Chief Executive Officer's compensation, are set forth below.
Base Salary
Members of senior management receive base salaries determined by the
responsibilities, skills and experience related to their respective positions.
Other factors considered in base salary determination are individual
performance, the success of each business unit in the individual's area of
responsibility in achieving established profit and business plans, the
competitiveness of the executive's total compensation and Wachovia's ability to
pay an appropriate and competitive salary. Members of senior management are
eligible for periodic increases in their base salary as a result of individual
performance or significant increases in their duties and responsibilities. The
amount and timing of an increase depends upon the individual's performance,
position of salary relative to the competitive market, and the time interval
and any added responsibilities since the last salary increase. The salary
increases during 2000 for certain executives, including the named executives,
were based on an evaluation by the Compensation Committee of the above-
described factors. These salary increases are reflected in the Summary
Compensation Table.
Annual Cash Incentives
The principal component of Wachovia's annual cash incentive program
historically has been the Senior Management Incentive Plan. The Compensation
Committee believes that the structure of the Plan ensures the competitiveness
of the annual cash incentive award opportunities under the Plan. Wachovia
continues to strive to align its total cash compensation levels with that of
its peer institutions and to emphasize the use of compensation based on
performance criteria, rather than general base salary increases.
In January of each year as part of administering Wachovia's annual cash
incentive program, the Compensation Committee establishes annual corporate
performance benchmarks and potential award opportunity levels as a percentage
of base salary based upon review of Wachovia's historical performance and
annual business plan, and taking into account the historical performance of
peer institutions. Bonus opportunities under the Plan are based upon corporate
performance criteria, the individual performance of each participant and
related business unit performances. Selected members of senior management,
including the named executives, were approved as participants in the Plan and
thus were eligible for awards in 2000. The annual corporate performance
benchmarks for 2000 were established in terms of: (1) net income per diluted
share (50% weight), (2) return on assets (25% weight) and (3) return on equity
(25% weight). The composite corporate performance evaluation factor is
determined by actual financial results for the year in relation to the
established goals.
The performance of each individual and the business unit for which an
individual is assigned is determined by evaluating each individual's
accomplishments compared with established annual business goals and key
strategic objectives for the individual or unit, as applicable. Based on the
Compensation Committee's policies, an individual assessment is made of the
employee's contribution to the achievement of Wachovia's overall performance,
goals and objectives. The resulting individual performance evaluation factor
may reduce, but not increase, the employee's award based upon the composite
corporate factor.
In January 2001, the Compensation Committee reviewed the overall corporate
performance for 2000 and determined there would not be award payments under the
Senior Management Incentive Plan for 2000 to the Chief Executive Officer and
other senior management employees, including the other named executives. The
decision was based upon Wachovia achieving net income per diluted share of
$4.58 (50% weight), a return of 1.34% on assets (25% weight) and a return of
15.89% on equity (25% weight), which were below performance goals established
for 2000.
162
Stock-Based Awards
The principal component of Wachovia's stock-based awards program is the
Wachovia Corporation Stock Plan. The purpose of the Stock Plan is to encourage
and enable members of senior management to increase their stock ownership
interests in Wachovia, thereby even further aligning their interests with the
interests of other shareholders. Members of senior management are eligible to
receive an annual benefit under the Plan in the form of incentive stock
options, nonqualified stock options, stock appreciation rights, known as SARs,
restricted stock and/or restricted units or other stock-related awards. Stock
options, restricted stock and SARs have been granted under the Plan. The stock
options and SARs typically vest over a five-year period. Vesting of restricted
stock grants is subject to attaining certain specified performance goals and
completion of the restriction period (generally five years). The number of
shares and kinds of awards granted an individual are based upon a number of
factors, including the level of responsibility, individual performance,
Wachovia's performance, the value of the options and awards in relation to the
individual's base salary and total compensation versus similar positions in the
market, and the amounts and kinds of prior awards. No specific objective
formula is used, however, to determine the amount of each specific award. The
Compensation Committee has determined that stock option grants made in 2001
will normally vest over three years, and the restrictions will lapse on stock
awards after four years. These changes were approved to make the terms of the
equity awards more competitive with those of peer financial institutions. These
vesting changes impact equity awards to all participants, including the named
executives.
In early 2000, the Compensation Committee made annual grants of stock
options and restricted stock to the Chief Executive Officer and other members
of senior management, including the named executives. The Compensation
Committee also subsequently awarded stock options and restricted stock to
certain members of senior management, including at least one of the named
executives, in conjunction with the assignment of significant new duties. The
Compensation Committee took into account the responsibility level and
performance of each individual and the other factors described above. These
stock awards granted to the named executives are included in the tables on the
following pages.
2000 Compensation for Wachovia's Chief Executive Officer
The Chief Executive Officer's compensation is determined based on the same
basic factors as described above for other members of senior management. At its
January 2000 meeting, the Compensation Committee reviewed comprehensive reports
prepared by two independent executive compensation and benefit consultants
analyzing Mr. Baker's total compensation compared with that of his counterparts
at peer financial services institutions. This competitive data was considered
in conjunction with Wachovia's overall performance in 1999 in meeting the needs
of shareholders, customers and employees, and the Compensation Committee
established the base salary, incentive award opportunity and stock awards of
the Chief Executive Officer for 2000 based on these factors, as well as the
factors described above for other members of senior management. The
Compensation Committee determined at its January 2001 meeting that no cash
bonus award was payable to Mr. Baker under the Senior Management Incentive Plan
for 2000 based upon Wachovia's performance (net income per diluted share,
return on assets and return on equity) as described above in this report under
the heading "Annual Cash Incentives."
Peter C. Browning, Chairman
Robert A. Ingram George R. Lewis John C. Whitaker, Jr.
163
Wachovia Compensation
The following table sets forth, for the years ended December 31, 2000, 1999,
and 1998, information regarding compensation paid to Wachovia's Chief Executive
Officer and the four other most highly compensated executive officers of
Wachovia, known as the named executives.
Summary Compensation Table
Annual Compensation Long-Term Compensation Awards
------------------------------------ -----------------------------
Other Annual Restricted Securities All Other
Name and Principal Compensation Stock Underlying Compensation
Position Year Salary ($) Bonus ($)(2) ($)(3) Awards ($)(4) Options/SARs (#) ($) (5)
------------------ ---- ---------- ------------ ------------ ------------- ---------------- ------------
Leslie M. Baker, Jr. ... 2000 990,000 0 54,817 2,240,000 175,000/0 238,520
Chairman and 1999 941,667 1,471,400 52,467 2,145,313 125,000/0 56,500
Chief Executive 1998 839,167 891,600 49,697 1,875,000 125,000/0 50,350
Officer (1)
G. Joseph Prendergast... 2000 650,000 0 32,721 1,660,000 100,000/0 116,189
President and 1999 616,667 770,800 220,266 2,179,063 100,000/0 37,000
Chief Operating 1998 540,000 573,800 30,138 1,125,000 50,000/0 32,400
Officer (1)
Robert S. McCoy, Jr. ... 2000 630,000 0 35,525 1,600,000 60,000/0 122,093
Vice Chairman and 1999 575,000 718,800 32,715 1,733,125 60,000/0 34,500
Chief Financial 1998 514,167 546,300 31,475 1,125,000 50,000/0 30,850
Officer
Mickey W. Dry........... 2000 408,333 0 38,278 1,280,000 30,000/0 130,310
Senior Executive 1999 366,667 485,300 39,829 1,287,188 30,000/0 22,000
Vice President and 1998 325,000 259,000 29,809 900,000 30,000/0 19,500
Chief Credit Officer
Jean E. Davis........... 2000 374,167 0 20,378 1,417,875 90,000/0 24,449
Senior Executive 1999 298,333 372,900 30,015 1,195,938 45,000/0 17,900
Vice President 1998 193,750 125,900 90,779 600,000 20,000/0 11,625
--------
(1) Effective as of January 1, 2001, Mr. Baker became President, as well as
Chairman of the Board and Chief Executive Officer, of Wachovia and Mr.
Prendergast resigned as President and Chief Operating Officer.
(2) Includes amounts payable under Wachovia's Senior Management Incentive Plan
and, for 1998, a supplemental bonus.
(3) All amounts disclosed are attributable to supplemental life and disability
insurance, tax return preparation and financial planning services, company-
sponsored social clubs, company-provided automobiles and automobile and
cost-of-living allowances. Includes, as to Mr. Prendergast for 1999,
$167,992 to cover certain relocation expenses incurred with his move to
Winston-Salem and $22,320 for a portion of the taxes owed on such amounts.
(4) Represents the value of restricted stock units awarded under Wachovia's
Stock Plan as of the date of the grant, without deduction for units that
may be surrendered at the time of distribution of the award to pay
applicable payroll taxes on the award. During 2000, Messrs. Baker,
Prendergast, McCoy and Dry, and Ms. Davis were awarded 35,000, 25,000,
25,000, 20,000 and 25,000 restricted stock units, respectively. All
restricted stock unit awards outstanding as of December 31, 2000 have a
five-year restriction period. Aggregate outstanding restricted stock unit
awards and their value at December 31, 2000 were: for Mr. Baker, 125,324
shares valued at $7,284,457; for Mr. Prendergast, 100,000 shares valued at
$5,812,500; for Mr. McCoy, 95,000 shares valued at $5,521,875; for Mr. Dry,
71,000 shares valued at $4,126,875; and for Ms. Davis, 49,500 shares valued
at $2,877,187. No dividends are paid on restricted stock awards during the
restriction period.
164
(5) Represents matching contributions with respect to Wachovia's Retirement
Savings and Profit-Sharing Plan and related equalization plan and,
beginning in 2000, the present value of the benefits of the net premiums
paid under Wachovia's Split Dollar Life Insurance Plan. During 2000, the
amounts allocated under the Retirement Savings and Profit-Sharing Plan and
related equalization plan to Messrs. Baker, Prendergast, McCoy and Dry, and
Ms. Davis were $53,460, $35,100, $34,020, $22,050 and $20,205,
respectively; and the value of the benefits under the Split Dollar Life
Insurance Plan for Messrs. Baker, Prendergast, McCoy and Dry, and Ms. Davis
was $185,060, $81,089, $88,073, $108,260 and $4,244, respectively.
Wachovia Options And Stock Appreciation Rights
The following table sets forth information as to the grant of stock options
during 2000 to the named executives. No SARs were granted during 2000.
Wachovia Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Individual Grants Annual Rates of
Number of ---------------------------------------------- Stock Price
Securities Percent of Total Appreciation for
Underlying Options Granted Exercise or Option Term (3)
Options to Employees in Base Price --------------------
Name Granted (#)(1) Fiscal Year ($/Share) (2) Expiration Date 5% ($) 10% ($)
---- -------------- ---------------- ------------- --------------- --------- ----------
Leslie M. Baker, Jr..... 175,000 3.90% 64.00 1/28/10 7,043,620 17,849,916
G. Joseph Prendergast... 100,000 2.23 64.00 1/28/10 4,024,926 10,199,952
Robert S. McCoy, Jr..... 60,000 1.34 64.00 1/28/10 2,414,955 6,119,971
Mickey W. Dry........... 30,000 .67 64.00 1/28/10 1,207,478 3,059,986
Jean E. Davis........... 50,000 1.11 64.00 1/28/10 2,012,463 5,099,976
Jean E. Davis........... 40,000 .89 51.1875 10/27/10 1,267,662 3,263,188
--------
(1) All stock options become exercisable over a five-year period in 20% annual
increments.
(2) The exercise price equals the market price of Wachovia common stock on the
date of the grant.
(3) The potential gains are based on the assumed annual rates of stock price
appreciation of 5% and 10% over the term of each option. Any actual gains
are dependent on the future performance of Wachovia's common stock and
general market conditions. There is no assurance that the assumed rates of
stock price appreciation will be achieved. Increases in the stock price
will benefit all shareholders commensurately.
The following table sets forth information with respect to the named
executives concerning the exercise of options during 2000 and unexercised
options and SARs held at year-end. No SARs were exercised during 2000 and,
except for 125,000 SARs held by Mr. Baker, no SARs were outstanding at year-
end.
Wachovia Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
Number of Securities
Underlying Unexercised Value of Unexercised In-
Shares Options/SARs at Fiscal the-Money Options/SARs At
Acquired on Year-End (#) Fiscal Year-End ($) (2)
Exercise Value Realized ------------------------- -------------------------
Name (#) ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
Leslie M. Baker, Jr..... 5,840 125,218 318,324 430,000 2,876,525 457,500
G. Joseph Prendergast... -- -- 106,000 227,000 997,000 83,375
Robert S. McCoy, Jr..... -- -- 78,000 154,000 536,750 68,000
Mickey W. Dry........... 3,000 87,937 62,500 141,400 188,925 288,575
Jean E. Davis........... 600 14,962 29,900 141,400 188,925 288,575
--------
(1) Based on the difference between the closing price on the date of exercise
and the option exercise price.
(2) Based on the difference between the closing price on December 31, 2000,
and the option exercise price.
165
Other Wachovia Executive Compensation Plans And Arrangements
Wachovia Pension Plan
The following table shows the estimated annual benefits payable at
retirement to a participant in the Retirement Income Plan, Wachovia's qualified
defined benefit plan.
Estimated Annual Retirement Benefits for
Average Base Salary During Years of Credited Service (1)(2)
Highest Five Consecutive Years -----------------------------------------------------
Before Retirement 10 15 20 25 30 35
------------------------------ -------- -------- -------- -------- -------- --------
$ 50,000 $ 4,986 $ 7,479 $ 9,972 $ 12,465 $ 14,958 $ 17,451
100,000 9,972 14,958 19,944 24,930 29,916 34,902
500,000 49,860 74,790 99,720 124,650 149,580 174,510
1,000,000 99,720 149,580 199,440 249,300 299,160 349,020
1,200,000 119,664 179,496 239,328 299,160 358,992 418,824
1,500,000 149,580 224,370 299,160 373,950 448,740 523,530
2,000,000 199,440 229,160 398,880 498,600 598,320 698,040
--------
(1) Under the terms of the Retirement Income Plan, annual retirement income
benefits are not reduced or offset by Social Security benefits. Estimated
annual retirement benefits shown above are based on a joint and 100%
survivor form of retirement income. The precise amount of the benefit
depends upon the age of a participant and the age of his or her surviving
spouse. Benefits vary under certain predecessor plans and plans maintained
by companies that merged into Wachovia.
(2) Some of the amounts shown exceed the limits imposed by federal law for
qualified pension plans and are payable only to participants in the other
retirement arrangements described below.
Employees of Wachovia and its subsidiaries who have completed one year of
service are eligible to participate in the Retirement Income Plan. Upon
retirement at age 65, a participant receives (subject to certain limitations)
an annual benefit which equals 1.2% of the average of the highest five
consecutive years of base compensation preceding termination or retirement
(average compensation), multiplied by years of service after December 31, 1989.
Employees of Wachovia prior to January 1, 1989, and employees of companies that
have merged into or have been acquired by Wachovia, may have accrued benefits
under certain predecessor defined benefit plans. Benefits vary under these
plans from the terms of the Retirement Income Plan.
Federal law places certain limitations on the amount of benefits payable
under qualified pension plans. The annual benefit paid to a participant at
Social Security retirement age cannot exceed $135,000 for 2000 and $140,000 for
2001 (adjusted in increments of $5,000 for inflation). In addition, the annual
amount of covered compensation under the plan is limited to $170,000 for 2000
and for 2001 (adjusted in increments of $10,000 for inflation). The 2000 base
salary for each of the named executives is set forth in the Summary
Compensation Table. For such individuals, full years of credited service are as
follows: Mr. Baker, 30 years; Ms. Davis, 15 years; Mr. Dry, 36 years; Mr.
McCoy, 16 years; and Mr. Prendergast, 26 years.
Wachovia Supplemental Retirement Arrangements
Wachovia has entered into nonqualified, unfunded retirement agreements with
a number of senior officers of Wachovia. These arrangements are intended to
restore the benefits lost because of statutory limits imposed by federal law
and to supplement the retirement payments received by participating executives
under the Retirement Income Plan. Except for the level of benefits provided
under the various agreements and the ages at which an executive is eligible to
retire, the agreements are substantially similar.
Under the terms of the supplemental retirement arrangements with the named
executives, each executive will retire at a specified age, or, with the consent
of the Compensation Committee, as early as age 55 on a reduced benefit basis
for each year prior to the retirement date specified in the agreement, provided
the executive has completed 10 years of service. Upon retirement, the executive
will be entitled to receive a
166
supplemental benefit. The monthly amount of the supplemental benefit is equal
to one-twelfth of the product of 2.5% of the named executive's final average
compensation times the number of years of creditable service under the
Retirement Income Plan (up to a maximum of 62.5%), reduced by the amount of
monthly payments under the Retirement Income Plan and any other pension plan.
"Final average compensation" means the average of the executive's annual
compensation for the three full years within the final five years of employment
which produce the highest average. Annual compensation for this purpose
includes total cash remuneration from Wachovia, including base salary,
incentive compensation to the extent approved by the Compensation Committee,
salary reduction amounts under qualified and unqualified plans or arrangements,
and deferrals under deferred compensation plans and agreements. The
supplemental benefit generally is paid in the form of a single life annuity for
the executive's life, although payments may be made in a lump sum in certain
circumstances. The agreements also provide for the payment of reduced
supplemental benefits in the event of the executive's death or disability.
A named executive will forfeit any rights under the supplemental retirement
arrangement if he fails to retire at his normal retirement date (unless the
named executive and Wachovia agree to extend the named executive's employment
beyond his normal retirement date), terminates employment prior to his
retirement date without Compensation Committee consent, or is terminated for
cause. In addition, the right to payment of supplemental benefits will
terminate if the executive violates certain noncompetition, confidentiality and
similar restrictions. The agreements with the named executives also provide
that, in the event of a change of control of Wachovia, the executive's rights
to benefits under the agreement will be fully vested, without regard to his
termination for any reason (other than cause). Further, if the executive is
voluntarily or involuntarily terminated during the three-year period following
a change of control, his supplemental benefit will be deferred until the end of
the compensation period under any applicable employment agreement with Wachovia
(or, if later, until the date the named executive attains age 55) and adjusted
to reflect any continuation benefits under his employment agreement.
The following table sets forth estimated total annual benefits which would
become payable to the named executives, with the exception of Mr. McCoy, under
the formula in their respective retirement agreements (which amounts will be
reduced by the benefits paid under the Retirement Income Plan) based upon final
average compensation and years of credited service.
Estimated Annual Retirement Benefits
Average Compensation During Highest for Years of Credited Service
Three Years in the Last Five Years Before ---------------------------------------
Retirement 10 15 20 25
----------------------------------------- -------- -------- ---------- ----------
$ 100,000 $ 25,000 $ 37,500 $ 50,000 $ 62,500
300,000 75,000 112,500 150,000 187,500
500,000 125,000 187,500 250,000 312,500
700,000 175,000 262,500 350,000 437,500
900,000 225,000 337,500 450,000 562,500
1,000,000 250,000 375,000 500,000 625,000
1,100,000 275,000 412,500 550,000 687,500
1,200,000 300,000 450,000 600,000 750,000
1,500,000 375,000 562,500 750,000 937,500
2,000,000 500,000 750,000 1,000,000 1,250,000
Mr. McCoy's retirement agreement is slightly different than those of the
other named executives in that his formula increases by 1% per year of service
from a percentage of 55% should he retire with 10 years of service up to a
maximum of 60% at 15 years of service. All other material features of his
retirement agreement are substantially similar to those of the other
participants.
Wachovia Retirement Savings and Profit-Sharing Plan
Wachovia has a voluntary qualified defined contribution plan titled the
Retirement Savings and Profit-Sharing Plan. The plan provides that eligible
employees can contribute to the plan from 1% to 15% of their
167
compensation. The plan provides that Wachovia will match 100% of each
participant's contributions up to the first 3% of the participant's contributed
compensation plus 50% of the next 3% of the participant's contributed
compensation. The plan also provides for (1) additional contributions by
Wachovia of up to 1.5% of the participant's contributed compensation if
Wachovia meets certain earnings performance criteria established annually at
the beginning of each year, and (2) special discretionary contributions by
Wachovia of up to an additional 4% if the committee administering the plan
considered Wachovia's annual performance to be truly outstanding.
Federal law limits the maximum annual compensation from which an employee
may elect to make contributions under qualified plans such as the plan to
$170,000 for 2000 and 2001 (adjusted in increments of $10,000 for inflation).
Participants may elect to make all or part of their contributions under these
plans on a before-tax basis provided such before-tax contributions do not
exceed $10,500 in 2000 and 2001 (adjusted in increments of $500 for inflation).
Employee contributions are subject to certain regulatory restrictions, which
may limit further the maximum contribution of certain more highly compensated
participants (including the named executives). During 2000, Wachovia maintained
a nonqualified equalization plan designed to protect selected key employees
(including the named executives) of Wachovia or its subsidiaries from loss of
benefits under the Retirement Savings and Profit-Sharing Plan resulting from
the application of limitations on contributions to qualified plans contained in
the Internal Revenue Code. If contributions under the plan were not allocated
to the key employee due to those limitations on contributions, the equalization
plan provided for Wachovia to credit to a nonqualified account for the employee
the amount of such contribution not so allocated. Amounts credited to each
participant's nonqualified account in 2000 were credited monthly with an
interest equivalent based on the Long-Term Applicable Federal Rate and are
payable to the participants in the equalization plan upon termination of
employment. The amounts contributed by Wachovia to the Retirement Savings and
Profit-Sharing Plan and the equalization plan for the benefit of the named
executives are included in the column "All Other Compensation" in the Summary
Compensation Table.
Wachovia Employment Agreements
Wachovia has entered into employment agreements with certain senior officers
of Wachovia, including the named executives. The terms of Mr. Baker's
employment agreement and the employment agreements of the other named
executives are substantially similar, other than the special retention award
granted to Mr. Baker, which is discussed below. Each employment agreement has a
three-year term, subject to extension until the executive reaches the specified
retirement age.
Under the terms of the employment agreements, during the term of the
agreement, the named executive will receive an annual base salary at least
equal to his current base salary and be eligible for periodic increases in base
salary. Each agreement provides that the named executive is entitled to certain
"continuation benefits" if he is involuntarily terminated during the term of
the agreement (that is, he is terminated by Wachovia other than for cause or he
voluntarily terminates employment as a result of a reduction in salary,
retirement agreement benefits, or duties and responsibilities). The executive
forfeits the right to continuation benefits if he is terminated for cause or if
he breaches certain consulting, confidentiality or noncompetition restrictions
following termination.
If the named executive is involuntarily terminated, the executive will be
entitled, for the period ending on the earlier of the third anniversary of the
termination or the named executive's normal retirement date, as defined in his
retirement agreement (or, for Mr. Baker, a period of three years following
termination), known as the compensation period, to receive monthly cash
compensation equal to one-twelfth of the sum of (1) the highest annual base
salary rate in effect during the 12-month period before termination, plus (2)
annual incentive compensation equal to the highest annual average based on any
three-year period during the final five years of employment (provided the
Compensation Committee approves such bonus amounts), plus (3) the total amount
of Wachovia contributions under the Retirement Savings and Profit-Sharing Plan
and any executive deferred compensation plans or arrangements in which he
participated (based on the highest annual average during any three-year period
among the final five years of employment).
168
In addition, in the event of his involuntary termination, the named
executive will be entitled during the compensation period to (1) continue
vesting with respect to stock options, restricted stock awards or other stock-
based awards granted under Wachovia's Stock Plan and other stock-based plans,
and (2) receive employee benefits and supplemental and equalization benefits to
which he was entitled prior to termination (or substantially equivalent
benefits). The employment agreements also provide that, if the named executive
terminates employment for any reason or is involuntarily terminated (other than
for cause) within the three-year period following a change of control, then (1)
he is entitled to the continuation benefits described above for the three-year
period beginning on the date of his termination; (2) he will receive "gross-up
payments" equal to the amount of excise taxes, income taxes, interest and
penalties if such payments are deemed excess parachute payments for federal
income tax purposes; and (3) with respect to Mr. Baker, his retention
restricted stock award, discussed below, will become fully vested and
exercisable.
In connection with the merger, certain executive officers of Wachovia will
not have similar positions in the combined company and will be entitled to
terminate their employment. See "The Merger Agreement--Interests of Certain
Persons in the Merger" above for a description of these termination rights.
In addition to the other benefits described above, Mr. Baker's employment
agreement also provides for the grant of a restricted stock award for 60,000
shares of Wachovia common stock at age 60, which will vest in 50% increments at
age 61 and 62 (or if a change in control occurs before he reaches age 60, the
shares will be transferrred and vested immediately). The retention component of
Mr. Baker's employment agreement also provides that all stock options,
restricted stock awards and other amounts granted under Wachovia's Stock Plan
(or similar plans) will become fully vested and exercisable once Mr. Baker
attains age 60.
As discussed in connection with the merger proposal, Mr. Baker entered into
a new employment agreement with First Union that will become effective if the
merger is completed. See "The Merger Agreement--Interests of Certain Persons in
the Merger" above for a description of Mr. Baker's new employment agreement. If
the First Union-Wachovia merger does not occur, Mr. Baker's existing employment
agreement with Wachovia will remain in effect.
Certain Transactions Involving Wachovia Directors And Executive Officers
Directors, nominees and executive officers, members of their immediate
families, and business organizations and individuals associated with them have
been customers of, and have had normal transactions with, Wachovia and its
affiliates. All such transactions were made in the ordinary course of business,
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other customers, and did not involve more than the normal risk of
collectibility or present other unfavorable features. In addition, Wachovia and
its affiliates have engaged in other transactions with such persons, all of
which were made on substantially the same terms as those prevailing at the time
for comparable transactions with other persons.
W. Hayne Hipp is Chairman, President, Chief Executive Officer and a director
of The Liberty Corporation. Until the sale of Liberty Life Insurance Company in
November 2000 to an unaffiliated company, The Liberty Corporation was the
parent of Liberty Life. The Hipp family has significant share holdings in The
Liberty Corporation. Wachovia places with Liberty Life certain credit life
insurance purchased by installment loan customers of its affiliates. The net
premium benefit on this credit life insurance retained by Liberty Life in 2000
was approximately $1,913. Employee-owned universal life insurance policies for
certain Wachovia employees also are written by Liberty Life. During 2000,
Wachovia paid approximately $28,700 in premiums for this plan coverage,
including approximately $16,900 in employee payments toward universal life
insurance plan coverage. Corporate-owned life insurance policies associated
with certain employee benefit obligations are written by Liberty Life. During
2000, premiums for this coverage were approximately $1,267,700.
169
Wachovia Stock Performance
The graph below presents the cumulative total return, assuming the
reinvestment of dividends, for the period from December 31, 1995 through
December 31, 2000, from an investment of $100 in each of Wachovia common stock,
the Standard & Poor's 500 Stock Index and the Keefe, Bruyette & Woods 50 Total
Return Index, or the KBW 50. The KBW 50 is a published industry index providing
a market capitalization weighted measure of the total return of 50 U.S. banking
companies, including all money center and most major regional banks.
[GRAPH]
Five-year
Base compound
period annual
1995 1996 1997 1998 1999 2000 growth rate
----------------------------------------------------------------
Wachovia $100 $127.61 $188.08 $207.21 $165.56 $147.02 8.0%
KBW 50 100 141.46 206.80 223.91 216.14 259.50 21.0
S&P 500 100 122.96 163.98 210.85 255.21 231.98 18.3
Wachovia Proposal 3. Appointment Of Independent Auditors
Ernst & Young LLP has been appointed independent auditors for Wachovia for
2001, subject to ratification of that appointment by the shareholders. Ernst &
Young LLP has acted as the independent auditors for Wachovia and its
predecessors since 1969. Wachovia has been advised by Ernst & Young LLP that,
to the best of its knowledge, no member of the firm has any direct or material
indirect financial interest in Wachovia or any of its subsidiaries, nor has any
such member had any connection during the past three years with Wachovia or any
of its subsidiaries in the capacity of promoter, underwriter, voting trustee,
director, officer or employee.
Representatives of Ernst & Young LLP will be present at the Annual Meeting
and will have an opportunity to make a statement if they desire to do so.
Representatives also will be available to respond to appropriate questions.
The Wachovia board of directors recommends a vote "FOR" ratification of the
appointment of Ernst & Young LLP as independent auditors of Wachovia for 2001.
170
LITIGATION RELATING TO THE PROPOSED WACHOVIA/FIRST UNION MERGER
First Union/Wachovia Litigation against SunTrust. On May 22, 2001, First
Union and First Union National Bank filed a lawsuit against SunTrust captioned
First Union Corporation and First Union National Bank v. SunTrust Banks, Inc.,
File No. 01-CVS 10075, in North Carolina Superior Court, County of Mecklenburg.
The complaint asserts claims by First Union for unfair trade practices, and
tortious interference with prospective economic advantage and asserts a claim
by both First Union and First Union National Bank for a declaratory judgment
that the stock option agreements are valid and fully enforceable. The complaint
seeks temporary, preliminary and permanent injunctive relief and declaratory
relief. On May 23, a First Amended Complaint was filed that added Wachovia as a
plaintiff on the declaratory judgment claim, and Wachovia asserted a separate
claim against SunTrust for breach of a confidentiality agreement. On May 24,
the North Carolina Superior Court entered a temporary restraining order
enjoining SunTrust from prosecuting or taking any steps to prosecute the
lawsuit it had filed against Wachovia, 10 Wachovia directors and First Union in
Georgia Superior Court, Fulton County, which is discussed below. On May 25,
SunTrust effected removal of the action to the United States District Court for
the Western District of North Carolina and filed a motion to dissolve the
temporary restraining order. Also on May 25, First Union, First Union National
Bank and Wachovia filed a motion to remand the action back to the North
Carolina Superior Court and a motion for a preliminary injunction or to
continue the temporary restraining order already in effect. On May 30, the
United States District Court for the Western District of North Carolina
remanded the action back to the North Carolina Superior Court, County of
Mecklenburg, and a written order followed on May 31. On June 1, Wachovia, First
Union and SunTrust entered into an agreement that all litigation brought by
them (other than claims over which the federal courts have exclusive
jurisdiction) would be moved to the North Carolina Business Court, and that
SunTrust would drop its Georgia state court action. On June 6, SunTrust filed
its answer and filed counterclaims against Wachovia, certain Wachovia directors
and First Union alleging that the Wachovia directors, aided and abetted by
First Union, breached their fiduciary duties by approving the merger agreement
and the amended stock option agreements, that those agreements are unreasonable
restraints of trade in violation of Georgia law, and seeking a declaration that
Wachovia must allow Wachovia shareholders to vote on SunTrust's proposed by-law
amendment at the August 3 Wachovia shareholder meeting. SunTrust's
counterclaims seek declaratory and injunctive relief. On June 11, First Union,
Wachovia and the Wachovia directors moved to dismiss the counterclaims. On June
18, the court dismissed SunTrust's claim for unreasonable restraint of trade
under Georgia law, but allowed SunTrust to proceed with its remaining claims.
On June 19, the court scheduled a hearing on SunTrust's motion for a
preliminary injunction for July 17.
SunTrust Federal Court Litigation. On May 22, 2001, SunTrust filed a lawsuit
against First Union and Wachovia captioned SunTrust Banks, Inc., v. Wachovia,
et al., Civil Action No. 1:01-CV-1309, in the United States District Court for
the Northern District of Georgia. The complaint asserts claims that the
preliminary joint proxy statement of First Union and Wachovia contains
materially false and misleading statements in violation of the federal
securities laws. The complaint seeks preliminary and permanent injunctive
relief and costs. On May 23, First Union filed an answer to the complaint,
denying any liability and asserting affirmative defenses. Also on May 23,
SunTrust filed a putative amended complaint asserting the same claims as in the
original complaint, and adding a claim that Wachovia has not complied with
federal rules concerning the record date for a shareholder meeting. The
putative amended complaint seeks substantially similar relief as the original
complaint. On May 23, SunTrust also filed a motion for expedited discovery and
requested that the court set a date for a preliminary injunction hearing. On
June 11 and 12, First Union and Wachovia, respectively, filed their answers to
the amended complaint and filed counterclaims against SunTrust asserting that
its preliminary proxy statement contained false and misleading statements in
violation of the federal securities laws. The counterclaims seek preliminary
and permanent injunctive relief. Also on June 11, First Union and Wachovia
opposed SunTrust's motion for expedited discovery and for a preliminary
injunction. On June 15, the court scheduled a hearing on SunTrust's motion for
expedited discovery for July 6. Also, on June 15, First Union filed a motion to
dismiss SunTrust's claims as moot. The filing of that motion automatically
stays discovery under federal law.
First Union and Wachovia believe that SunTrust's complaint is without merit
and intend to defend it vigorously.
171
SunTrust State Court Litigation. On May 23, 2001, SunTrust filed a complaint
against First Union, Wachovia and 10 of Wachovia's directors captioned SunTrust
v. Baker, et al., Civil Action No. 2001CV38256, in the Georgia Superior Court,
Fulton County. The complaint asserts claims for breach of fiduciary duty and
breach of the duty of loyalty and candor against the Wachovia directors, and
aiding and abetting the breaches of those duties by First Union. The complaint
also asserts a claim for restraint of trade under Georgia Code section 13-8-2
and the Georgia Constitution. The complaint seeks declaratory and preliminary
and permanent injunctive relief, and costs and attorneys' fees. On May 23,
SunTrust filed a motion to consolidate the case with Wyatt, et al. v. Baker, et
al., a putative shareholder class action discussed below. The motion was
granted on May 23. On May 24, SunTrust filed a motion to expedite discovery and
to schedule a preliminary injunction hearing. By order dated May 24, the court
scheduled a hearing for May 31 to hear SunTrust's motion. Later on May 24, the
North Carolina Superior Court in First Union, et al. v. SunTrust entered a
temporary restraining order enjoining SunTrust from prosecuting or taking any
steps to prosecute this action. The Georgia state court subsequently adjourned
the hearing scheduled for May 31.
As mentioned above, on June 4, SunTrust dropped this case and brought these
claims in the North Carolina Business Court on June 6.
Wachovia Shareholder Litigation. On or about April 20, 2001, an individual
stockholder of Wachovia, purporting to represent a class of holders of Wachovia
common stock, filed a putative Class Action Complaint against Wachovia, Leslie
M. Baker, Jr. and Morris W. Offitt captioned Krim v. Wachovia, et al., No.
1:01CV00417, in the United States District Court for the Middle District of
North Carolina. The complaint alleges that the defendants breached their
fiduciary duties by agreeing to the merger. The complaint seeks injunctive
relief, unspecified damages, and costs and attorneys' fees. On or about April
30, 2001, an amended complaint was filed against the same defendants asserting
similar claims and seeking similar relief. On or about May 4, 2001, the
plaintiff moved for expedited discovery, which Wachovia has opposed. On June 4,
the defendants moved to dismiss or stay the action. Also on June 4, plaintiff
filed a motion for class certification.
On May 1, 2001, an individual stockholder of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia and the Wachovia directors captioned Bennett
v. Baker, et al., in North Carolina Superior Court, Forsyth County. The
complaint alleges that the Wachovia directors breached their fiduciary duties
by entering into the merger agreement with First Union. The complaint seeks
injunctive relief, unspecified damages, and costs and attorneys' fees, which
defendants have opposed. On or about May 24, 2001, plaintiff filed a motion for
class certification. On May 25, 2001, Wachovia, its directors and First Union
filed a motion to transfer this action to the North Carolina Business Court.
On or about May 1, 2001, an individual stockholder of Wachovia, purporting
to represent a class of holders of Wachovia common stock, filed a putative
Class Action Complaint against Wachovia and the Wachovia directors captioned
Leser v. Wachovia, et al., File No. 01WS6743, in North Carolina Superior Court,
Guilford County. The complaint alleges that the Wachovia directors breached
their fiduciary duties by entering into the merger agreement with First Union
and by failing to consider other alternatives. The complaint seeks injunctive
relief, unspecified damages, and costs and attorneys' fees. On May 29, the
action was transferred to the North Carolina Superior Court, Forsyth County. On
June 8, plaintiff filed a motion for class certification. On June 13,
defendants filed a motion to transfer this action to the North Carolina
Business Court.
On May 14, 2001, an individual stockholder of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia and the Wachovia directors, captioned Heaney
v. Wachovia, et al., File No. 01CVS4748, in North Carolina Superior Court,
Forsyth County. The complaint alleges that the Wachovia directors breached
their fiduciary duties by entering into the merger agreement with First Union
and by failing to consider other alternatives. The complaint seeks injunctive
relief, unspecified damages, and costs and attorneys' fees. On May 25, 2001,
Wachovia, its directors and First Union filed a motion to transfer this action
to the North Carolina Business Court. That motion was granted. On June 4, an
amended complaint was filed, and on June 5, plaintiff filed a motion for a
preliminary injunction.
172
On May 16, 2001, two individual stockholders of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia, the Wachovia directors and First Union
captioned Wyatt, et al. v. Baker, et al., Case No. 2001CV38062, in Georgia
Superior Court, Fulton County. The complaint alleges that the Wachovia
directors, aided and abetted by First Union, breached their fiduciary duties by
entering into the merger agreement with First Union and by failing to consider
other alternatives. The complaint seeks injunctive relief, unspecified damages,
and costs and attorneys' fees. On May 25, 2001, plaintiffs filed a motion for
expedited discovery and requested that they be permitted to participate in the
May 31 hearing on SunTrust's motion for expedited discovery and to set a
hearing in SunTrust's Georgia state court action. Plaintiffs have withdrawn
their motion for expedited discovery.
On May 17, 2001, an individual stockholder of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia, the Wachovia directors, and First Union,
captioned Wachsman v. Wachovia, et al., File No. 01CVS4810, in North Carolina
Superior Court, Forsyth County. The complaint alleges that the Wachovia
directors breached their fiduciary duties by refusing to negotiate with
SunTrust. The complaint seeks injunctive relief, unspecified damages, and costs
and attorneys' fees. On May 25, 2001, Wachovia, its directors and First Union
filed a motion to transfer this action to the North Carolina Business Court.
That motion was granted.
On May 22, 2001, an individual stockholder of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia and the Wachovia directors, captioned
Rosenberg v. Wachovia, et al., File No. 01CVS4868, in North Carolina Superior
Court, Forsyth County. The complaint alleges that the Wachovia directors
breached their fiduciary duties by entering into the merger agreement with
First Union and by failing to consider other alternatives. The complaint seeks
injunctive relief, unspecified damages, and costs and attorneys' fees. Upon
defendants' motion, the action was transferred to the North Carolina Business
Court. On June 4, an amended complaint was filed, and on June 5, plaintiff
filed a motion for a preliminary injunction.
On May 23, 2001, an individual stockholder of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia, the Wachovia directors and First Union
captioned Drucker v. Wachovia, et al., Case No. 2001CV38351, in Georgia
Superior Court, Fulton County. The complaint alleges that the Wachovia
directors, aided and abetted by First Union, breached their fiduciary duties by
entering into the merger agreement with First Union and by failing to consider
other alternatives. The complaint seeks injunctive relief, unspecified damages,
and costs and attorneys' fees.
On or about May 29, 2001, an individual shareholder of Wachovia, purporting
to represent a class of holders of Wachovia common stock, filed a putative
Class Action Complaint against Wachovia, the Wachovia directors and First Union
captioned Drucker v. Wachovia, et al., Case No. 1-CVS-10641, in North Carolina
Superior Court, County of Mecklenburg. The complaint alleges that the Wachovia
directors, aided and abetted by First Union, violated their fiduciary duties by
entering into the merger agreement with First Union and failing to consider
other alternatives. The complaint seeks injunctive relief, unspecified damages,
and costs and attorneys' fees. On June 13, defendants filed a motion to
transfer this action to the North Carolina Business Court.
On June 6, 2001, two individual shareholders of Wachovia, purporting to
represent a class of holders of Wachovia common stock, filed a putative Class
Action Complaint against Wachovia, the Wachovia directors and First Union
captioned Hrobar v. Baker, et al., Case No. 01-CV-006893, in North Carolina
Superior Court, Wake County. The complaint alleges that the Wachovia directors,
aided and abetted by First Union, violated their fiduciary duties by entering
into the merger agreement with First Union and failing to consider other
alternatives. The complaint seeks injunctive relief, unspecified damages, and
costs and attorneys' fees. On June 12, the defendants filed a motion to
transfer this action to the North Carolina Business Court.
173
On or about June 15, 2001, four individual shareholders of First Union filed
a shareholder derivative action against First Union and its directors captioned
Winters, et al. v. First Union Corporation, et al., Case No. 01-CVS-5362, in
North Carolina Superior Court, Forsyth County. The complaint alleges that the
First Union directors breached their fiduciary duties by agreeing to a merger
between First Union and Wachovia. The complaint seeks permanent and preliminary
injunctive relief, and costs.
Wachovia and First Union believe that the putative shareholder class action
complaints are without merit and intend to defend them vigorously.
Shareholder List Litigation. On May 31, 2001, an individual shareholder of
Wachovia, who is also the Vice Chairman of SunTrust, filed an action in the
North Carolina Superior Court, Forsyth County, captioned Hoepner v. Wachovia,
Case No. 01CVS5106. The complaint alleges that plaintiff seeks to examine the
Wachovia shareholder list and certain related shareholder list materials of
Wachovia to enable plaintiff and SunTrust to communicate with other Wachovia
shareholders with respect to SunTrust's solicitation of proxies urging Wachovia
shareholders to vote against the First Union merger. The complaint alleges that
Wachovia declined to provide the requested information unless plaintiff
confirmed that he would not provide such records to SunTrust or any other
person that has not established its entitlement as a qualified shareholder, or
certify SunTrust's status as a qualified shareholder. The complaint seeks a
declaration that Wachovia's failure to permit plaintiff to inspect the
requested documents constitutes a violation of North Carolina common and
statutory law, and seeks injunctive relief, and costs and attorneys' fees. This
action was moved to the North Carolina Business Court. On June 14, that court
ordered Wachovia to produce its shareholder list to Hoepner or his agent by
June 20.
Effect of Merger-Related Litigation. It is a condition to closing the merger
that no judicial body of competent jurisdiction shall have issued any judgment,
decree, injunction or other order that prohibits or makes illegal the closing
of the merger. Both Wachovia and First Union believe that this condition will
be satisfied despite SunTrust's litigation. Even if SunTrust succeeded in
having the options or portions of the merger agreement declared invalid, the
declaration should not affect Wachovia's or First Union's obligation to close
the merger, and neither of our boards of directors believes that such a
declaration would cause it to revise its recommendation of the merger.
Similarly, Wachovia and First Union believe that the merger closing condition
will be satisfied despite the putative shareholder class actions. However, we
cannot give any assurances as to the effect of either the SunTrust litigation
or the putative shareholder class actions because it is impossible to predict
the ultimate outcomes of these litigations.
VALIDITY OF STOCK
The validity of the First Union common stock and the DEPs to be issued in
connection with the merger will be passed upon for First Union by Ross E.
Jeffries, Jr., Senior Vice President and Assistant General Counsel of First
Union. Mr. Jeffries owns shares of First Union common stock and has options to
purchase additional shares of First Union common stock.
174
EXPERTS
The consolidated financial statements of First Union and subsidiaries as of
December 31, 2000 and 1999, and for each of the years in the three-year period
ended December 31, 2000, included in First Union's Annual Report on Form 10-K
for the year ended December 31, 2000, have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Wachovia Corporation and
subsidiaries appearing in Wachovia Corporation's Annual Report (Form 10-K) for
the year ended December 31, 2000, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
Representatives of KPMG LLP will be present at the First Union annual
meeting, and representatives of Ernst & Young LLP will be present at the
Wachovia annual meeting. In each case, these representatives will have the
opportunity to make a statement if they desire to do so and are expected to be
available to respond to appropriate questions.
SHAREHOLDER PROPOSALS FOR NEXT YEAR
First Union
If the merger is completed, Wachovia shareholders will become shareholders
of First Union. Shareholder proposals intended to be included in First Union's
proxy statement and voted on at First Union's regularly scheduled 2002 Annual
Meeting of Shareholders, which according to First Union's by-laws is scheduled
for April 16, 2002, must be received at First Union's offices at One First
Union Center, Charlotte, North Carolina 28288-0013, Attention: Corporate
Secretary, on or before November 13, 2001. Applicable SEC rules and regulations
govern the submission of shareholder proposals and our consideration of them
for inclusion in next year's proxy statement and form of proxy.
Pursuant to First Union's by-laws, in order for any business not included in
the proxy statement for the 2002 Annual Meeting of Shareholders to be brought
before the meeting by a shareholder entitled to vote at the meeting, the
shareholder must give timely written notice of that business to First Union's
Corporate Secretary. According to our by-laws, that meeting is scheduled to be
held on April 16, 2002, and to be timely, the notice must not be received any
earlier than 90 days prior to the meeting date (January 16, 2002), nor any
later than 60 days prior to the meeting date (February 15, 2002). If the
meeting is not held on April 16, 2002 and less than 70 days' notice or prior
public disclosure is provided to shareholders, the notice must be received no
later than the tenth day after public disclosure of the actual meeting date.
The notice must state (1) a brief description of the business desired to be
brought before the meeting and the reasons for so doing, (2) the name and
address of the shareholder and the number of shares of First Union common stock
the shareholder owns, and (3) any material interest of the shareholder in that
business, other than having an interest as a shareholder. A copy of our by-laws
is available upon request to: First Union Corporation, One First Union Center,
Charlotte, North Carolina 28288-0013, Attention: Corporate Secretary.
Wachovia
If the merger occurs, there will be no Wachovia annual meeting of
shareholders next year. In that case, shareholder proposals must be submitted
to First Union's Corporate Secretary in accordance with the procedures
described above. In case the merger is not completed, we include below
information relevant to a regularly scheduled 2002 Wachovia annual meeting of
shareholders. In order to be considered for inclusion in the proxy statement
for Wachovia's 2002 annual meeting of shareholders, which is presently
scheduled (if it is held at all) for April 26, 2002, shareholder proposals
would need to be received by the Secretary of Wachovia no later than November
19, 2001.
175
OTHER MATTERS
As of the date of this joint proxy statement-prospectus, Wachovia's board
and First Union's board know of no matters that will be presented for
consideration at either of their annual meetings other than as described in
this joint proxy statement-prospectus. If any other matters properly come
before either of the First Union or Wachovia annual meetings, or any
adjournments or postponements of these meetings, and are voted upon, the
enclosed proxies will be deemed to confer discretionary authority on the
individuals that they name as proxies to vote the shares represented by these
proxies as to any of these matters. The individuals named as proxies intend to
vote or not to vote in accordance with the recommendation of the respective
managements of Wachovia and First Union.
Wachovia's by-laws contain procedures that shareholders must follow to
present business at an annual meeting of shareholders. A shareholder may obtain
a copy of these procedures from Wachovia's Secretary. In addition to other
applicable requirements, for business to be properly brought before the 2002
annual meeting of shareholders, a shareholder must give notice of the matter to
be presented at the meeting in a proper written form to Wachovia's Secretary.
The Secretary must receive this written notice at the principal offices of
Wachovia not earlier than December 27, 2001 and not later than January 26,
2002. Shareholder proposals not made in accordance with these requirements may
be disregarded by the Chairman of the meeting.
Shareholders who wish to nominate persons for election as directors at the
2002 annual meeting of shareholders, which is presently scheduled to be held on
April 26, 2002, must give written notice in accordance with the requirements of
Wachovia's by-laws to Wachovia's Secretary not earlier than December 27, 2001
and not later than January 26, 2002. Each notice must set forth (1) the name
and address of the shareholder who proposes to make the nomination and the name
and address of the person to be nominated; (2) a representation that the
shareholder is a holder of record of shares of common stock entitled to vote at
the meeting and intends to appear in person or by proxy at the meeting to
nominate the person specified in the notice; (3) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination is to be made; (4) such other information regarding each nominee as
would be required to be included in a proxy statement pursuant to the proxy
rules of the SEC if the nominee had been nominated by the board of directors or
a board committee; and (5) the written consent of each nominee to serve as a
director if so elected. Nominations not made in accordance with these
requirements may be disregarded by the Chairman of the meeting.
176
WHERE YOU CAN FIND MORE INFORMATION
First Union has filed a registration statement with the SEC under the
Securities Act that registers the distribution to Wachovia shareholders of the
shares of common stock of First Union to be issued in the merger. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about First Union, Wachovia and the combined
company and the common stock of these companies. The rules and regulations of
the SEC allow us to omit some information included in the registration
statement from this document.
In addition, First Union (File No. 1-10000) and Wachovia (File No. 1-9021)
file reports, proxy statements and other information with the SEC under the
Exchange Act. You may read and copy this information at the following locations
of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, like First Union
and Wachovia, that file electronically with the SEC. The address of that site
is http://www.sec.gov.
You may obtain additional proxy cards and other information related to the
proxy solicitation by contacting the appropriate proxy solicitation firm.
If you are a First Union If you are a Wachovia
shareholder: shareholder:
Morrow & Co., Inc. MacKenzie Partners, Inc.
445 Park Ave. - 5th Floor 156 Fifth Avenue
New York, NY 10022-2606 New York, NY 10010
(212) 754-8000 1-800-322-2885 (toll free in the
U.S.)
or (212) 929-5500 (collect)
or
Georgeson Shareholder
111 Commerce Road
Carlstadt, NJ 07072
1-800-223-2064 (toll free in the
U.S.)
If you would like to If you would like to
request documents, please do request documents, please do
so by July 24, 2001 to receive so by July 27, 2001 to receive
them before First Union's them before Wachovia's annual
annual meeting. meeting.
First Union's address on the world wide web is http://www.firstunion.com,
and Wachovia's address is http://www.wachovia.com. The information on our web
sites is not a part of this document.
You can also inspect reports, proxy statements and other information about
First Union and Wachovia at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
177
The SEC allows First Union and Wachovia to "incorporate by reference"
information into this document. This means that the companies can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this document, except for any information that is
superseded by information that is included directly in this document.
This document incorporates by reference the documents listed below that
First Union and Wachovia have previously filed with the SEC. They contain
important information about our companies and their financial condition.
WACHOVIA FILINGS PERIOD OR DATE FILED
---------------- -----------------------------------------------
Annual Report on Form 10-K................. Year ended December 31, 2000
Quarterly Report on Form 10-Q.............. Quarter Ended March 31, 2001 (as amended
on June 26, 2001)
Current Reports on Form 8-K................ January 17, 2001, February 6, 2001
March 29, 2001, March 30, 2001
(two reports filed on this date),
April 9, 2001, April 17, 2001,
April 19, 2001 and May 1, 2001
The description of Wachovia common
stock set forth in the registration
statement on Form 8-B filed pursuant
to Section 12 of the Exchange Act,
including any amendment or report
filed with the SEC for the purpose
of updating this description.
FIRST UNION FILINGS PERIOD OR DATE FILED
------------------- -----------------------------------------------
Annual Report on Form 10-K................. Year ended December 31, 2000
Quarterly Report on Form 10-Q.............. Quarter Ended March 31, 2001 (as amended
on June 26, 2001)
Current Reports on Form 8-K................ January 18, 2001, April 16, 2001 (as amended
on June 25, 2001), May 3, 2001 and May 15, 2001
(as amended on June 25, 2001)
The description of First Union
common stock set forth in the
registration statement on Form 8-
A12B filed pursuant to Section 12 of
the Exchange Act, including any
amendment or report filed with the
SEC for the purpose of updating this
description.
The description of the rights
agreement, contained in a
registration statement on Form 8-A
filed pursuant to Section 12 of the
Exchange Act, including any
amendment or report filed with the
SEC for the purpose of updating this
description.
First Union and Wachovia incorporate by reference additional documents that
either company may file with the SEC between the date of this document and the
dates of their respective annual meetings. These documents include periodic
reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K, as well as proxy statements.
First Union has supplied all information contained or incorporated by
reference in this document relating to First Union, as well as all pro forma
financial information, and Wachovia has supplied all such information relating
to Wachovia.
178
You can obtain any of the documents incorporated by reference in this
document from First Union or Wachovia, as the case may be, or from the SEC
through the SEC's Internet world wide web site at the address described above.
Documents incorporated by reference are available from the companies without
charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this document. You can
obtain documents incorporated by reference in this document by requesting them
in writing or by telephone from the appropriate company at the following
addresses:
First Union Corporation Wachovia Corporation
Investor Relations P.O. Box 3099
One First Union Center Winston-Salem, North Carolina 27150
Charlotte, North Carolina 28288 Attention: Secretary
Telephone: (704) 374-6782 Telephone: (336) 732-2549
or
191 Peachtree St., N.E.
Atlanta, Georgia 30303
Attention: Secretary
Telephone: (404) 332-6661
If you would like to request documents, please do so by July 24, 2001 to
receive them before the First Union annual meeting or by July 27, 2001 to
receive them before the Wachovia annual meeting. If you request any
incorporated documents from us, we will mail them to you by first class mail,
or another equally prompt means, within one business day after we receive your
request.
We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different from, or in
addition to, that contained in this document or in any of the materials that we
have incorporated into this document. Therefore, if anyone does give you
information of this sort, you should not rely on it. If you are in a
jurisdiction where offers to exchange or sell, or solicitations of offers to
exchange or purchase, the securities offered by this document or the
solicitation of proxies is unlawful, or if you are a person to whom it is
unlawful to direct these types of activities, then the offer presented in this
document does not extend to you. The information contained in this document
speaks only as of the date of this document unless the information specifically
indicates that another date applies.
FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference
in this document, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations and business of First Union and Wachovia and,
assuming the consummation of the merger, a combined First Union and Wachovia.
Such statements include, but are not limited to, statements relating to:
. synergies (including cost savings), and accretion to reported earnings
expected to be realized from the merger;
. business opportunities and strategies potentially available to the
combined company;
. merger-related and restructuring charges expected to be incurred;
. management, operations and policies of the combined company after the
merger; and
. statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "estimates," "should"
or similar expressions.
179
These forward-looking statements involve some risks and uncertainties.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among other things,
the following possibilities:
. the risk that the businesses of First Union and Wachovia will not be
integrated successfully or such integration may be more difficult, time-
consuming or costly than expected;
. expected revenue synergies and cost savings from the merger may not be
fully realized or realized within the expected time frame;
. revenues following the merger may be lower than expected;
. deposit attrition, operating costs, customer loss and business
disruption following the merger, including, without limitation,
difficulties in maintaining relationships with employees, may be greater
than expected;
. the ability to obtain governmental approvals of the merger on the
proposed terms and schedule;
. the failure of First Union's and Wachovia's shareholders to approve the
plan of merger;
. The effect of SunTrust's unsolicited proposal on our timing or our
transaction may be greater than we anticipate;
. competitive pressures among depository and other financial institutions
may increase significantly and have an effect on pricing, spending,
third-party relationships and revenues;
. the strength of the United States economy in general and the strength of
the local economies in which the combined company will conduct
operations may be different than expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand for
credit, including the resultant effect on the combined company's loan
portfolio and allowance for loan losses;
. changes in the U.S. and foreign legal and regulatory framework; and
. adverse conditions in the stock market, the public debt market and other
capital markets (including changes in interest rate conditions) and the
impact of such conditions on the combined company's capital markets and
asset management activities.
See "Where You Can Find More Information" on page 177.
180
FIRST UNION AND WACHOVIA
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
and explanatory notes are presented to show the impact of the merger on our
companies' historical financial positions and results of operations under the
purchase method of accounting. Under this method of accounting, the assets and
liabilities of the company not surviving the merger are, as of the effective
date of the merger, recorded at their respective fair values and added to those
of the surviving corporation. The unaudited pro forma condensed combined
financial information combines the historical financial information of First
Union and Wachovia as of and for the three months ended March 31, 2001, and for
the year ended December 31, 2000. The unaudited pro forma condensed combined
balance sheet as of March 31, 2001, assumes the merger was consummated on that
date. The unaudited pro forma condensed combined statements of income give
effect to the merger as if the merger had been consummated at the beginning of
each period presented.
The merger provides for the exchange of 2 shares of First Union common stock
for each outstanding share of Wachovia common stock. The unaudited pro forma
condensed combined financial information is based on, and derived from, and
should be read in conjunction with the historical consolidated financial
statements and the related notes of both First Union and Wachovia, which are
incorporated in this document by reference. See "Where You Can Find More
Information."
The unaudited pro forma condensed combined financial information is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred or financial position if the
merger had been consummated during the period or as of the date for which the
pro forma data are presented, nor is it necessarily indicative of future
operating results or financial position of the combined company.
181
PRO FORMA COMBINED CONDENSED BALANCE SHEET
FIRST UNION AND WACHOVIA
March 31, 2001
(Unaudited)
The following unaudited pro forma combined condensed balance sheet combines
the consolidated historical balance sheets of First Union and Wachovia assuming
the companies had been combined as of March 31, 2001, on a purchase accounting
basis.
March 31, 2001
----------------------------------------
First Pro Forma Pro Forma
(In millions) Union Wachovia Adjustments Combined
------------- -------- -------- ----------- ---------
ASSETS
Cash and due from banks (Note 4)..... $ 7,857 3,015 (1,578) 9,294
Interest-bearing bank balances....... 2,971 238 -- 3,209
Federal funds sold and securities
purchased under resale agreements... 11,866 592 -- 12,458
-------- ------ ------ -------
Total cash and cash equivalents.. 22,694 3,845 (1,578) 24,961
-------- ------ ------ -------
Trading account assets............... 20,431 884 -- 21,315
Securities (Note 4).................. 51,528 9,050 33 60,611
Loans, net of unearned income ....... 122,853 56,703 -- 179,556
Allowance for loan losses............ (1,759) (851) -- (2,610)
-------- ------ ------ -------
Loans, net....................... 121,094 55,852 -- 176,946
-------- ------ ------ -------
Premises and equipment (Note 4)...... 4,968 957 (102) 5,823
Due from customers on acceptances.... 894 79 -- 973
Goodwill and other intangible assets
(Notes 3 and 4)..................... 3,690 1,506 7,637 12,833
Other assets (Note 4)................ 27,650 3,433 (75) 31,008
-------- ------ ------ -------
Total assets..................... $252,949 75,606 5,915 334,470
======== ====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits (Note
4)................................. 28,582 8,884 (285) 37,181
Interest-bearing deposits (Note 4).. 112,213 36,733 (1,215) 147,731
-------- ------ ------ -------
Total deposits....................... 140,795 45,617 (1,500) 184,912
Short-term borrowings................ 39,719 9,490 -- 49,209
Bank acceptances outstanding......... 902 79 -- 981
Trading account liabilities.......... 8,130 428 -- 8,558
Other liabilities (Note 4)........... 11,230 2,415 1,023 14,668
Long-term debt....................... 36,092 10,712 -- 46,804
-------- ------ ------ -------
Total liabilities................ 236,868 68,741 (477) 305,132
-------- ------ ------ -------
STOCKHOLDERS' EQUITY
Preferred stock (Notes 2 and 4)...... -- -- 50 50
Common stock (Notes 2 and 4)......... 3,271 1,052 350 4,673
Paid-in capital (Note 4)............. 6,307 1,142 10,787 18,236
Retained earnings (Note 4)........... 6,281 4,596 (4,720) 6,157
Accumulated other comprehensive
income, net (Note 4)................ 222 75 (75) 222
-------- ------ ------ -------
Total stockholders' equity....... 16,081 6,865 6,392 29,338
-------- ------ ------ -------
Total liabilities and
stockholders' equity............ $252,949 75,606 5,915 334,470
======== ====== ====== =======
See accompanying notes to pro forma financial information.
182
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FIRST UNION AND WACHOVIA
Three Months Ended March 31, 2001
(Unaudited)
The following unaudited pro forma combined condensed statement of income
combines the consolidated historical statements of income of First Union and
Wachovia assuming the companies had been combined as of January 1, 2001, on a
purchase accounting basis.
Three Months Ended March 31, 2001
----------------------------------------
First Pro Forma Pro Forma
(In millions) Union Wachovia Adjustments Combined
------------- -------- -------- ----------- ---------
Interest income..................... $ 4,025 1,350 -- 5,375
Interest expense.................... 2,323 720 -- 3,043
-------- ------- ------- ---------
Net interest income................. 1,702 630 -- 2,332
Provision for loan losses........... 219 122 -- 341
-------- ------- ------- ---------
Net interest income after provision
for loan losses.................... 1,483 508 -- 1,991
Securities transactions--portfolio.. (16) 9 -- (7)
Fee and other income................ 1,590 492 -- 2,082
Restructuring and merger-related
charges............................ 2 13 -- 15
Noninterest expense (Notes 5 and
8)................................. 2,207 619 187 3,013
-------- ------- ------- ---------
Income before income taxes.......... 848 377 (187) 1,038
Income taxes (Notes 5 and 8)........ 264 135 (40) 359
-------- ------- ------- ---------
Net income.......................... $ 584 242 (147) 679
======== ======= ======= =========
PER COMMON SHARE DATA (Note 6)
Basic............................... $ 0.60 1.17 -- 0.48
Diluted............................. $ 0.59 1.17 -- 0.47
Average common shares outstanding
(In thousands)
Basic............................. 967,671 206,061 206,061 1,379,793
Diluted........................... 975,847 207,569 207,569 1,390,985
See accompanying notes to pro forma financial information.
183
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FIRST UNION AND WACHOVIA
Year Ended December 31, 2000
(Unaudited)
The following unaudited pro forma combined condensed statement of income
combines the consolidated historical statements of income of First Union and
Wachovia assuming the companies had been combined as of January 1, 2000, on a
purchase accounting basis.
Year Ended December 31, 2000
----------------------------------------
First Pro Forma Pro Forma
(In millions) Union Wachovia Adjustments Combined
------------- -------- -------- ----------- ---------
Interest income...................... $ 17,534 5,345 -- 22,879
Interest expense..................... 10,097 2,830 -- 12,927
-------- ------- ------- ---------
Net interest income.................. 7,437 2,515 -- 9,952
Provision for loan losses............ 1,736 588 -- 2,324
-------- ------- ------- ---------
Net interest income after provision
for loan losses..................... 5,701 1,927 -- 7,628
Securities transactions--portfolio... (1,134) -- -- (1,134)
Fee and other income................. 7,846 1,931 -- 9,777
Restructuring and merger-related
charges............................. 2,190 136 -- 2,326
Noninterest expense (Notes 5 and 8).. 9,520 2,447 749 12,716
-------- ------- ------- ---------
Income before income taxes and
cumulative effect of a change in
accounting principle................ 703 1,275 (749) 1,229
Income taxes (Notes 5 and 8)......... 565 443 (160) 848
-------- ------- ------- ---------
Income before cumulative effect of a
change in accounting principle...... $ 138 832 (589) 381
======== ======= ======= =========
PER COMMON SHARE DATA (Note 6)
Income before change in accounting
principle
Basic............................... $ 0.12 4.10 -- 0.26
Diluted............................. $ 0.12 4.07 -- 0.26
Average common shares outstanding (In
thousands)
Basic............................... 970,608 202,989 202,989 1,376,586
Diluted............................. 974,172 204,450 204,450 1,383,072
See accompanying notes to pro forma financial information.
184
NOTES TO FIRST UNION AND WACHOVIA UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
FIRST UNION AND WACHOVIA
Three Months Ended March 31, 2001
Year Ended December 31, 2000
(Unaudited)
(1) The merger will be accounted for using the purchase method of
accounting, and accordingly, the assets and liabilities of Wachovia will be
recorded at their respective fair values on the date the merger is completed.
The shares of First Union common stock issued to effect the merger will be
recorded at $31.15 per share which is the average price of the shares over a
four-day period surrounding the date the merger was announced.
The pro forma financial information includes estimated adjustments to record
certain assets and liabilities of Wachovia at their respective fair values. The
pro forma adjustments included herein are subject to updates as additional
information becomes available and as additional analyses are performed. Certain
other assets and liabilities of Wachovia, principally loans and borrowings,
will also be subject to adjustment to their respective fair values. Pending
more detailed analyses, no pro forma adjustments are included herein for these
assets and liabilities.
The unaudited pro forma financial information includes the impact of
required deposit divestitures estimated to be $1.5 billion. We expect to
realize significant revenue enhancements and cost savings following the merger
which also are not reflected in this pro forma financial information. No
assurance can be given with respect to the ultimate level of such revenue
enhancements or cost savings.
The final allocation of the purchase price will be determined after the
merger is completed and after completion of thorough analyses to determine the
fair values of Wachovia's tangible and identifiable intangible assets and
liabilities as of the date the merger is completed. Any change in the fair
value of the net assets of Wachovia will change the amount of the purchase
price allocable to goodwill. Additionally, changes to Wachovia's stockholders'
equity including net income from April 1, 2001, through the date the merger is
completed, will also change the amount of goodwill recorded. In addition, the
final adjustments may be materially different from the unaudited pro forma
adjustments presented herein.
(2) The pro forma financial information for the merger is included only as
of and for the three months ended March 31, 2001, and for the year ended
December 31, 2000. The pro forma adjustments in the pro forma financial
statements reflect an exchange ratio of 2 shares of First Union common stock
for each of the 210,335,000 shares of Wachovia common stock that were
outstanding at March 31, 2001. The unaudited pro forma information presented in
the pro forma financial statements is not necessarily indicative of the results
of operations or the combined financial position that would have resulted had
the merger been completed at the beginning of the applicable periods presented,
nor is it necessarily indicative of the results of operations in future periods
or the future financial position of the combined company.
The pro forma financial information reflects the addition of 420,670,000
shares of First Union common stock with an aggregate par value of $1.4 billion,
an increase in paid-in capital of $11.9 billion for the excess of the fair
value of the shares over the par value, and goodwill and deposit base premium
of $7.3 billion and $1.8 billion, respectively. Included in the pro forma
financial information for the three months ended March 31, 2001, is the
assumption that shareholders holding 50% of Wachovia common stock, or
105,168,000 common shares, will elect to receive the one-time cash payment of
$0.48 per Wachovia share, or a total of $51 million, which will be paid to
Wachovia shareholders in connection with the merger. It is assumed that the
remaining 50% of Wachovia shareholders will elect to receive 210,335,000 shares
of First Union dividend equalization preferred stock (DEPs), which based on the
current quarterly Wachovia common stock dividend rate of $0.30 per share and
the quarterly First Union common stock dividend rate of $0.24 per share, would
have entitled the holders of the First Union dividend equalization preferred
stock to receive a dividend of $.06 per share, or a total of
185
$13 million, for the three months ended March 31, 2001. The assumption that
one-half of Wachovia's shareholders will elect to receive the $0.48 cash
payment and one-half will elect to receive DEPs was deemed to be the most
reasonable and least speculative assumption for purposes of this presentation
because First Union and Wachovia do not currently know which election Wachovia
shareholders will make upon completion of the merger. The estimated present
value of the DEPs is $0.48 per Wachovia share, or $50 million, and accordingly,
is included in the pro forma financial information.
We attributed a value of $0.24 per DEP by calculating the present value of
the difference between $0.30 per share and the regular quarterly dividend per
common share we estimate for the combined company. We based our estimate of the
combined company's regular quarterly common stock dividend on a cash basis
dividend payout ratio of slightly less than 33%. This results in dividends of
$0.06 per DEP for the first two quarters after the merger, $0.04 per DEP for
the next two quarters and $0.02 per DEP for the next three quarters. These
estimated dividends amount to $0.26 per DEP, and since the dividends are
cumulative, the full amount of the estimated difference has been included in
the valuation. The present value of the total estimated DEP dividend is $0.24
using a discount rate of 13%. We selected the 13% discount rate based on the
risk free rate adjusted for our credit standing and the uncertainty associated
with the combined company's future dividends. We do not believe that the
liquidation preference of the DEPs or whether the DEPs will be listed on an
exchange or quoted through an interdealer quotation system materially affects
their present value, and therefore, we did not include these factors in our
valuation. As we have previously stated in this document, the combined
company's dividend policy is subject to change and, accordingly, the amount of
the dividends actually paid may differ from the amounts we assumed for purposes
of our present value calculations.
Upon completion of the merger, Wachovia stock options will be exchanged for
stock options of the combined company with the number of options and option
price adjusted for the 2-for-1 exchange ratio. The vesting will continue in
accordance with the vesting schedule of the original Wachovia options. Vested
and unvested employee stock options issued by the combined company in exchange
for stock options held by employees of Wachovia are considered part of the
purchase price, and accordingly, the purchase price includes the fair value of
employee stock options of $227 million.
The fair value of the combined company options that will be issued in
exchange for the Wachovia options was estimated using the Black-Scholes option
pricing model. Option pricing models require the use of highly subjective
assumptions, including expected stock price volatility, which when changed can
materially affect fair value estimates. Accordingly, the model does not
necessarily provide a reliable single measure of the fair value of employee
stock options. The more significant assumptions used in estimating the fair
value of the First Union stock options to be issued in exchange for Wachovia
stock options include a risk-free interest rate of 4.5 percent, a dividend
yield of 3.2 percent, weighted average expected life of 5.3 years, and
volatility of the combined company stock of 45 percent.
Additionally, the pro forma balance sheet adjustments include an estimated
$112 million restructuring accrual; payment of an estimated $78 million of
merger-related charges; an estimated net adjustment of $144 million to reflect
the net assets of Wachovia at their respective fair values; and an estimated
$520 million to reflect the amounts allocated to liabilities assumed in the
purchase business combination. The liabilities assumed in the merger consist
principally of personnel related costs which include involuntary termination
benefits for employees severed in connection with the merger as well as
relocation costs for continuing employees, costs to cancel contracts that will
provide no future benefit to the combined company, and occupancy related costs
representing the present value of future lease payments or lease cancellation
penalties for space vacated in connection with the merger. The $520 million
includes only those costs associated with the company not surviving the merger.
These balance sheet adjustments are part of a total of $1.4 billion of
restructuring charges, merger-related charges and purchase accounting
adjustments as shown in Note 9 below. The rest of the $1.4 billion is estimated
merger-related charges not reflected in the pro forma financial statements
since they will be recorded in years 2002 through 2004.
The restructuring and merger-related adjustments are not included in the pro
forma statements of income since they will be recorded in the combined results
of operations after completion of the merger and are not
186
indicative of what the historical results of the combined company would have
been had our companies been actually combined during the periods presented.
(3) The computation of the purchase price, the allocation of the purchase
price to the net assets of Wachovia based on fair values estimated at March 31,
2001, the basis for determining the amount of deposit base premium allocated to
the purchase price and the resulting amount of goodwill are presented below.
(In millions) March 31, 2001
------------- ----------------------
Purchase price
Wachovia common stock outstanding (In thousands)..... 210,335
Exchange ratio....................................... 2
--------
Total (In thousands)................................ 420,670
Purchase price per Wachovia common share............. $ 31.15 $13,104
========
Wachovia common shares electing to receive DEPs
shares (In thousands)............................... 105,168
Estimated present value per share.................... $ 0.48 50
========
Cash dividend........................................ 51
Fair value of outstanding employee stock options..... 227
-------
Total purchase price................................ 13,432
Net assets acquired
Wachovia stockholders' equity........................ $ 6,865
Wachovia goodwill and other intangible assets........ $(1,506) (5,359)
======== -------
Excess of purchase price over carrying value of net
assets acquired.................................... 8,073
Estimated adjustments to reflect net assets acquired
at fair value.......................................
Investment securities............................... (33)
Premises and equipment.............................. $102
Other assets........................................ $ 75 177
====
Estimated amounts allocated to liabilities assumed in
the purchase business combination
Personnel related................................... $289
Contract cancellations.............................. 93
Occupancy related................................... 55
Other............................................... $ 83 520 697
==== ========
Deferred income taxes
Estimated deposit base intangible................... $ 1,825
Investment securities--adjustment to fair value..... 33
Estimated purchase accounting adjustments........... (697)
--------
Total............................................. $ 1,161
Income tax rate..................................... 0.35 406
========
Deduct
Estimated deposit base intangible
Wachovia deposits................................... $ 45,617
Premium rate........................................ 0.04 (1,825)
======== -------
Goodwill........................................ $ 7,318
=======
187
(4) The pro forma adjustments related to the pro forma balance sheet at
March 31, 2001, are presented below.
(In millions) March 31, 2001
------------- -----------------
Cash
Assumed deposit divestiture.............................. $(1,500)
Merger-related charges................................... (78)
-------
Total cash adjustments.................................. (1,578)
Investment securities--adjustment to fair value............ 33
Premises and equipment--adjustment to fair value........... (102)
Goodwill and other intangible assets--adjustment
Goodwill................................................. 7,318
Wachovia goodwill and other intangible assets............ (1,506)
Deposit base intangible.................................. 1,825
-------
Goodwill and other intangible assets adjustment, net.... 7,637
-------
Other assets--adjustment to fair value..................... (75)
-------
Total................................................. $ 5,915
=======
Deposits
Noninterest-bearing--assumed divestiture of 19 percent of
$1.5 billion............................................ (285)
Interest-bearing--assumed divestiture of 81 percent of
$1.5 billion............................................ (1,215)
-------
Total deposit adjustment.............................. (1,500)
-------
Other liabilities
Personnel related........................................ 289
Occupancy related........................................ 55
Contract cancellations................................... 93
Dividend payable......................................... 51
Restructuring accrual.................................... 112
Other.................................................... 83
Current income taxes (benefits)
Restructuring accrual.................................. $ (112)
Merger-related charges................................. (78)
--------
Total restructuring and merger-related charges
adjustment........................................... $ (190)
Income tax rate....................................... 0.35 (66)
========
Deferred income taxes
Purchase accounting adjustments (Note 3)............... 406
-------
Total other liabilities adjustment.................... 1,023
-------
Total liabilities adjustment.......................... (477)
-------
Stockholders' equity
Preferred stock adjustment............................... 50
Common stock adjustment
Shares of common stock to be issued (In thousands)...... 420,670
First Union par value................................... $ 3.33 1,402
========
Less Wachovia common stock.............................. (1,052)
-------
Common stock adjustment............................... 350
-------
Paid-in capital adjustment
Purchase price--Wachovia common shares.................. 13,104
Fair value of outstanding employee stock options........ 227
Wachovia retained earnings.............................. 4,596
Wachovia accumulated other comprehensive income......... 75
Wachovia stockholders' equity........................... (6,865)
Common stock adjustment................................. (350)
-------
Paid-in capital adjustment............................ 10,787
-------
Retained earnings adjustment
Restructuring and merger-related charges adjustment, net
of current income tax benefit.......................... (124)
Elimination of Wachovia retained earnings............... (4,596)
-------
Retained earnings adjustment.......................... (4,720)
-------
Elimination of Wachovia accumulated other comprehensive
income.................................................. (75)
-------
Stockholders' equity adjustment....................... 6,392
-------
Total................................................. $ 5,915
=======
188
(5) The following pro forma adjustments related to the unaudited pro forma
combined condensed statements of income reflect amortization on a seven-year
sum-of-the-years' digits method for the deposit base intangible and a 25-year
straight-line amortization method for goodwill.
Three Months Ended Year Ended
March 31, December 31,
(In millions) 2001 2000
------------- ------------------ ------------
Noninterest expense adjustments
Deposit base intangible amortization......... $ 114 456
Goodwill amortization........................ 73 293
---------- ---------
Total noninterest expense adjustment........ 187 749
---------- ---------
Reduction in income before income taxes and
cumulative effect of a change in accounting
principle .................................... (187) (749)
---------- ---------
Income tax adjustment
Deposit base intangible amortization......... 114 456
Income tax rate.............................. 0.35 0.35
---------- ---------
Total income tax adjustment................. (40) (160)
---------- ---------
Reduction in income before cumulative effect of
a change in accounting principle.............. $ (147) (589)
========== =========
(6) The pro forma computation of basic and diluted earnings per share for
the three months ended March 31, 2001, and for the year ended December 31,
2000, is presented below.
Three Months Ended Year Ended
March 31, December 31,
(Dollars in millions, except per share data) 2001 2000
-------------------------------------------- ------------------ ------------
Income before cumulative effect of a change in
accounting principle.......................... $ 679 381
Less:
Dividends on preferred stock................. (13) --
Imputed interest on First Union's
transactions in its common stock............ (7) (21)
---------- ---------
Income available to common stockholders before
cumulative effect of a change in accounting
principle..................................... $ 659 360
========== =========
Basic earnings per share....................... $ 0.48 0.26
Diluted earnings per share..................... $ 0.47 0.26
Average shares--basic (In thousands)........... 1,379,793 1,376,586
Average shares--diluted (In thousands)......... 1,390,985 1,383,072
========== =========
(7) On March 1, 2001, Wachovia completed the purchase of Republic Security
Financial Corporation, a bank holding company headquartered in West Palm Beach,
Florida. Republic Security had assets of $3.1 billion and deposits of $2.1
billion at December 31, 2000. The transaction was accounted for as a purchase
and resulted in intangible assets of approximately $260 million and the
issuance of 6.1 million shares of Wachovia common stock. The historical
financial information for Wachovia includes this acquisition as of and for the
one month ended March 31, 2001, and the pro forma financial information
presented herein is not adjusted for this acquisition on a pro forma basis.
On April 9, 2001, Wachovia announced an agreement to sell its credit card
portfolio, which will be recorded as a discontinued operation by Wachovia. The
portfolio includes 2.8 million customer accounts and managed balances of $8
billion. The transaction is expected to close in the second quarter of 2001,
subject to regulatory approval, and is expected to result in a pre-tax gain of
approximately $1.4 billion. This transaction is not included in the pro forma
financial information presented herein.
(8) The Financial Accounting Standards Board has issued a Proposed Statement
of Financial Accounting Standards addressing the accounting for business
combinations and acquired intangible assets. Under this
189
proposed standard, goodwill and certain other intangible assets would not be
subject to amortization, but rather would be subject to periodic testing for
impairment. Deposit base intangible would continue to be subject to
amortization. The FASB currently expects to issue a final standard in mid-July;
however, there is no assurance that they will issue the final standard in
accordance with that timetable or that the final standard will have the same
provisions as currently proposed.
(9) In connection with the merger, we have begun to further develop our
plans, which are currently very preliminary, to consolidate the operations of
the two companies. The specific details of these plans will be refined over the
next several months. We are currently in the process of assessing the two
companies' personnel, benefit plans, premises, equipment, computer systems and
service contracts to determine where we may take advantage of redundancies or
where it will be beneficial or necessary to convert to one system. Certain
decisions arising from these assessments may involve involuntary termination of
former Wachovia employees, vacating former Wachovia leased premises, canceling
contracts between the former Wachovia and certain service providers and selling
or otherwise disposing of certain premises, furniture and equipment owned by
the former Wachovia. The costs associated with such decisions will be recorded
as purchase accounting adjustments, which have the effect of increasing the
amount of the purchase price allocable to goodwill. It is expected that all
such costs will be identified and recorded within one year of completion of the
merger and all such actions required to effect these decisions would be taken
within one year after finalization of our plans.
In addition to decisions regarding former Wachovia employees and activities,
certain decisions may be made to involuntarily terminate former First Union
employees, vacate former First Union leased premises, cancel contracts and sell
or otherwise dispose of certain premises, furniture and equipment owned by
First Union. The costs of all such decisions would be recorded as a
restructuring charge in the results of operations of the combined company in
the period in which our plans are finalized and approved by the appropriate
level of management. We expect to record a restructuring charge upon completion
of the merger and additional restructuring charges may follow during the merger
integration period as plans are finalized.
In addition to the costs described above, we will incur merger-related
charges in the process of combining the operations of the two companies. These
merger-related charges include system conversion costs, employee retention
arrangements and costs of incremental communications to customers and others.
It is expected that these costs will be incurred over a three-year period after
completion of the merger.
The following is a summary of estimated purchase accounting adjustments,
restructuring charges and merger-related charges.
Merger-Related
Purchase Charges
Accounting Restructuring -------------------
(In millions) Adjustments Charges 2001 2002 2003 2004 Total
------------- ----------- ------------- ---- ---- ---- ---- -----
Personnel related........... $289 102 22 18 28 6 465
Premises and equipment...... 102 10 9 28 30 15 194
Contract cancellations...... 93 -- -- -- -- -- 93
Other assets................ 75 -- -- -- -- -- 75
Occupancy related........... 55 -- 6 18 57 18 154
Conversion related.......... -- -- 10 69 110 96 285
Communication related....... 1 -- 20 11 17 -- 49
Other....................... 82 -- 11 24 8 4 129
---- --- --- --- --- --- -----
Total..................... $697 112 78 168 250 139 1,444
==== === === === === === =====
190
APPENDIX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
dated as of April 15, 2001
and amended and restated
between
FIRST UNION CORPORATION
and
WACHOVIA CORPORATION
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS; INTERPRETATION
1.01 Definitions........................................................ A-1
1.02 Interpretation..................................................... A-6
ARTICLE II
THE MERGER
2.01 The Merger......................................................... A-7
2.02 Closing............................................................ A-7
2.03 Effective Time..................................................... A-7
2.04 Effects of the Merger.............................................. A-7
2.05 Articles of Incorporation and By-laws.............................. A-7
2.06 Corporate Governance............................................... A-7
ARTICLE III
CONSIDERATION; EXCHANGE PROCEDURES
3.01 Consideration...................................................... A-8
3.02 Cancellation of Shares............................................. A-9
3.03 Rights as Shareholders; Stock Transfers............................ A-9
3.04 Exchange Procedures................................................ A-9
3.05 Fractional Shares.................................................. A-10
3.06 Anti-Dilution Adjustments.......................................... A-10
3.07 Stock Options...................................................... A-10
3.08 Effect on First Union Stock........................................ A-11
ARTICLE IV
CONDUCT OF BUSINESS PENDING MERGER
4.01 Forebearances...................................................... A-11
4.02 Coordination of Dividends.......................................... A-12
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.01 Disclosure Schedules............................................... A-13
5.02 Standard........................................................... A-13
5.03 Representations and Warranties..................................... A-13
ARTICLE VI
COVENANTS
6.01 Reasonable Best Efforts............................................ A-19
6.02 Shareholder Approvals.............................................. A-19
6.03 SEC Filings........................................................ A-20
6.04 Press Releases..................................................... A-21
6.05 Access; Information................................................ A-21
6.06 Acquisition Proposals.............................................. A-21
6.07 Affiliate Agreements............................................... A-22
6.08 Takeover Laws and Provisions....................................... A-22
6.09 Exchange Listing................................................... A-22
6.10 Regulatory Applications............................................ A-22
i
Page
-----
6.11 Indemnification................................................. A-23
6.12 Benefit Plans................................................... A-23
6.13 Notification of Certain Matters................................. A-25
6.14 Exemption from Liability Under Section 16(b).................... A-25
ARTICLE VII
CONDITIONS TO THE MERGER
7.01 Conditions to Each Party's Obligation to Effect the Merger...... A-25
7.02 Conditions to Wachovia's Obligation............................. A-26
7.03 Conditions to First Union's Obligation.......................... A-26
ARTICLE VIII
TERMINATION
8.01 Termination..................................................... A-27
8.02 Effect of Termination and Abandonment........................... A-27
ARTICLE IX
MISCELLANEOUS
9.01 Survival........................................................ A-28
9.02 Waiver; Amendment............................................... A-28
9.03 Counterparts.................................................... A-28
9.04 Governing Law................................................... A-28
9.05 Expenses........................................................ A-28
9.06 Notices......................................................... A-28
9.07 Entire Understanding; No Third Party Beneficiaries.............. A-29
9.08 Severability.................................................... A-29
9.09 Alternative Structure........................................... A-29
Annex 1 Form of Wachovia Stock Option Agreement
Annex 2 Form of First Union Stock Option Agreement
Annex 3 Form of Amendments to Articles of Incorporation
Annex 4 Form of Amendments to By-laws
Annex 5 Certain Officers of the Surviving Corporation
Annex 6 Form of Wachovia Affiliate Letter
ii
AGREEMENT AND PLAN OF MERGER, dated as of April 15, 2001 and amended and
restated (this "Agreement"), between First Union Corporation, a North Carolina
corporation ("First Union"), and Wachovia Corporation, a North Carolina
corporation ("Wachovia").
Recitals
A. The Proposed Transaction. The parties intend to effect a strategic
business combination through the merger of Wachovia with and into First Union
(the "Merger"), with First Union the surviving corporation (the "Surviving
Corporation").
B. Board Determinations. The respective boards of directors of First Union
and Wachovia have each determined that the Merger and the other transactions
contemplated hereby are consistent with, and will further, their respective
business strategies and goals, and are in the best interests of their
respective stockholders and, therefore, have approved the Merger, this
Agreement and the plan of merger contained in this Agreement.
C. Intended Tax Treatment. The parties intend the Merger to be treated as a
reorganization under Section 368(a) of the Internal Revenue Code of 1986 (the
"Code").
D. Stock Option Agreements. As an inducement to and condition of Wachovia's
willingness to enter into this Agreement and the Wachovia Stock Option
Agreement (as defined in the following sentence), First Union will grant to
Wachovia an option pursuant to a Stock Option Agreement (the "First Union Stock
Option Agreement"). As an inducement to and condition of First Union's
willingness to enter into this Agreement and the First Union Stock Option
Agreement, Wachovia will grant to First Union an option pursuant to a Stock
Option Agreement (the "Wachovia Stock Option Agreement" and, together with the
First Union Stock Option Agreement, the "Stock Option Agreements"). The Stock
Option Agreements, forms of which are attached hereto as Annex 1 and Annex 2,
will be entered into immediately following the execution and delivery hereof.
NOW, THEREFORE, in consideration of the premises, and of the mutual
representations, warranties, covenants and agreements contained in this
Agreement, First Union and Wachovia agree as follows:
ARTICLE I
Definitions; Interpretation
1.01 Definitions. This Agreement uses the following definitions:
"Acquisition Proposal," with respect to either First Union or Wachovia,
means a tender or exchange offer, proposal for a merger, consolidation or other
business combination involving First Union or Wachovia, as the case may be, or
any of their respective Significant Subsidiaries or any proposal or offer to
acquire in any manner more than 15% of the voting power in, or more than 15% of
the business, assets or deposits of, First Union or Wachovia, as the case may
be, or any of their respective Significant Subsidiaries, other than (1) the
transactions contemplated by this Agreement and (2) the transactions
contemplated by that certain Purchase and Sale Agreement, dated as of April 8,
2001, to which Wachovia is a party, relating to the sale of its consumer credit
card business (the "Purchase and Sale Agreement").
"Agreement" means this Agreement, as amended, modified or amended and
restated from time to time in accordance with its terms.
"Articles of Merger" has the meaning assigned in Section 2.03.
"BCA" means the Business Corporation Act of the State of North Carolina,
N.C. Gen. Stats. ch. 55.
A-1
"Benefit Arrangement" means with respect to each of First Union and
Wachovia, each "employee benefit plan" (within the meaning of section 3(3) of
ERISA), and all stock purchase, stock option, severance, employment, change-in-
control, fringe benefit, bonus, incentive, deferred compensation, paid time off
benefits and all other employee benefit plans, agreements, programs, policies
or other arrangements, whether or not subject to ERISA, under which any
Employee or any of its current or former directors has any present or future
right to benefits sponsored or maintained by it or its Subsidiaries, or under
which it or its Subsidiaries has had or has any present or future liability.
"Benefit Plans" has the meaning assigned in Section 5.03(m).
"Cash Payment" has the meaning assigned in Section 3.01(b)(2).
"Closing" has the meaning assigned in Section 2.02.
"Closing Date" has the meaning assigned in Section 2.02.
"Code" has the meaning assigned in the Recitals.
"Confidentiality Agreement" has the meaning assigned in Section 6.05(b).
"Constituent Documents" means the articles or certificate of incorporation
and by-laws of a corporation or banking organization, the certificate of
partnership and partnership agreement of a general or limited partnership, the
certificate of formation and limited liability company agreement of a limited
liability company, the trust agreement of a trust and the comparable documents
of other entities.
"Conversion Period" has the meaning assigned in Section 6.12(c).
"Costs" has the meaning assigned in Section 6.11(a).
"DEPs" means the Dividend Equalization Preferred Shares of First Union, no
par value, having substantially the terms set forth in Annex 3.
"Disclosure Schedule" has the meaning assigned in Section 5.01.
"Dissenting Stockholder" has the meaning assigned in Section 3.01(a).
"Effective Time" has the meaning assigned in Section 2.03.
"Election Form" has the meaning assigned in Section 3.04(b).
"Employees" has the meaning assigned in Section 5.03(m).
"Employment Agreement" has the meaning assigned in Section 2.06(c).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning assigned in Section 5.03(m).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning assigned in Section 3.03(a).
"Exchange Ratio" has the meaning assigned in Section 3.01(a).
"First Union" has the meaning assigned in the preamble.
"First Union Articles" means the Amended and Restated Articles of
Incorporation of First Union, as in effect on the date hereof or as amended as
provided herein, as the context requires.
"First Union Benefit Arrangements" has the meaning assigned in Section
6.12(a).
A-2
"First Union Board" means the Board of Directors of First Union.
"First Union By-Laws" means the By-laws of First Union, as in effect on the
date hereof or as amended as provided herein, as the context requires.
"First Union Common Stock" means the common stock, par value $3.33 1/3 per
share, of First Union.
"First Union Meeting" has the meaning assigned in Section 6.02(c).
"First Union Person" has the meaning assigned in Section 8.04(b).
"First Union Preferred Stock" means, collectively, the Preferred Stock, no-
par value, the Class A Preferred Stock, no-par value, and the DEPs of First
Union.
"First Union Rights" means rights to purchase shares of First Union Stock
issued under the First Union Rights Agreement.
"First Union Rights Agreement" means the Shareholder Protection Rights
Agreement, dated as of December 19, 2000, between First Union and First Union
National Bank, as Rights Agent.
"First Union Stock" means, collectively, the First Union Common Stock and
the First Union Preferred Stock.
"First Union Stock Option" has the meaning assigned in Section 3.05.
"First Union Stock Option Agreement" has the meaning assigned in the
Recitals.
"First Union Stock Plans" means the First Union 1998 Stock Incentive Plan,
the First Union 1999 Employee Stock Plan, the First Union 1996 Master Stock
Compensation Plan and the First Union 1992 Master Stock Compensation Plan.
"Former First Union Directors" has the meaning assigned in Section 2.06(b).
"Former Wachovia Directors" has the meaning assigned in Section 2.06(b).
"GAAP" means United States generally accepted accounting principles.
"Governmental Authority" means any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign, or any industry self-regulatory authority.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder.
"Indemnified Party" has the meaning assigned in Section 6.11(a).
"Joint Proxy Statement" has the meaning assigned in Section 6.03(a).
"Lapse Date" has the meaning assigned in Section 2.06(a).
"Lien" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
"Material Adverse Effect" means, with respect to First Union or Wachovia,
any effect that
(a) is material and adverse to the financial condition, results of
operations or business of First Union and its Subsidiaries, taken as a
whole, or Wachovia and its Subsidiaries, taken as a whole, respectively,
excluding (with respect to each of clause (1), (2) or (3), to the extent
that the effect of a change on it is not
A-3
materially different than on comparable U.S. banking or financial services
organizations) the impact of (1) changes in banking and other laws of
general applicability or changes in the interpretation thereof by
Governmental Authorities, (2) changes in GAAP or regulatory accounting
requirements applicable to U.S. banking or financial services organizations
generally, (3) changes in prevailing interest rates or other general
economic conditions affecting U.S. banking or financial services
organizations generally, (4) this Agreement and the transactions
contemplated hereby or the announcement thereof, (5) actions or omissions
of a party to this Agreement taken with the prior written consent of the
other party to this Agreement, in contemplation of the transactions
contemplated hereby, and (6) to the extent consistent with GAAP, any
modifications or changes to valuation policies or practices, or
restructuring charges, in each case taken with the prior approval of First
Union or Wachovia, as the case may be, in connection with the Merger; or
(b) would materially impair the ability of First Union or Wachovia,
respectively, to perform its obligations under this Agreement or to
consummate the transactions contemplated hereby.
"Merger" has the meaning assigned in the Recitals.
"New Certificates" has the meaning assigned in Section 3.03(a).
"NYSE" means the New York Stock Exchange, Inc.
"Old Certificates" has the meaning assigned in Section 3.03(a).
"party" means First Union or Wachovia.
"Pension Plan" has the meaning assigned in Section 5.03(m).
"person" is to be interpreted broadly to include any individual, savings
association, bank, trust company, corporation, limited liability company,
partnership, association, joint-stock company, business trust or unincorporated
organization.
"Plans" has the meaning assigned in Section 5.03(m).
"Previously Disclosed" means information set forth by a party in the
applicable paragraph of its Disclosure Schedule, or any other paragraph of its
Disclosure Schedule (so long as it is reasonably clear from the context that
the disclosure in such other paragraph of its Disclosure Schedule is also
applicable to the section of this Agreement in question).
"Purchase and Sale Agreement" has the meaning assigned in this Section 1.01.
"Registration Statement" has the meaning assigned in Section 6.03(a).
"Regulatory Authorities" has the meaning assigned in Section 5.03(j).
"Regulatory Filings" has the meaning assigned in Section 5.03(h).
"Representatives" means, with respect to any person, such person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Requisite Regulatory Approvals" has the meaning assigned in Section
6.10(a).
"Rights" means, with respect to any person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any other person
any right to subscribe for or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument the value of
which is determined in whole or in part by reference to the market price or
value of, shares of capital stock of such first person.
A-4
"SEC" means the United States Securities and Exchange Commission.
"Secretary of State" means the Secretary of State of the State of North
Carolina.
"Section 16 Information" means information regarding the Wachovia Insiders,
the number of shares of Wachovia Common Stock held or to be held by each such
Wachovia Insider expected to be exchanged for First Union Common Stock in the
Merger, and the number and description of the options to purchase shares of
Wachovia Common Stock held by each such Wachovia Insider and expected to be
converted into options to purchase shares of First Union Common Stock in
connection with the Merger.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Stock Option Agreements" has the meaning assigned in the Recitals.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
those terms in Rule 1-02 of Regulation S-X promulgated by the SEC.
"Superior Proposal" means a bona fide written Acquisition Proposal which
the First Union Board or the Wachovia Board, as the case may be, concludes in
good faith to be more favorable from a financial point of view to its
shareholders than the Merger and the other transactions contemplated hereby,
(1) after receiving the advice of its financial advisors (who shall be a
nationally recognized investment banking firm), (2) after taking into account
the likelihood of consummation of such transaction on the terms set forth
therein (as compared to, and with due regard for, the terms herein) and (3)
after taking into account all legal (with the advice of outside counsel),
financial (including the financing terms of any such proposal), regulatory and
other aspects of such proposal and any other relevant factors permitted under
applicable law; provided that for purposes of the definition of "Superior
Proposal", the references to "more than 15%" in the definition of Acquisition
Proposal shall be deemed to be references to "a majority" and the definition
of Acquisition Proposal shall only refer to a transaction involving First
Union or Wachovia, as the case may be, and not their respective Significant
Subsidiaries.
"Surviving Corporation" has the meaning assigned in the Recitals.
"Takeover Laws" has the meaning assigned in Section 5.03(p).
"Takeover Provisions" has the meaning assigned in Section 5.03(p).
"Tax" and "Taxes" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts,
sales, use, ad valorem, goods and services, capital, production, transfer,
franchise, windfall profits, license, withholding, payroll, employment,
disability, employer health, excise, estimated, severance, stamp, occupation,
property, environmental, unemployment or other taxes, custom duties, fees,
assessments or charges of any kind whatsoever, together with any interest and
any penalties, additions to tax or additional amounts imposed by any taxing
authority whether arising before, on or after the Effective Time.
"Tax Returns" means any return, amended return or other report (including
elections, declarations, disclosures, schedules, estimates and information
returns) required to be filed with respect to any Tax.
"Wachovia" has the meaning assigned in the preamble to this Agreement.
"Wachovia Affiliate" has the meaning assigned in Section 6.07.
"Wachovia Benefit Arrangements" has the meaning assigned in Section
6.12(a).
A-5
"Wachovia Board" means the Board of Directors of Wachovia.
"Wachovia Common Stock" means the common stock, par value $5.00 per share,
of Wachovia.
"Wachovia DRIP" means Wachovia's Dividend Reinvestment and Common Stock
Purchase Plan.
"Wachovia Insiders" means those officers and directors of Wachovia subject
to the reporting requirements of Section 16(a) of the Exchange Act and who are
listed in the Section 16 Information.
"Wachovia Meeting" has the meaning assigned in Section 6.02(c).
"Wachovia Person" has the meaning assigned in Section 8.03(b).
"Wachovia Preferred Stock" means the preferred stock, par value $5.00 per
share, of Wachovia.
"Wachovia Stock" means, collectively, the Wachovia Common Stock and the
Wachovia Preferred Stock.
"Wachovia Stock Option" has the meaning assigned in Section 3.05.
"Wachovia Stock Option Agreement" has the meaning assigned in the Recitals.
"Wachovia Stock Plans" means the Senior Management and Director Stock Plan
of Wachovia Corporation, as amended, the Wachovia Deferred Compensation Plan,
as amended, the Amended and Restated Wachovia Corporation Stock Plan and the
Wachovia Corporation Director Deferred Stock Unit Plan, and other stock plans
assumed by Wachovia in previous acquisitions.
1.02 Interpretation. (a) In this Agreement, except as context may otherwise
require, references:
(1) to the Preamble, Recitals, Sections, Exhibits, Annexes or Schedules
are to the Preamble to, a Recital or Section of, or Exhibit, Annex or
Schedule to, this Agreement;
(2) to this Agreement are to this Agreement, and the Annexes and
Schedules to it, taken as a whole;
(3) to any agreement (including this Agreement), contract, statute or
regulation are to the agreement, contract, statute or regulation as
amended, modified, supplemented or replaced from time to time (in the case
of an agreement or contract, to the extent permitted by the terms hereof);
and to any section of any statute or regulation are to any successor to the
section;
(4) to the "transactions contemplated hereby" includes the transactions
provided for in the Stock Option Agreements as well as this Agreement
(including the Annexes to it);
(5) to any Governmental Authority include any successor to that
Governmental Authority; and
(6) to the date of this Agreement are to April 15, 2001.
(b) The table of contents and article and section headings are for
reference purposes only and do not limit or otherwise affect any of the
substance of this Agreement.
(c) The words "include," "includes" or "including" are to be deemed
followed by the words "without limitation."
(d) The words "herein," "hereof" or "hereunder", and similar terms are to
be deemed to refer to this Agreement as a whole and not to any specific
Section.
(e) This Agreement is the product of negotiation by the parties, having the
assistance of counsel and other advisers. The parties intend that this
Agreement not be construed more strictly with regard to one party than with
regard to the other.
A-6
(f) No provision of this Agreement is to be construed to require, directly
or indirectly, any person to take any action, or omit to take any action,
which action or omission would violate applicable law (whether statutory or
common law), rule or regulation.
ARTICLE II
The Merger
2.01 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, Wachovia will merge with and into First Union at the Effective
Time. At the Effective Time, the separate corporate existence of Wachovia will
terminate. First Union will be the Surviving Corporation, and will continue
its corporate existence under the laws of the state of North Carolina.
2.02 Closing. The closing of the Merger (the "Closing") will take place in
the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York, at
10:00 a.m. on the third business day (unless the parties agree to another time
or date) after satisfaction or waiver of the conditions set forth in Article
VII, other than those conditions that by their nature are to be satisfied at
the Closing, but subject to the fulfillment or waiver of those conditions (the
"Closing Date").
2.03 Effective Time. Subject to the provisions of this Agreement, in
connection with the Closing First Union will duly execute and deliver articles
of merger (the "Articles of Merger") to the Secretary of State for filing
under Section 55-11-05 of the BCA. The parties will make all other filings or
recordings required under the BCA and the Merger will become effective when
the Articles of Merger are filed in the office of the Secretary of State, or
at such later date or time as First Union and Wachovia agree and specify in
the Articles of Merger (the time the Merger becomes effective being the
"Effective Time").
2.04 Effects of the Merger. The Merger will have the effects prescribed by
the BCA and this Agreement.
2.05 Articles of Incorporation and By-laws. (a) The First Union Articles,
as in effect immediately before the Effective Time and amended as specified in
Annex 3, will be the articles of incorporation of the Surviving Corporation as
of the Effective Time.
(b) The First Union By-Laws, as in effect immediately before the Effective
Time and amended as specified in Annex 4, will be the by-laws of the Surviving
Corporation as of the Effective Time.
2.06 Corporate Governance. (a) Survival of Section 2.06. Notwithstanding
any other provision in this Agreement, the provisions of this Section 2.06 are
intended to survive the Effective Time and remain continuously in effect until
immediately after the close of the annual meeting of shareholders of the
Surviving Corporation held in 2004 (the "Lapse Date"), at which time the
provisions of this Section 2.06 terminate. This Section 2.06(a) does not
affect the term of any Employment Agreements referred to in this Section 2.06.
(b) Board of Directors.
(1) Composition. At the Effective Time, the Surviving Corporation's
board of directors will comprise 18 directors, to consist of 9 current
members of the First Union Board designated by First Union before the
Effective Time ("Former First Union Directors"), and 9 current members of
the Wachovia Board designated by Wachovia before the Effective Time
("Former Wachovia Directors"). The Former First Union Directors and Former
Wachovia Directors who are designated each will be split as equally as
possible among the three classes of directors. The members of the Surviving
Corporation's board of directors as of the Effective Time will serve as
directors until their respective successors are duly elected and qualified
in accordance with the First Union Articles, First Union By-laws and
applicable law. Unless he earlier resigns or retires, the current Chairman,
President and Chief Executive Officer of Wachovia, Mr. L.M. Baker, Jr.,
will be a member of the Surviving Corporation's board of directors. Unless
he earlier
A-7
resigns or retires, the current Chairman, President and Chief Executive
Officer of First Union, Mr. G. Kennedy Thompson, will be a member of the
Surviving Corporation's board of directors.
(2) Nomination of Directors. As set forth in Annex 3, certain provisions
regarding qualifications and procedures for nomination of candidates for
election as directors after the Effective Time will be contained in the
Surviving Corporation's Articles of Incorporation.
(c) Officers.
(1) Composition. Unless he earlier resigns or retires and as long as he
remains a director, Mr. Baker will be Chairman of the Board of the
Surviving Corporation from the Effective Time until the Lapse Date. Unless
he earlier resigns or retires, Mr. Thompson will be President and Chief
Executive Officer of the Surviving Corporation from the Effective Time
until the time at which Mr. Baker ceases to serve as Chairman (which will
be no later than the Lapse Date) and thereafter in accordance with his
Employment Agreement (as defined below). In addition, the First Union Board
will adopt resolutions prior to the Effective Time electing those persons
set forth in Annex 5 to the positions described in Annex 5 as of the
Effective Time.
(2) Employment Agreements. First Union (A) has an employment agreement
with Mr. Thompson (that agreement, or any successor agreement, including
any amendment thereto, an "Employment Agreement"), and (B) is entering into
an employment agreement with Mr. Baker (that agreement, or any successor
agreement, including any amendment thereto, also an "Employment
Agreement"), each of which is intended to be in force at the Effective Time
(as amended if necessary to be consistent with this Section 2.06). During
the terms of their respective Employment Agreements, Mr. Baker and Mr.
Thompson will have the respective powers, and perform the respective
duties, set forth in each of their respective Employment Agreements, along
with the duties of their offices as described in this Section 2.06 and the
Surviving Corporation's Constituent Documents.
(d) Modifications to the Corporate Governance Provisions. As set forth in
Annex 3, provisions regarding certain actions of the Surviving Corporation's
board of directors and the votes required for such actions will be contained in
the Surviving Corporation's Constituent Documents.
(e) Headquarters. The headquarters of the Surviving Corporation will be
located in Charlotte, North Carolina.
ARTICLE III
Consideration; Exchange Procedures
3.01 Consideration. At the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of Wachovia Stock,
each share of Wachovia Common Stock outstanding immediately prior to the
Effective Time will be converted into:
(a) Two (the "Exchange Ratio") fully paid and nonassessable shares of First
Union Common Stock and the requisite number of First Union Rights issued and
attached to such shares under the First Union Rights Agreement; and
(b) The right to receive, at the election of the holder, but subject to the
election procedures set forth in Section 3.04(b), either:
(1) Two DEPs; or
(2) $0.48 in cash (the "Cash Payment").
Notwithstanding anything in this Section 3.01 to the contrary, (x) at the
Effective Time and by virtue of the Merger, each share of Wachovia Common Stock
owned by First Union or held in Wachovia's treasury will
A-8
be canceled and no shares of First Union Stock and no First Union Rights or
other consideration will be issued or paid in exchange therefor, and (y) any
holder of Wachovia Common Stock may elect to be paid the "fair value" of his or
her Wachovia Common Stock pursuant to the procedure set forth in Article 13 of
the BCA (such holder, a "Dissenting Stockholder") as if such procedures applied
to the Merger; provided that such Dissenting Stockholder follows the procedures
and takes action in accordance with such Article of the BCA. If any Dissenting
Stockholder gives notice to Wachovia, Wachovia will promptly give First Union
notice thereof, and First Union will have the right to participate in all
negotiations and proceedings with respect to any such demands. Neither Wachovia
nor the Surviving Corporation will, except with the prior written consent of
First Union, voluntarily make any payment with respect to, or settle or offer
to settle, any such demand for payment. If any Dissenting Stockholder fails to
perfect or effectively withdraws or loses the right to dissent, the Wachovia
Common Stock held by such Dissenting Stockholder will thereupon be treated as
though such shares had been converted into First Union Common Stock pursuant to
this Section 3.01(b).
3.02 Cancellation of Shares. At the Effective Time, the shares of Wachovia
Common Stock will no longer be outstanding and will automatically be canceled
and will cease to exist. Certificates that represented Wachovia Common Stock
before the Effective Time will be deemed for all purposes to represent the
number of shares of First Union Common Stock, into which they were converted
pursuant to Section 3.01, and, as contemplated by the First Union Rights
Agreement, attached First Union Rights, as well as the right to receive the
additional consideration elected by the holder under Sections 3.01(b) and
3.04(b).
3.03 Rights as Shareholders; Stock Transfers. At the Effective Time, holders
of Wachovia Common Stock will cease to be, and will have no rights as,
shareholders of Wachovia, other than rights to (a) receive any then unpaid
dividend or other distribution with respect to such Wachovia Common Stock
having a record date before the Effective Time and (b) receive the merger
consideration provided under this Article III. After the Effective Time, there
will be no transfers of shares of Wachovia Common Stock on the stock transfer
books of Wachovia or the Surviving Corporation, and shares of Wachovia Common
Stock presented to the Surviving Corporation for any reason will be canceled
and exchanged in accordance with this Article III.
3.04 Exchange Procedures. (a) As of the Effective Time, First Union will
deposit with First Union's transfer agent or with a depository or trust
institution of recognized standing selected by Wachovia and reasonably
satisfactory to First Union (in such capacity, the "Exchange Agent"), for the
benefit of the holders of certificates formerly representing shares of Wachovia
Common Stock ("Old Certificates"), (1) certificates representing the shares of
First Union Common Stock ("New Certificates") issuable to holders of Old
Certificates under this Article III, (2) certificates representing DEPs
issuable pursuant to Section 3.01(b)(1) and (3) cash payable pursuant to
Section 3.01(b)(2) and Section 3.05.
(b) Promptly after the Effective Time, First Union will send or cause to be
sent to each person who was a recordholder of Wachovia Common Stock immediately
before the Effective Time transmittal materials for exchanging Old
Certificates. The transmittal materials shall include an election form (the
"Election Form") to each holder of record of Wachovia Common Stock. Pursuant to
Section 3.01(b), the Election Form will be used by each holder of Wachovia
Common Stock to elect to receive either (1) two DEPs or (2) the Cash Payment,
for each share of Wachovia Common Stock held by such holder. Any shares of
Wachovia Common Stock with respect to which the recordholder thereof shall not
have properly submitted to the Exchange Agent a properly completed Election
Form by 90 days after the Effective Time shall be deemed to have elected to
receive the Cash Payment. First Union will have reasonable discretion, which it
may delegate in whole or in part to the Exchange Agent, to determine whether
Election Forms have been properly completed, signed and timely submitted or to
disregard defects in Election Forms. Such decisions of First Union (or of the
Exchange Agent) will be conclusive and binding absent manifest error. Neither
First Union nor the Exchange Agent will be under any obligation to notify any
person of any defect in an Election Form submitted to the Exchange Agent.
Shares of Wachovia Common Stock covered by an Election Form that is not
effective will be treated as if no election had been made with respect to such
shares of Wachovia Common Stock, which will result in such holder receiving the
Cash Payment. Once an election is made it may not be revoked. A recordholder
acting in different capacities or acting on behalf of other persons in any way
will be entitled to submit an Election Form for each
A-9
capacity in which such recordholder so acts with respect to each person for
which it so acts. First Union will cause the New Certificates, the certificates
representing the DEPs and/or any check in respect of dividends or distributions
or the Cash Payment or for fractional shares, as applicable, that the
shareholder will be entitled to receive to be delivered to that shareholder
upon delivery to the Exchange Agent of appropriate Old Certificates (or
customary indemnity if any of such certificates are lost, stolen or destroyed)
owned by such shareholder along with the Election Form and other appropriate
transmittal materials. No interest will be paid on any such cash or other
consideration deliverable pursuant to this Article III.
(c) Neither First Union, Wachovia nor the Exchange Agent will be liable to
any former holder of Wachovia Common Stock for any amount properly delivered to
a public official pursuant to applicable abandoned property, escheat or similar
laws.
3.05 Fractional Shares. (a) Notwithstanding any other provision hereof, no
fractional shares of First Union Common Stock and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger;
instead, First Union will pay to each holder of Wachovia Common Stock who would
otherwise be entitled to a fractional share of First Union Common Stock (after
taking into account all Old Certificates delivered by such holder) an amount in
cash (without interest) determined by multiplying such fraction of a share of
First Union common stock (after taking into account the Exchange Ratio) by the
last reported sale price of First Union Common Stock, as reported by the NYSE
Composite Transactions Reporting System (as reported in The Wall Street Journal
or, if not reported therein, in another authoritative source), for the last
NYSE trading day preceding the Effective Time.
(b) Notwithstanding any other provision hereof, no fractional DEPs and no
certificates or scrip therefor, or other evidence of ownership thereof, will be
issued in the Merger; instead, in addition to the payment provided in Section
3.05(a), First Union will pay to each holder of Wachovia Common Stock who
elects pursuant to Section 3.04(b) hereof to receive DEPs and would otherwise
be entitled to a fractional share of such stock an amount in cash (without
interest) determined by multiplying such fraction of a DEPs by $0.48 and
dividing the product thereof by 2 (representing the number of DEPs issuable in
respect of each share of Wachovia Common Stock).
(c) First Union will pay to each holder of fractional shares of Wachovia
Common Stock who elects pursuant to Section 3.04(b) hereof to receive the Cash
Payment fractional amounts of the Cash Payment.
3.06 Anti-Dilution Adjustments. If First Union changes (or the First Union
Board sets a record date that will occur before the Effective Time for a change
in) the number or kind of shares of First Union Common
Stock outstanding by way of a stock split, stock dividend, recapitalization,
reclassification, reorganization or similar transaction, then the Exchange
Ratio will be adjusted proportionately to account for such change.
3.07 Stock Options. At the Effective Time, all outstanding and unexercised
employee and director options to purchase shares of Wachovia Common Stock
(each, a "Wachovia Stock Option") will cease to represent an option to purchase
Wachovia Common Stock and will be converted automatically into options to
purchase First Union Common Stock (each, a "First Union Stock Option"), and
First Union will assume each Wachovia Stock Option subject to its terms,
including any acceleration in vesting that will occur as a consequence of the
Merger according to the instruments governing the Wachovia Stock Option;
provided, however, that after the Effective Time:
(a) the number of shares of First Union Common Stock purchasable upon
exercise of each Wachovia Stock Option will equal the product of (1) the
number of shares of Wachovia Common Stock that were purchasable under the
Wachovia Stock Option immediately before the Effective Time and (2) the
Exchange Ratio, rounded to the nearest whole share;
(b) the per share exercise price for each Wachovia Stock Option will
equal the quotient of (1) the per share exercise price of the Wachovia
Stock Option in effect immediately before the Effective Time and (2) the
Exchange Ratio, rounded to the nearest cent; and
A-10
(c) the holder of any Wachovia Stock Option will not be entitled to
receive any Cash Payment or any DEPs as provided for in Sections 3.01(b)
and 3.04(b) unless such Wachovia Stock Option is exercised before the
Effective Time.
Notwithstanding the foregoing, each Wachovia Stock Option that is intended to
be an "incentive stock option" (as defined in Section 422 of the Code) will be
adjusted in accordance with the requirements of Section 424 of the Code.
Accordingly, with respect to any incentive stock options, fractional shares
will be rounded down to the nearest whole number of shares and, where
necessary, the per share exercise price will be rounded up to the nearest cent.
Before the Effective Time, First Union will take all corporate action necessary
to reserve for issuance a sufficient number of shares of First Union Common
Stock for delivery upon exercise of First Union Stock Options in accordance
with this Section 3.07. As soon as practicable after the Effective Time, First
Union will file one or more appropriate registration statements (on Form S-3 or
Form S-8 or any successor or other appropriate forms) with respect to the First
Union Common Stock underlying the First Union Stock Options described in this
Section 3.07, and will use all reasonable best efforts to maintain the
effectiveness of those registration statements and the current status of the
related prospectuses for so long as the Wachovia Stock Options remain
outstanding.
3.08 Effect on First Union Stock. Each share of First Union Stock
outstanding immediately prior to the Effective Time will remain outstanding.
ARTICLE IV
Conduct of Business Pending Merger
4.01 Forebearances. First Union and Wachovia each agrees that from the date
hereof until the Effective Time, except as expressly contemplated by this
Agreement or the Stock Option Agreements or as Previously Disclosed, without
the prior written consent of the other party (which consent will not be
unreasonably withheld or delayed), it will not, and will cause each of its
Subsidiaries not to:
(a) Ordinary Course. Conduct its business and the business of its
Subsidiaries other than in the ordinary and usual course or fail to use
reasonable best efforts to preserve intact their business organizations and
assets and maintain their rights, franchises and authorizations and their
existing relations with customers, suppliers, employees and business
associates, or take any action reasonably likely to materially impair its
ability to perform its obligations under this Agreement or the Stock Option
Agreements or to consummate the transactions contemplated hereby.
(b) Banking Operations. Enter into any new material line of business or
change its material lending, investment, underwriting, risk and asset
liability management and other material banking and operating policies,
except as required by applicable law, regulation or policies imposed by any
Governmental Authority.
(c) Capital Stock. Other than pursuant to Rights Previously Disclosed
and outstanding on the date of this Agreement or pursuant to the Stock
Option Agreements or the Wachovia DRIP, (1) issue, sell or otherwise permit
to become outstanding, or dispose of or encumber or pledge, or authorize or
propose the creation of, any additional shares of its stock, including
issuances of new shares of Wachovia Common Stock under Wachovia's
Retirement Savings and Profit Sharing Plan or (2) permit any additional
shares of its stock to become subject to new grants, except issuances of
employee or director stock options or other stock-based employee Rights, in
either case, in the ordinary course of business consistent with past
practice.
(d) Dividends, Distributions, Repurchases. (1) Make, declare, pay or set
aside for payment any dividend on or in respect of, or declare or make any
distribution on any shares of its stock (other than (A) dividends from its
wholly owned Subsidiaries to it or another of its wholly owned
Subsidiaries, (B) regular quarterly dividends on its common stock at a rate
equal to the rate paid by it during the fiscal
A-11
quarter immediately preceding the date hereof, (C) in the case of Wachovia,
the distribution of rights pursuant to a shareholder rights plan adopted
after the date hereof that contains an exemption for this Agreement and the
transactions contemplated hereby) or (2) directly or indirectly adjust,
split, combine, redeem, reclassify, purchase or otherwise acquire, any
shares of its stock (other than repurchases of common shares in the
ordinary course of business to satisfy obligations under dividend
reinvestment or employee benefit plans).
(e) Dispositions. Sell, transfer, mortgage, encumber or otherwise
dispose of or discontinue any of its assets, deposits, business or
properties, except for sales, transfers, mortgages, encumbrances or other
dispositions or discontinuances in the ordinary course of business
consistent with past practice and in a transaction that, together with
other such transactions, is not material to it and its Subsidiaries, taken
as a whole; provided, that the foregoing shall not apply to the
transactions contemplated by the Purchase and Sale Agreement.
(f) Acquisitions. Acquire (other than by way of foreclosures or
acquisitions of control in a fiduciary or similar capacity or in
satisfaction of debts previously contracted in good faith, in each case in
the ordinary and usual course of business consistent with past practice)
all or any portion of the assets, business, deposits or properties of any
other entity except in the ordinary course of business consistent with past
practice and in a transaction that, together with other such transactions,
is not material to it and its Subsidiaries, taken as a whole, and does not
present a material risk that the Closing Date will be materially delayed or
that the Requisite Regulatory Approvals will be more difficult to obtain.
(g) Constituent Documents. Amend its Constituent Documents or the
Constituent Documents (or similar governing documents) of any of its
Significant Subsidiaries.
(h) Accounting Methods. Implement or adopt any change in its accounting
principles, practices or methods, other than as may be required by GAAP or
applicable regulatory accounting requirements.
(i) Adverse Actions. Notwithstanding anything herein to the contrary,
(1) knowingly take, or knowingly omit to take, any action that would, or is
reasonably likely to, prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code or (2)
knowingly take, or knowingly omit to take, any action that is reasonably
likely to result in any of the conditions to the Merger set forth in
Article VII not being satisfied, except as may be required by applicable
law or regulation; provided, that nothing in this Section 4.01(i) shall
preclude either party from exercising its respective rights under the Stock
Option Agreements.
(j) Indebtedness. Incur or guarantee any indebtedness for borrowed money
other than in the ordinary course of business consistent with past
practice.
(k) Commitments. Enter into any contract with respect to, or otherwise
agree or commit to do, any of the foregoing.
4.02 Coordination of Dividends. Until the Effective Time, First Union and
Wachovia will coordinate on the declaration of any dividends or other
distributions with respect to First Union Common Stock and Wachovia Common
Stock and the related record dates and payment dates, it being intended that
First Union and Wachovia shareholders will not receive more than one dividend,
or fail to receive one dividend, for any single calendar quarter on their
shares of First Union Common Stock or Wachovia Common Stock (including any
shares of First Union Common Stock received in exchange therefor in the
Merger), as the case may be; provided that Wachovia shall in all events be
permitted to set a record date for the payment of its regular third quarter
dividend (in an amount permitted by Section 4.01(d)(1)(B)) prior to the Closing
Date.
A-12
ARTICLE V
Representations and Warranties
5.01 Disclosure Schedules. Before entry into this Agreement, First Union
delivered to Wachovia a schedule, and within three business days after the date
of this Agreement Wachovia will have delivered to First Union a schedule
(respectively, each schedule a "Disclosure Schedule"), setting forth, among
other things, items the disclosure of which is necessary or appropriate either
in response to an express disclosure requirement contained in a provision
hereof or as an exception to one or more representations or warranties
contained in Section 5.03 or to one or more of its covenants contained in
Article IV; provided, that the mere inclusion of an item in a Disclosure
Schedule as an exception to a representation or warranty will not be deemed an
admission by a party that such item is material or was required to be disclosed
therein; and provided further that without First Union's prior written consent
Wachovia's Disclosure Schedule may not include any exception item that was not
disclosed to First Union prior to entry into this Agreement as part of the due
diligence process conducted.
5.02 Standard. For all purposes of this Agreement, no representation or
warranty of Wachovia or First Union contained in Section 5.03 (other than the
representations and warranties contained in Section 5.03(b) and 5.03(c), which
shall be true in all material respects) will be deemed untrue, and no party
will be deemed to have breached a representation or warranty, as a consequence
of the existence of any fact, event or circumstance unless such fact,
circumstance or event, individually or taken together with all other facts,
events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 (read for this purpose without regard to any
individual reference to "materiality" or "material adverse effect") has had or
is reasonably likely to have a Material Adverse Effect with respect to Wachovia
or First Union, as the case may be.
5.03 Representations and Warranties. Except as Previously Disclosed,
Wachovia hereby represents and warrants to First Union, and First Union hereby
represents and warrants to Wachovia, to the extent applicable, as follows:
(a) Organization, Standing and Authority. It is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. It is duly qualified to do business and
is in good standing in all jurisdictions where its ownership or leasing of
property or assets or its conduct of business requires it to be so
qualified.
(b) Wachovia Stock. In the case of Wachovia:
The authorized capital stock of Wachovia consists of 1,000,000,000
shares of Wachovia Common Stock and 50,000,000 shares of Wachovia
Preferred Stock. As of March 31, 2001, no more than 210,400,000 shares
of Wachovia Common Stock and no shares of Wachovia Preferred Stock were
outstanding. As of the date of this Agreement, no more than 21,100,000
shares of Wachovia Common Stock were reserved for issuance under the
Wachovia Stock Plans (of which no more than 20,300,000 were reserved
for issuance in respect of awards outstanding as of such date); and no
more than 21,000 shares of Wachovia Common Stock were reserved for
issuance upon conversion of convertible debt of Wachovia and its
Subsidiaries. The outstanding shares of Wachovia Common Stock have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued
in violation of any preemptive rights). Except as set forth above or in
the Wachovia Stock Option Agreement and except for shares issuable
pursuant to the Wachovia DRIP and Wachovia's Retirement Savings and
Profit Sharing Plan, as of the date of this Agreement, there are no
shares of Wachovia Stock reserved for issuance, Wachovia does not have
any Rights outstanding with respect to Wachovia Stock, and Wachovia
does not have any commitment to authorize, issue or sell any Wachovia
Stock or Rights, except pursuant to this Agreement, outstanding
Wachovia Stock Options, the Wachovia Stock Plans and the dividend
reinvestment segment of the Wachovia DRIP (which will be satisfied
without issuance of new shares
A-13
to the fullest extent possible). As of the date of this Agreement,
Wachovia has no contractual obligations to redeem, repurchase or
otherwise acquire, or to register with the SEC, any shares of Wachovia
Stock.
(c) First Union Stock. In the case of First Union:
The authorized capital stock of First Union consists of
2,000,000,000 shares of First Union Common Stock and 50,000,000 shares
of First Union Preferred Stock (comprising 10,000,000 shares of
Preferred Stock, no-par value, and 40,000,000 shares of Class A
Preferred Stock, no-par value). As of the date of this Agreement, no
more than 985,000,000 shares of First Union Common Stock and no shares
of First Union Preferred Stock were outstanding. As of the date of this
Agreement, no more than 80,000,000 shares of First Union Common Stock
were subject to First Union Stock Options granted under the First Union
Stock Plans. As of the date of this Agreement, there were no more than
60,000,000 shares of First Union Common Stock reserved for issuance
under the First Union Stock Plans. The outstanding shares of First
Union Common Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive
rights (and were not issued in violation of any preemptive rights). The
shares of First Union stock to be issued in the Merger have been duly
authorized and, if and when issued in the Merger, will be fully paid
and nonassessable. Except as set forth above or in the First Union
Stock Option Agreement and except for the DEPs to be issued pursuant to
Section 3.01(b)(1), as of the date of this Agreement, there are no
shares of First Union Stock reserved for issuance, First Union does not
have any Rights issued or outstanding with respect to First Union
Stock, and First Union does not have any commitment to authorize, issue
or sell any First Union Stock or Rights, except pursuant to this
Agreement, outstanding First Union Stock Options, the First Union Stock
Plans, the First Union Rights Agreement and the dividend reinvestment
segment of First Union's Dividend Reinvestment Plan. As of the date of
this Agreement, First Union has no contractual obligations to redeem,
repurchase or otherwise acquire, or to register with the SEC, any
shares of First Union Stock.
(d) Significant Subsidiaries. (1) (A) It owns, directly or indirectly,
all the outstanding equity securities of each of its Significant
Subsidiaries free and clear of any Liens, (B) no equity securities of any
of its Significant Subsidiaries are or may become required to be issued
(other than to it or its wholly owned Subsidiaries) by reason of any Right
or otherwise, (C) there are no contracts, commitments, understandings or
arrangements by which any of such Significant Subsidiaries is or may be
bound to sell or otherwise transfer any equity securities of any such
Significant Subsidiaries (other than to it or its wholly-owned
Subsidiaries), (D) there are no contracts, commitments, understandings, or
arrangements relating to its rights to vote or to dispose of such
securities and (E) all the equity securities of each Significant Subsidiary
held by it or its Subsidiaries have been duly authorized and are validly
issued and outstanding, fully paid and nonassessable (except as provided in
12 U.S.C. (S) 55 or comparable state laws in the case of bank
Subsidiaries).
(2) Each of its Significant Subsidiaries has been duly organized and
is validly existing in good standing under the laws of the jurisdiction
of its organization, and is duly qualified to do business and in good
standing in all jurisdictions where its ownership or leasing of
property or its conduct of business requires it to be so qualified.
(e) Power. It and each of its Subsidiaries has the corporate power (or
comparable) and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and it has the
corporate (or comparable) power and authority to execute, deliver and
perform its obligations under this Agreement and the Stock Option
Agreements and to consummate the transactions contemplated hereby and
thereby.
(f) Authority. It has duly authorized, executed and delivered this
Agreement and has taken all corporate action necessary in order to execute
and deliver the Stock Option Agreements. Subject only to receipt of the
affirmative vote of the holders of a majority of the outstanding shares of
First Union Common Stock or Wachovia Common Stock, as the case may be, to
approve the plan of merger contained
A-14
in this Agreement, this Agreement and the transactions contemplated hereby
have been authorized by all necessary respective corporate action. This
Agreement is its valid and legally binding obligation, enforceable in
accordance with its terms (except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general applicability relating to or affecting
creditors' rights or by general equity principles).
(g) Regulatory Approvals; No Defaults. (1) No consents or approvals of,
or filings or registrations with, any Governmental Authority or with any
third party are required to be made or obtained by it or any of its
Subsidiaries in connection with the execution, delivery or performance by
it of this Agreement and the Stock Option Agreements or to consummate the
Merger except for (A) filings of applications and notices with, receipt of
approvals or nonobjections from, and expiration of the related waiting
period required by foreign, federal and state banking authorities,
including applications and notices under the Bank Holding Company Act of
1956, the Federal Reserve Act to the Federal Reserve System, and an
application to the New York State Banking Department, (B) filing of
notices, and expiration of the related waiting period, under the HSR Act,
(C) filings of applications and notices with, and receipt of approvals or
nonobjections from, the SEC and state securities authorities, the National
Association of Securities Dealers, Inc., applicable securities exchanges
and self-regulatory organizations, as well as the Small Business
Administration and state insurance authorities, (D) filing of the
Registration Statement and Joint Proxy Statement with the SEC, and
declaration by the SEC of the Registration Statement's effectiveness under
the Securities Act, (E) receipt of the applicable shareholder approvals
described in Section 5.03(f) and the approval of shareholders of investment
companies advised by Wachovia or its Subsidiaries, (F) the filing of the
Articles of Merger, and (G) such filings with applicable securities
exchanges to obtain the authorizations for listing contemplated by this
Agreement.
(2) Subject to receipt of the regulatory consents and approvals
referred to in the preceding paragraph, and the expiration of related
waiting periods, and required filings under federal and state
securities laws, the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
(including the Stock Option Agreements) do not and will not (A)
constitute a breach or violation of, or a default under, or give rise
to any Lien or any acceleration of remedies, penalty, increase in
material benefit payable or right of termination under, any law, rule
or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of it or of any of its
Subsidiaries or to which it or any of its Subsidiaries or properties is
subject or bound, (B) constitute a breach or violation of, or a default
under, its Constituent Documents or (C) require any consent or approval
under any such law, rule, regulation, judgment, decree, order,
governmental permit or license, agreement, indenture or instrument.
(3) As of the date hereof, it is not aware of any reason why the
necessary regulatory approvals and consents will not be received in
order to permit consummation of the Merger.
(h) Financial Reports and Regulatory Documents; Material Adverse
Effect. (1) Its Annual Reports on Form 10-K for the fiscal years ended
December 31, 1999 and 2000, and all other reports, registration statements,
definitive proxy statements or information statements filed by it or any of
its Subsidiaries subsequent to December 31, 1998 under the Securities Act,
or under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form
filed (collectively, its "Regulatory Filings") with the SEC as of the date
filed, (A) complied in all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as the case may
be, and (B) 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 the light of the circumstances under which they
were made, not misleading; and each of the statements of financial position
contained in or incorporated by reference into any such Regulatory Filing
(including the related notes and schedules) fairly presented in all
material respects its financial position and that of its Subsidiaries as of
the date of such statement, and each of the statements of income and
changes in shareholders' equity and cash flows or equivalent statements in
such Regulatory Filings (including any related notes and schedules thereto)
fairly presented in all material respects, the results of operations,
changes in shareholders' equity and changes in cash flows, as the case may
be, of it and its
A-15
Subsidiaries for the periods to which those statements relate, in each case
in accordance with GAAP consistently applied during the periods involved,
except in each case as may be noted therein, and subject to normal year-end
audit adjustments and as permitted by Form 10-Q in the case of unaudited
statements.
(2) Since December 31, 2000, it and its Subsidiaries have not
incurred any liability other than in the ordinary course of business
consistent with past practice.
(3) Since December 31, 2000, (A) it and its Subsidiaries have
conducted their respective businesses in the ordinary and usual course
consistent with past practice (excluding the incurrence of expenses
related to this Agreement and the transactions contemplated hereby) and
(B) no event has occurred or circumstance arisen that, individually or
taken together with all other facts, circumstances and events
(described in any paragraph of Section 5.03 or otherwise), has had or
is reasonably likely to have a Material Adverse Effect with respect to
it.
(i) Litigation. Except as Previously Disclosed or set forth in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2000,
there is no suit, action, investigation or proceeding pending or, to its
knowledge, threatened against or affecting it or any of its Subsidiaries
(and it is not aware of any basis for any such suit, action or proceeding)
that, individually or in the aggregate, is (1) material to it and its
Subsidiaries, taken as a whole, or (2) that is reasonably likely to prevent
or delay it in any material respect from performing its obligations under,
or consummating the transactions contemplated by, this Agreement.
(j) Regulatory Matters. It is a financial holding company, as defined in
Section 2(p) of the Bank Holding Company Act of 1956, as amended. Neither
it nor any of its Subsidiaries is subject to, or has been advised that it
is reasonably likely to become subject to, any written order, decree,
agreement, memorandum of understanding or similar arrangement with, or a
commitment letter or similar submission to, or extraordinary supervisory
letter from, or adopted any extraordinary board resolutions at the request
of, any Governmental Authority charged with the supervision or regulation
of financial institutions or issuers of securities or engaged in the
insurance of deposits or the supervision or regulation of it or any of its
Subsidiaries (collectively, the "Regulatory Authorities").
(k) Compliance with Laws. It and each of its Subsidiaries:
(1) conducts its business in compliance with all applicable federal,
state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable thereto or to the
employees conducting such businesses;
(2) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to
own or lease their properties and to conduct their businesses as
presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to
its knowledge, no suspension or cancellation of any of them is
threatened; and
(3) has received, since December 31, 1998, no written notification
from any Governmental Authority (A) asserting that it or any of its
Subsidiaries is not in compliance with any of the statutes, regulations
or ordinances which such Governmental Authority enforces or (B)
threatening to revoke any license, franchise, permit or governmental
authorization.
(l) Material Contracts; Defaults. (1) Except for those agreements and
other documents filed as exhibits to its Regulatory Filings, neither it nor
any of its Subsidiaries is a party to, bound by or subject to any
agreement, contract, arrangement, commitment or understanding (whether
written or oral) (A) that is a "material contract" within the meaning of
Item 601(b)(10) of the SEC's Regulation S-K, (B) that restricts the conduct
of business by it or any of its Subsidiaries or its or their ability to
compete in any line of business or (C) with respect to employment of an
officer, director or consultant.
(2) Neither it nor any of its Subsidiaries is in default under any
material contract, agreement, commitment, arrangement, lease, insurance
policy or other instrument to which it is a party, by which
A-16
its respective assets, business, or operations may be bound or
affected, or under which it or its respective assets, business, or
operations receives benefits, 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.
(m) Employee Benefit Plans. (1) All material benefit and compensation
plans, contracts, policies or arrangements covering its current employees
or former employees and those of its Subsidiaries (its "Employees") and its
current or former directors, including, but not limited to, "employee
benefit plans" within the meaning of Section 3(3) of ERISA, and deferred
compensation, stock option, stock purchase, stock appreciation rights,
stock based, incentive and bonus plans (its "Benefit Plans"), are
Previously Disclosed. True and complete copies of all Benefit Plans,
including, but not limited to, any trust instruments and insurance
contracts forming a part of any Benefit Plans, and all amendments thereto,
have been made available to the other party.
(2) All employee benefit plans, other than "multiemployer plans"
within the meaning of Section 3(37) of ERISA, covering its Employees
(its "Plans"), to the extent subject to ERISA, are in substantial
compliance with ERISA. Each of its Plans which is an "employee pension
benefit plan" within the meaning of Section 3(2) of ERISA ("Pension
Plan"), and which is intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the
Internal Revenue Service, and it is not aware of any circumstances
reasonably likely to result in revocation of any such favorable
determination letter. Each Plan which is intended to be part of a
voluntary employees' beneficiary association within the meaning of
Section 501(c)(9) of the Code has (i) received an opinion letter from
the Internal Revenue Service recognizing its exempt status under
Section 501(c)(9) of the Code and (ii) filed a timely notice with the
Internal Revenue Service pursuant to Section 505(c) of the Code, and it
is not aware of circumstances likely to result in the loss of the
exempt status of such Plan under Section 501(c)(9) of the Code. There
is no material pending or, to the knowledge of Wachovia or First Union,
as the case may be, threatened litigation relating to its Plans.
Neither it nor any of its Subsidiaries has engaged in a transaction
with respect to any of its Plans that, assuming the taxable period of
such transaction expired as of the date hereof, could subject it or any
of its Subsidiaries to a tax or penalty imposed by either Section 4975
of the Code or Section 502(i) of ERISA in an amount which would be
material.
(3) No liability under Subtitle C or D of Title IV of ERISA has been
or is reasonably expected to be incurred by it or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-
employer plan", within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with it under
Section 4001 of ERISA or Section 414 of the Code (an "ERISA
Affiliate"). None of it, any of its Subsidiaries or any of its ERISA
Affiliates has contributed to a "multiemployer plan", within the
meaning of Section 3(37) of ERISA, at any time on or after September
26, 1980. No notice of a "reportable event", within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has
not been waived, has been required to be filed for any of its Pension
Plans or by any of its ERISA Affiliates within the 12-month period
ending on the date hereof.
(4) All contributions required to be made under the terms of any of
its Plans have been timely made or have been reflected on its
consolidated financial statements included in its Regulatory Filings.
None of its Pension Plans or any single-employer plan of any of its
ERISA Affiliates has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the Code or Section
302 of ERISA and none of its ERISA Affiliates has an outstanding
funding waiver. Neither it nor any of its Subsidiaries has provided, or
is required to provide, security to any of its Pension Plans or to any
single-employer plan of any of its ERISA Affiliates pursuant to Section
401(a)(29) of the Code.
(5) There has been no amendment to, announcement by it or any of its
subsidiaries relating to, or change in employee participation or
coverage under, any Plan which would increase materially the expense of
maintaining such Plan above the level of the expense incurred therefor
for the most recent
A-17
fiscal year. Neither its execution of this Agreement or the Stock
Option Agreements, the performance of its obligations hereunder or
under the Stock Option Agreements, the consummation of the transactions
contemplated by this Agreement and the Stock Option Agreements, the
termination of the employment of any of its employees within a
specified time of the Effective Time nor shareholder approval of the
transactions covered by this Agreement, will (x) limit its right, in
its sole discretion, to administer or amend in any respect or terminate
any of its Benefit Plans or any related trust, (y) entitle any of its
employees or any employees of its Subsidiaries to severance pay or any
increase in severance pay, or (z) accelerate the time of payment or
vesting or trigger any payment or funding (through a grantor trust or
otherwise) of compensation or benefits under, increase the amount
payable or trigger any other material obligation pursuant to, any of
its Benefit Plans. Without limiting the foregoing, as a result of the
consummation of the transactions contemplated by this Agreement
(including, without limitation, as a result of the termination of the
employment of any of its employees within a specified time of the
Effective Time) neither it nor any of its Subsidiaries will be
obligated to make a payment to an individual that would be a "parachute
payment" to a "disqualified individual" as those terms are defined in
Section 280G of the Code, without regard to whether such payment is
reasonable compensation for personal services performed or to be
performed in the future.
(n) Taxes. (1) All Tax Returns that are required to be filed (taking
into account any extensions of time within which to file) by or with
respect to it and its Subsidiaries have been duly and timely filed, and all
such Tax Returns are complete and accurate in all material respects, (2)
all Taxes shown to be due on the Tax Returns referred to in clause (1) or
that are otherwise due and payable have been paid in full, (3) all Taxes
that it or any of its Subsidiaries is obligated to withhold from amounts
owing to any employee, creditor or third party have been paid over to the
proper Governmental Authority in a timely manner, to the extent due and
payable, and (4) no extensions or waivers of statutes of limitation have
been given by or requested with respect to any of its U.S. federal income
taxes or those of its Subsidiaries. It has made provision in accordance
with GAAP, in the financial statements included in the Regulatory Filings
filed before the date hereof, for all Taxes that accrued on or before the
end of the most recent period covered by its Regulatory Filings filed
before the date hereof. As of the date hereof, neither it nor any of its
Subsidiaries has any reason to believe that any conditions exist that could
reasonably be expected to prevent or impede the Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code. No Liens
for Taxes exist with respect to any of its assets or properties or those of
its Subsidiaries, except for statutory Liens for Taxes not yet due and
payable or that are being contested in good faith and reserved for in
accordance with GAAP. Neither it nor any of its Subsidiaries has been a
party to any distribution occurring during the two-year period prior to the
date of this Agreement in which the parties to such distribution treated
the distribution as one to which Section 355 of the Code applied, except
for distributions occurring among members of the same group of affiliated
corporations filing a consolidated federal income tax return.
(o) Books and Records. Its books and records and those of its
Subsidiaries have been fully, properly and accurately maintained in all
material respects, and there are no material inaccuracies or discrepancies
of any kind contained or reflected therein.
(p) Takeover Laws and Provisions. It has taken all action required to be
taken by it in order to exempt this Agreement and the transactions
contemplated hereby (and the Stock Option Agreements and the transactions
contemplated thereby) from, and this Agreement and the transactions
contemplated hereby (and the Stock Option Agreements and the transactions
contemplated thereby) are exempt from, the requirements of any
"moratorium," "control share," "fair price," "affiliate transaction,"
"business combination" or other antitakeover laws and regulations of any
state (collectively, "Takeover Laws"), including Articles 9 and 9A of the
BCA. It has taken all action required to be taken by it in order to make
this Agreement and the transactions contemplated hereby (and the Stock
Option Agreements and the transactions contemplated thereby) comply with,
and this Agreement and the transactions contemplated hereby (and the Stock
Option Agreements and the transactions contemplated thereby) do comply
with, the requirements of any Articles, Sections or provisions of its
Constituent Documents concerning "business
A-18
combination," "fair price," "voting requirement," "constituency
requirement" or other related provisions (collectively, "Takeover
Provisions").
(q) Financial Advisors, Etc. (1) None of it, its Subsidiaries or any of
their officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees
in connection with the transactions contemplated herein, except that, in
connection with this Agreement and the Stock Option Agreements, First Union
has retained Merrill Lynch & Co. as its financial advisor and Wachovia has
retained Credit Suisse First Boston Corporation and Goldman, Sachs & Co. as
its financial advisors, the arrangements with which have been disclosed to
the other party prior to the date hereof.
(2) As of April 15, 2001, (A) Wachovia has received a written
opinion of Credit Suisse First Boston Corporation to the effect that
the Exchange Ratio is fair from a financial point of view to holders of
Wachovia Common Stock and (B) First Union has received a written
opinion of Merrill Lynch & Co. to the effect that the Exchange Ratio is
fair from a financial point of view to First Union and holders of First
Union Common Stock.
(3) As of May 22, 2001, Wachovia has received opinions of Credit
Suisse First Boston and Goldman, Sachs & Co. to the effect that the
Exchange Ratio is fair from a financial point of view to holders of
Wachovia Common Stock.
ARTICLE VI
Covenants
6.01 Reasonable Best Efforts. (a) Subject to the terms and conditions of
this Agreement, First Union and Wachovia will use all reasonable best efforts
to take, or cause to be taken, in good faith, all actions, and to do, or cause
to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby, and each will cooperate fully with, and furnish
information to, the other party to that end.
(b) First Union agrees to execute and deliver, or cause to be executed and
delivered, by or on behalf of the Surviving Corporation, at or prior to the
Effective Time, one or more supplemental indentures and other instruments
required for the due assumption of Wachovia's outstanding debt, guarantees,
securities, and (to the extent informed of such requirement by Wachovia) other
agreements to the extent required by the terms of such debt, guarantees,
securities or other agreements.
6.02 Shareholder Approvals. (a) The Wachovia Board adopted this Agreement
and the plan of merger it contains and adopted resolutions recommending as of
the date hereof to Wachovia's shareholders approval of the plan of merger
contained in this Agreement and any other matters required to be approved or
adopted in order to effect the Merger and other transactions contemplated by
this Agreement.
(b) The First Union Board adopted this Agreement and the plan of merger it
contains and adopted resolutions recommending as of the date hereof to First
Union's shareholders the approval of the plan of merger contained in this
Agreement and any other matters required to be approved or adopted in order to
effect the Merger and other transactions contemplated by this Agreement.
(c) The First Union Board and Wachovia Board each will submit to their
shareholders the plan of merger contained in this Agreement and any other
matters required to be approved or adopted by shareholders in order to carry
out the intentions of this Agreement. In furtherance of that obligation, First
Union and Wachovia each will take, in accordance with applicable law and its
respective Constituent Documents, all action necessary to convene a meeting of
its shareholders (including any adjournment or postponement, the "First Union
Meeting"
A-19
and the "Wachovia Meeting", respectively), as promptly as practicable, to
consider and vote upon approval of the plan of merger as well as any other such
matters. The First Union Board and Wachovia Board each will use all reasonable
best efforts to obtain from their respective shareholders a vote approving the
plan of merger contained in this Agreement. However, if the Wachovia Board or
First Union Board, after consultation with (and based on the advice of)
counsel, determines in good faith that, because of a conflict of interest or
other special circumstances (it being agreed that such special circumstances
will include, for purposes of this Agreement, the receipt by a party of an
Acquisition Proposal that such party's board of directors concludes in good
faith constitutes a Superior Proposal), it would more likely than not result in
a violation of its fiduciary duties under applicable law to continue to
recommend the plan of merger set forth in this Agreement, then in submitting
the plan of merger to the Wachovia Meeting or the First Union Meeting, as the
case may be, the Wachovia Board or First Union Board, as the case may be, may
submit the plan of merger to its respective shareholders without recommendation
(although the resolutions adopting this Agreement as of the date hereof,
described in Sections 6.02(a) and (b), may not be rescinded or amended), in
which event the Wachovia Board or First Union Board, as the case may be, may
communicate the basis for its lack of a recommendation to the shareholders in
the Joint Proxy Statement or an appropriate amendment or supplement thereto to
the extent required by law; provided that it may not take any actions under
this sentence until after giving the other party hereto at least five business
days to respond to such Acquisition Proposal (and after giving the other party
notice of the latest material terms, conditions and third party in the
Acquisition Proposal) and then taking into account any amendment or
modification to this Agreement proposed by the other party hereto (it being
agreed that Section 4 of the Confidentiality Agreement will not preclude such a
response or proposal).
6.03 SEC Filings. (a) First Union and Wachovia will cooperate in ensuring
that all filings required under SEC Rules 165, 425 and 14a-12 are timely and
properly made. First Union also will prepare a registration statement on Form
S-4 or other applicable form (the "Registration Statement") to be filed by
First Union with the SEC in connection with the issuance of First Union Common
Stock and DEPs in the Merger, and the parties will jointly prepare the joint
proxy statement and prospectus and other proxy solicitation materials of First
Union and Wachovia constituting a part thereof (the "Joint Proxy Statement")
and all related documents. The parties agree to cooperate, and to cause their
Subsidiaries to cooperate, with the other party, its counsel and its
accountants, in the preparation of the Registration Statement and the Joint
Proxy Statement; and provided that both parties and their respective
Subsidiaries have cooperated as required above, First Union and Wachovia agree
to file the Registration Statement, including the Joint Proxy Statement in
preliminary form, with the SEC as promptly as reasonably practicable. Each of
First Union and Wachovia will use all reasonable best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as reasonably practicable after filing thereof. First Union also
agrees to use all reasonable best efforts to obtain all necessary state
securities law or "Blue Sky" permits and approvals required to carry out the
transactions contemplated by this Agreement. Wachovia agrees to furnish to
First Union all information concerning Wachovia, its Subsidiaries, officers,
directors and shareholders as may be reasonably requested in connection with
the foregoing.
(b) First Union and Wachovia each agrees, as to itself and its Subsidiaries,
that none of the information supplied or to be supplied by it for inclusion or
incorporation by reference in (1) the Registration Statement will, at the time
the Registration Statement and each amendment or supplement thereto, if any,
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (2) the Joint
Proxy Statement and any amendment or supplement thereto will, at the date of
mailing to shareholders and at the time of the First Union Meeting or the
Wachovia Meeting, as the case may be, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which such statement was made, not misleading. First Union and Wachovia
each further agrees that if it becomes aware that any information furnished by
it would cause any of the statements in the Joint Proxy Statement or the
Registration Statement to be false or misleading with respect to any material
fact, or to omit to state any material fact necessary to make the statements
therein not false or misleading, to promptly inform the other party thereof and
to take appropriate steps to correct the Joint Proxy Statement or the
Registration Statement.
A-20
(c) First Union will advise Wachovia, promptly after First Union receives
notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of First Union Common Stock
or DEPs for offering or sale in any jurisdiction, of the initiation or threat
of any proceeding for any such purpose, or of any request by the SEC for the
amendment or supplement of the Registration Statement or for additional
information.
6.04 Press Releases. First Union and Wachovia will consult with each other
before issuing any press release, written employee communication or other
written shareholder communication with respect to the Merger or this Agreement
and will not issue any such communication or make any such public statement
without the prior consent of the other party, which will not be unreasonably
withheld or delayed; provided, however, that a party may, without the prior
consent of the other party (but after prior consultation, to the extent
practicable in the circumstances), issue such communication or make such public
statement as may be required by applicable law or securities exchange rules.
First Union and Wachovia will cooperate to develop all public communications
and make appropriate members of management available at presentations related
to the transactions contemplated by this Agreement as reasonably requested by
the other party.
6.05 Access; Information. (a) Each of First Union and Wachovia agrees that
upon reasonable notice and subject to applicable laws relating to the exchange
of information, it will (and will cause its Subsidiaries to) afford the other
party, and the other party's officers, employees, counsel, accountants and
other authorized Representatives, such access during normal business hours
throughout the period before the Effective Time to the books, records
(including, without limitation, Tax Returns and work papers of independent
auditors), properties, personnel and to such other information as any party may
reasonably request and, during such period, it will furnish promptly to such
other party (1) a copy of each report, schedule and other document filed by it
pursuant to the requirements of federal or state securities or banking laws,
and (2) all other information concerning the business, properties and personnel
of it as the other may reasonably request. Neither party nor any of its
Subsidiaries will be required to afford access or disclose information that
would jeopardize attorney-client privilege or contravene any binding agreement
with any third party. The parties will make appropriate substitute arrangements
in circumstances where the previous sentence applies.
(b) Each party agrees that it will hold any information which is nonpublic
and confidential to the extent required by, and in accordance with, the
Confidentiality Agreement dated April 5, 2001 between First Union and Wachovia
(the "Confidentiality Agreement").
(c) No investigation by either party of the business and affairs of the
other party, pursuant to this Section 6.05 or otherwise, will affect or be
deemed to modify or waive any representation, warranty, covenant or agreement
in this Agreement, or the conditions to either party's obligation to consummate
the transactions contemplated by this Agreement.
6.06 Acquisition Proposals. First Union and Wachovia each agrees that it
will not, and will cause its Subsidiaries and its and its Subsidiaries'
officers, directors, agents, advisors and affiliates not to, initiate, solicit,
encourage or knowingly facilitate inquiries or proposals with respect to, or
engage in any negotiations concerning, or provide any confidential or nonpublic
information or data to, or have any discussions with, any person relating to,
any Acquisition Proposal or waive any provision of or amend the terms of the
First Union Rights Agreement, in respect of an Acquisition Proposal; provided
that, in the event either party receives an unsolicited bona fide Acquisition
Proposal and such party's board of directors concludes in good faith that there
is a reasonable likelihood that such Acquisition Proposal constitutes or is
reasonably likely to result in a Superior Proposal, such party may, and may
permit its Subsidiaries and its and its Subsidiaries' Representatives to,
furnish or cause to be furnished nonpublic information and participate in such
negotiations or discussions to the extent that the board of directors of such
party concludes in good faith (and based on the advice of counsel) that failure
to take such actions would more likely than not result in a violation of its
fiduciary duties under applicable law; provided that prior to providing any
nonpublic information permitted to be provided pursuant to the foregoing
proviso, it shall have entered into a confidentiality agreement with such third
party on terms no
A-21
less favorable to it than the Confidentiality Agreement as entered into on
April 5, 2001. Each of First Union and Wachovia will immediately cease and
cause to be terminated any activities, discussions or negotiations conducted
before the date of this Agreement with any persons other than Wachovia or First
Union, as the case may be, with respect to any Acquisition Proposal and will
use its reasonable best efforts to enforce any confidentiality or similar
agreement relating to an Acquisition Proposal. First Union and Wachovia will
promptly (within one business day) advise the other party following receipt of
any Acquisition Proposal and the substance thereof (including the identity of
the person making such Acquisition Proposal), and will keep the other party
apprised of any related developments, discussions and negotiations (including
the terms and conditions of the Acquisition Transaction) on a current basis.
(b) Nothing contained in this Agreement shall prevent a party or its board
of directors from complying with Rule 14d-9 and Rule 14e-2 under the Exchange
Act with respect to an Acquisition Proposal, provided that such Rules will in
no way eliminate or modify the effect that any action pursuant to such Rules
would otherwise have under this Agreement.
6.07 Affiliate Agreements. Not later than the 15th day before the mailing of
the Joint Proxy Statement, Wachovia will deliver to First Union a schedule of
each person that, to the best of its knowledge, is or is reasonably likely to
be, as of the date of the Wachovia Meeting, deemed to be an "affiliate" of
Wachovia (each, a "Wachovia Affiliate") as that term is used in Rule 145 under
the Securities Act. Wachovia will use its reasonable best efforts to cause each
person who may be deemed to be a Wachovia Affiliate to execute and deliver to
First Union and Wachovia on or before the date of mailing of the Joint Proxy
Statement an agreement in substantially the form attached hereto as Annex 6.
6.08 Takeover Laws and Provisions. No party will take any action that would
cause the transactions contemplated by this Agreement to be subject to
requirements imposed by any Takeover Law and each of them will take all
necessary steps within its control to exempt (or ensure the continued exemption
of) those transactions from, or if necessary challenge the validity or
applicability of, any applicable Takeover Law, as now or hereafter in effect.
No party will take any action that would cause the transactions contemplated by
this Agreement not to comply with any Takeover Provisions and each of them will
take all necessary steps within its control to make those transactions comply
with (or continue to comply with) the Takeover Provisions.
6.09 Exchange Listing. First Union will use (a) all reasonable best efforts
to cause the shares of First Union Common Stock to be issued in the Merger to
be approved for listing on the NYSE, subject to official notice of issuance, as
promptly as practicable, and in any event before the Effective Time and (b) to
use reasonable efforts to cause the DEPs to be issued in the Merger to be
listed on a securities, futures or options exchange or quoted on a dealer
quotation system.
6.10 Regulatory Applications. (a) First Union and Wachovia and their
respective Subsidiaries will cooperate and use all reasonable best efforts to
prepare as promptly as possible all documentation, to effect all filings and to
obtain all permits, consents, approvals and authorizations of all third parties
and Governmental Authorities necessary to consummate the transactions
contemplated by this Agreement (the "Requisite Regulatory Approvals") and will
make all necessary filings in respect of those Requisite Regulatory Approvals
as soon as practicable. Each of First Union and Wachovia will have the right to
review in advance, and to the extent practicable each will consult with the
other, in each case subject to applicable laws relating to the exchange of
information, with respect to all material written information submitted to any
third party or any Governmental Authority in connection with the Requisite
Regulatory Approvals. In exercising the foregoing right, each of the parties
will act reasonably and as promptly as practicable. Each party agrees that it
will consult with the other party with respect to obtaining all material
permits, consents, approvals and authorizations of all third parties and
Governmental Authorities necessary or advisable to consummate the transactions
contemplated by this Agreement and each party will keep the other party
appraised of the status of material matters relating to completion of the
transactions contemplated hereby.
(b) First Union and Wachovia will, upon request, furnish the other party
with all information concerning itself, its Subsidiaries, directors, officers
and shareholders and such other matters as may be reasonably
A-22
necessary or advisable in connection with any filing, notice or application
made by or on behalf of such other party or any of its Subsidiaries with or to
any third party or Governmental Authority in connection with the transaction
contemplated by this Agreement.
6.11 Indemnification. (a) Following the Effective Time, the Surviving
Corporation will indemnify, defend and hold harmless the present and former
directors, officers and employees of Wachovia and its Subsidiaries (each, an
"Indemnified Party") against all costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") as incurred, in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of actions or omissions occurring at or before the
Effective Time (including the transactions contemplated by this Agreement) (1)
to the same extent as such persons are indemnified or have the right to
advancement of expenses pursuant to the Constituent Documents and
indemnification agreements, if any, in effect on the date of this Agreement
with Wachovia and its Subsidiaries, and (2) without limitation of clause (1),
to the fullest extent permitted by law.
(b) For a period of six years following the Effective Time, First Union will
use all reasonable best efforts to provide director's and officer's liability
insurance that serves to reimburse the present and former officers and
directors of Wachovia or any of their respective Subsidiaries (determined as of
the Effective Time) (as opposed to Wachovia or such Subsidiary) with respect to
claims against such directors and officers arising from facts or events
occurring before the Effective Time (including the transactions contemplated by
this Agreement) which insurance will contain at least the same coverage and
amounts, and contain terms and conditions no less advantageous to the
Indemnified Party as that coverage currently provided by Wachovia; provided,
that if First Union is unable to maintain or obtain the insurance called for by
this Section 6.11(b), First Union will use all reasonable best efforts to
obtain as much comparable insurance as is reasonably available; and provided,
further, that officers and directors of Wachovia or any Subsidiary may be
required to make application and provide customary representations and
warranties to First Union's insurance carrier for the purpose of obtaining such
insurance.
(c) Any Indemnified Party wishing to claim indemnification under Section
6.11(a), upon learning of any claim, action, suit, proceeding or investigation
described above, will promptly notify First Union; provided that failure so to
notify will not affect the obligations of First Union under Section 6.11(a)
unless and to the extent that First Union is actually and materially prejudiced
as a consequence.
(d) If First Union or any of its successors or assigns consolidates with or
merges into any other entity and is not the continuing or surviving entity of
such consolidation or merger or transfers all or substantially all of its
assets to any other entity, then and in each case, First Union will cause
proper provision to be made so that the successors and assigns of First Union
will assume the obligations set forth in this Section 6.11.
(e) The provisions of this Section 6.11 are intended to be for the benefit
of, and will be enforceable by, each Indemnified Party and his or her heirs and
Representatives.
6.12 Benefit Plans. (a) The Surviving Corporation will, from and after the
Effective Time, (1) comply with the Benefit Arrangements of Wachovia (the
"Wachovia Benefit Arrangements") in accordance with their terms and continue to
provide such benefits until such time as the employees of Wachovia become
participants in replacement Surviving Corporation Benefit Arrangements, (2)
provide employees of Wachovia who become employees of the Surviving Corporation
with employee benefit plans no less favorable in the aggregate than those
provided to similarly situated employees of First Union, (3) provide employees
of Wachovia who become employees of the Surviving Corporation credit for years
of service with Wachovia or any of its Subsidiaries before the Effective Time
for the purpose of eligibility (including eligibility for retirement) and
vesting in the Benefit Arrangements of First Union (the "First Union Benefit
Arrangements") and any future Benefit Arrangements of the Surviving
Corporation, and benefit determination and accrual (provided that there will be
no double-counting of service credit) in the Benefit Arrangements of First
Union (excluding First Union tax-qualified defined benefit pension plan, which
accruals are described in clause (4) below) and any future Benefit
A-23
Arrangements of the Surviving Corporation, (4) provide employees of Wachovia
who become employees of the Surviving Corporation a defined benefit pension
benefit under First Union's tax-qualified defined benefit plan that shall be
the greater of (A) the benefit determined under the benefit formula of the
First Union plan taking into account service from the Effective Time plus
Wachovia service as reflected in the Wachovia tax-qualified defined benefit
pension plan as of the Effective Time, or (B) the sum of the accrued benefit
determined in the Wachovia defined benefit plan as of the Effective Time,
adjusted to reflect any increase in the Wachovia plan final average
compensation (as calculated under the First Union definition of final average
compensation in effect as of the date hereof) resulting from giving effect to
any compensation paid to the employees by the Surviving Corporation, plus the
benefit determined in the First Union defined benefit plan using service from
the Effective Time; provided that there will be no double-counting of service
credit for such defined benefit plan, (5) cause any and all pre-existing
condition limitations (to the extent such limitations did not apply to a pre-
existing condition under comparable Wachovia Benefit Arrangements) and
eligibility waiting periods under group health plans of First Union to be
waived with respect to employees of Wachovia who become employees of First
Union or its Subsidiaries (and their eligible dependents) and (6) cause to be
credited any deductibles or out-of-pocket expenses incurred by employees of
Wachovia and their beneficiaries and dependents during the portion of the
applicable plan year before their participation in the First Union Benefit
Arrangements with the objective that there be no double counting during the
year in which they first participate in the First Union Benefit Arrangements of
such deductibles or out-of-pocket expenses. First Union, Wachovia and the
Surviving Corporation will honor, or cause to be honored, in accordance with
their terms, all vested or accrued benefit obligations to, and contractual
rights of, Employees of Wachovia and its Subsidiaries, including, without
limitation, any benefits or rights arising as a result of the Merger (either
alone or in combination with any other event); it being understood and agreed
to by the parties hereto that the Merger will constitute a "change in control"
for purposes of all Wachovia Benefit Arrangements (excluding the Amended and
Restated Wachovia Corporation Stock Plan as provided in Section 6.12(b)).
(b) Before the Joint Proxy Statement is mailed to shareholders, the
Management Resources and Compensation Committee of the Wachovia Board will
exercise their authority under Section 21(a)(iv) of the Amended and Restated
Wachovia Corporation Stock Plan to determine that this transaction will not
constitute a change in control under the Amended and Restated Wachovia
Corporation Stock Plan so as to trigger (solely as a result of such plan, as
opposed to any other agreements, which shall remain unaffected by such
committee action) accelerated vesting of all otherwise unvested stock options,
phantom units and other stock-based awards under the Amended and Restated
Wachovia Corporation Stock Plan. Notwithstanding the foregoing, the Human
Resources Committee of the Surviving Corporation's board of directors (or other
applicable administrator of the Wachovia Stock Plans) may, in its discretion,
vest such stock-based compensation in the event Employees of Wachovia and its
Subsidiaries terminate employment following the Merger. At the Effective Time,
each right of any kind to acquire or receive Wachovia Common Stock that may be
held, awarded, outstanding, payable or reserved for issuance under any Wachovia
Benefit Arrangement, except with respect to Wachovia Stock Options (which are
covered under Section 3.05 hereof), shall be deemed to be converted into the
right to acquire or receive (as the case may be) that number of shares of First
Union Common Stock equal to the result of multiplying such Wachovia Common
Stock by the Exchange Ratio, rounded to the nearest whole share, and such
rights shall otherwise be subject to the terms and conditions applicable to the
rights under the relevant Wachovia Benefit Arrangement. Similarly, all Wachovia
Benefit Arrangements (and awards thereunder) providing for cash payments
measured by the value of Wachovia Common Stock shall be deemed to refer to that
number of shares of First Union Common Stock equal to the result of multiplying
such Wachovia Common Stock by the Exchange Ratio, rounded to the nearest whole
share, and such cash payments shall otherwise be made on the terms and
conditions applicable under the Wachovia Benefit Arrangement. At or prior to
the Effective Time, Wachovia shall adopt appropriate amendments to the Wachovia
Benefit Arrangements to effectuate the provisions of this paragraph. As soon as
practicable after the Effective Time, First Union shall, if registration of any
interests in such Wachovia Benefit Arrangements or the shares of First Union
Common Stock issued thereunder is required under the Securities Act, file an
appropriate registration statement (on Form S-3 or Form S-8 or any successor or
other appropriate forms) with respect to such interests or First Union Common
Stock. Before the Effective Time, First Union will, if applicable, take all
corporate action necessary
A-24
to reserve for issuance a sufficient number of shares of First Union Common
Stock for delivery under the Wachovia Benefit Arrangements.
(c) During the period commencing at the Effective Time and ending 90 days
after the date that final computer systems of First Union and Wachovia are
converted, but no later than four years after the Closing Date (the "Conversion
Period"), the Surviving Corporation shall provide severance benefits to its
Employees (including those who were First Union Employees and Wachovia
Employees immediately prior to the Effective Time) who terminate employment
during the Conversion Period in accordance with the formulae used to determine
the duration (or equivalent lump sum value) of salary continuation and COBRA
subsidy under Wachovia's severance policies as of the date hereof, and using
the Wachovia definition of eligibility (including, but not limited to, the
definition of displacement and comparable job, provided that a "comparable job"
may be more narrowly defined than as currently defined in the Amended and
Restated Wachovia Corporation Severance Pay Plan) under its current severance
plan. Such benefits may be provided under the First Union severance plan. No
Employees of the Surviving Corporation shall be entitled to any severance
benefits pursuant to this provision unless their employment is terminated
during the Conversion Period. If the Surviving Corporation's Employees
terminate employment after the Conversion Period, they will be entitled to
severance benefits, if any, in accordance with the provisions of the Surviving
Corporation's severance plan in effect at that time. For the purposes of
determining the applicability of this Section 6.12(c) only, the date of an
Employee's termination will be defined as the date the affected Employee is
given formal written notification his or her job will be eliminated under the
terms of the First Union severance plan. Nothing in this Section 6.12(c) shall
prohibit the Surviving Corporation from establishing a different severance
policy for employees hired by the Surviving Corporation after the Effective
Time.
6.13 Notification of Certain Matters. First Union and Wachovia will give
prompt notice to the other of any fact, event or circumstance known to it that
(1) is reasonably likely, individually or taken together with all other facts,
events and circumstances known to it, to result in any Material Adverse Effect
with respect to it or (2) would cause or constitute a material breach of any of
its representations, warranties, covenants or agreements contained herein that
reasonably could be expected to give rise, individually or in the aggregate, to
the failure of a condition in Article VII.
6.14 Exemption from Liability Under Section 16(b). Assuming that Wachovia
delivers to First Union the Section 16 Information in a timely and accurate
manner before the Effective Time, the First Union Board, or a committee of
"non-employee directors" thereof (as such term is defined for purposes of Rule
16b-3(d) under the Exchange Act), will reasonably promptly thereafter and in
any event before the Effective Time adopt a resolution providing that the
receipt by the Wachovia Insiders of First Union Common Stock in exchange for
shares of Wachovia Common Stock, and of options to purchase shares of First
Union Common Stock upon conversion of options to purchase shares of Wachovia
Common Stock, in each case pursuant to the transactions contemplated hereby and
to the extent such securities are listed in the Section 16 Information, are
approved by the First Union Board or by such committee thereof, and are
intended to be exempt from liability pursuant to Section 16(b) under the
Exchange Act, such that any such receipt will be so exempt.
ARTICLE VII
Conditions to the Merger
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of First Union and Wachovia to consummate the
Merger is subject to the fulfillment or written waiver by First Union and
Wachovia before the Effective Time of each of the following conditions:
(a) Shareholder Approvals. The plan of merger contained in this
Agreement shall have been duly approved by the requisite vote of the
shareholders of First Union and Wachovia.
A-25
(b) Regulatory Approvals. All Requisite Regulatory Approvals (1) shall
have been obtained and shall remain in full force and effect and all
statutory waiting periods in respect thereof shall have expired and (2)
shall not have imposed a condition on such approval that would, after the
Effective Time, have a Material Adverse Effect on the Surviving Corporation
and its Subsidiaries.
(c) No Injunction. No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute,
rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits
consummation of the Merger. No statute, rule, regulation, order, injunction
or decree shall have been enacted, entered, promulgated or enforced by any
Governmental Authority which prohibits or makes illegal the consummation of
the Merger.
(d) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and be
in effect and no proceedings for that purpose shall have been initiated by
the SEC and not withdrawn.
(e) NYSE Listing. The shares of First Union Common Stock to be issued in
the Merger shall have been approved for listing on the NYSE, subject to
official notice of issuance.
(f) Opinions of Tax Counsel. First Union shall have received an opinion
of Sullivan & Cromwell, and Wachovia shall have received an opinion of
Simpson Thacher & Bartlett, each dated the Closing Date and based on facts,
representations and assumptions described in each such opinion, to the
effect that (1) the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code, (2) First Union and Wachovia will
each be a party to that reorganization within the meaning of Section 368(b)
of the Code and (3) no gain or loss will be recognized by shareholders of
Wachovia who receive shares of First Union Common Stock in exchange for all
of their Wachovia Common Stock, except with respect to consideration
received that does not constitute stock of First Union, including the Cash
Payment and any cash received in lieu of fractional shares. In rendering
such opinions, Sullivan & Cromwell and Simpson Thacher & Bartlett each will
be entitled to receive and rely upon customary certificates and
representations of officers of First Union and Wachovia.
7.02 Conditions to Wachovia's Obligation. Wachovia's obligation to
consummate the Merger is also subject to the fulfillment or written waiver by
Wachovia before the Effective Time of each of the following conditions:
(a) First Union's Representations and Warranties. The representations
and warranties of First Union in this Agreement shall be true and correct
as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date; and Wachovia
shall have received a certificate, dated the Closing Date, signed on behalf
of First Union by the Chief Executive Officer or Chief Financial Officer of
First Union to that effect.
(b) Performance of First Union's Obligations. First Union shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or before the Effective Time; and Wachovia
shall have received a certificate, dated the Closing Date, signed on behalf
of First Union by the Chief Executive Officer or Chief Financial Officer of
First Union to that effect.
7.03 Conditions to First Union's Obligation. First Union's obligation to
consummate the Merger is also subject to the fulfillment, or written waiver by
First Union, before the Effective Time of each of the following conditions:
(a) Wachovia's Representations and Warranties. The representations and
warranties of Wachovia in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as
though made on and
A-26
as of the Closing Date; and First Union shall have received a certificate,
dated the Closing Date, signed on behalf of Wachovia by the Chief Executive
Officer or Chief Financial Officer of Wachovia to that effect.
(b) Performance of Wachovia's Obligations. Wachovia shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or before the Effective Time; and First Union shall
have received a certificate, dated the Closing Date, signed on behalf of
Wachovia by the Chief Executive Officer or Chief Financial Officer of
Wachovia to that effect.
ARTICLE VIII
Termination
8.01 Termination. This Agreement may be terminated, and the Merger may be
abandoned, at any time before the Effective Time, by First Union or Wachovia:
(a) Mutual Agreement. With the mutual agreement of the other party.
(b) Breach. Upon 60 days' prior written notice of termination, if there
has occurred and is continuing: (1) a breach by the other party of any
representation or warranty contained herein, or (2) a breach by the other
party of any of the covenants or agreements in this Agreement; provided
that such breach (under either clause (1) or (2)) would entitle the non-
breaching party not to consummate the Merger under Article VII.
(c) Adverse Action. If the other party's board of directors submits this
Agreement (or the plan of merger contained herein) to its shareholders
without a recommendation for approval or with special and materially
adverse conditions on such approval; or such board of directors otherwise
withdraws or materially and adversely modifies (or discloses its intention
to withdraw or materially and adversely modify) its recommendation referred
to in Section 6.02; or such board of directors recommends to its
shareholders an Acquisition Proposal other than the Merger; or such board
of directors negotiates or authorizes the conduct of negotiations (and five
business days have elapsed without such negotiations being discontinued)
with a third party (it being understood and agreed that "negotiate" shall
not be deemed to include the provision of information to, or the request
and receipt of information from, any person that submits an Acquisition
Proposal or discussions regarding such information for the sole purpose of
ascertaining the terms of such Acquisition Proposal and determining whether
the board of directors will in fact engage in, or authorize, negotiations)
regarding an Acquisition Proposal other than the Merger.
(d) Delay. If the Effective Time has not occurred by the close of
business on January 16, 2002; provided, however, that the right to
terminate this Agreement under this Section 8.01(d) shall not be available
to any party whose failure to comply with any provision of this Agreement
has been the cause of, or materially contributed to, the failure of the
Effective Time to occur on or before such date; by First Union only, in the
event that Wachovia has not delivered its Disclosure Schedule by the fifth
business day after the date hereof in the manner contemplated by Section
5.01.
(e) Denial of Regulatory Approval. If the approval of any Governmental
Authority required for consummation of the Merger and the other
transactions contemplated by this Agreement is denied by final,
nonappealable action of such Governmental Authority; provided, however,
that the right to terminate this Agreement under this Section 8.01(e) shall
not be available to any party whose failure to comply with any provision of
this Agreement has been the cause of, or materially contributed to, such
action.
8.02 Effect of Termination and Abandonment. If this Agreement is terminated
and the Merger is abandoned, neither party will have any liability or further
obligation under this Agreement, except that termination will not relieve a
party from liability for any breach by it of this Agreement and except that the
first sentence of Section 5.03(q), Section 6.05(b), this Section 8.02 and
Article IX will survive termination of this Agreement. Notwithstanding the
foregoing, in the event of any termination of this Agreement, the Stock Option
Agreements shall remain in full force and effect in accordance with their
respective terms.
A-27
ARTICLE IX
Miscellaneous
9.01 Survival. The representations, warranties, agreements and covenants
contained in this Agreement will not survive the Effective Time (other than
Section 2.06, Article III, Sections 6.05(b), 6.11 and this Article IX).
9.02 Waiver; Amendment. Before the Effective Time, any provision of this
Agreement may be (a) waived by the party benefited by the provision, but only
in writing, or (b) amended or modified at any time, but only by a written
agreement executed in the same manner as this Agreement, except to the extent
that any such amendment would violate North Carolina law or require
resubmission of this Agreement or the plan of merger contained herein to the
shareholders of First Union or Wachovia.
9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to constitute an original.
9.04 Governing Law. This Agreement is governed by, and will be interpreted
in accordance with, the laws of the State of North Carolina applicable to
contracts made and to be performed entirely within that State.
9.05 Expenses. Each party will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that First Union and Wachovia will each bear and pay one-half of the following
expenses: (a) the costs (excluding the fees and disbursements of counsel,
financial advisors and accountants) incurred in connection with the preparation
(including copying and printing and distributing) of the Registration
Statement, the Joint Proxy Statement and applications to Governmental
Authorities for the approval of the Merger and (b) all listing, filing or
registration fees, including, without limitation, fees paid for filing the
Registration Statement with the SEC, filing fees for the HSR Act notices and
any other fees paid for filings with Governmental Authorities.
9.06 Notices. All notices, requests and other communications given or made
under this Agreement must be in writing and will be deemed given when
personally delivered, facsimile transmitted (with confirmation) or mailed by
registered or certified mail (return receipt requested) to the persons and
addresses set forth below or such other place as such party may specify by
notice.
If to First Union, to:
First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Attention: Mark C. Treanor, Esq.
Executive Vice President and General Counsel
Facsimile: (704) 374-7105
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: H. Rodgin Cohen, Esq.
Mitchell S. Eitel, Esq.
Facsimile: (212) 558-3588
A-28
If to Wachovia, to:
Wachovia Corporation
100 North Main Street
Winston-Salem, NC 27150
Attention: Kenneth W. McAllister, Esq.
Senior Executive Vice President and General Counsel
Facsimile: (336) 732-5959
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Lee Meyerson, Esq.
Facsimile: (212) 455-2502
9.07 Entire Understanding; No Third Party Beneficiaries. This Agreement and
the Stock Option Agreements represent the entire understanding of First Union
and Wachovia regarding the transactions contemplated hereby and supersede any
and all other oral or written agreements previously made or purported to be
made, other than the Confidentiality Agreement, which will survive the
execution and delivery of this Agreement (provided that the Confidentiality
Agreement is hereby amended to provide that Section 4 of the Confidentiality
Agreement will (1) no longer be binding on a party, and each party hereby
waives the other party's obligations under Section 4, once a Triggering Event
(as defined in the Stock Option Agreements) has occurred with respect to the
other party and this Agreement has been terminated) and (2) not impair the
rights of a party to make a response or propose amendments or modifications as
contemplated by the final proviso to Section 6.02(b). No representation,
warranty, inducement, promise, understanding or condition not set forth in this
Agreement has been made or relied on by any party in entering into this
Agreement. Except for Section 6.11, which is intended to benefit the
Indemnified Parties to the extent stated, nothing expressed or implied in this
Agreement is intended to confer any rights, remedies, obligations or
liabilities upon any person other than First Union and Wachovia.
9.08 Severability. If any provision of this Agreement or the application
thereof to any person (including, without limitation, the officers and
directors of First Union or Wachovia) or circumstance is determined by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions, or the application of such provision to persons or circumstances
other than those as to which it has been held invalid or unenforceable, will
remain in full force and effect and will in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination, the parties will negotiate in
good faith in an effort to agree upon a suitable and equitable substitute
provision to effect the original intent of the parties. Prior to the
termination of this Agreement in accordance with its terms, the absence of a
vote, approval or adoption by the shareholders of First Union or Wachovia will
not render invalid or inoperative any provision hereof not specifically
required to be contained in the plan of merger to be adopted by such
stockholders pursuant to Section 55-11-01(b) or 55-11-01(c)(1) of the BCA.
9.09 Alternative Structure. Notwithstanding anything to the contrary
contained in this Agreement, before the Effective Time, the parties may
mutually agree to revise the structure of the Merger and related transactions,
provided that each of the transactions comprising the revised structure (1)
does not change the amount or form of consideration to be received by the
shareholders of Wachovia and the holders of Wachovia Stock Options, (2) is
reasonably capable of consummation in as timely a manner as the structure
contemplated herein, (3) would not reasonably be expected to cause the
conditions in Section 7.01(f) hereof not to be satisfied and (4) is not
otherwise prejudicial to the interests of the shareholders of either party.
This Agreement and any related documents will be appropriately amended in order
to reflect any such revised structure.
A-29
ANNEX 1
FORM OF WACHOVIA STOCK OPTION AGREEMENT
[Please see Appendix B]
A-30
ANNEX 2
FORM OF FIRST UNION STOCK OPTION AGREEMENT
[Please see Appendix C]
A-31
ANNEX 3
AMENDMENTS TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF THE
SURVIVING CORPORATION
The following amendments will be made at the Effective Time to the Amended
and Restated Articles of Incorporation of the Surviving Corporation:
1. Article 1 will read as follows:
"1. The name of the Corporation is Wachovia Corporation".
2. The first two sentences of Article 4 will read as follows:
"4. The aggregate number of shares which the Corporation shall have
authority to issue is Three Billion Five Hundred Fifty Million
(3,550,000,000) shares, divided into three (3) classes. The designation
of each class, the number of authorized shares of each class, and the
par value of each class, is as follows:
Par Value
Class Number of Shares Per Share
----- ---------------- ---------
Common Stock................................ 3,000,000,000 $3.33 1/3
Preferred Stock............................. 10,000,000 No-par
Class A Preferred Stock..................... 40,000,000 No-par
Dividend Equalization Preferred Shares...... 500,000,000 No-par."
3. The following text will be added to Article 4 to set forth certain
preferences, privileges, limitations and relative rights of the
Corporation's Dividend Equalization Preferred Shares, no par value, before
issuance of any shares of such class:
"1. Designation.
(a) There is established a class of shares designated as Dividend
Equalization Preferred Shares ("DEPs"), which is issuable solely as
consideration to former holders of common stock of Wachovia
Corporation in the merger of Wachovia Corporation with and into the
Corporation.
(b) DEPs redeemed, purchased or otherwise acquired by the
Corporation or any of its subsidiaries (other than in a bona fide
fiduciary capacity) shall be cancelled and may not be reissued. DEPs
may be issued in fractional shares which are whole number multiples
of one one-thousandth of a share, which fractional shares shall
entitle the holder, in proportion to such holder's fractional share,
to all rights of a holder of a whole share of DEPs.
(c) DEPs shall (1) with respect to distributions upon the
liquidation, winding-up and dissolution of the Corporation, rank (x)
senior to the Common Stock for the Liquidation Preference stated and
defined in Section 4(a) below and (y) junior to each class or series
of preferred stock (including the Preferred Stock and the Class A
Preferred Stock) established by the Board of Directors after [insert
date of Effective Time] and (2) with respect to dividend
distributions, rank (x) pari passu with the Common Stock and (y)
junior to each class or series of preferred stock (including the
Preferred Stock and the Class A Preferred Stock) established by the
Board of Directors after [insert date of Effective Time].
2. Dividends.
(a) (1) Subject to Section 2(c), the holders of full or
fractional DEPs shall be entitled to receive cash dividends, when
declared by the Board of Directors of the Corporation, but only out
of funds legally available therefor, on the date in each fiscal
quarter that regular quarterly dividends are payable on or in
respect of the Common Stock, in an amount per whole share of DEPs
equal to the amount determined under Section 2(b) below.
A-32
(2) Each such dividend shall be paid to the holders of record of
DEPs on the date fixed as the record date by the Board of Directors
for the payment of such dividend or distribution on the Common
Stock. If no dividend is declared with respect to the Common Stock
by the fifth day prior to the last day of the second month of any
particular fiscal quarter, a dividend calculated in accordance with
this Section 2 (and assuming solely for this purpose that no
dividend will be paid on the Common Stock for such fiscal quarter)
shall be paid to each holder of record of DEPs as of the 15th day of
the third month of such fiscal quarter, payable on the last day (or
the next succeeding business day) of the third month of such fiscal
quarter, and, if thereafter a dividend is declared with respect to
the Common Stock during such fiscal quarter, no additional dividend
on the DEPs shall be paid on the date of payment of such dividend on
the Common Stock.
(3) Dividends on each full and each fractional share of DEPs
shall be cumulative from the date such full or fractional share is
originally issued.
(b) If the amount payable in cash as a dividend per share of
Common Stock in a particular fiscal quarter is less than the
Equalization Payment (as defined below), including if the amount of
cash payable per share of Common Stock is zero or no dividend was
declared with respect to the Common Stock, then the dividend payable
on each full share of DEPs for such fiscal quarter shall be equal to
the difference (if more than zero) of $0.30 (the "Equalization
Payment") minus (1) the amount payable in cash of the dividend
actually declared per share of Common Stock for that fiscal quarter
or (2) zero if no dividend is declared with respect to the Common
Stock by the date specified in the second sentence of Section
2(a)(2). No amount of dividend will be paid with respect to any
share of DEPs in any particular fiscal quarter if the regular
quarterly dividend declared by the Corporation per share of Common
Stock for such fiscal quarter is greater than or equal to the
Equalization Payment. Subject to Section 2(a)(2), no dividend will
be paid on the DEPs other than in connection with regular quarterly
dividends declared on the Common Stock.
(c) The dividend rights of DEPs shall (1) commence on the first
regular quarterly dividend record date to occur after the effective
time of the merger of Wachovia Corporation into the Corporation and
(2) expire immediately after the date (the "Dividend Expiration
Date") upon which a regular quarterly dividend on the Common Stock
was paid, if (x) the aggregate amount of dividends paid on the
Common Stock for the three fiscal quarters immediately preceding
such date, taken together with the regular quarterly dividend paid
on the Common Stock on the day immediately prior to the Dividend
Expiration Date, is equal to or greater than $1.20 and (y) all
cumulative dividends on the DEPs have been paid in full. After the
Dividend Expiration Date, holders of full or fractional DEPs will
not be entitled to any dividends on the DEPs, regardless of whether
any DEPs remain outstanding.
(d) Holders of DEPs shall not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full
cumulative dividends as herein provided on DEPs.
(e) If the Corporation shall at any time after the close of
business on [insert date of Effective Time] (A) declare or pay a
dividend on any Common Stock payable in Common Stock, (B) subdivide
any Common Stock, (C) combine any Common Stock into a smaller number
of shares or (D) distribute to its holders of Common Stock rights or
warrants to acquire Common Stock, then and in each such case,
references to "Common Stock" in these designations of the DEPs shall
be references to the aggregate number (as a "package") of shares of
Common Stock that a holder of one share of Common Stock immediately
prior to such event would hold thereafter as a result thereof.
(f) If the Corporation shall at any time after the close of
business on [insert date of Effective Time], and before the Dividend
Expiration Date, begin paying dividends on the Common Stock other
than quarterly (e.g., semi-annually or annually), the Equalization
Payment
A-33
shall be multiplied by a fraction the numerator of which is 4 and
the denominator of which is the number of regular dividend periods in a
year as adjusted and other appropriate adjustments will be made by the
Corporation to these designations of the DEPs as may be necessary such
that the aggregate amount of dividends payable on the DEPs annually in
accordance with the Equalization Payment set forth in this Section 2
will be the same as before such adjustment in the aggregate on an
annualized basis.
3. Merger, Consolidation, Reclassification. Prior to the Dividend
Expiration Date, the Corporation shall not enter into any agreement
with respect to, or consummate or permit to occur, any merger,
consolidation, reclassification or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or other property unless proper provisions are
made such that the DEPs (or such other securities for which DEPs may be
exchanged) have designated rights and privileges substantially
identical to the DEPs (so that the rights are not materially and
adversely changed from the rights herein provided), including that
provisions are made to preserve the appropriate and proportionate
rights and benefits of the Equalization Payment as were intended to be
conferred on former shareholders of Wachovia Corporation upon creation
of the DEPs.
4. Liquidation.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary,
the holders of full and fractional DEPs shall be entitled, before
any distribution or payment is made on any date to the holders of
the Common Stock or any other stock of the Corporation ranking
junior to the DEPs upon liquidation, to be paid in full an amount
per whole share of DEPs equal to $0.01 (the "Liquidation
Preference"), together with accrued dividends to such distribution
or payment date, whether or not earned or declared. If such payment
shall have been made in full to all holders of DEPs, the holders of
DEPs as such shall have no right or claim to any of the remaining
assets of the Corporation.
(b) In the event the assets of the Corporation available for
distribution to the holders of DEPs upon any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to
which such holders are entitled pursuant to Section 4(a), no such
distribution shall be made on account of any shares of any other
class or series of Preferred Stock or Class A Preferred Stock
ranking on a parity with the DEPs upon such liquidation, dissolution
or winding up unless proportionate distributive amounts shall be
paid on account of the DEPs, ratably in proportion to the full
distributable amounts for which holders of all such parity shares
are respectively entitled upon such liquidation, dissolution or
winding up.
(c) Upon the liquidation, dissolution or winding up of the
Corporation, the holders of DEPs then outstanding shall be entitled
to be paid out of assets of the Corporation available for
distribution to its shareholders all amounts to which such holders
are entitled pursuant to the first paragraph of this Section 4
before any payment shall be made to the holders of Common Stock or
any other stock of the Corporation ranking junior upon liquidation
to the DEPs.
(d) For the purposes of this Section 4, the consolidation or
merger of, or binding statutory share exchange by, the Corporation
with any other corporation shall not be deemed to constitute a
liquidation, dissolution or winding up of the Corporation.
5. Redemption, Conversion, Exchange.
(a) The DEPs shall not be convertible or exchangeable. Other than
as described in the next sentence, the DEPs shall not be redeemable.
The DEPs shall be redeemable by the Corporation, at the
Corporation's option and in its sole discretion, for an amount in
cash equal to the Liquidation Preference per share of DEPs, after
December 31, 2021.
(b) In case of redemption of less than all of the DEPs at the
time outstanding, the shares to be redeemed shall be selected pro
rata or by lot as determined by the Corporation in its sole
A-34
discretion, provided that the Corporation may redeem all shares held
by holders of fewer than
100 DEPs (or by holders that would hold fewer than 100 DEPs
following such redemption) prior to its redemption of other DEPs.
(c) Notice of any redemption shall be sent by or on behalf of the
Corporation no less than 30 nor more than 60 days prior to the date
specified for redemption in such notice (the "Redemption Date"), by
first class mail, postage prepaid, to all holders of record of the
DEPs at their last addresses as they appear on the books of the
Corporation; provided, however, that no failure to give such notice
or any defect therein or in the mailing thereof shall affect the
validity of the proceedings for the redemption of any DEPs except as
to the holder to whom the Corporation has failed to give notice or
except as to the holder to whom notice was defective. In addition to
any information required by applicable law or regulation or the
rules of any exchange upon which the DEPs may be listed or admitted
to trading, such notice shall state (1) that such redemption is
being made pursuant to the redemption provisions of this Section 5,
(2) the Redemption Date, (3) the redemption price, (4) the total
number of DEPs to be redeemed and, if less than all shares held by
such holder are to be redeemed, the number of such shares to be
redeemed, and (5) the place or places where certificates for such
shares are to be surrendered for payment of the redemption price,
including any procedures applicable to redemption to be accomplished
through book-entry transfers. Upon the mailing of any such notice of
redemption, the Corporation shall become obligated to redeem, on the
Redemption Date, all shares called for redemption.
6. Voting Rights. Except as otherwise required by applicable law or
regulation or the rules of a securities exchange upon which the DEPs
may be listed or quoted, holders of the DEPs shall have no voting
rights."
4. A new Article 6 will be inserted, reading as follows:
"6. The following provisions in Article 6 of these Amended and
Restated Articles of Incorporation will be effective until
immediately after the close of the annual meeting of shareholders of
the Corporation held in 2004 (the "Lapse Date").
A. Qualifications for Directors. Subject to the provisions of this
Article 6 and subject to the terms of any class or series of stock
having a preference over the common stock as to dividends or upon
liquidation providing for special circumstances under which holders
thereof may elect directors, until the Lapse Date, (1) in order to
qualify for election as a director of the Corporation at an annual
or special meeting of stockholders or by written consent of
stockholders, an individual must be nominated either by (a) a
stockholder entitled to vote in the election of directors who has
complied with all requirements for such nomination that may be
provided for in these Amended and Restated Articles of Incorporation
and the Corporation's By-laws or (b) the applicable Nominating
Committee (as defined below) provided for in this Section A of this
Article 6 and (2) in order to qualify for election as a director of
the Corporation by the board of directors to fill a vacancy or newly
created directorship, an individual must be nominated to the board
of directors by the applicable Nominating Committee (as defined
below) provided for in this Section A of this Article 6. The
qualification procedures for clauses (1)(b) and (2) of the previous
sentence are known herein as the "Nomination Procedures".
(i) (A) If the Board of Directors decides to increase at any time
the number of members of the Board of Directors, the Board of
Directors shall designate such new directorships in such a way as to
cause the ratio of the number of Former First Union Directorships
(as defined below) to the number of Former Wachovia Directorships
(as defined below) (the "Ratio") to equal one.
(B) If the Board of Directors decides to decrease the number of
members of the Board of Directors, the Board of Directors shall
designate those directorships that are up for election at the annual
shareholders' meeting in such a way as to cause the Ratio to equal
one.
A-35
(C) If the Board of Directors decides to decrease, during any
period between consecutive annual shareholders meetings, the number
of members of the Board of Directors, the Board of Directors shall
cause the Ratio to equal one.
(ii) The board of directors may decide by the vote of a Special Majority
(as defined below), on the recommendation of both a First Union Nominating
Committee (as defined below) and a Wachovia Nominating Committee (as
defined below), (A) not to designate any one or more directorships in the
manner described in the previous paragraph (i), or (B) to determine that
the Nominating Committee Procedures shall not apply to any one or more
directorships.
(iii) At [insert date of Effective Time], any director who was formerly
a director of First Union Corporation shall be a "Former First Union
Director" and any director who was formerly a director of Wachovia
Corporation shall be a "Former Wachovia Director." Any person filling (by
election or appointment) a Former First Union Directorship and nominated
under the Nomination Procedures shall be considered a "Former First Union
Director"; any person filling (by election or appointment) a Former
Wachovia Directorship and qualified by the Nomination Procedures shall be
considered a "Former Wachovia Director." Any person who is a Former First
Union Director or Former Wachovia Director under this paragraph (iii) shall
also be a "Continuing Director".
(iv) For any directorship occupied by, vacated by, to be occupied by, or
designated for a Former First Union Director (a "Former First Union
Directorship"), the Nominating Committee will consist of two Former First
Union Directors (a "First Union Nominating Committee"); for any
directorship occupied by, vacated by, to be occupied by, or designated for
a Former Wachovia Director (a "Former Wachovia Directorship"), the
Nominating Committee will consist of two Former Wachovia Directors (a
"Wachovia Nominating Committee"). Subject to the powers of the stockholders
of the Corporation pursuant to these Articles, the By-Laws and under North
Carolina law, the First Union Nominating Committee will have sole and
exclusive power to nominate persons to fill the Former First Union
Directorships and the Wachovia Nominating Committee will have the sole and
exclusive power to nominate persons to fill the Former Wachovia
Directorships. Either a First Union Nominating Committee or a Wachovia
Nominating Committee may be referred to herein by the general term
"Nominating Committee".
(v) The members of the First Union Nominating Committee will be Former
First Union Directors designated from time to time by Mr. G. Kennedy
Thompson; the members of the Wachovia Nominating Committee will be Former
Wachovia Directors designated from time to time by Mr. L.M. Baker, Jr.;
provided, that, should Mr. Baker or Mr. Thompson be otherwise unable to
recommend for appointment such members of a Nominating Committee, the
members of the First Union Nominating Committee will be Former First Union
Directors appointed by the most senior Former First Union Director then
serving on the Board of Directors and the Former Wachovia Directors will be
Former Wachovia Directors appointed by the most senior Former Wachovia
Director then serving on the Board of Directors.
B. Certain Officers and Actions by Special Majority. (1) Unless he earlier
resigns or retires and as long as he remains a director, and, subject to this
Article 6, Mr. Baker (or his successor) will be Chairman of the Board of the
Corporation until the Lapse Date and, unless he earlier resigns or retires, Mr.
Thompson (or his successor) will be President and Chief Executive Officer of
the Corporation. Unless he earlier resigns or retires and as long as he remains
a director, at the time (not later than the Lapse Date) that Mr. Baker ceases
to serve as the Chairman of the Board of the Corporation, Mr. Thompson (or his
successor) will succeed Mr. Baker in that position, unless the Board of
Directors, by vote of a Special Majority, decides otherwise. Should either
person referred to in this Section B(1) cease to be a director, such director
position will be filled in accordance with the Nomination Procedures and, only
after filling such position, shall the vacant position of Chairman or Chief
Executive Officer and President (as applicable) be decided. Until the Lapse
Date, all decisions by the Board regarding filling the positions of Chairman or
Chief Executive Officer and President (except Mr. Thompson's succession as
described in the second sentence of this Section B(1)) will be made by vote of
a Special Majority.
A-36
(2) In addition, until the Lapse Date, the following actions will require
the vote of a Special Majority:
(a) the removal of Mr. Baker as the Chairman of the Board or of Mr.
Thompson as the Chairman, the Chief Executive Officer or the President;
(b) any action to make a modification or amendment to the employment
agreements of Mr. Baker as the Chairman of the Board or of Mr. Thompson as
the Chairman, the Chief Executive Officer or President; or
(c) any recommendation to shareholders to make an amendment to or
modification or repeal of, or any recommendation to adopt any provision
(whether contained in this Charter, the By-Laws or otherwise) inconsistent
with, any provision of this Article 6.
(3) "Special Majority" means a number of directors equal to at least (A)
three-quarters of the entire membership of the Corporation's board of
directors and (B) a majority of both the Former First Union Directors and
Former Wachovia Directors then serving.
A-37
ANNEX 4
AMENDMENTS TO
BY-LAWS
OF THE
SURVIVING CORPORATION
The following amendment shall be made at the Effective Time to the By-laws
of the Surviving Corporation:
1. Article III shall be amended by adding the following Section 8:
"SECTION 8. Notwithstanding the foregoing, until the Lapse Date
referred to in the Articles of Incorporation, the qualification
procedures for nomination as a director shall be governed by Article 6
of the Articles of Incorporation. Accordingly, prior to the Lapse Date,
in the case of any inconsistency between Article 6 of the Articles of
Incorporation and the foregoing provisions of this Article III, the
provisions of Article 6 shall govern."
2. Article V, Section 8 of the By-laws of First Union Corporation will
be amended to read as follows:
"SECTION 8. CHAIRMAN; CHIEF EXECUTIVE OFFICER. The positions of
Chairman and Chief Executive Officer both shall be considered positions
of officers of the Corporation. Except as provided in Article 6 of the
Amended and Restated Articles of Incorporation, the Chairman shall be
the Chief Executive Officer of the Corporation unless some other officer
is so designated by the Board of Directors."
3. Article V shall be amended by adding the following Section 11:
"SECTION 11. Notwithstanding the foregoing, until the Lapse Date, the
positions of Chairman and Chief Executive Officer shall be filled and
held in accordance with, and by the persons specified in, Article 6 of
the Articles of Incorporation."
4. Article VIII, Section 4, shall be amended by adding at the end
thereof the following sentence:
"The Board of Directors shall not amend, modify or rescind, or take
any action inconsistent with, the provisions of Article III, Section 8;
Article IV, Section 10; or Article V, Section 10 of these By-Laws,
without the affirmative vote of a Special Majority (as defined in the
Articles of Incorporation)."
A-38
ANNEX 5
CERTAIN SENIOR EXECUTIVE OFFICERS
OF THE
SURVIVING CORPORATION
Name and Current Title and/or Position with Surviving
Position Corporation
----------------------------- --------------------------
L.M. Baker, Jr., Chairman, Chairman
President and Chief Executive
Officer of Wachovia
G. Kennedy Thompson, Chairman, President and Chief
President and Chief Executive Executive Officer
Officer of First Union
Benjamin P. Jenkins, Vice Head of General Banking
Chairman of the Board of First
Union
Robert P. Kelly, Executive Vice Chief Financial Officer
President and Chief Financial
Officer of First Union
David M. Carroll, Executive Vice Co-Head of Integration
President of First Union
Robert S. McCoy, Jr., Vice Co-Head of Integration
Chairman, Chief Financial
Officer and Treasurer of
Wachovia
W. Barnes Hauptfuhrer, Co-Head, Co-Head of Corporate and
Capital Markets Group, First Investment Banking
Union Securities, Inc.
Stephen E. Cummings, Co-Head, Co-Head of Corporate and
Capital Markets Group, First Investment Banking
Union Securities, Inc.
Donald A. McMullen, Jr., Vice Head of Brokerage and
Chairman of First Union Mutual Funds
Stanhope A. Kelly, Senior Head of Wealth Management
Executive Vice President,
Banking and Wealth Management
Services of Wachovia
Donald K. Truslow, Senior Head of Risk Management
Executive Vice President, Chief
Risk Officer of Wachovia
Jean E. Davis, Senior Executive Head of Operations and
Vice President, Operations and Technology
Technology, Retail and eBusiness
of Wachovia
Mark C. Treanor, Executive Vice Head of Legal
President, Secretary and General
Counsel of First Union
Paul George, Executive Vice Head of Human Resources
President of Wachovia
A-39
ANNEX 6
FORM OF WACHOVIA AFFILIATE LETTER
, 2001
Wachovia Corporation
100 North Main Street
Winston-Salem, NC 27150
First Union Corporation
One First Union Center
Charlotte, NC 28288
Ladies and Gentlemen:
I have been advised that I may be deemed to be an "affiliate" of Wachovia
Corporation (the "Company"), as that term is defined for purposes of Rule 145
promulgated by the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended (the "Securities Act"). I understand that
pursuant to the terms of the Agreement and Plan of Merger, dated April 15, 2001
(as amended from time to time, the "Agreement"), between the Company and First
Union Corporation ("First Union"), the Company plans to merge with and into
First Union (the "Merger"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to them in the Agreement.
I further understand that as a result of the Merger, I may receive common
stock or dividend equalization preferred shares of First Union (collectively,
the "First Union Stock") in exchange for shares of common stock of the Company
(the "Company Common Stock") or as a result of the exercise of Wachovia Stock
Options or similar Rights (as each term is defined in the Agreement).
I have carefully read this letter and reviewed the Agreement and discussed
their requirements and other applicable limitations upon my ability to sell,
transfer, or otherwise dispose of First Union Stock and Company Common Stock,
to the extent I felt necessary, with my counsel or counsel for the Company.
I represent, warrant and covenant with and to First Union that in the event
I receive any First Union Stock as a result of the Merger:
1. I will not make any sale, transfer, or other disposition of such
First Union Stock unless (a) such sale, transfer or other disposition has
been registered under the Securities Act, (b) such sale, transfer or other
disposition is made in conformity with the provisions of Rule 145 under the
Securities Act, or (c) in the opinion of counsel in form and substance
reasonably satisfactory to First Union, 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, except as provided in Section 3.07 of the
Agreement, First Union is under no obligation to register the sale,
transfer or other disposition of shares of First Union 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, except the obligation to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, as more fully
described below.
3. I understand that stop transfer instructions will be given to First
Union's transfer agent with respect to the shares of First Union Stock
issued to me as a result of 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 a
transaction to which Rule 145 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 between the registered
holder hereof and First
A-40
Union Corporation, a copy of which agreement is on file at the
principal offices of First Union Corporation"
4. I understand that, unless transfer by me of the First Union Stock
issued to me as a result of 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, First Union 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 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 an exemption from the registration requirements of
the Securities Act of 1933."
I understand and agree that the legends set forth in paragraph (3) or (4)
above, as the case may be, will be removed by delivery of substitute
certificates without such legend if I deliver to First Union (a) 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 First Union, to the effect that such
legend is not required for purposes of the Securities Act, or (b) evidence or
representations reasonably satisfactory to First Union that First Union Stock
represented by such certificates is being or has been sold in conformity with
the provisions of Rule 145(d).
By its acceptance hereof, First Union agrees, for a period of two years
after the Effective Time (as defined in the Agreement), that it, as the
Surviving Corporation, will file on a timely basis all reports required to be
filed by it pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, so that the public information provisions of Rule 144(c)
promulgated under the Securities Act are satisfied and the resale provisions of
Rule 145(d)(1) and (2) promulgated under the Securities Act are therefore
available to me in the event I desire to transfer any First Union Stock issued
to me in the Merger.
By signing this letter agreement, without limiting or abrogating the
agreements that I have made as set forth above, I do not admit that I am an
"affiliate" of the Company within the meaning of the Securities Act or the
rules and regulations promulgated thereunder, and I do not waive any right that
I may have to object to any assertion that I am an affiliate.
This letter agreement shall be governed by and construed in accordance with
the laws of the State of North Carolina. This letter agreement shall terminate
if and when the Agreement is terminated according to its terms.
Very truly yours,
_____________________________________
Name:
Accepted this day of
, 2001.
Wachovia Corporation
By __________________________________
Name: ____________________________
Title: ___________________________
First Union Corporation
By __________________________________
Name: ____________________________
Title: ___________________________
A-41
APPENDIX B
STOCK OPTION AGREEMENT, dated as of April 15, 2001 and amended and restated
(this "Agreement"), between First Union Corporation, a North Carolina
corporation ("Grantee"), and Wachovia Corporation, a North Carolina corporation
("Issuer").
RECITALS
A. Merger Agreement. Grantee and Issuer have entered into an Agreement and
Plan of Merger, dated as of April 15, 2001 (as amended, restated or otherwise
modified from time to time, the "Merger Agreement"), which agreement was
executed and delivered immediately prior to the execution and delivery of this
Stock Option Agreement, pursuant to which Issuer is to merge with and into
Grantee (the "Merger"); and
B. Option. As a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option
(as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. Grant of Option. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to an aggregate of 19.9% of the total fully paid and nonassessable shares of
the common stock, par value $5.00 per share, of Issuer ("Common Stock") issued
and outstanding at the close of business on April 12, 2001 at a price per share
equal to $59.482 (the "Option Price"); provided, however, that in no event
shall the number of shares for which this Option is exercisable (when
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.
If Issuer adopts a shareholder protection rights plan or similar agreement,
Issuer shall make proper provision so that each share of Common Stock issued
upon exercise of the Option shall be accompanied by the applicable number of
rights under such agreement.
(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 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. Exercise. (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
(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 (6) months following such Subsequent Triggering Event (or such later
period as provided in Section 10). An Exercise Termination Event shall be the
earliest to occur of the following: (1) the Effective Time (as defined in the
Merger Agreement) of the Merger; (2) 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 8.01(b) (unless the breach by Issuer giving rise to such
right of termination is unintentional) or Section 8.01(c) of the Merger
Agreement (a "Listed Termination"); or (3) the passage of eighteen (18) months
(or such longer period as provided in
B-1
Section 10) after termination of the Merger Agreement if such termination
follows the occurrence of an Initial Triggering Event or is a Listed
Termination. The term "Holder" shall mean the holder or holders of the Option.
Notwithstanding anything to the contrary contained herein, the Option may not
be exercised at any time when Grantee shall be in material breach of any of its
covenants or agreements contained in the Merger Agreement such that Issuer
shall be entitled to terminate the Merger Agreement pursuant to Section
8.01(b)(2) thereof.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring on or after the date hereof:
(1) Issuer or any of its Significant Subsidiaries (as defined in Rule 1-
02 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC")) (the "Issuer Subsidiaries"), 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 "1934 Act"), and the rules and regulations thereunder) other
than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or
the Board of Directors of Issuer (the "Issuer Board") shall have
recommended that the stockholders of Issuer approve or accept any
Acquisition Transaction other than as contemplated by the Merger Agreement.
For purposes of this Agreement, (A) "Acquisition Transaction" shall mean
(x) a merger or consolidation, or other business combination transaction,
involving Issuer or any Issuer Subsidiary (other than mergers,
consolidations or similar transactions involving solely Issuer and/or one
or more wholly-owned Subsidiaries of the Issuer, provided, any such
transaction is not entered into in violation of the terms of the Merger
Agreement), (y) a purchase, lease or other acquisition of more than 15% of
the business, 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 more than 15% 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 1934 Act;
(2) Any person other than the Grantee or any Grantee Subsidiary shall
have acquired beneficial ownership or the right to acquire beneficial
ownership of 15% 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 1934 Act, and the rules
and regulations thereunder);
(3) The stockholders of Issuer shall have voted and failed to approve
the Merger Agreement and the Merger 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 canceled 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 canceled, 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 disclosed an intention to make, a proposal to engage in
an Acquisition Transaction;
(4) The Issuer Board shall have withdrawn, modified or qualified (or
publicly announced its intention to withdraw, modify or qualify) in any
manner materially adverse in any respect to Grantee its recommendation that
the stockholders of Issuer approve the transactions contemplated by the
Merger Agreement in anticipation of engaging in an Acquisition Transaction,
or Issuer or any Issuer Subsidiary shall have authorized, recommended or
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;
(5) 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 stockholders to approve the
issuance of shares to be offered in such an exchange offer);
B-2
(6) Issuer shall have willfully breached any covenant or obligation
contained in the Merger Agreement after a proposal is made by a third party
to Issuer or its stockholders to engage in an Acquisition Transaction, and
(A) 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) and (B) such breach shall not have been cured prior to the
Notice Date (as defined in Section 2(e)); or
(7) Any person other than Grantee or any Grantee Subsidiary, without
Grantee's 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 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:
(1) 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
(2) The occurrence of the Initial Triggering Event described in clause
(1) of subsection (b) of this Section 2, except that the percentage
referred to in clauses (y) and (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") promptly after it becomes aware of the occurrence thereof,
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 (1) the total
number of shares it will purchase pursuant to such exercise and (2) 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 (1) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in cash or,
subject to the following sentence, securities and (2) 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. Only debt securities or preferred stock issued by the Holder that are
investment grade and readily marketable may be used as all or part of the
purchase price in lieu of cash. The value of any securities shall be determined
by the agreement of two nationally recognized investment banking firms, one
selected by each of the Holder and Issuer (and reasonably acceptable to the
other party); if such investment banking firms are unable to reasonably agree
upon such valuation, the value shall be determined by a third nationally
recognized investment banking firm chosen by the first two. Notwithstanding the
foregoing, in no event shall Holder pay any portion of the purchase price for
shares of Common Stock with securities that are not a permissible investment
for a financial holding company under the BHCA (as hereinafter defined).
B-3
(g) At such closing, simultaneously with the delivery of immediately
available funds or securities satisfying the criteria specified in subsection
(f) of this Section 2, (1) 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; and (2) Grantee shall deliver to Issuer a letter
agreeing that Grantee shall not offer to sell or otherwise dispose of such
shares of Common Stock in violation of applicable federal and state securities
laws or the provisions of this Agreement.
(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: (1) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "1933 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 1933 Act; (2) 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, in form and substance reasonably satisfactory
to the Issuer; and (3) the legend shall be removed in its entirety if the
conditions in the preceding clauses (1) and (2) 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, the Holder shall be deemed to be
the holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be closed or
that certificates representing such shares of Common Stock shall not then be
actually delivered to the Holder. Issuer shall pay all expenses, and any and
all United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its assignee,
transferee or designee.
3. Covenants of Issuer. Issuer agrees: (1) 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 then-
outstanding options, warrants, convertible securities and other rights to
purchase Common Stock; (2) 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; and (3) 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 (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state or other federal 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
B-4
require) in order to permit the Holder to exercise the Option and Issuer duly
and effectively to issue shares of Common Stock pursuant hereto.
4. Exchange. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations entitling the
holder thereof to purchase, on the same terms and subject to the same
conditions as are set forth herein, in the aggregate the same number of shares
of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any 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. Certain Adjustments. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common Stock
purchasable upon the exercise of the Option and the Option Price shall be
subject to adjustment from time to time as provided in this Section 5. In the
event of any change in Common Stock by reason of a stock dividend, stock split,
split-up, recapitalization, stock combination, exchange of shares or similar
transaction, the type and number of shares or securities subject to the Option,
and the Option Price therefor, shall be adjusted appropriately, and proper
provision shall be made in the agreements governing such transaction, so that
Grantee shall receive, upon exercise of the Option, the same number and class
of shares or other securities or property that Grantee would have received in
respect of Common Stock if the Option had been exercised immediately prior to
such event, or the record date therefor, as applicable. If any additional
shares of Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 5 or upon
exercise of the Option), the number of shares of Common Stock subject to the
Option shall be adjusted so that, after such issuance, it, 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 to or issued pursuant to the Option.
6. Registration Rights. 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 twelve (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 1933 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
B-5
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 the Holder shall
constitute at least 33 1/3% of the total number of shares to be sold by the
Holder and Issuer in the aggregate; and provided further, however, that if such
reduction occurs, then Issuer shall file a registration statement for the
balance as promptly as practicable 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 twelve (12) month period
referred to in the first sentence of this section shall be increased to twenty-
four (24) months. Each such Holder shall provide all information reasonably
requested by Issuer for inclusion in any registration statement to be filed
hereunder. If requested by any such Holder in connection with such
registration, Issuer shall become a party to any underwriting agreement
relating to the sale of such shares, but only to the extent of obligating
itself in respect of representations, warranties, indemnities and other
agreements customarily included in 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. Repurchase. (a) At any time after the occurrence of a Repurchase Event
(as defined below) (1) 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 (2) at
the request of any present or former Holder who at the time owns Option Shares
(each, 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.
The Holder and the Owner, as the case may be, shall also represent and warrant
that it has sole record and beneficial ownership of such Option Shares and that
such Option Shares are then free and clear of all liens. As promptly as
practicable, and in any event within five (5) 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
B-6
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 (5)
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 (1) 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 (2)
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 and prior to the occurrence of an Exercise
Termination Event:
(1) 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
(2) the consummation of any Acquisition Transaction described in Section
2(b)(1)(A) hereof, except that the percentage referred to in clauses (y)
and (z) shall be 25%.
8. Substitute Option. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (1) 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, (2) 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
voting shares and share equivalents of the merged or acquiring company, or (3)
to sell or otherwise transfer all or substantially all of its or any Issuer
Subsidiary's assets or deposits, in one transaction or in a series of related
transactions, 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,
B-7
of either (x) the Acquiring Corporation (as hereinafter defined) or (y) any
person that controls the Acquiring Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (A) the continuing or surviving
person of a consolidation or merger with Issuer (if other than Issuer), (B)
the acquiring person in a plan of exchange in which Issuer is acquired, (C)
the Issuer in a merger or plan of exchange in which Issuer is the
continuing or surviving or acquiring person and (D) the transferee of all
or a substantial part of Issuer's assets or deposits (or the assets or
deposits of any Issuer Subsidiary).
(2) "Substitute Common Stock" shall mean the common stock issued by the
issuer of the Substitute Option upon exercise of the Substitute Option.
(3) "Assigned Value" shall mean the market/offer price, as defined in
Section 7.
(4) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for one (1) year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the issuer
of the Substitute Option, the Average Price shall be computed with respect
to a share of common stock issued by the person merging into Issuer or by
any company which controls or is controlled by such person, as the Holder
may elect.
(c) The Substitute Option shall have the same terms as the Option, provided
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to the Holder. The 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, 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 twice
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 twice 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 (1)
the value of the Substitute Option without giving effect to the limitation in
this clause (e) over (2) 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. Repurchase of Substitute Option. (a) At the request of the holder of the
Substitute Option (the "Substitute Option Holder") made prior to an Exercise
Termination Event, the Substitute Option Issuer shall repurchase the Substitute
Option from the Substitute Option Holder at a price (the "Substitute Option
Repurchase Price") equal to the amount by which (1) the Highest Closing Price
(as hereinafter defined)
B-8
exceeds (2) 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 made prior to an Exercise Termination
Event of any present or former Substitute Option Holder (each, the "Substitute
Share Owner") who at the time owns shares of Substitute Common Stock issued
upon total or partial exercise of the Substitute Option ("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 to be so repurchased. 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.
(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 (5) 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 (5) 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 such prohibition, whereupon, in the latter case, the
Substitute Option Issuer shall promptly (1) 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 (2)
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 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
B-9
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. Extension of Periods Under Certain Circumstances. The periods for
exercise of certain rights under Sections 2, 6, 7, 9 and 14 shall be extended
for up to a maximum of six months in any given case: (1) 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; (2) to the extent necessary to avoid liability under Section
16(b) of the 1934 Act by reason of such exercise; and (3) when there exists an
injunction, order or judgment that prohibits or delays exercise of such right.
11. Representations and Warranties. (a) Issuer hereby represents and
warrants to Grantee as follows:
(1) Issuer has the requisite 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.
(2) 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 to the Option, 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.
(b) Grantee hereby represents and warrants to Issuer as follows: Grantee
has the requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by the Grantee and the performance of its obligations
hereunder by the Grantee have been duly and validly authorized by the Board of
Directors of Grantee and no other corporate proceedings on the part of the
Grantee are necessary to authorize this Agreement or for Grantee to perform
its obligations hereunder. This Agreement has been duly and validly executed
and delivered by Grantee.
(c) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired with a
view to the public distribution thereof and will not be transferred or
otherwise disposed or except in a transaction registered or exempt from
registration under the 1933 Act.
12. Assignment. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except
that in the event an Initial 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 fifteen (15) days following the date on which the
Federal Reserve Board or other regulatory authority 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 (1) a
widely dispersed public distribution, (2) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (3) 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 (4) any other manner approved by the Federal Reserve
Board or other regulatory authority.
13. Filings, Etc. 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
B-10
transactions contemplated by this Agreement, including, without limitation,
applying to the Federal Reserve Board under the BHCA for approval to acquire
the shares issuable hereunder.
14. Surrender of Option. (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 14(a), if Issuer has
previously repurchased the Option or any portion of the Option pursuant to
Section 7. The "Surrender Price" shall be equal to $375 million (1) plus, if
applicable, Grantee's purchase price with respect to any Option Shares and (2)
minus, if applicable, the excess of (A) the net price, if any, received by
Grantee or a Grantee Subsidiary pursuant to the sale of Option Shares (or any
other securities into which such Option Shares were converted or exchanged) to
any unaffiliated party, or to Issuer pursuant to Section 7, over (B) Grantee's
purchase price of such Option Shares. For purposes of this Section 14, the term
Grantee shall include all Holders and in no event shall the aggregate amounts
paid or payable pursuant to this Section 14 to all Holders exceed the amount
set forth in the preceding sentence as payable to Grantee.
(b) Grantee may exercise its right to relinquish the Option and any Option
Shares pursuant to this Section 14 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 (1) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 14 and (2) 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 (5) 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 14 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (1) 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 (5) 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 (2) 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 Date shall be extended to a date six
(6) months from the date on which the Exercise Termination Date would have
occurred if not for the provisions of this Section 14(c) (during which period
Grantee may exercise any of its rights hereunder, including any and all rights
pursuant to this Section 14).
15. Specific Performance. 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.
16. Maximum Profit. (a) Notwithstanding any other provision herein, in no
event shall Grantee's Total Profit (as defined in Section 16(c)) exceed $780
million (the "Maximum Profit"), and, if the Total Profit would otherwise exceed
such amount, Grantee, at its sole election, shall either (1) reduce the number
of shares subject to the Option (and any Substitute Option), (2) deliver to
Issuer, or Substitute Issuer, as the case may be, for cancellation shares of
Common Stock or Substitute Common Stock, as the case may be, previously
purchased by Grantee valued at fair market value at the time of delivery, (3)
pay cash to Issuer, or Substitute Issuer, as the case may be, (4) increase or
otherwise adjust the Option Price or Substitute Option Price (or any portion
B-11
thereof), (5) reduce the amount of the Option Repurchase Price or Substitute
Option Repurchase Price, or (6) undertake any combination of the foregoing, so
that Grantee's actually realized Total Profit shall not exceed the Maximum
Profit after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, the Option (and
any Substitute Option) may not be exercised for a number of shares as would, as
of the date of exercise, result in a Notional Total Profit (as defined in
Section 16(d)) of more than the Maximum Profit and, if exercise of the Option
(and any Substitute Option) would otherwise result in the Notional Total Profit
exceeding such amount, Grantee, in its discretion, may take any of the actions
specified in Section 16(a) so that the Notional Total Profit shall not exceed
the Maximum Profit; provided, that nothing in this sentence shall restrict any
subsequent exercise of the Option (and any Substitute Option) which at such
time complies with this sentence.
(c) For purposes of this Agreement, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (1) the excess of (A) the net
cash amounts or fair market value of any property 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, after payment of
applicable brokerage or sales commissions and discounts, if any, over (B)
Grantee's aggregate purchase price for such Option Shares (or other
securities), plus (2) all amounts received by Grantee, a Holder or an Owner
including a Substitute Option Holder or Substitute Share Owner) upon the
repurchase of the Option and/or any Option Shares by Issuer pursuant to Section
7 or upon the surrender of the Option and/or any Option Shares pursuant to
Section 14 (net in the case of Option Shares or Substitute Option Shares of the
Owner's or Substitute Share Owner's aggregate purchase price therefor), plus
(3) all equivalent amounts with respect to the Substitute Option and any other
amounts paid pursuant to Sections 8(e) and 9, if any, minus (4) all amounts of
cash previously paid to Issuer pursuant to Section 16(a)(3) and the value of
all Option Shares (or other securities) previously delivered to Issuer for
cancellation pursuant to Section 16(a)(2), which value shall be as set forth in
clause (3) of Section 16(a).
(d) For purposes of this Agreement, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee may propose to exercise the
Option shall be the Total Profit, determined as of the date of such proposed
exercise assuming (1) that the Option were exercised on such date for such
number of shares, (2) 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) and (3) the effect
of any adjustments made by or to be made by Grantee pursuant to Section 16(a).
For purposes of this Section 16, the term Grantee will include all Holders and
transactions by any affiliate transferee of Grantee in respect of the Option or
Option Shares transferred to it shall be treated as if made by Grantee.
17. Severability. 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. Notices. 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. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina applicable to contracts
made and to be performed entirely in that State.
B-12
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
21. Expenses. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
22. Entire Agreement; Third-Party Rights. 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. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
B-13
APPENDIX C
STOCK OPTION AGREEMENT, dated as of April 15, 2001 and amended and restated
(this "Agreement"), between Wachovia Corporation, a North Carolina corporation
("Grantee"), and First Union Corporation, a North Carolina corporation
("Issuer").
Recitals
A. Merger Agreement. Grantee and Issuer have entered into an Agreement and
Plan of Merger, dated as of April 15, 2001 (as amended, restated or otherwise
notified from time to time, the "Merger Agreement"), which agreement was
executed and delivered immediately prior to the execution and delivery of this
Stock Option Agreement, pursuant to which Grantee is to merge with and into
Issuer (the "Merger"); and
B. Option. As a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option
(as hereinafter defined).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:
1. Grant of Option. (a) Issuer hereby grants to Grantee an unconditional,
irrevocable option (the "Option") to purchase, subject to the terms hereof, up
to an aggregate of 19.9% of the total fully paid and nonassessable shares of
the common stock, par value $3.33 1/3 per share, of Issuer ("Common Stock")
issued and outstanding at the close of business on April 12, 2001 at a price
per share equal to $31.892 (the "Option Price"); provided, however, that in no
event shall the number of shares for which this Option is exercisable (when
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.
Issuer shall make proper provision so that each share of Common Stock issued
upon exercise of the Option shall be accompanied by the applicable number of
First Union Rights (as such term is defined in the Merger Agreement).
(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 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 1(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. Exercise. (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
(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 (6) months following such Subsequent Triggering Event (or such later
period as provided in Section 10). An Exercise Termination Event shall be the
earliest to occur of the following: (1) the Effective Time (as defined in the
Merger Agreement) of the Merger; (2) 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 8.01(b) (unless the breach by Issuer giving rise to such
right of termination is unintentional) or Section 8.01(c) of the Merger
Agreement (a "Listed Termination"); or (3) the passage of eighteen (18) 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. The term "Holder" shall mean the
holder or holders of the Option. Notwithstanding anything to the contrary
contained herein, the Option may not be exercised at any
C-1
time when Grantee shall be in material breach of any of its covenants or
agreements contained in the Merger Agreement such that Issuer shall be entitled
to terminate the Merger Agreement pursuant to Section 8.01(b)(2) thereof.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring on or after the date hereof:
(1) Issuer or any of its Significant Subsidiaries (as defined in Rule 1-
02 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC")) (the "Issuer Subsidiaries"), 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 "1934 Act"), and the rules and regulations thereunder) other
than Grantee or any of its Subsidiaries (each a "Grantee Subsidiary") or
the Board of Directors of Issuer (the "Issuer Board") shall have
recommended that the stockholders of Issuer approve or accept any
Acquisition Transaction other than as contemplated by the Merger Agreement.
For purposes of this Agreement, (A) "Acquisition Transaction" shall mean
(x) a merger or consolidation, or other business combination transaction,
involving Issuer or any Issuer Subsidiary (other than mergers,
consolidations or similar transactions involving solely Issuer and/or one
or more wholly-owned Subsidiaries of the Issuer, provided, any such
transaction is not entered into in violation of the terms of the Merger
Agreement), (y) a purchase, lease or other acquisition of more than 15% of
the business, 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 more than 15% 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 1934 Act;
(2) Any person other than the Grantee or any Grantee Subsidiary shall
have acquired beneficial ownership or the right to acquire beneficial
ownership of 15% 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 1934 Act, and the rules
and regulations thereunder);
(3) The stockholders of Issuer shall have voted and failed to approve
the Merger Agreement and the Merger 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 canceled 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 canceled, 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 disclosed an intention to make, a proposal to engage in
an Acquisition Transaction;
(4) The Issuer Board shall have withdrawn, modified or qualified (or
publicly announced its intention to withdraw, modify or qualify) in any
manner materially adverse in any respect to Grantee its recommendation that
the stockholders of Issuer approve the transactions contemplated by the
Merger Agreement in anticipation of engaging in an Acquisition Transaction,
or Issuer or any Issuer Subsidiary shall have authorized, recommended or
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;
(5) 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 stockholders to approve the
issuance of shares to be offered in such an exchange offer);
(6) Issuer shall have willfully breached any covenant or obligation
contained in the Merger Agreement after a proposal is made by a third party
to Issuer or its stockholders to engage in an
C-2
Acquisition Transaction, and (A) 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) and (B) such breach shall
not have been cured prior to the Notice Date (as defined in Section 2(e));
or
(7) Any person other than Grantee or any Grantee Subsidiary, without
Grantee's 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 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:
(1) 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
(2) The occurrence of the Initial Triggering Event described in clause
(1) of subsection (b) of this Section 2, except that the percentage
referred to in clauses (y) and (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") promptly after it becomes aware of the occurrence thereof,
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 (1) the total
number of shares it will purchase pursuant to such exercise and (2) 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 (1) pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in cash or,
subject to the following sentence, securities and (2) 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. Only debt securities or preferred stock issued by the Holder that are
investment grade and readily marketable may be used as all or part of the
purchase price in lieu of cash. The value of any securities shall be determined
by the agreement of two nationally recognized investment banking firms, one
selected by each of the Holder and Issuer (and reasonably acceptable to the
other party); if such investment banking firms are unable to reasonably agree
upon such valuation, the value shall be determined by a third nationally
recognized investment banking firm chosen by the first two. Notwithstanding the
foregoing, in no event shall Holder pay any portion of the purchase price for
shares of Common Stock with securities that are not a permissible investment
for a financial holding company under the BHCA (as hereinafter defined).
(g) At such closing, simultaneously with the delivery of immediately
available funds or securities satisfying the criteria specified in subsection
(f) of this Section 2, (1) Issuer shall deliver to the Holder a certificate or
certificates representing the number of shares of Common Stock purchased by the
Holder and, if
C-3
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 and (2) Grantee shall deliver to Issuer a letter agreeing that
Grantee shall not offer to sell or otherwise dispose of such shares of Common
Stock in violation of applicable federal and state securities laws or the
provisions of this Agreement.
(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: (1) the reference to the resale restrictions
of the Securities Act of 1933, as amended (the "1933 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 1933 Act; (2) 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, in form and substance reasonably satisfactory
to the Issuer; and (3) the legend shall be removed in its entirety if the
conditions in the preceding clauses (1) and (2) 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, the Holder shall be deemed to be
the holder of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Issuer shall then be closed or
that certificates representing such shares of Common Stock shall not then be
actually delivered to the Holder. Issuer shall pay all expenses, and any and
all United States federal, state and local taxes and other charges that may be
payable in connection with the preparation, issue and delivery of stock
certificates under this Section 2 in the name of the Holder or its assignee,
transferee or designee.
3. Covenants of Issuer. Issuer agrees: (1) 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 then-
outstanding options, warrants, convertible securities and other rights to
purchase Common Stock; (2) 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; and (3) 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 (the "BHCA"), or the Change in
Bank Control Act of 1978, as amended, or any state or other federal 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.
C-4
4. Exchange. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer, for other
Agreements providing for Options of different denominations entitling the
holder thereof to purchase, on the same terms and subject to the same
conditions as are set forth herein, in the aggregate the same number of shares
of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as
used herein include any 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. Certain Adjustments. In addition to the adjustment in the number of
shares of Common Stock that are purchasable upon exercise of the Option
pursuant to Section 1 of this Agreement, the number of shares of Common Stock
purchasable upon the exercise of the Option and the Option Price shall be
subject to adjustment from time to time as provided in this Section 5. In the
event of any change in Common Stock by reason of a stock dividend, stock split,
split-up, recapitalization, stock combination, exchange of shares or similar
transaction, the type and number of shares or securities subject to the Option,
and the Option Price therefor, shall be adjusted appropriately, and proper
provision shall be made in the agreements governing such transaction, so that
Grantee shall receive, upon exercise of the Option, the same number and class
of shares or other securities or property that Grantee would have received in
respect of Common Stock if the Option had been exercised immediately prior to
such event, or the record date therefor, as applicable. If any additional
shares of Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 5 or upon
exercise of the Option), the number of shares of Common Stock subject to the
Option shall be adjusted so that, after such issuance, it, 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 to or issued pursuant to the Option.
6. Registration Rights. 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 twelve (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 1933 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 the Holder shall constitute at least 33 1/3% of the total
number of shares to be sold by the Holder and Issuer in the
C-5
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 twelve (12) month period referred to in the
first sentence of this section shall be increased to twenty-four (24) months.
Each such Holder shall provide all information reasonably requested by Issuer
for inclusion in any registration statement to be filed hereunder. If requested
by any such Holder in connection with such registration, Issuer shall become a
party to any underwriting agreement relating to the sale of such shares, but
only to the extent of obligating itself in respect of representations,
warranties, indemnities and other agreements customarily included in 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. Repurchase. (a) At any time after the occurrence of a Repurchase Event
(as defined below) (1) 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 (2) at
the request of any present or former Holder who at the time owns Option Shares
(each, 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.
The Holder and the Owner, as the case may be, shall also represent and warrant
that it has sole record and beneficial ownership of such Option Shares and that
such Option Shares are then free and clear of all liens. As promptly as
practicable, and in any event within five (5) 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-6
(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 (5)
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 (1) 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 (2)
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 and prior to the occurrence of an Exercise
Termination Event:
(1) 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
(2) the consummation of any Acquisition Transaction described in Section
2(b)(1)(A) hereof, except that the percentage referred to in clauses (y)
and (z) shall be 25%.
8. Substitute Option. (a) In the event that prior to an Exercise Termination
Event, Issuer shall enter into an agreement (1) 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, (2) 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
voting shares and share equivalents of the merged or acquiring company, or (3)
to sell or otherwise transfer all or substantially all of its or any Issuer
Subsidiary's assets or deposits, in one transaction or in a series of related
transactions, 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.
C-7
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (A) the continuing or surviving
person of a consolidation or merger with Issuer (if other than Issuer), (B)
the acquiring person in a plan of exchange in which Issuer is acquired, (C)
the Issuer in a merger or plan of exchange in which Issuer is the
continuing or surviving or acquiring person and (D) the transferee of all
or a substantial part of Issuer's assets or deposits (or the assets or
deposits of any Issuer Subsidiary).
(2) "Substitute Common Stock" shall mean the common stock issued by the
issuer of the Substitute Option upon exercise of the Substitute Option.
(3) "Assigned Value" shall mean the market/offer price, as defined in
Section 7.
(4) "Average Price" shall mean the average closing price of a share of
the Substitute Common Stock for one (1) year immediately preceding the
consolidation, merger or sale in question, but in no event higher than the
closing price of the shares of Substitute Common Stock on the day preceding
such consolidation, merger or sale; provided that if Issuer is the issuer
of the Substitute Option, the Average Price shall be computed with respect
to a share of common stock issued by the person merging into Issuer or by
any company which controls or is controlled by such person, as the Holder
may elect.
(c) The Substitute Option shall have the same terms as the Option, provided
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to the Holder. The 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, 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 twice
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 twice 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 (1)
the value of the Substitute Option without giving effect to the limitation in
this clause (e) over (2) 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. Repurchase of Substitute Option. (a) At the request of the holder of the
Substitute Option (the "Substitute Option Holder") made prior to an Exercise
Termination Event, the Substitute Option Issuer shall repurchase the Substitute
Option from the Substitute Option Holder at a price (the "Substitute Option
Repurchase Price") equal to the amount by which (1) the Highest Closing Price
(as hereinafter defined) exceeds (2) 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 made prior to
an Exercise Termination Event of any present or former Substitute Option Holder
(each, the "Substitute Share
C-8
Owner") who at the time owns shares of Substitute Common Stock issued upon
total or partial exercise of the Subsititue Option ("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 to be so repurchased. 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.
(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 (5) 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 (5) 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 such prohibition, whereupon, in the latter case, the
Substitute Option Issuer shall promptly (1) 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 (2)
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 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.
C-9
10. Extension of Periods Under Certain Circumstances. The periods for
exercise of certain rights under Sections 2, 6, 7, 9 and 14 shall be extended
for up to a maximum of six months in any given case: (1) 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; (2) to the extent necessary to avoid liability under Section
16(b) of the 1934 Act by reason of such exercise; and (3) when there exists an
injunction, order or judgment that prohibits or delays exercise of such right.
11. Representations and Warranties. (a) Issuer hereby represents and
warrants to Grantee as follows:
(1) Issuer has the requisite 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.
(2) 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 to the option 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.
(b) Grantee hereby represents and warrants to Issuer as follows: Grantee
has the requisite corporate power and authority to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and delivery
of this Agreement by the Grantee and the performance of its obligations
hereunder by the Grantee have been duly and validly authorized by the Board of
Directors of Grantee and no other corporate proceedings on the part of the
Grantee are necessary to authorize this Agreement or for Grantee to perform
its obligations hereunder. This Agreement has been duly and validly executed
and delivered by Grantee.
(c) This Option is not being, and any Option Shares or other securities
acquired by Grantee upon exercise of the Option will not be, acquired with a
view to the public distribution thereof and will not be transferred or
otherwise disposed or except in a transaction registered or exempt from
registration under the 1933 Act.
12. Assignment. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except
that in the event an Initial 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 fifteen (15) days following the date on which the
Federal Reserve Board or other regulatory authority 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 (1) a
widely dispersed public distribution, (2) a private placement in which no one
party acquires the right to purchase in excess of 2% of the voting shares of
Issuer, (3) 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 (4) any other manner approved by the Federal Reserve
Board or other regulatory authority.
13. Filings, Etc. 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, including, without limitation, applying to the
Federal Reserve Board under the BHCA for approval to acquire the shares
issuable hereunder.
C-10
14. Surrender of Option. (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 14(a), if issuer has
previously repurchased the Option or any portion of the Option pursuant to
Section 7. The "Surrender Price" shall be equal to $375 million (1) plus, if
applicable, Grantee's purchase price with respect to any Option Shares and (2)
minus, if applicable, the excess of (A) the net price, if any, received by
Grantee or a Grantee Subsidiary pursuant to the sale of Option Shares (or any
other securities into which such Option Shares were converted or exchanged) to
any unaffiliated party, or to Issuer pursuant to Secftion 7, over (B) Grantee's
purchase price of such Option Shares. For purposes of this Section 14, the term
Grantee shall include all Holders and in no event shall the aggregate amounts
paid or payable pursuant to this Section 14 to all Holders exceed the amount
set forth in the preceding sentence as payable to Grantee.
(b) Grantee may exercise its right to relinquish the Option and any Option
Shares pursuant to this Section 14 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 (1) that Grantee elects to
relinquish the Option and Option Shares, if any, in accordance with the
provisions of this Section 14 and (2) 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 (5) 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 14 is prohibited
under applicable law or regulation, or as a consequence of administrative
policy, from paying to Grantee the Surrender Price in full, (1) 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 (5) 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 (2) 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 Date shall be extended to a date six
(6) months from the date on which the Exercise Termination Date would have
occurred if not for the provisions of this Section 14(c) (during which period
Grantee may exercise any of its rights hereunder, including any and all rights
pursuant to this Section 14).
15. Specific Performance. 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.
16. Maximum Profit. (a) Notwithstanding any other provision herein, in no
event shall Grantee's Total Profit (as defined in Section 16(c)) exceed $780
million (the "Maximum Profit"), and, if the Total Profit would otherwise exceed
such amount, Grantee, at its sole election, shall either (1) reduce the number
of shares subject to the Option (and any Substitute Option), (2) deliver to
Issuer, or Substitute Issuer, as the case may be, for cancellation shares of
Common Stock or Substitute Common Stock, as the case may be, previously
purchased by Grantee valued at fair market value at the time of delivery, (3)
pay cash to Issuer, or Substitute Issuer, as the case may be, (4) increase or
otherwise adjust the Option Price or Substitute Option Price (or any portion
thereof), (5) reduce the amount of the Option Repurchase Price or Substitute
Option Repurchase Price, or (6) undertake any combination of the foregoing, so
that Grantee's actually realized Total Profit shall not exceed the Maximum
Profit after taking into account the foregoing actions.
C-11
(b) Notwithstanding any other provision of this Agreement, the Option (and
any Substitute Option) may not be exercised for a number of shares as would, as
of the date of exercise, result in a Notional Total Profit (as defined in
Section 16(d)) of more than the Maximum Profit and, if exercise of the Option
(and any Substitute Option) would otherwise result in the Notional Total Profit
exceeding such amount, Grantee, in its discretion, may take any of the actions
specified in Section 16(a) so that the Notional Total Profit shall not exceed
the Maximum Profit; provided, that nothing in this sentence shall restrict any
subsequent exercise of the Option (and any Substitute Option) which at such
time complies with this sentence.
(c) For purposes of this Agreement, the term "Total Profit" shall mean the
aggregate amount (before taxes) of the following: (1) the excess of (A) the net
cash amounts or fair market value of any property 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, after payment of
applicable brokerage or sales commissions and discounts, if any, over (B)
Grantee's aggregate purchase price for such Option Shares (or other
securities), plus (2) all amounts received by Grantee, a Holder or an Owner
(including a Substitute Option Holder or Substitute Share Owner) upon the
repurchase of the Option and/or any Option Shares by Issuer pursuant to Section
7 or upon the surrender of the Option and/or any Option Shares pursuant to
Section 14 (net in the case of Option Shares or Substitute Option Shares of the
Owner's or Substitute Share Owner's aggregate purchase price therefor), plus
(3) all equivalent amounts with respect to the Substitute Option and any other
amounts paid pursuant to Sections 8(e) and 9, if any, minus (4) all amounts of
cash previously paid to Issuer pursuant to Section 16 (a)(3) and the value of
all Option Shares (or other securities) previously delivered to Issuer for
cancellation pursuant to Section 16(a)(2), which value shall be as set forth in
clause (3) of Section 16(a).
(d) For purposes of this Agreement, the term "Notional Total Profit" with
respect to any number of shares as to which Grantee may propose to exercise the
Option shall be the Total Profit, determined as of the date of such proposed
exercise assuming (1) that the Option were exercised on such date for such
number of shares, (2) 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) and (3) the effect
of any adjustments made by or to be made by Grantee pursuant to Section 16(a).
For purposes of this Section 16, the term Grantee will include all Holders and
transactions by any affiliate transferee of Grantee in respect of the Option or
Option Shares transferred to it shall be treated as if made by Grantee.
17. Severability. 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. Notices. 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. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina applicable to contracts
made and to be performed entirely in that State.
20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
C-12
21. Expenses. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
22. Entire Agreement; Third-Party Rights. 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. Capitalized terms used in this Agreement and not
defined herein shall have the meanings assigned thereto in the Merger
Agreement.
C-13
APPENDIX D
June 27, 2001
Board of Directors
First Union Corporation
One First Union Center
Charlotte, NC 28288-0005
Members of the Board:
We understand that First Union Corporation ("First Union") and Wachovia
Corporation ("Wachovia") have entered into an Agreement and Plan of Merger,
dated as of April 15, 2001, and amended and restated (the "Agreement"),
pursuant to which Wachovia is to be merged with and into First Union, with
First Union being the surviving corporation in the transaction (the "Merger").
Pursuant to the Merger, each outstanding share of Wachovia common stock, par
value $5 per share (the "Wachovia Shares"), other than certain excluded shares
specified in the Agreement, will be converted into the right to receive 2.0
shares (the "Exchange Ratio") of the common stock, $3.33 1/3 par value, of
First Union (the "First Union Shares"), all as more fully set forth in the
Agreement.
You have asked us whether, in our opinion, the Exchange Ratio is fair from a
financial point of view to First Union and the shareholders of First Union.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to First Union and Wachovia that we deemed to be relevant;
(2) Reviewed certain information relating to the respective businesses,
earnings, assets, liabilities and prospects of First Union and Wachovia
furnished to us by senior management of First Union, as well as the
amount and timing of the cost savings, revenue enhancements and related
expenses expected to result from the Merger (the "Expected Synergies")
furnished to us by senior management of First Union;
(3) Conducted discussions with members of senior management and
representatives of First Union and Wachovia concerning the matters
described in clauses (1) and (2) above, as well as their respective
businesses and prospects before and after giving effect to the Merger
and the Expected Synergies;
(4) Reviewed the market prices and valuation multiples for the First Union
Shares and the Wachovia Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(5) Reviewed the respective publicly reported financial condition and
results of operations of First Union and Wachovia and compared them
with those of certain publicly traded companies that we deemed to be
relevant;
D-1
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of First Union and Wachovia and their respective
financial and legal advisors with respect to the Merger;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed the Agreement and the related stock option agreement provided
to us; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of the assets or liabilities
of First Union or Wachovia or been furnished with any such evaluation or
appraisal. We are not experts in the evaluation of allowances for loan losses,
and we have neither made an independent evaluation of the adequacy of the
allowances for loan losses of First Union or Wachovia, nor have we reviewed any
individual credit files of First Union or Wachovia or been requested to conduct
such a review, and, as a result, we have assumed that the respective allowances
for loan losses for First Union and Wachovia are adequate to cover such losses
and will be adequate on a pro forma basis for the combined entity. In addition,
we have not assumed any obligation to conduct, nor have we conducted, any
physical inspection of the properties or facilities of First Union or Wachovia.
With respect to the financial and operating information, including without
limitation, financial forecasts, valuations of contingencies, projections
regarding under-performing or non-performing assets, net charge-offs, adequacy
of reserves, future economic conditions, and the Expected Synergies, furnished
to or discussed with us by First Union, we have assumed that all such
information has been reasonably prepared and reflect the best currently
available estimates and judgments of the senior management of First Union as to
the future financial and operating performance of First Union, Wachovia or the
combined entity, as the case may be, and the Expected Synergies. We have
further assumed that the Merger will qualify as a tax-free reorganization for
U.S. federal income tax purposes.
Our opinion is necessarily based upon market, economic and other conditions
as in effect on, and on the information made available to us as of, the date
hereof. For the purposes of rendering this opinion, we have assumed that the
Merger will be consummated substantially in accordance with the terms set forth
in the Agreement, including in all respects material to our analysis, that the
representations and warranties of each party in the Agreement and in all
related documents and instruments (collectively, the "Documents") that are
referred to therein are true and correct, that each party to the Documents will
perform all of the covenants and agreements required to be performed by such
party under such Documents and that all conditions to the consummation of the
Merger will be satisfied without waiver thereof. We have also assumed that, in
the course of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Merger, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the future results of operations or
financial condition of First Union, Wachovia, or the combined entity, as the
case may be, or on the contemplated benefits of the Merger, including the
Expected Synergies.
D-2
[Merrill Lynch Logo]
We have been retained by the Board of Directors of First Union to act as
financial advisor to First Union in connection with the Merger and will receive
a fee from First Union for our services, a significant portion of which is
contingent upon the consummation of the Merger. In addition, First Union has
agreed to indemnify us for certain liabilities arising out of our engagement.
We have in the past two years provided financial advisory, investment banking
and other services to First Union and Wachovia and have received fees for the
rendering of such services, and we may continue to provide such services in the
future. In addition, in the ordinary course of our business, we may actively
trade the First Union Shares and other securities of First Union and its
affiliates and the Wachovia Shares and other securities of Wachovia and its
affiliates for our own account and for the accounts of our customers, and,
accordingly, may at any time hold long or short positions in such securities.
This opinion is for the use and benefit of the Board of Directors of First
Union. It is further understood that this opinion will not be reproduced,
summarized, described or referred to or given to any person without Merrill
Lynch's prior written consent. Our opinion does not address the merits of the
underlying decision by First Union to engage in the Merger and does not
constitute a recommendation to any shareholder of First Union as to how such
shareholder should vote on the proposed Merger or any other matter related
thereto.
We have not considered, nor are we expressing any opinion herein with
respect to, the prices at which First Union Shares or Wachovia Shares will
trade following the announcement of the Merger or the price at which First
Union Shares will trade following the consummation of the Merger.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair, from a financial point of view,
to First Union and the shareholders of First Union.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
D-3
APPENDIX E
(Credit Suisse/First Boston Logo appears here)
June 27, 2001
Board of Directors
Wachovia Corporation
100 North Main Street
Winston-Salem, NC 27150-3099
Members of the Board:
You have asked us to advise you with respect to the fairness to holders of
common stock of Wachovia from a financial point of view of the Exchange Ratio
(as defined below) set forth in the Agreement and Plan of Merger, dated as of
April 15, 2001, and amended and restated (the "Agreement"), between Wachovia
Corporation ("Wachovia") and First Union Corporation ("First Union"). Pursuant
to the Agreement, Wachovia will merge with and into First Union with First
Union being the surviving corporation (the "Merger") and each outstanding share
of the common stock, par value $5.00 per share, of Wachovia ("Wachovia Common
Stock") will be converted into 2.0 (the "Exchange Ratio") shares of the common
stock, par value $3.33 1/3 per share, of First Union ("First Union Common
Stock"). The Agreement further provides that each outstanding share of Wachovia
Common Stock will be converted into the right to receive, at the election of
the holder thereof and subject to certain procedures and limitations set forth
in the Agreement, (i) 2.0 (the "DEPS Consideration") shares of dividend
equalization preferred stock, no par value, of First Union (the "DEPS") or (ii)
$0.48 in cash (the "Cash Payment" and, together with the DEPS Consideration,
the "Dividend Consideration").
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to Wachovia and First Union, as
well as the Agreement and certain related documents. We also have reviewed
certain other information provided to or discussed with us by Wachovia and
First Union, including publicly available financial forecasts for Wachovia and
First Union, and have met with Wachovia's and First Union's managements to
discuss the businesses and prospects of Wachovia and First Union. We also have
considered certain financial and stock market data of Wachovia and First Union,
and we have compared those data with similar data for other publicly held
companies in businesses similar to Wachovia and First Union, and we have
considered, to the extent publicly available, the financial terms of certain
other business combinations and other transactions which have been effected. We
also considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant. We also have considered the views of Wachovia's and First Union's
managements concerning the business, operational and strategic benefits and
implications of the Merger, including financial forecasts provided to us by
Wachovia and First Union relating to the synergistic values and operating cost
savings expected to be achieved through the combination of the operations of
Wachovia and First Union.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
such information being complete and accurate in all material respects. We have
reviewed and discussed with the managements of Wachovia and First Union
publicly available financial forecasts relating to Wachovia and First Union and
have been advised, and have assumed, that such forecasts represent reasonable
estimates and judgments as to the future financial performance of Wachovia and
First Union. In addition, we have relied, without independent verification,
upon the estimates and judgments of the managements of Wachovia and First Union
as to the potential cost savings and other potential synergies (including the
amount, timing and achievability thereof) anticipated to result from the
Merger. You also have informed us, and we have assumed, that the Merger will be
treated as a tax-free reorganization for
E-1
Board of Directors
Wachovia Corporation
June 27, 2001
Page 2
federal income tax purposes. We have assumed, with your consent, that in the
course of obtaining the necessary regulatory and third party approvals and
consents for the Merger, no modification, delay, limitation, restriction or
condition will be imposed that will have a material adverse effect on the
expected benefits of the Merger. You also have advised us, and we have assumed,
that the Merger will be consummated in accordance with the terms of the
Agreement, without waiver, amendment or modification of any material term,
condition or agreement contained therein. In addition, we have not been
requested to conduct, and have not conducted, a review of individual credit
files or made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Wachovia or First Union, nor have we
been furnished with any such evaluations or appraisals, including loan or lease
portfolios or the allowances for losses with respect thereto, and have been
advised and therefore have assumed, that such allowances for Wachovia and First
Union, as adjusted in connection with the Merger, will be in the aggregate
adequate to cover such losses. Our opinion does not address the relative merits
of the Merger as compared to other business strategies that may be available to
Wachovia (including but not limited to any proposal received from SunTrust
Banks, Inc.) or the effect of any other transaction in which Wachovia might
engage, nor does it address the underlying business decision of Wachovia to
engage in the Merger. Our opinion is necessarily based upon information
available to us, and financial, economic, market and other conditions as they
exist and can be evaluated on the date hereof. In connection with our
engagement, we were not requested to, and did not, solicit third party
indications of interest in the possible acquisition of all or a part of
Wachovia. We are not expressing any opinion as to the actual value of First
Union Common Stock or the DEPS when issued pursuant to the Merger or the prices
at which the First Union Common Stock or the DEPS will trade at any time.
We have acted as financial advisor to Wachovia in connection with the Merger
and will receive a fee for our services, a significant portion of which is
contingent upon the consummation of the Merger. We in the past have provided,
and may in the future provide, investment banking and financial services to
Wachovia and First Union unrelated to the Merger, for which services we have
received, and expect to receive, compensation. In the ordinary course of our
business, we and our affiliates may actively trade the debt and equity
securities of both Wachovia and First Union for our and such affiliates' own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Wachovia in connection with its evaluation of the Merger and does
not constitute a recommendation to any holder of Wachovia Common Stock as to
the form of the Dividend Consideration such holder should elect to receive or
as to how such holder should vote or act on any matter relating to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair to the holders of Wachovia Common Stock from
a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON
CORPORATION
E-2
APPENDIX F
Goldman, Sachs & Co. 85 Broad Street New York, New York 10004
Tel: 212-902-1000
[Goldman Sachs Logo]
June 27, 2001
Board of Directors
Wachovia Corporation
100 North Main Street
Winston-Salem, NC 27101
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $5.00
per share (the "Shares"), of Wachovia Corporation (the "Company") of the
exchange ratio of 2.00 shares of Common Stock, par value $3.33 1/3 per share
(the "First Union Shares"), of First Union Corporation ("First Union") to be
received for each Share (the "Exchange Ratio") pursuant to the Agreement and
Plan of Merger, dated as of April 15, 2001 and amended and restated, between
First Union and the Company (the "Agreement"). In addition, pursuant to the
Agreement each holder of Shares will receive at the option of each holder
either (a) a cash payment of $0.48 for each Share (the "Cash Payment") or (b)
2.00 Dividend Equalization Preferred Shares of First Union, no par value for
each Share (with those terms as set forth in the Agreement, the "DEPS").
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. We are
familiar with the Company having provided certain investment banking services
to the Company from time to time including having participated as an
underwriter in various medium term note and straight debt offerings. We also
have provided, and may in the future provide, certain investment banking
services to First Union from time to time. Goldman, Sachs & Co. provides a full
range of financial advisory and securities services and, in the course of its
normal trading activities, may from time to time effect transactions and hold
securities, including derivative securities, of the Company or First Union for
its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the Registration Statement on Form S-4 of First Union, as amended
through the date hereof, which includes the preliminary Joint Proxy Statement-
Prospectus relating to the Agreement; Annual Reports to Stockholders and Annual
Reports on Form 10-K of the Company and First Union for the five years ended
December 31, 2000; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company and First Union; certain other
communications from the Company and First Union to their respective
stockholders; and certain internal financial analyses and forecasts for the
Company and First Union prepared by their respective managements (the
"Forecasts"), including certain cost savings, operating synergies, and the
impact of certain divestitures projected by the management of First Union and
the Company to result from the transaction contemplated by the Agreement (the
"Synergies"). We also have held discussions with members of the senior
managements of the Company and First Union regarding their assessment of the
strategic rationale for, and the potential benefits of, the transaction
contemplated by the Agreement and the past and current business operations,
financial
F-1
condition and future prospects of their respective companies. We have also
reviewed the letter dated May 14, 2001 from SunTrust Banks, Inc. ("SunTrust")
to the Company with respect to a possible transaction between SunTrust and the
Company and related public filings of SunTrust. In addition, we have reviewed
the reported price and trading activity for the Shares and the First Union
Shares, compared certain financial and stock market information for the Company
and First Union with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of
certain recent business combinations in the commercial banking industry
specifically and in other industries generally and performed such studies and
analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information discussed with or reviewed by us and have
assumed such accuracy and completeness for purposes of rendering this opinion.
We have assumed that the Forecasts, including the Synergies, have been
reasonably prepared and reflect the best currently available judgments and
estimates of the managements of First Union and the Company and that the
Forecasts and Synergies will be realized in the amounts and at the times
contemplated thereby. We are not experts in the evaluation of loan and lease
portfolios for purposes of assessing the adequacy of the allowances for losses
with respect thereto and have assumed, with your consent, that such allowances
for First Union and the Company are each in the aggregate adequate to cover all
such losses. In addition, we have not reviewed individual credit files nor have
we made an independent evaluation or appraisal of the assets and liabilities
(including any hedge or derivative positions) of the Company and First Union
and we have not been furnished with any such evaluation or appraisal. We also
have assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the transaction contemplated by the
Agreement will be obtained without any adverse effect on the Company or First
Union or on the expected benefits of the transaction contemplated by the
Agreement. We were not requested to solicit, and did not solicit, interest from
other parties with respect to an acquisition of or a business combination with
the Company. Our opinion does not address the relative merits of the
transaction contemplated pursuant to the Agreement as compared to any
alternative business transaction that might be available to the Company, nor
does it address the underlying business decision of the Company to engage in
the transaction contemplated by the Agreement. Our advisory services and the
opinion expressed herein are provided for the information and assistance of the
Board of Directors of the Company in connection with its consideration of the
transaction contemplated by the Agreement and such opinion does not constitute
a recommendation as to how any holder of the Shares should vote with respect to
such transaction or what election any holder should make as to whether to
receive the Cash Payment or the DEPS pursuant to the transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to the
holders of Shares.
/s/ Goldman, Sachs & Co.
_____________________________________
F-2
APPENDIX G
FIRST UNION CORPORATION
AUDIT COMMITTEE CHARTER
1. The Audit Committee (the "Committee") shall be comprised of a minimum of
three (3) directors, all of whom shall meet the audit committee membership
requirements of the New York Stock Exchange, Inc. None of the members shall be
officers or employees of First Union Corporation (including all of its
subsidiaries, the "Corporation") or have any other relationship with the
Corporation that may interfere with the exercise of their independence from
management and the Corporation, as determined by the Board of Directors. All
members of the Committee shall have a basic understanding of finance and
accounting, and at least one member of the Committee shall have accounting or
related financial management expertise, as determined by the Board of
Directors. Members of the Committee shall be appointed annually by majority
vote of the Board of Directors and shall serve until the next annual meeting of
the Board of Directors or until their successors shall be duly qualified and
appointed.
2. The primary responsibilities of the Committee are to (i) assist the Board of
Directors in overseeing, and receiving objective information regarding, the
policies, procedures and activities of the Corporation with respect to
auditing, accounting, internal controls, financial reporting, and regarding
such other policies, procedures and activities of the Corporation as may be
directed by the Board of Directors; and (ii) monitor the independence and
performance of the Corporation's internal auditors and its independent external
auditors. While the Committee has the responsibilities and powers set forth in
this Charter, the management of the Corporation is responsible for the
preparation, presentation and integrity of the Corporation's financial
statements. The independent external auditors are responsible for planning and
carrying out a proper audit of the Corporation's annual financial statements,
and other procedures. In fulfilling their responsibilities set forth herein, it
is recognized that members of the Committee are not full-time employees of the
Corporation and are not, and do not represent themselves to be, accountants or
auditors by profession or experts in the fields of accounting or auditing,
including in respect of auditor independence. As such, it is not the duty or
responsibility of the Committee or its members to conduct "field work" or other
types of auditing or accounting reviews or procedures or to set auditor
independence standards, and each member of the Committee shall be entitled to
rely on (i) the integrity of those persons and organizations within and outside
the Corporation from which it receives information, (ii) the accuracy of the
financial and other information provided to the Committee by such persons or
organizations absent actual knowledge to the contrary (which shall be promptly
reported to the Board of Directors), and (iii) representations made by
management as to any information technology, internal audit and other non-audit
services provided by the external auditors to the Corporation.
Based on the foregoing, the Committee shall meet and receive information
from management, the internal auditors and the external auditors, as
applicable, on the following items:
(a) The independence, qualifications and retention of the independent audi-
tors. In connection with the foregoing, and recognizing that the inde-
pendent auditors are ultimately accountable to the Committee and the
Board of Directors and that the Committee and the Board of Directors
have the ultimate authority and responsibility to select, evaluate and,
where appropriate, replace the independent auditors (or to nominate the
independent auditors to be proposed for stockholder approval in any
proxy statement), the Committee shall receive information and reports
regarding (i) audit and non-audit services provided by the independent
auditors, including a formal written statement, provided by the inde-
pendent auditors, delineating all relationships between the independent
auditors and the Corporation, addressing at least the matters set forth
in Independence Standards Board No. 1.; and (ii) the aggregate fees
billed by the independent auditors, as provided to the Committee in a
written statement by the independent auditors, for (x) the audit of the
Corporation's annual financial statements for the most recent fiscal
year and the reviews of the financial statements included in the Corpo-
ration's
G-1
quarterly reports on Form 10-Q for that fiscal year, (y) information
technology consulting services for the most recent fiscal year, and
(z) all other services rendered by the independent auditors for the most
recent fiscal year.
The Committee shall discuss the above information and reports, and any
relationships or services disclosed in the independent auditors' statement
as to independence that may impact the objectivity and independence of the
independent auditors, with management, the internal auditors and such
independent auditors, as appropriate, and, if so determined by the
Committee, recommend that the Board of Directors take appropriate action to
satisfy itself of the independence of the auditors. In addition, if
applicable, the Committee shall consider whether the independent auditors'
provision of information technology consulting services relating to
financial information systems design and implementation and other non-audit
services to the Corporation is compatible with maintaining the independence
of the independent auditors. Based on the foregoing, the Committee shall
annually recommend to the Board of Directors the appointment of the
independent auditors or approve any replacement of the auditors when, based
on such information and reports, the Committee believes circumstances
warrant such replacement.
(b) The arrangements and scope of the independent auditors' audit plan
prior to commencement of their annual examination of the Corporation's
financial statements.
(c) The performance of the independent auditors including, as required by
circumstances:
. The basis of any significant changes in the Corporation's accounting
principles and methods of their application.
. The independent auditors' comments on significant weaknesses in
internal accounting controls and considerations given or corrective
action taken by management, and
. Other matters relating to the audits of the Corporation's annual or
quarterly financial statements or other auditing results as may be of
concern to the Committee or the independent auditors, including a
discussion of the audited financial statements and any matters
required to be communicated by the independent auditors in accordance
with Statement of Auditing Standards No. 61, and the quality and
appropriateness of the Corporation's accounting principles.
(d) The independence of the Internal Audit Division, including information
regarding the sufficiency of such independence, despite their status
as employees, to permit members of the Internal Audit Division to
freely conduct internal auditing without management interference.
(e) The general scope of planned internal auditing activities prior to
their commencement.
(f) The results of internal audits, as appropriate, and the performance of
the Internal Audit Division including, as required by circumstances:
. Action taken by the Corporation's management on recommendations made
by the Internal Audit Division.
. Reports of defalcations made to regulatory authorities.
. Other matters relating to internal auditing activities as may be of
concern to the Committee or the internal auditors.
(g) The independent auditors' and/or internal auditors' assessment of the
Corporation's compliance with various policies and procedures to ensure
adequate internal controls have been instituted by management.
(h) The audits of any political action committees sponsored by the Corpora-
tion.
(i) The reports of inspections, examinations and investigations by state
and federal regulatory agencies, as appropriate, and consideration
given or corrective action taken by management on any criticism in such
reports.
G-2
3. The Committee shall report the information elicited by its activities to the
Board of Directors and, where appropriate, its recommendations for action by
the Board of Directors at their next meeting subsequent to that of the
Committee. Certain action by the Committee may be similarly reported to the
Board of Directors for approval, ratification, and/or confirmation.
4. The Committee shall review and reassess the adequacy of the Charter at least
annually, and shall have the Charter published at least every three years in
accordance with the regulations of the Securities and Exchange Commission (the
"SEC"). On an annual basis, the Committee shall also prepare a report or other
disclosures, including any recommendation of the Committee required by the
rules of the SEC, to be included in the Corporation's annual proxy statement.
5. The Committee shall meet at least four (4) times annually and such meetings
shall, during their course and in total, provide for at least:
(a) Attendance of only representatives of the Internal Audit Division to
review the scope of planned auditing activities for the year and inter-
nal auditing results for the year.
(b) Attendance of only representatives of the independent auditors to re-
view the performance of their annual audit.
6. In order to carry out the duties conferred upon the Committee by the
Charter, the Committee is authorized to employ and to confer from time to time
with independent outside counsel and with such additional outside advisors and
consultants as it may deem necessary or appropriate and to authorize the
Corporation to pay reasonable compensation for such services.
G-3
APPENDIX H
FIRST UNION CORPORATION
SENIOR MANAGEMENT INCENTIVE PLAN
1. Purpose. The purpose of the First Union Corporation Senior Management Incen-
tive Plan is to retain and motivate key executives of First Union (as defined
herein) by providing them with the opportunity to earn incentive awards based
upon the extent to which specified performance goals for a Performance Period
(as defined herein) have been achieved or exceeded.
2. Definitions. As used in the Plan, the following terms shall have the follow-
ing meanings:
(a) "1934 Act" means the Securities Exchange Act of 1934, as amended, in-
cluding the rules and regulations promulgated thereunder.
(b) "Annual Base Salary" means the amount of base salary paid to a Partici-
pant for a calendar year. This amount may be adjusted to include the
amount of any base salary deferrals for such year, unless the Committee
specifies otherwise at the time that the Participant's award opportu-
nity for a Performance Period is established.
(c) "Applicable Period" means, with respect to any Performance Period, a
period commencing on or before the first day of the Performance Period
and ending the earlier of (i) the 90 days after the commencement of the
Performance Period or (ii) the date on which 25% of the Performance Pe-
riod has been completed. Any action required within such period may be
taken at a later date if U.S. Treasury regulations under Section 162(m)
of the Internal Revenue Code are amended or interpreted to permit a
later date.
(d) "Board" means the Board of Directors of the Company.
(e) "Change of Control" means a change in control of the Company of a na-
ture that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the 1934 Act; provid-
ed, however, that, without limitation, such a Change of Control shall
be deemed to have occurred if (i) any one person, or more than one per-
son acting as a group, acquires "beneficial ownership" (as defined in
Rule 13d-3 of the 1934 Act) of shares of the Company's common stock
that, together with shares held by such person or group, possesses more
than 50 percent of the total fair market value or total voting power of
the shares of Company common stock outstanding, (ii) any one person, or
more than one person acting as a group, acquires (or has acquired dur-
ing the 12-month period ending on the date of the most recent acquisi-
tion by such person or persons) "beneficial ownership" of shares of
Company common stock possessing 20 percent or more of the total voting
power of the shares of Company common stock outstanding, or (iii) a ma-
jority of members of the Board is replaced during any 12-month period
by directors whose appointment or election is not endorsed by a major-
ity of the members of the Board prior to the date of such appointment
or election.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(g) "Committee" means the Human Resources Committee of the Board or a sub-
committee thereof that is comprised solely of two or more non-employee
directors (each of whom is intended to qualify as an "outside director"
within the meaning of Section 162(m) of the Code).
(h) "Company" means First Union Corporation, a corporation organized under
the laws of the State of North Carolina, including any successor there-
to.
(i) "Disability" means, with respect to an Employee, means having received
long-term disability benefits under the Company's Long-Term Disability
Plan for a period of 12 consecutive months.
H-1
(j) "Early Retirement" means termination of a Participant's employment upon
satisfaction of the requirements for early retirement under the
Company's pension plan.
(k) "Executive Officers" means those officers of the Company, as designated
from time to time by the Board, who are deemed to come within the defi-
nitions set forth in Rule 3b-7 under the 1934 Act.
(l) "First Union" means (i) the Company and (ii) any entity that is di-
rectly or indirectly controlled by the Company.
(m) "Individual Award Opportunity" means the potential of a Participant to
receive an incentive award if the performance goals for a Performance
Period have been satisfied. An Individual Award Opportunity may be ex-
pressed in dollars, as a percent of annual base salary or on a formula
basis that is consistent with the provisions of the Plan.
(n) "Negative Discretion" means the discretion authorized under the Plan
that may be exercised by the Committee to eliminate, or reduce the size
of, an incentive award otherwise payable to a Participant for a Perfor-
mance Period. The exercise of this discretion must be consistent with
the Plan qualifying as "performance-based compensation" under Section
162(m) of the Code.
(o) "Normal Retirement" means termination of a Participant's employment
upon satisfaction of the requirements for normal retirement under the
terms of the Company's pension plan.
(p) "Operating Income" means the reported net income applicable to the
Company's common stockholders excluding reported (i) extraordinary
gains or losses or as a result of changes in accounting principles,
(ii) restructuring, merger-related or restructuring-related charges,
and (iii) similar one-time accounting or operational charges.
(q) "Participant" means, for any given Performance Period, each key em-
ployee of First Union who is an Executive Officer or is recommended by
the CEO and approved by the Committee to be a Participant in the Plan
for an identified Performance Period.
(r) "Performance Measures and Goals" means the objective performance goals
including, but not limited to, financial and non-financial measures,
established and approved by the Committee for purposes of developing
the size of incentive awards under the Plan.
(s) "Performance Period" means any period commencing on or after January 1,
2001, for which performance goals are established pursuant to Section 5
of the Plan and during which performance shall be measured to determine
if any payment will be made under the Plan. A Performance Period may be
coincident with one or more fiscal years of the Company, or a portion
thereof.
(t) "Plan" means First Union Corporation's Senior Management Incentive Plan
as set forth herein, and as it may be amended.
(u) "Retirement" means either Early Retirement or Normal Retirement.
3. Administration.
(a) General. The Plan shall be administered by the Committee subject to the
terms of the Plan and applicable law including, but not limited to,
Section 162(m) of the Code. In addition to any other express powers and
authorizations conferred on the Committee by the Plan, the Committee
shall have the full power and authority, in its discretion:
(i) to designate, within the Applicable Period, the Participants in the Plan
and their Individual Award Opportunities for the Performance Period;
(ii) to establish, within the Applicable Period, and thereafter administer the
performance goals and other award terms and conditions that are to apply
under the Plan for the Performance Period;
H-2
(iii) to determine and certify (A) any amounts earned for any Performance
Period, based on actual performance versus the performance goals set for
such period, in writing prior to the payment of any incentive awards and
(B) that any other material terms applicable to incentive awards have also
been satisfied;
(iv) to decide, within the Applicable Period, the extent to which the grant or
payment of any incentive award hereunder shall be made to a Participant in
the event of (A) the Participant's termination of employment due to death,
Disability, Retirement or other termination of employment with First
Union, (B) the occurrence of a Change of Control or (C) the occurrence of
any merger, consolidation, or acquisition where the Company's stockholders
on the effective date of such merger, consolidation, or acquisition do not
own at least 50% of the outstanding shares of voting stock of the
surviving corporation;
(v) to decide under what circumstances and terms, incentive awards are to be
paid on a deferred basis, including automatic deferrals at the Committee's
election, as well as elective deferrals at the election of any
Participant;
(vi) to adopt, revise, suspend, waive or repeal, when and as appropriate, in
its sole and absolute discretion, such administrative rules, guidelines
and procedures for the Plan as it deems necessary or advisable to
implement the terms and conditions of the Plan;
(vii) to interpret and administer the terms and provisions of the Plan and any
incentive award granted under the Plan (including reconciling any
inconsistencies, correcting any defaults and addressing any omissions in
the Plan or any related instrument or agreement); and
(viii) to otherwise supervise the administration of the Plan.
It is intended that all amounts payable to Participants under the Plan who
are "covered employees" within the meaning of U.S. Treasury Regulation
1.162-27(c)(2) shall constitute "qualified performance-based compensation"
within the meaning of U.S. Treasury Regulation 1.162-27(e), and, to the
maximum extent possible, the Plan and the terms of any awards thereunder
shall be so interpreted and construed.
(b) Binding Nature of Committee Decisions. Unless otherwise expressly pro-
vided in the Plan, all designations, determinations, interpretations
and other decisions made under or with respect to the Plan or any award
under the Plan shall be within the sole and absolute discretion of the
Committee, and shall be final, conclusive and binding on all persons,
including First Union, any Participant, and any beneficiary or other
person having, or claiming, any rights under the Plan.
(c) Delegation. The Committee may delegate to one or more officers or em-
ployees of the Company the authority, subject to such terms as the Com-
mittee shall determine, to perform such functions, including the Com-
mittee's functions under the Plan, as the Committee may determine, ex-
cept that the Committee may not delegate its authority for actions
which would cause awards intended to qualify as "performance-based com-
pensation" under Section 162(m) of the Code to fail to so qualify. In
the case of any such delegation, references to the Committee herein
shall be deemed to include any person to whom authority has been dele-
gated, unless the context otherwise requires.
(d) Limitation of Liability. The Committee, each member thereof, and any
other person acting pursuant to authority delegated by the Committee
shall be entitled, in good faith, to rely or act upon any report or
other information furnished by any officer or employee of the Company,
the Company's independent auditors, consultants or any other agents as-
sisting in the administration of the Plan. Members of the Committee or
any other person acting pursuant to authority delegated by the Commit-
tee, and any officer or employee of the Company acting at the direction
or on behalf of the Committee or other delegee shall not be personally
liable for any action or
H-3
determination taken or made in good faith with respect to the Plan, and
shall, to the extent permitted by law, be fully indemnified and pro-
tected by the Company with respect to any such action or determination.
(e) Indemnification. Each person who is or shall have been a member of the
Committee or of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may
be imposed upon or reasonably incurred by him in connection with or re-
sulting from any claim, action, suit, or proceeding to which he may be
a party or in which he may be involved by reason of any action taken or
failure to act under the Plan and against and from any and all amounts
paid by him in settlement thereof, with the Company's approval, or paid
by him in satisfaction of any judgment in any such action, suit, or
proceeding against him, provided he shall give the Company an opportu-
nity, at its own expense, to handle and defend the same before he un-
dertakes to handle and defend it on his own behalf. The foregoing right
of indemnification shall not be exclusive of any other rights of indem-
nification to which such persons may be entitled under the Company's
Articles of Incorporation or Bylaws, as a matter of law, or otherwise,
or any power that the Company may have to indemnify them or hold them
harmless.
4. Plan Participation.
(a) Annual Participant Designations by Committee. For each Performance Pe-
riod, the Committee, in its sole and absolute discretion, within the
Applicable Period, shall designate those key employees of First Union
who shall be Participants in the Plan for such Performance Period. Such
designations shall be made by the Committee, in its sole and absolute
discretion, based primarily on its determination as to which key
employees:
(i) are likely to be Executive Officers of the Company as of the last
day of the fiscal year for which the Company would be entitled to a
federal tax deduction for payment of the award in respect of such
Performance Period; and
(ii) are likely to be "covered employees" (within the meaning of Section
162(m)(3) of the Code) of the Company and to have individual com-
pensation in excess of $1 million, excluding compensation that
would be considered "performance-based" for purposes of Section
162(m);
as well as such other considerations as the Committee deems appropriate, in
its sole and absolute discretion.
(b) Other Plan Participation. Notwithstanding any provision in any other
plan of incentive compensation of the Company, an employee who is a
Participant in the Plan for any given Performance Period shall not par-
ticipate in any other plan during a Performance Period if participation
would cause any award hereunder to fail to qualify as "performance-
based" under Section 162(m).
5. Performance Measures and Goals.
(a) Establishing Performance Goals. For each Performance Period, the Com-
mittee shall establish, within the Applicable Period, one or more ob-
jective performance measures and specific goals for each Participant
and/or each group of Participants. Such goals shall be based exclu-
sively on one or more of the following objective corporate-wide, sub-
sidiary, division or operating unit measures:
(i) financial criteria -- consisting of one or more objectives including
earnings per share, economic profit, shareholder value added, return
on equity, return on assets, net income, pre-tax net income, operat-
ing income, or revenue growth; and
(ii) strategic business criteria -- consisting of one or more objectives
based on achieving specified goals related to employee satisfaction
and retention, customer satisfaction, leadership and core values.
H-4
(b) The Committee may specify, within the Applicable Period, the definition
of these terms as well as any adjustments that may be made in their
calculation. Each goal may be expressed on an absolute or relative ba-
sis, may include comparisons based on current internal targets, the
past performance of the Company (including the performance of one or
more subsidiaries, divisions, and/or operating units) and/or the past
or current performance of other companies.
(c) Impact of Extraordinary Items or Changes in Accounting. The measures
utilized in establishing performance goals under the Plan for any given
Performance Period shall be determined in accordance with generally ac-
cepted accounting principles and in a manner consistent with the meth-
ods used in the Company's audited financial statements, and may exclude
the items excluded in determining Operating Income.
6.Incentive Award Opportunities and Awards.
(a) Setting of Individual Award Opportunities. At the time performance
goals are established for a Performance Period, the Committee also
shall establish an Individual Award Opportunity for such Performance
Period for each Participant or group of Participants. This Individual
Award Opportunity, which shall be based on the achievement of one or
more of the stated performance goals, may be expressed in dollars, as a
multiple of salary or on a formula basis. The Committee, in all cases,
shall have the sole and absolute discretion, based on such factors as
it deems appropriate, to apply Negative Discretion to reduce the actual
incentive awards that would otherwise be payable to any Participant.
(b) Maximum Individual Award Opportunity. Notwithstanding any other provi-
sion of the Plan, the maximum Individual Award Opportunity under the
Plan for any Participant in any one calendar year shall be 0.25% of the
Company's Operating Income for the applicable Performance Period.
(c) Incentive Awards. Incentive awards determined under the Plan for a Per-
formance Period shall be paid to Participants in cash or in shares of
Company common stock or in any other form of cash or stock as deter-
mined by the Committee as soon as practicable following the end of the
Performance Period to which they apply, provided:
(i) that no such payment shall be made unless and until the Committee,
based on the Company's audited financial results for such Perfor-
mance Period (as prepared and reviewed by the Company's independent
public accountants), has certified in writing the extent to which
the applicable performance goals for such Performance Period have
been satisfied, and the Committee has made its decisions regarding
whether it will exercise Negative Discretion to reduce any incentive
award;
(ii) that the Committee may specify that a portion of the actual incen-
tive award for any given Performance Period shall be paid on a de-
ferred basis, based on such award payment rules as the Committee
may establish for such Performance Period;
(iii) that the Committee may require, within the Applicable Period, that
Participants must still be employed as of the end of such Perfor-
mance Period or such later date that is identified in order to be
eligible to receive any award;
(iv) that the Committee may, subject Section 6(c)(i) of the Plan, adopt
such forfeiture, pro-ration or other rules as it sees appropriate
regarding the affect of certain events on the actual incentive
awarded including, but not limited to, a Participant's death, Dis-
ability, Retirement, or voluntary or other termination; and
(v) that in the case of shares and share-based awards, the issuance of
the shares or awards is authorized under the applicable stock incen-
tive plan maintained by the Company and has been approved by any
other committee or body necessary to authorize the award under such
other plan. In such case, any shares of Company common stock issued
in connection with such award will count against the aggregate num-
ber of shares reserved and available for
H-5
issuance under such other plan in accordance with the applicable pro-
visions thereof. Unless otherwise specifically authorized by the Com-
mittee, any such authorization relating to a "covered employee" shall
be undertaken at such time and on such terms as will ensure that the
award hereunder and any award granted under such other plan will con-
tinue to qualify as "performance-based compensation" for purposes of
Section 162(m) of the Code or will not otherwise result in payment of
compensation for which the Company may not claim a tax deduction un-
der Section 162(m) of the Code.
7. Discretionary Pool.
Upon such terms and conditions as the Committee may impose and upon the
achievement of such Performance Measures and Goals as the Committee may de-
termine, the Company shall fund a bonus pool which may be allocated to Par-
ticipants in the sole discretion of the Chief Executive Officer of the Com-
pany. Notwithstanding the foregoing, no award from such bonus pool shall be
made to a Participant (a) which, together with other awards to such Partic-
ipant, exceeds the limitations established in Section 6(b) of the Plan, (b)
which exceeds 25% of such Participant's Individual Award Opportunity or (c)
if such Participant is a "covered employee" under the Code and such payment
causes any other payment under the Plan to fail to qualify as tax deduct-
ible under Section 162(m) of the Code.
8. General Provisions.
(a) Plan Amendment or Termination. The Committee at any time may amend or
terminate the Plan, provided (i) that, without the Participant's writ-
ten consent, no such amendment or termination shall adversely affect
the right of any Participant to receive an incentive award for a Per-
formance Period in effect as of the effective date of such amendment or
termination and (ii) that the Board shall be authorized to make any
amendments necessary to comply with applicable regulatory requirements
(including without limitation, Section 162(m) of the Code).
(b) Applicable Law. All issues arising under the Plan shall be governed by,
and construed in accordance with, the laws of the State of North Caro-
lina.
(c) Tax Withholding. The Company shall have the right to deduct from any
payment of any award a sufficient amount to cover withholding of any
federal, state or local or other governmental taxes or charges required
by law or such greater amount of withholding as the Committee shall de-
termine from time to time and as permitted or required by applicable
rules and regulations, or to take such other action as may be necessary
to satisfy any such withholding obligations.
(d) No Employment Right Conferred. Participation in the Plan shall not con-
fer on any Participant the right to remain employed by the Company, and
the Company specifically reserves the right to terminate any Partici-
pant's employment at any time with or without cause or notice.
(e) Impact of Plan Award on Other Plans. Incentive awards hereunder shall
not be treated as compensation for purposes of any other compensation
or benefit plan, program or arrangement of the Company, unless either
(i) such other plan, program or arrangement provides that compensation
as incentive awards are to be considered as compensation thereunder or
(ii) the Board or the Committee so determines in writing.
Neither the adoption of the Plan nor the submission of the Plan to the
Company's stockholders for their approval shall be construed as limiting
the power of the Board or the Committee to adopt such other incentive
arrangements as it may otherwise deem appropriate.
(f) Costs and Expenses. All award and administrative costs and expenses of
the Plan shall be borne by the Company.
(g) Non-Transferability of Rights. Except as and to the extent required by
law, a Participant's rights under the Plan may not be assigned or
transferred in whole or in part either directly or by operation of law.
H-6
(h) Binding Effect. The Plan shall be binding upon the Company and its suc-
cessors. If the Company becomes a party to any merger, consolidation or
reorganization, then the Plan shall remain in full force and effect as
an obligation of the Company.
(i) Unfunded Plan. Unless otherwise determined by the Committee, the Plan
shall be unfunded and shall not create (or be construed to create) a
trust or a separate fund or funds. The Plan shall not establish any fi-
duciary relationship between the Company and any Participant or other
person. To the extent any person holds any rights by virtue of an
award, such rights shall constitute general unsecured liabilities of
the Company and shall not confer upon any such person any right, title,
or interest in any assets of the Company.
(j) Deferrals of Awards. If permitted by the Committee, a Participant may
elect to defer payment of cash award under the Plan if deferral of an
award under the Plan is permitted pursuant to the terms of a deferred
compensation program of the Company existing at the time the election
to defer is permitted to be made, and the Participant complies with the
terms of such program.
9. Effective Date.
The Plan is effective for Performance Periods commencing on or after Janu-
ary 1, 2001, subject to stockholder approval of the Plan. No payments shall
be made under the Plan prior to the time such stockholder approval is ob-
tained in accordance with applicable law.
H-7
APPENDIX I
FIRST UNION CORPORATION
1998 STOCK INCENTIVE PLAN
(as amended)
1. ESTABLISHMENT AND PURPOSE
First Union Corporation, a North Carolina corporation ("First Union"),
hereby establishes an incentive compensation plan, which shall be known as the
"FIRST UNION CORPORATION 1998 STOCK INCENTIVE PLAN" (the "Plan").
The purposes of the Plan are to (a) help align the long-term financial
interests of Participants with those of stockholders; (b) reinforce a
performance-oriented culture/strategy; (c) incent and reward employees for
increasing First Union's common stock price over time; and (d) motivate,
attract and retain the services of Participants upon whose judgment, interest
and special effort the successful conduct of First Union's operations are
dependent.
2. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective on April 21, 1998, subject to its approval
by the stockholders of First Union, and shall remain in effect, subject to the
right of the Board to amend or terminate the Plan at any time pursuant to the
terms hereof, until all Shares subject to it shall have been purchased or
acquired according to the Plan's provisions. In no event may an Award be
granted under the Plan after April 20, 2008. After the date on which the Plan
becomes effective, no further grants will be made under the Prior Plan.
3. DEFINITIONS
(a) "1934 Act" means the Securities Exchange Act of 1934, as amended,
including the rules and regulations promulgated thereunder.
(b) "Award" means, individually or collectively, an Option (including an
ISO or an NQSO), SAR, Stock Award, any other award made pursuant to the
terms of the Plan, or any combination thereof.
(c) "Award Agreement" means an agreement entered into by the Corporation
and each Participant setting forth the terms and provisions applicable to
Awards.
(d) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and Regulations
under the 1934 Act.
(e) "Board" means the Board of Directors of First Union.
(f) "Change of Control" means a change in control of First Union of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the 1934 Act; provided,
however, that, without limitation, such a Change of Control shall be deemed
to have occurred if (i) any one person, or more than one person acting as a
group, acquires Beneficial Ownership of Shares that, together with Shares
held by such person or group, possesses more than 50 percent of the total
Fair Market Value or total voting power of the Shares, (ii) any one person,
or more than one person acting as a group, acquires (or has acquired during
the 12-month period ending on the date of the most recent acquisition by
such person or persons) Beneficial Ownership of Shares possessing 20
percent or more of the total voting power of the Shares, or (iii) a
majority of members of the Board is replaced during any 12-month period by
directors whose appointment or election is not endorsed by a majority of
the members of the Board prior to the date of such appointment or election.
(g) "Code" means the Internal Revenue Code of 1986, as amended (or any
successor thereto), including any rules and regulations promulgated
thereunder.
(h) "Committee" means the Human Resources Committee of the Board or such
other committee as is appointed by the Board to administer the Plan.
I-1
(i) "Corporation" means (i) First Union and any entity that is directly
or indirectly controlled by First Union, or (ii) any entity in which First
Union has a significant equity interest, as determined by the Committee.
(j) "Covered Officer" means, for a calendar year, a Participant who is
one of the group of executive officers of the Corporation designated by the
Committee in writing as "Covered Officers".
(k) "Date of Termination of Employment" means, with respect to an
Employee who is terminating employment with the Corporation, (i) the last
day such Employee performs actual services for the Corporation as an
Employee, (ii) the 91st day of a bona fide leave of absence when such
Employee's right to continue employment with the Corporation is not
guaranteed by law or contract or, if later, on the date that such legal or
contractual guarantee lapses, (iii) the date that such Employee is deemed
to have a Disability, or (iv) the date of such Employee's death, as
applicable.
(l) "Disability", with respect to an Employee, means having received
long-term disability benefits under the Coporation's Long-Term Disability
Plan for a period of 12 consecutive months.
(m) "Early Retirement" means termination of a Participant's employment
upon satisfaction of the requirements for early retirement under First
Union's pension plan.
(n) "Employee" means an employee of the Corporation.
(o) "Fair Market Value" means the closing sales price of the Shares on
the New York Stock Exchange Composite Tape on the valuation date, or, if
there were no sales on the valuation date, the closing sales price on the
New York Stock Exchange Composite Tape on the first trading day before such
valuation date.
(p) "First Union" is defined in Section 1 herein.
(q) "ISO" means an Option to purchase Shares granted under Section 7(a)
herein, which is designated as an ISO and which is intended to meet the
requirements of Section 422 of the Code.
(r) "NQSO" means an Option to purchase Shares granted under Section 7(a)
herein, and which is not intended to meet the requirements of Section 422
of the Code.
(s) "Normal Retirement" means termination of a Participant's employment
upon satisfaction of the requirements for normal retirement under the terms
of First Union's pension plan.
(t) "Option" means an ISO or an NQSO.
(u) "Option Price" means the price at which a Share may be purchased by
a Participant pursuant to an Option.
(v) "Participant" means an Employee of the Corporation who has been
granted an Award under the Plan.
(w) "Performance-Based Exception" means the performance-based exception
set forth in Code Section 162(m)(4)(C) from the deductibility limitations
of Code Section 162(m).
(x) "Performance Goals" means performance goals based on any of the
following criteria and established by the Committee prior to April 1 of
each year: earnings or earnings growth; return on equity, assets or
investment; revenues; expenses; stock price; market share; charge-offs; or
reductions in non-performing assets. Such Performance Goals may be
particular to an Employee or the division, department, branch, line of
business, subsidiary or other unit in which the Employee works, or may be
based on the performance of the Corporation generally.
(y) "Performance Stock Awards" means the Stock Awards granted to Covered
Officers upon satisfaction of the conditions set forth in Section 7(c)(ii)
of the Plan.
(z) "Period of Restriction" means the period during which the vesting
and/or transfer of Stock Awards is limited in some way, and the Shares
subject to such Stock Awards are subject to a substantial risk of
forfeiture, as provided in Section 7(c) herein.
I-2
(aa) "Plan" is defined in Section 1 herein.
(bb) "Plan Year" means a twelve-month period beginning with January 1 of
each year.
(cc) "Prior Plan" means the First Union 1996 Master Stock Compensation
Plan.
(dd) "RSAs" means a Stock Award granted to a Participant pursuant to
Section 7(c) herein which contains restrictions on vesting and/or transfer.
(ee) "Retirement" means either Early Retirement or Normal Retirement.
(ff) "SAR" means an Award, granted alone or in connection with a related
Option, designated as an SAR, pursuant to the terms of Section 7(b) herein.
(gg) "Shares" means the common stock of First Union, par value $3.33 1/3
per share.
(hh) "Stock Award" shall represent an Award made in Shares or
denominated in units equivalent in value to Shares or any other Award based
on or related to Shares, including, but not limited to, RSAs.
4. PLAN ADMINISTRATION
(a) The Committee. The Committee shall be responsible for administering
the Plan. If considered appropriate by the Board in light of applicable
laws, rules, or regulations, the Committee shall be comprised of two or
more non-employee members of the Board each of whom is a "Non-Employee
Director" within the meaning of Rule 16b-3 under the 1934 Act and an
"outside director" within the meaning of Section 162(m) of the Code. Any
action taken with respect to Covered Officers for purpose of meeting the
Performance-Based Exception shall be taken by the Committee only if all of
the members of the Committee are "outside directors" within the meaning of
Code Section 162(m).
(b) Committee Authority. The Committee may at any time alter, amend,
suspend or discontinue the Plan or any or all agreements granted under the
Plan to the extent permitted by law. Except as limited by law, or by the
Articles of Incorporation or By-laws of First Union, and subject to the
provisions herein, the Committee shall have full and exclusive power to
interpret the Plan and to adopt such rules, regulations, and guidelines for
carrying out the Plan as it may deem necessary or proper, all of which
powers shall be executed in the best interests of the Corporation and in
keeping with the provisions and objectives of the Plan. These powers
include, but are not limited to (i) selecting Award recipients and the
extent of their participation; (ii) establishing all Award terms and
conditions; (iii) adopting procedures and regulations governing Awards; and
(iv) making all other determinations necessary or advisable for the
administration of the Plan. In addition, except as provided herein, in
First Union's Articles of Incorporation or By-laws, or pursuant to
applicable law, the Committee shall have authority, in its sole discretion,
to accelerate the date that any Award which was not otherwise exercisable
or vested shall become exercisable or vested in whole or in part without
any obligation to accelerate such date with respect to any other Awards
granted to any Participant. All determinations, interpretations or other
actions taken or made by the Committee pursuant to the provisions of the
Plan shall be final, binding and conclusive on all persons interested
herein.
The Committee may delegate to one or more officers of the Corporation
the authority to carry out some or all of its responsibilities, provided
that the Committee may not delegate its authority and powers in any way
which would be inconsistent with the requirements of the Code or the 1934
Act. The Committee may at any time rescind the authority delegated to any
such officers.
In no event shall the Committee have the right to (i) cancel outstanding
Options or SARs for the purpose of replacing or regranting such Options or
SARs with an Option Price that is less than the original Option Price of
the Option or SAR, or otherwise reduce the Option Price, or (ii) increase
the number of shares available for issuance in accordance with Section 6 of
the Plan (except in accordance with Section 6(c)) without shareholder
approval.
I-3
No member of the Committee shall be liable for any action or
determination with respect to the Plan, and the members shall be entitled
to indemnification and reimbursement in the manner provided in First
Union's Articles of Incorporation. In the performance of its functions
under the Plan, the Committee shall be entitled to rely upon information
and advice furnished by the Corporation's officers, accountants, counsel
and any other party the Committee deems necessary, and no member of the
Committee shall be liable for any action taken or not taken in reliance
upon any such advice.
5. PARTICIPATION
The individuals who shall be eligible to receive Awards under the Plan shall
be officers or other selected key employees of the Corporation as the Committee
shall approve from time to time.
In the event of a change in a Participant's duties and responsibilities, or
a transfer of the Participant to a different position, the Committee may
terminate any Award granted to such Participant or reduce the number of Shares
subject thereto commensurate with the transfer or change in responsibility, as
determined by the Committee in its discretion.
Notwithstanding any provision of the Plan to the contrary, in order to
foster and promote achievement of the purposes of the Plan or to comply with
provisions of laws in other countries in which the Corporation operates or has
employees, the Committee, in its sole discretion, shall have the power and
authority to (i) determine which Employees (if any) employed outside the United
States are eligible or required to participate in the Plan, (ii) modify the
terms and conditions of any Awards made to such Employees, and (iii) establish
subplans, modified Option exercise and other terms and procedures to the extent
such actions may be necessary or advisable.
6. AVAILABLE SHARES OF COMMON STOCK
(a) Share Limitations. The aggregate amount of Shares that may be granted
under the Plan shall be as follows:
(i) the aggregate number of Shares as to which Awards may be granted in
any Plan Year shall not exceed 1.5% of the total Shares outstanding as
reported in the Annual Report on Form 10-K of First Union for the fiscal
year ending immediately prior to such Plan Year;
(ii) there shall be carried forward and be available for Awards under
the Plan in each Plan Year, in addition to the Shares available for grant
under Section 6(a)(i) above, (a) 5,000,000 Shares available for issuance
under the Prior Plan; (b) with respect to any succeeding Plan Year, any
unused portion of the limit for a Plan Year; and (c) any Shares represented
by Awards or portions of Awards made under the Plan which are forfeited,
expire, terminate or are canceled or settled without issuance; provided,
however, that if (a) the Option Price for an Option granted under the Plan
is satisfied by tendering Shares or (b) an SAR is paid by issuing Shares,
only the net number of Shares issued shall be used for determining the
maximum number of Shares available for issuance under the Plan;
(iii) the aggregate number of Shares (prior to adjustments as provided
in Section 6(c)) that may be represented by Awards granted to any single
individual under the Plan in any calendar year under Sections 7(a), (b) and
(c) of the Plan shall not exceed 1,250,000; and
(iv) the aggregate number of Shares (prior to adjustments as provided in
Section 6(c))that may be covered by Awards made in the form of ISOs shall
not exceed 100,000,000. Such aggregate number of Shares may be increased by
any Shares represented by ISOs or portions of ISOs granted under the Plan
which are forfeited, expire, terminate or are cancelled or settled without
issuance. If the Option Price for an ISO granted under the Plan is
satisfied by tendering Shares, only the net number of Shares issued shall
be used for determining the maximum number of Shares in the form of ISOs
available for issuance under the Plan.
I-4
(b) Shares not applied to limitations. The following will not be applied
to the share limitations of Section 6(a) above: (i) dividends or dividend
equivalents paid in cash in connection with outstanding Awards, (ii) stock
denominated Awards which by their terms may be settled only in cash, and
(iii) Shares and any Awards that are granted through the assumption of, or
in substitution for, outstanding Awards previously granted to Employees as
the result of a merger, consolidation, or acquisition of the employing
company as the result of which it is merged with the Corporation or becomes
a subsidiary of the Corporation.
(c) Adjustments. In the event of any stock dividend, stock split,
combination or exchange of equity securities, merger, consolidation,
recapitalization, divestiture or other distribution (other than ordinary
cash dividends) of assets to stockholders, or any other change affecting
Shares or Share price, such proportionate adjustments, if any, as the
Committee in its discretion may deem appropriate to reflect such change
shall be made with respect to the limitations on the numbers of Shares that
may be issued and represented by Awards under the Plan; provided, however,
that any fractional shares resulting from any such adjustment shall be
eliminated. Upon the occurrence of any such event, the Committee may also
(or in lieu of any of the foregoing adjustments) make such other
adjustments as it shall consider appropriate to preserve the benefits or
potential benefits intended to be made available to Participants. Options
granted pursuant to the Plan and described as ISOs shall not be adjusted in
a manner that causes the Options to fail to continue to qualify as ISOs.
The Shares subject to the provisions of the Plan shall be shares of
authorized but unissued Shares.
7. AWARDS UNDER THE PLAN
The types of Awards set forth in this Article 7 may be granted under the
Plan, singly, in combination or in tandem as the Committee may determine.
(a) Options.
(i) Grant. An Option shall represent a right to purchase a specified
number of Shares at a stated Option Price during a specified time, not to
exceed ten years from the date of grant, as determined by the Committee.
The Option Price per Share for each ISO shall not be less than 100% of the
Fair Market Value on the date of grant. An Option may be in the form of an
ISO which is consistent with the applicable terms, conditions, and
limitations established by the Code and the Committee. Each Option grant
shall be evidenced by an Award Agreement that shall specify the Option
Price, the duration of the Option, the number of Shares to which the Option
pertains, and such other provisions as the Committee shall determine. The
Award Agreement also shall specify whether the Option is intended to be an
ISO or an NQSO. Options granted under this Section 7(a) shall be
exercisable at such times and be subject to such restrictions and
conditions as the Committee shall in each instance approve and which shall
be set forth in the applicable Award Agreement, which need not be the same
for each grant or for each Participant. Upon satisfaction of the applicable
conditions to exercisability specified in the terms and conditions of the
Award as set forth in the Award Agreement, the Participant shall be
entitled to exercise the Option in whole or in part and to receive, upon
satisfaction or payment of the Option Price in the manner contemplated in
this Section 7(a), the number of Shares in respect of which the Option
shall have been exercised.
(ii) Exercise. Options shall be exercised by the delivery of a written
notice of exercise to the Corporation, setting forth the number of Shares
with respect to which the Option is to be exercised, accompanied by full
payment for the Shares. The Shares covered by an Option may be purchased by
methods designated by the Committee, in its discretion, including, but not
limited to (A) a cash payment; (B) tendering Shares owned by the
Participant, valued at the Fair Market Value at the date of exercise; or
(C) any combination of the above. As soon as practicable after receipt of a
written notification of exercise and full payment, the Corporation shall
deliver to the Participant, Share certificates in an appropriate amount
based upon the number of Shares purchased under the Option.
(iii) Termination. If the employment of a Participant with the
Corporation shall terminate by reason of death, Disability or Retirement,
any then outstanding Options granted to such Participant shall become
I-5
immediately exercisable on the Date of Termination of Employment. Unless
the Committee determines otherwise, any such outstanding Options will be
forfeited on the expiration date of such Options or within three years
after the Date of Termination of Employment, whichever period is shorter.
Unless the Committee determines otherwise, if the employment of a
Participant with the Corporation shall terminate for any reason other than
death, Disability or Retirement, (i) any then outstanding but unexercisable
Options granted to such Participant will be forfeited on the Date of
Termination of Employment, and (ii) any then outstanding and exercisable
Options granted to such Participant will be forfeited on the expiration
date of such Options or three months after the Date of Termination of
Employment, whichever period is shorter.
(iv) ISOs. In the case of any outstanding Options granted to a
Participant that are ISOs, the tax treatment prescribed under Section 422
of the Code shall not be available if such Options are not exercised (A)
within three months after the Date of Termination of Employment unless such
termination is due to death or Disability, or (B) within one year after the
Date of Termination of Employment due to Disability. If a Participant's
employment is terminated due to death, the tax treatment prescribed under
Section 422 of the Code shall be available if the Participant was either an
Employee on the date of death or an Employee within the three month period
prior to the date of death.
(b) SARs.
(i) Grant. An SAR shall represent a right to receive a payment in cash,
Shares, or a combination thereof, equal to the excess of the Fair Market
Value of a specified number of Shares on the date the SAR is exercised over
an amount which shall be no less than the Fair Market Value on the date the
SAR was granted (or the Option Price for SARs granted in tandem with an
Option) as set forth in the applicable Award Agreement. Each SAR grant
shall be evidenced by an Award Agreement that shall specify the SAR
exercise price, the duration of the SAR, the number of Shares to which the
SAR pertains, whether the SAR is granted in tandem with the grant of an
Option or is freestanding, and such other provisions as the Committee shall
determine. SARs granted under this Section 7(b) shall be exercisable at
such times and be subject to such restrictions and conditions as the
Committee shall in each instance approve and which shall be set forth in
the applicable Award Agreement, which need not be the same for each grant
of for each Participant.
(ii) Exercise. SARs shall be exercised by the delivery of a written
notice of exercise to the Corporation, setting forth the number of Shares
with respect to which the SAR is to be exercised. The date of exercise of
the SAR shall be the date on which the Corporation shall have received
notice from the Participant of the exercise of such SAR. SARs granted in
tandem with the grant of an Option may be exercised for all or part of the
Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. SARs granted in
tandem with the grant of an Option may be exercised only with respect to
the Shares for which its related Option is then exercisable. With respect
to SARs granted in tandem with an ISO, (A) such SAR will expire no later
than the expiration of the underlying ISO, (B) the value of the payout with
respect to such SAR may be for no more than one hundred percent of the
difference between the Option Price of the underlying ISO and the Fair
Market Value of the Shares subject to the underlying ISO at the time such
SAR is exercised, and (C) such SAR may be exercised only when the Fair
Market Value of the Shares subject to the underlying ISO exceeds the Option
Price of the ISO. SARs granted independently from the grant of an Option
may be exercised upon the terms and conditions contained in the applicable
Award Agreement. Notwithstanding any other provision of the Plan, the
Committee may impose such conditions on exercise of an SAR (including,
without limitation, the right of the Committee to limit the time of
exercise to specified periods) as may be required to satisfy the
requirements of Section 16 (or any successor law) of the 1934 Act. In the
event the SAR shall be payable in Shares, a certificate for the Shares
acquired upon exercise of an SAR shall be issued in the name of the
Participant as soon as practicable following receipt of notice of exercise.
No fractional Shares will be issuable upon exercise of the SAR and, unless
provided in the applicable Award Agreement, the Participant will receive
cash in lieu of fractional Shares.
I-6
(iii) Termination. If the employment of a Participant with the
Corporation shall terminate by reason of death, Disability or Normal
Retirement, any then outstanding SARs granted to such Participant shall
become immediately exercisable on the Date of Termination of Employment.
Unless the Committee determines otherwise, any such outstanding SARs will
be forfeited on the expiration date of such SARs or within three years
after the Date of Termination of Employment, whichever period is shorter.
Unless the Committee determines otherwise, if the employment of a
Participant with the Corporation shall terminate for any reason other than
death, Disability or Normal Retirement, (i) any then outstanding but
unexercisable SARs granted to such Participant will be forfeited on the
Date of Termination of Employment, and (ii) any then outstanding and
exercisable SARs granted to such Participant will be forfeited on the
expiration date of such SARs or three months after the Date of Termination
of Employment, whichever period is shorter.
(c) Stock Awards.
(i) Grant. All or any part of any Stock Award may be subject to
conditions and restrictions established by the Committee, and set forth in
the applicable Award Agreement, which may include, but are not limited to,
continuous service with the Corporation, a requirement that Participants
pay a stipulated purchase price for each Stock Award, the achievement of
specific Performance Goals, and/or applicable securities laws restrictions.
During the applicable Period of Restriction, Participants holding RSAs may
exercise full voting rights with respect to such Shares. During the
applicable Period of Restriction, Participants holding RSAs shall be
entitled to receive all dividends and other distributions paid with respect
to such Shares while they are so restricted. If any such dividends or
distributions are paid in Shares, such Shares shall be subject to the same
restrictions on transferability as the RSAs with respect to which they are
paid.
(ii) Performance Stock Awards. Performance Stock Awards will be granted
to Covered Officers under the following conditions:
(A) Prior to April 1 of each year, the Committee shall determine the
Covered Officers and the Performance Goals for such year that will need to
be attained in order to permit Performance Stock Awards to be granted to
the Covered Officers in the following year; and
(B) the value of Performance Stock Awards granted to a Covered Officer
(calculated by multiplying the Fair Market Value on the date of grant times
the number of Shares of the Stock Award) shall equal 300% of the Covered
Officer's base salary for the calendar year preceding the date of grant;
provided, that such value may not exceed $4,500,000; and provided, further,
that the Committee may, in its discretion, reduce the number of Shares to
be granted in the Performance Stock Award.
Notwithstanding the foregoing, any Shares of restricted stock issued to
Covered Officers in 1998 pursuant to the satisfaction of the performance goal
set forth in the Prior Plan shall be issued under the Plan in accordance with
the terms, conditions and limitations set forth in the Prior Plan.
(iii) Termination. Unless the Committee determines otherwise, if the
employment of a Participant with the Corporation shall terminate because of
Normal Retirement, Disability or death, any remaining Period of Restriction
applicable to Stock Awards granted to such Participant shall automatically
terminate and, except as otherwise provided in this Section 7(c), such
Stock Awards shall be free of restrictions and freely transferable. Unless
the Committee determines otherwise, if the employment of a Participant with
the Corporation shall terminate for any reason other than death, Disability
or Normal Retirement, then any Stock Awards subject to restrictions on the
date of such termination shall automatically be forfeited on the Date of
Termination of Employment and returned to the Corporation; provided,
however, if such employment terminates due to Early Retirement or any
involuntary termination by the Corporation, the Committee may, in its sole
discretion, waive the automatic forfeiture of any or all such Stock Awards
and/or may add such new restrictions to such Stock Awards as it deems
appropriate.
I-7
8. DIVIDENDS AND DIVIDEND EQUIVALENTS
The Committee may provide the Awards under Section 7(c) of the Plan earn
dividends or dividend equivalents. Such dividends or dividend equivalents may
be paid currently or may be credited to a Participant's account. Any crediting
of dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in additional
Shares or Share equivalents.
9. PAYMENTS AND PAYMENT DEFERRALS
Payment of Awards may be in the form of cash, Shares, other Awards, or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee also may require or permit
Participants to elect to defer the receipt or issuance of Shares from Options
or Stock Awards or the settlement of Awards in cash under such rules and
procedures as it may establish under the Plan. It also may provide that
deferred settlements of Awards include the payment or crediting of earnings on
deferred amounts. In addition, the Committee may stipulate in an Award
Agreement, either at the time of grant or by subsequent amendment, that a
payment or portion of a payment of an Award be delayed in the event that
Section 162(m) of the Code (or any successor or similar provision of the Code
affecting tax deductibility) would disallow a tax deduction by the Corporation
for all or a portion of such payment. The period of any such delay in payment
shall be until the payment, or portion thereof, is tax deductible, or such
earlier date as the Committee shall determine.
10. TRANSFERABILITY
(a) ISOs. No ISO granted under the Plan may be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by
will or by the laws of descent and distribution. Further, all ISOs granted
to a Participant under the Plan shall be exercisable during his or her
lifetime only by such Participant. The foregoing shall also apply to all
SARs granted in tandem with an ISO.
(b) NQSOs and SARs. Except as otherwise provided in a Participant's
Award Agreement, no NQSO or SAR granted under the Plan may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further,
except as otherwise provided in a Participant's Award Agreement, all NQSOs
and SARs granted to a Participant under the Plan shall be exercisable
during his or her lifetime only by such Participant.
(c) Stock Awards. Stock Awards granted under the Plan may not be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated until
the end of the applicable Period of Restriction established by the
Committee and specified in the applicable Award Agreement, or upon earlier
satisfaction of any other conditions, as specified by the Committee in its
sole discretion and set forth in the applicable Award Agreement. All rights
with respect to a Stock Award granted to a Participant under the Plan shall
be available during his or her lifetime only to such Participant.
11. CHANGE OF CONTROL
In the event of (i) any merger, consolidation, or acquisition where the
stockholders of First Union on the effective date of such merger,
consolidation, or acquisition do not own at least 50% of the outstanding shares
of voting stock of the surviving corporation, or (ii) any Change of Control,
each Award granted under the Plan shall immediately be exercisable and/or fully
vested and nonforfeitable, as the case may be.
12. AWARD AGREEMENTS
Each Award under the Plan shall be evidenced by an Award Agreement setting
forth its terms, conditions, and limitations for each Award, the provisions
applicable in the event the Participant's employment terminates, and the
Corporation's authority unilaterally or bilaterally to amend, modify, suspend,
cancel, or rescind any Award. The Committee need not require the execution of
any such agreement by the recipient, in which case acceptance of the Award by
the respective Participant shall constitute agreement by the Participant to the
terms and conditions of the Awards.
I-8
13. TAX WITHHOLDING
The Corporation shall have the right to deduct from any settlement of an
Award made under the Plan, including the delivery of Shares, or require the
payment of, a sufficient amount to cover withholding of any federal, state or
local or other governmental taxes or charges required by law or such greater
amount of withholding as the Committee shall determine from time to time and as
permitted or required by applicable rules and regulations, or to take such
other action as may be necessary to satisfy any such withholding obligations.
If the Committee permits or requires Shares to be used to satisfy required tax
withholding, such Shares shall be valued at the Fair Market Value as of the tax
recognition date for such Award or such other date as may be required by
applicable law, rule or regulation. The Corporation shall have the right to
effect income, social security and medicare tax withholding and reporting as
may be required under applicable law upon the disposition by an Employee of
Common Stock acquired upon the exercise of an option qualifying as an incentive
stock option under Section 422 of the Code at the time of exercise. The
Corporation shall collect any required withholding from "other earnings" of the
employee. In the absence of "other earnings" sufficient to satisfy such
withholding, the employee shall remit such amounts required to satisfy such
withholding obligations to the Corporation within 10 business days of any such
notice and request for payment.
14. OTHER BENEFIT AND COMPENSATION PROGRAMS
Unless otherwise specifically determined by the Committee, settlements of
Awards received by Participants under the Plan shall not be deemed a part of a
Participant's regular, recurring compensation for purposes of calculating
payments or benefits from the Corporation's benefit plans or severance program.
Further, the Corporation may adopt other compensation programs, plans or
arrangements as it deems appropriate or necessary. The Committee may permit a
Participant to defer such Participant's receipt of the payment of cash or the
delivery of Shares that would otherwise be due to such Participant by virtue of
the exercise of an Option or SAR, or the satisfaction of conditions, lapse or
waiver of restrictions with respect to Stock Awards. If any such deferral
election is required or permitted, the Committee shall, in its sole discretion,
establish rules and procedures for such payment deferrals.
15. UNFUNDED PLAN
Unless otherwise determined by the Committee, the Plan shall be unfunded and
shall not create (or be construed to create) a trust or a separate fund or
funds. The Plan shall not establish any fiduciary relationship between the
Corporation and any participant or other person. To the extent any person holds
any rights by virtue of an Award granted under the Plan, such rights shall
constitute general unsecured liabilities of the Corporation and shall not
confer upon any participant any right, title, or interest in any assets of the
Corporation.
16. REGULATORY APPROVALS
The implementation of the Plan, the granting of any Award under the Plan,
and the issuance of Shares upon the exercise or settlement or any Award shall
by subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
Awards granted under it, or the Shares issued pursuant to it.
17. RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder with respect to Shares
covered by an Award until the date the Participant or his nominee is the holder
of record. No adjustment will be made for dividends or other rights for which
the record date is prior to such date, except as provided in Section 6(c).
I-9
18. FUTURE RIGHTS
No person shall have any claim or right to be granted an Award, and the
grant of an Award shall not be construed as giving a Participant the right to
be retained in the employ of the Corporation or to participate in any other
compensation or benefit plan, program or arrangement of the Corporation. In
addition, the Corporation expressly reserves the right at any time to dismiss a
Participant free from any liability or any claim under the Plan, except as
provided herein or in any agreement entered into hereunder.
19. GOVERNING LAW
The Plan and all agreements entered into under the Plan shall be construed
in accordance with and governed by the laws of the State of North Carolina.
20. SUCCESSORS AND ASSIGNS
The Plan and any applicable Award Agreement entered into under the Plan
shall be binding on all successors and assigns of a Participant, including,
without limitation, the estate of such Participant and the executor,
administrator or trustee of such estate, or any receiver or trustee in
bankruptcy or representative of the Participant's creditors.
21. INDEMNIFICATION
Each person who is or shall have been a member of the Committee or of the
Board shall be indemnified and held harmless by the Corporation against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him in connection with or resulting from any claim,
action, suit, or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him in settlement thereof, with
the Corporation's approval, or paid by him in satisfaction of any judgment in
any such action, suit, or proceeding against him, provided he shall give the
Corporation an opportunity, at its own expense, to handle and defend the same
before he undertakes to handle and defend it on his own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under First Union's
Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any
power that the Corporation may have to indemnify them or hold them harmless.
22. APPLICATION OF FUNDS
The proceeds received by the Corporation from the issuance of Shares
pursuant to the exercise of Options will be used for general corporate
purposes.
I-10
APPENDIX J
WACHOVIA CORPORATION
AMENDED AND RESTATED
AUDIT COMMITTEE CHARTER
I. Composition of the Audit Committee: The Audit Committee shall be comprised
of at least three directors, each of whom shall have no relationship to Wa-
chovia Corporation (Wachovia) that may interfere with the exercise of their
independence from management and Wachovia and shall otherwise satisfy the
applicable membership requirements under the rules of the New York Stock Ex-
change, Inc., as such requirements are interpreted by Wachovia's Board of
Directors (Board of Directors) in its business judgment.
II. Purpose of the Audit Committee: The purposes of the Audit Committee are to
assist the Board of Directors:
1. in its oversight of Wachovia's accounting and financial reporting prin-
ciples and policies and internal audit controls and procedures;
2. in its oversight of Wachovia's financial statements and the independent
audit thereof;
3. in selecting, evaluating and, where deemed appropriate, replacing the
outside auditors (or nominating the outside auditors to be proposed for
shareholder approval in any proxy statement); and
4. in evaluating the independence of the outside auditors.
The function of the Audit Committee is oversight. The management of Wacho-
via is responsible for the preparation, presentation and integrity of
Wachovia's financial statements. Management and the general auditor of the
internal auditing department (general auditor) are responsible for main-
taining appropriate accounting and financial reporting principles and poli-
cies and internal controls and procedures designed to assure compliance
with accounting standards and applicable laws and regulations. The indepen-
dent auditors are responsible for planning and carrying out a proper audit
of Wachovia's annual financial statements, reviews of Wachovia's quarterly
financial statements prior to the filing of each quarterly report on Form
10-Q, and other procedures. In fulfilling their responsibilities hereunder,
it is recognized that members of the Audit Committee are not full-time em-
ployees of Wachovia and are not, and do not represent themselves to be, ac-
countants or auditors by profession or experts in the fields of accounting
or auditing including in respect of auditor independence. As such, it is
not the duty or responsibility of the Audit Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures or to set auditor independence standards, and each member of the
Audit Committee shall be entitled to rely on (i) the integrity of those
persons and organizations within and outside Wachovia from which it re-
ceives information, (ii) the accuracy of the financial and other informa-
tion provided to the Audit Committee by such persons or organizations ab-
sent actual knowledge to the contrary (which shall be promptly reported to
the Board of Directors) and (iii) representations made by management as to
any information technology, internal audit and other non-audit services
provided by the auditors to Wachovia.
The independent auditors for Wachovia are ultimately accountable to the
Board of Directors as assisted by the Audit Committee. The Board of Direc-
tors, with the assistance of the Audit Committee, has the ultimate author-
ity and responsibility to select, evaluate and, nominate the independent
auditors to be proposed for shareholder approval in the proxy statement.
J-1
The independent auditors shall submit to Wachovia annually a formal written
statement delineating all relationships between the independent auditors
and Wachovia ("Statement as to Independence"), addressing each non-audit
service provided to Wachovia and the matters set forth in Independence
Standards Board No. 1.
The outside auditors shall submit to Wachovia annually a formal written
statement of the fees billed for each of the following categories of serv-
ices rendered by the outside auditors: (i) the audit of Wachovia's annual
financial statements for the most recent fiscal year and the reviews of the
financial statements included in Wachovia's Quarterly Reports on Form 10-Q
for that fiscal year; (ii) information technology consulting services for
the most recent fiscal year, in the aggregate and by each service (and sep-
arately identifying fees for such services relating to financial informa-
tion systems design and implementation); and (iii) all other services ren-
dered by the outside auditors for the most recent fiscal year, in the ag-
gregate and by each service.
III. Meetings of the Audit Committee: The Audit Committee shall meet four times
annually, or more frequently if circumstances dictate, to discuss with
management the annual audited financial statements and quarterly financial
results. The Audit Committee should meet separately at least annually with
management, the general auditor and the independent auditors to discuss
any matters that the Audit Committee or any of these persons or firms be-
lieve should be discussed privately. The Audit Committee may request any
officer or employee of Wachovia or Wachovia's independent counsel or inde-
pendent auditors to attend a meeting of the Audit Committee or to meet
with any members of or consultants to, the Audit Committee. Members of the
Audit Committee may participate in a meeting of the Audit Committee by
means of conference call or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
IV. Duties and Powers of the Audit Committee: To carry out its purposes, the
Audit Committee shall have the following duties and powers:
1. with respect to the independent auditors,
(i) to provide advice to the Board of Directors in selecting,
evaluating or replacing the independent auditors;
(ii) to review the fees charged by the independent auditors for audit
and non-audit services;
(iii) to ensure that the independent auditors prepare and deliver annu-
ally a Statement as to Independence, to discuss with the indepen-
dent auditors any relationships or services disclosed in this
Statement that may impact the objectivity and independence of
Wachovia's independent auditors and to recommend that the Board of
Directors take appropriate action in response to this Statement to
satisfy itself of the independent auditors' independence;
(iv) if applicable, to consider whether the outside auditors' provision
of (a) information technology consulting services relating to fi-
nancial information systems design and implementation and (b) other
non-audit services to Wachovia is compatible with maintaining the
independence of the outside auditors; and
(v) to instruct the independent auditors that the independent auditors
are ultimately accountable to the Board of Directors and Audit Com-
mittee.
2. with respect to the internal auditing department,
J-2
(i) to review the appointment and replacement of the general auditor;
and
(ii) to advise the general auditor that he or she is expected to provide
to the Audit Committee summaries of and, as appropriate, the sig-
nificant reports to management prepared by the internal auditing
department and management's responses thereto.
3. with respect to financial reporting principles and policies and internal
audit controls and procedures,
(i) to advise management, the general auditor and the independent audi-
tors that they are expected to provide to the Audit Committee a
timely analysis of significant financial reporting issues and prac-
tices;
(ii) to consider any reports or communications (and management's and/or
the internal audit department's responses thereto) submitted to the
Audit Committee by the independent auditors required by or referred
to in SAS 61 (as codified by AU Section 380), as may be modified or
supplemented, including reports and communications related to:
. deficiencies noted in the audit in the design or operation of in-
ternal controls;
. consideration of fraud in a financial statement audit;
. detection of illegal acts;
. the independent auditors' responsibility under generally accepted
auditing standards;
. significant accounting policies;
. management judgments and accounting estimates;
. adjustments arising from the audit;
. the responsibility of the independent auditors for other informa-
tion in documents containing audited financial statements;
. disagreements with management;
. consultation by management with other accountants;
. major issues discussed with management prior to retention of the
independent auditors;
. difficulties encountered with management in performing the audit;
. the independent auditors' judgments about the quality of
Wachovia's accounting principles; and
. reviews of interim financial information conducted by the indepen-
dent auditors.
J-3
(iii) to meet with management, the general auditor and/or the indepen-
dent auditors:
. to discuss the scope of the annual audit;
. to discuss the audited financial statements;
. to discuss any significant matters arising from any audit or re-
port or communication referred to in items 2(ii) or 3(ii) above,
whether raised by management, the general auditor or the indepen-
dent auditors, relating to Wachovia's financial statements;
. to review the form of opinion the independent auditors propose to
render to the Board of Directors and shareholders;
. to discuss significant changes to Wachovia's auditing and account-
ing principles, policies, controls, procedures and practices pro-
posed or contemplated by the independent auditors, the general au-
ditor or management, and
. to inquire about significant risks and exposures, if any, and the
steps taken to monitor and minimize such risks.
(iv) to obtain from the independent auditors assurance that the audit
was conducted in a manner consistent with Section 10A of the Secu-
rities Exchange Act of 1934, as amended, which sets forth certain
procedures to be followed in any audit of financial statements re-
quired under the Securities Exchange Act of 1934; and
(v) to discuss with Wachovia's general counsel any significant legal
matters that may have a material effect on the financial statements,
Wachovia's compliance policies, including material notices to or in-
quiries received from governmental agencies.
4. with respect to reporting and recommendations,
(i) to prepare any report or other disclosures, including any recommen-
dation of the Audit Committee, required by the rules of the Securi-
ties and Exchange Commission to be included in Wachovia's annual
proxy statement;
(ii) to review this Charter at least annually and recommend any changes
to the full Board of Directors; and
(iii) to report its activities to the full Board of Directors on a regu-
lar basis and to make such recommendations with respect to the
above and other matters as the Audit Committee may deem necessary
or appropriate.
V. Resources and Authority of the Audit Committee: The Audit Committee shall
have the resources and authority appropriate to discharge its
responsibilities, including the authority to engage independent auditors
for special audits, reviews and other procedures and to retain special
counsel and other experts or consultants.
J-4
APPENDIX K
CHAPTER 55. NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13. DISSENTERS' RIGHTS
(S) 55-13-01. Definitions
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and
in the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be
inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable
under all the circumstances, giving due consideration to the rate currently
paid by the corporation on its principal bank loans, if any, but not less
than the rate provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on file
with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
(S) 55-13-02. Right to dissent
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger whose shares are not affected under
G.S. 55-11-04) is a party unless (i) approval by the shareholders of that
corporation is not required under G.S. 55-11-03(g) or (ii) such shares are
then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than as permitted by G.S. 55-12-01,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or substantially all of the
net proceeds of the sale will be distributed in cash to the shareholders
within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
the shares; (iii) alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities; (iv) excludes or limits
the right of the shares to
K-1
vote on any matter, or to cumulate votes; (v) reduces the number of shares
owned by the shareholder to a fraction of a share if the fractional share
so created is to be acquired for cash under G.S. 55-6-04; or (vi) changes
the corporation into a nonprofit corporation or cooperative organization;
or
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in
exchange for cash or other property, unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of shareholders to dissent from, or obtain payment of the fair value of
the shares in the event of, the corporate actions set forth in subdivisions
(1), (2), or (3) of subsection (a) of this section if the affected shares are
any class or series which, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting at which
the plan of merger or share exchange or the sale or exchange of property is to
be acted on, were (i) listed on a national securities exchange or designated
as a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or (ii) held by at least
2,000 record shareholders. This subsection does not apply in cases in which
either:
(1) The articles of incorporation, bylaws, or a resolution of the board
of directors of the corporation issuing the shares provide otherwise; or
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share exchange
to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which,
at the record date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which the plan of merger or
share exchange is to be acted on, were either listed subject to notice
of issuance on a national securities exchange or designated as a
national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc., or held by at
least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in sub-subdivisions
a. and b. of this subdivision.
(S) 55-13-03. Dissent by nominees and beneficial owners
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
are determined as if the shares as to which he dissents and his other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial
shareholder.
(S)(S) 55-13-04 through 55-13-19
Reserved for future codification purposes.
K-2
(S) 55-13-20. Notice of dissenters' rights
(a) If proposed corporate action creating dissenters' rights under G.S. 55-
13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S. 55-
13-02 unless he voted for such corporate action.
(S) 55-13-21. Notice of intent to demand payment
(a) If proposed corporate action creating dissenters' rights under G.S. 55-
13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this Article.
(S) 55-13-22. Dissenters' notice
(a) If proposed corporate action creating dissenters' rights under G.S. 55-
13-02 is authorized at a shareholders' meeting, the corporation shall mail by
registered or certified mail, return receipt requested, a written dissenters'
notice to all shareholders who satisfied the requirements of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating
dissenters' rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date
the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
(S) 55-13-23. Duty to demand payment
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
K-3
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
(S) 55-13-24. Share restrictions
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
(S) 55-13-25. Payment
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the end
of a fiscal year ending not more than 16 months before the date of payment,
an income statement for that year, a statement of cash flows for that year,
and the latest available interim financial statements, if any;
(2) An explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
(S) 55-13-26. Failure to take action
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
(S) 55-13-27
Reserved for future codification purposes.
(S) 55-13-28. Procedure if shareholder dissatisfied with corporation's payment
or failure to perform
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
the amount in excess of the payment by the corporation under G.S. 55-13-25 for
the fair value of his shares and interest due, if:
K-4
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(b) A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing (i) under subdivision
(a)(1) within 30 days after the corporation made payment for his shares or (ii)
under subdivisions (a)(2) and (a)(3) within 30 days after the corporation has
failed to perform timely. A dissenter who fails to notify the corporation of
his demand under subsection (a) within such 30-day period shall be deemed to
have withdrawn his dissent and demand for payment.
(S) 55-13-29
Reserved for future codification purposes.
(S) 55-13-30. Court action
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i) the
date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter's
payment demand under G.S. 55-13-28 by filing a complaint with the Superior
Court Division of the General Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who takes no action within the 60-
day period shall be deemed to have withdrawn his dissent and demand for
payment.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
(S) 55-13-31. Court costs and counsel fees
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of appraisers appointed by the court, and shall assess the costs
as it finds equitable.
K-5
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either or
any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
K-6
Please Vote Today
For this historic merger to happen, we need a majority vote from our
shareholders. If you don't send in your vote, it is the same as voting against
the merger.
First Union Shareholder Meeting
July 31, 2001, 11:00 am
Adam's Mark Hotel
555 South McDowell Street
Charlotte, NC 28204
(704) 372-4100
Symphony Ballroom
DIRECTIONS
I-85 SOUTH FROM GREENSBORO
Follow I-85 South to Charlotte. Take exit for I-77 South to Columbia. Follow
I-77 South to I-277. Loop onto I-277 (John Belk Freeway) and go to Caldwell
Street exit. Take Caldwell Street exit onto Caldwell Street. Go to E. Stonewall
Street and turn right onto E. Stonewall Street. Go on E. Stonewall Street until
you come to S. McDowell Street. Turn left onto S. McDowell Street and the Adam's
Mark Hotel will be on your right.
I-85 NORTH FROM ATLANTA
Follow I-85 North to I-77 South. Loop onto I-277 (John Belk Freeway) and go to
Caldwell Street exit. Take Caldwell Street exit onto Caldwell Street. Go to E.
Stonewall Street and turn right onto E. Stonewall Street. Go on E. Stonewall
Street until you come to S. McDowell Street. Turn left onto S. McDowell Street
and the Adam's Mark Hotel will be on your right.
DIRECTIONS FROM THE AIRPORT
Leave Airport and merge left onto Billy Graham Parkway. Take Billy Graham
Parkway to I-77 North. Follow I-77 North to I-277. Merge onto I-277 (John Belk
Freeway) and go to Caldwell Street exit. Take Caldwell Street exit onto Caldwell
Street. Go to E. Stonewall Street and turn right onto E. Stonewall Street. Go on
E. Stonewall Street until you come to S. McDowell Street. Turn left onto S.
McDowell Street and the Adam's Mark Hotel will be on your right.
I-77 NORTH FROM COLUMBIA
Follow I-77 North to I-277. Merge onto I-277 (John Belk Freeway) and go to
Caldwell Street exit. Take Caldwell Street exit onto Caldwell Street. Go to E.
Stonewall Street and turn right onto E. Stonewall Street. Go on E. Stonewall
Street until you come to S. McDowell Street. Turn left onto S. McDowell Street
and the Adam's Mark Hotel will be on your right.
I-77 SOUTH FROM MOORESVILLE AND STATESVILLE
Follow I-77 South to I-277. Loop onto I-277 (John Belk Freeway) and go to
Caldwell Street exit. Take Caldwell Street exit onto Caldwell Street. Go to E.
Stonewall Street and turn right onto E. Stonewall Street. Go on E. Stonewall
Street until you come to S. McDowell Street. Turn left onto S. McDowell Street
and the Adam's Mark Hotel will be on your right.
Notice of Shareholder Meeting
================================================================================
Your Vote is Important
Vote "For" the merger.